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 June 30, ~~2005~~2008

¨	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 000-27501

The TriZetto Group, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		33-0761159
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
567 San Nicolas Drive, Suite 360 Newport Beach, California		92660
(Address of Principal Executive Offices)		(Zip Code)

567 San Nicolas Drive, Suite 360

Newport Beach, California

92660

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s telephone number, including area code: (949) 719-2200

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 ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer ~~(as~~or ~~defined~~a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). ~~Yes x No ¨~~

AsLarge ofaccelerated ~~August~~filer x Accelerated 1,filer ¨ Non-accelerated ~~2005,~~filer ¨ ~~42,898,028 shares, $0.001 par value per share, of the registrant’s common stock were outstanding.~~

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

As of August 1, 2008 43,198,047 shares, $0.001 par value per share, of the registrant’s common stock were outstanding.

THE TRIZETTO GROUP, INC.

QUARTERLY REPORT ON

FORM 10-Q

For the Quarterly Period Ended June 30, ~~2005~~2008

TABLE OF CONTENTS

		PAGE
PART I — FINANCIAL INFORMATION
PART I—FINANCIAL INFORMATION
Item 1	Financial Statements:
	Condensed Consolidated Balance Sheets as of June 30, 2005 (unaudited) and December 31, 2004	3
	Condensed Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007	1
	Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2004	4
	Unaudited Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2008 and 2007	2
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007	3
	Notes to Unaudited Condensed Consolidated Financial Statements	64
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1114
Item 3	Quantitative and Qualitative Disclosures ~~about~~About Market Risk	2425
Item 4	Controls and Procedures	2426
PART II — OTHER INFORMATION
PART II—OTHER INFORMATION
Item 1	Legal Proceedings	2527
Item 4	Submission of Matters to a Vote of Security Holders	25
Item 1A	Risk Factors	28
Item 6	Exhibits	26
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	37
SIGNATURES		27
Item 4	Submission of Matters to a Vote of Security Holders	37
Item 6	Exhibits	37
SIGNATURES		38

PART I — FINANCIAL INFORMATION

Item 1.

Financial Statements

The TriZetto Group, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	June 30,2005			December 31,2004
	June 30,2008			December 31,2007
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	54148,~~807~~596		$	70208,~~489~~507
Short-term investments		—			1,203
Accounts receivable, less allowances of $1,785 and $3,528 at June 30, 2008 and December 31, 2007, respectively		107,197			92,118
Restricted cash		1,544			1,455
Prepaid expenses and other current assets		24,857			17,458
Accounts receivable, net		45,387			52,483
Deferred tax assets		10,273			10,273
Prepaid expenses and other current assets		9,940			7,964
Total current assets		290,923			328,356
Total current assets		111,678			133,594
Property and equipment, net		31,845			32,889
Property and equipment, net		25,139			31,466
Capitalized software development costs, net		23,800			25,903
Capitalized software development costs, net		28,294			27,902
Long-term investments		67,715			—
Goodwill		39213,~~455~~549			39200,~~201~~219
Other intangible assets, net		369,~~357~~759			574,~~097~~545
Other assets		415,~~605~~104			216,~~624~~070
Total assets	$	~~212~~712,~~528~~695		$	~~239~~677,~~884~~982
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term notes payable	$	2,950		$	39,600
Current portion of notes payable	$	601		$	53
Capital lease obligations		2,960			4,186
Current portion of term loan		10,714			10,714
Accounts payable		11,540			13,019
Current portion of capital lease obligations		776			1,108
Accrued liabilities		27,113			37,585
Accounts payable		12,946			16,142
Deferred revenue		40,527			39,520
Accrued liabilities		52,001			53,079
Total current liabilities		85,090			133,910
Deferred revenue		71,772			41,356
Long-term line of credit		23,000			12,000
Total current liabilities		148,810			122,452
Capital lease obligations		697			1,838
Long-term convertible debt		330,000			330,000
Deferred revenue		1,498			1,882
Long-term revolving line of credit and term loan		53,571			60,250
Other long-term liabilities		17,~~371~~155			36,~~321~~370
Total liabilities		111,656			152,951
Capital lease obligations		899			1,172
Deferred tax liabilities		2,817			2,817
Deferred revenue, non-current		4,593			7,265
Total liabilities		547,845			530,326
Commitments and contingencies
Stockholders’ equity:
Common stock		4344			4244
Additional paid-in capital		374,649			369,669
Accumulated other comprehensive income		(4,585	)		—
Deferred stock compensation		(3,192	)		(2,873	)
Additional paid-in capital		375,202			362,151
Accumulated deficit		(~~270~~205,~~628~~811	)		(~~279~~214,~~905~~539	)
Total stockholders’ equity		~~100~~164,~~872~~850			86147,~~933~~656
Total liabilities and stockholders’ equity	$	~~212~~712,~~528~~695		$	~~239~~677,~~884~~982

See accompanying notes.

The TriZetto Group, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~INCOME

(in thousands, except per share data)

(unaudited)

	Three Months EndedJune 30,						Six Months ~~Ended~~EndedJune ~~June~~ 30,
	2005			2004			2005			2004
	2008			2007			2008			2007
Revenue:
Recurring revenue	$	40,116		$	41,603		$	79,139		$	83,905
Services and other	$	101,441		$	91,432		$	191,488		$	181,207
Non-recurring revenue		32,392			25,914			65,187			49,362
Products		15,576			23,403			32,349			47,131
Total revenue		72117,~~508~~017			67114,~~517~~835			~~144~~223,~~326~~837			~~133~~228,~~267~~338
Cost of revenue:
Operating costs and expenses:
Recurring revenue		24,769			28,959			48,167			61,238
Cost of revenue—services and other		50,860			50,353			98,734			99,952
Non-recurring revenue		17,214			15,184			33,425			30,357
Cost of revenue—products (excludes amortization of acquired technology)		4,320			4,775			8,938			9,978
		41,983			44,143			81,592			91,595
Research and development		16,452			16,444			31,547			32,179
Recurring revenue – loss on contracts		(2,877	)		(4,886	)		(2,877	)		(5,886	)
Selling, general and administrative		32,429			29,337			61,219			57,145
Non-recurring revenue – loss on contracts		—			3,931			—			4,988
Amortization of acquired technology		1,421			1,237			2,842			2,947
		(2,877	)		(955	)		(2,877	)		(898	)
Amortization of acquired other intangible assets		1,411			1,360			2,794			2,661
Total cost of revenue		39,106			43,188			78,715			90,697
Total operating costs and expenses		106,893			103,506			206,074			204,862
Gross profit		33,402			24,329			65,611			42,570
Income from operations		10,124			11,329			17,763			23,476
Operating expenses:
Interest income		1,541			2,803			3,706			3,556
Research and development		8,434			7,863			16,915			14,989
Interest expense		(3,057	)		(3,483	)		(6,325	)		(6,124	)
Selling, general and administrative		18,775			14,443			36,877			28,503
Change in fair value of derivative liabilities		—			(2,483	)		—			(2,483	)
Amortization of other intangible assets		857			1,160			1,740			2,111
Income before provision for income taxes		8,608			8,166			15,144			18,425
Total operating expenses		28,066			23,466			55,532			45,603
Provision for income taxes		(3,802	)		(4,523	)		(6,416	)		(8,886	)
Income (loss) from operations		5,336			863			10,079			(3,033	)
Net income	$	4,806		$	3,643		$	8,728		$	9,539
Interest income		182			92			371			261
Net income for diluted EPS calculation	$	5,551		$	4,184		$	10,266		$	10,858
Interest expense		(178	)		(324	)		(537	)		(736	)
Net income per share:
Income (loss) before provision for income taxes		5,340			631			9,913			(3,508	)
Basic	$	0.11		$	0.08		$	0.21		$	0.22
Provision for income taxes		(361	)		(200	)		(636	)		(400	)
Diluted	$	0.09		$	0.07		$	0.17		$	0.18
Net income (loss)	$	4,979		$	431		$	9,277		$	(3,908	)
Shares used in computing net income per share:
Net income (loss) per share:
Basic		42,625			44,522			42,473			44,192
Basic	$	0.12		$	0.01		$	0.22		$	(0.08	)
Diluted		60,768			61,876			60,531			61,777
Diluted	$	0.11		$	0.01		$	0.21		$	(0.08	)
Shares used in computing net income (loss) per share:
Basic		41,988			46,869			41,852			46,811
Diluted		44,816			48,233			44,383			46,811

See accompanying notes.

The TriZetto Group, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended June 30,
	Six Months EndedJune 30,
	2005			2004
	2008			2007
Cash flows from operating activities:
Net income (loss)	$	9,277		$	(3,908	)
Net income	$	8,728		$	9,539
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Benefit from doubtful accounts and sales allowance		(612	)		(1,933	)
Net reduction in doubtful accounts and sales allowance		(705	)		(1,628	)
Amortization of deferred stock compensation		544			217
Stock-based compensation		4,973			5,533
Depreciation and amortization		11,~~501~~555			1012,~~136~~332
Amortization of other intangible assets		1,740			2,111
Amortization of acquired technology		2,842			2,947
Loss on contracts		(2,877	)		(898	)
Amortization of acquired other intangible assets		2,794			2,661
Loss on disposal of assets		37			—
Change in fair value of derivative liabilities		—			2,483
Changes in assets and liabilities:
Excess tax benefits from stock-based compensation		(4,636	)		—
Restricted cash		(89	)		24
Loss on disposal of assets		223			—
Accounts receivable		7,834			(4,725	)
Increase in cash surrender value of life insurance policies		(474	)		(565	)
Prepaid expenses and other current assets		(2,223	)		(3,060	)
Changes in assets and liabilities, net of acquisitions:
Income tax receivable		92			594
Restricted cash		—			(819	)
Notes receivable		29			10
Accounts receivable		(14,374	)		(11,406	)
Other assets		(1,982	)		127
Prepaid expenses and other current assets		(1,673	)		(2,285	)
Accounts payable		(1,479	)		4,372
Other assets		350			1,954
Accrued liabilities		(9,490	)		(7,973	)
Accounts payable		(3,196	)		(5,456	)
Deferred revenue		623			7,032
Accrued liabilities		(4,001	)		(7,715	)
Net cash provided by operating activities		12,925			2,126
Deferred revenue		27,744			19,557
Net cash provided by operating activities		30,150			27,132
Cash flows from investing activities:
Sale (purchase) of short-term investments, net		1,203			(1,257	)
Purchase of investments		(77,200	)		(195,640	)
Purchase of property and equipment and software licenses		(1,640	)		(1,498	)
Sale of investments		4,900			142,575
Capitalization of software development costs		(4,124	)		(4,635	)
Purchase of property and equipment and software licenses		(5,946	)		(9,333	)
Acquisitions, net of cash acquired		—			(2,049	)
Capitalization of software development costs		(2,685	)		(3,829	)
Net cash used in investing activities		(4,561	)		(9,439	)
Purchase of intangible assets		(850	)		—
Acquisitions, net of cash acquired		(9,622	)		(143,196	)
Net cash used in investing activities		(91,403	)		(209,423	)
Cash flows from financing activities:
Proceeds from revolving line of credit		~~39,000~~—			—104,200
Proceeds from debt financing		1,511			1,110
Proceeds from term note		—			75,000
Payments on revolving line of credit		(28,000	)		—
Proceeds from notes payable		571			—
Payments on notes payable		(38,161	)		(566	)
Proceeds from convertible debt		—			223,100
Payments on term note		—			(3,750	)
Proceeds from warrant		—			25,714
Payments on capital leases		(2,514	)		(2,594	)
Proceeds from debt financing		495			717
Employee exercise of stock options and purchase of common stock		4,118			1,091
Payments on revolving line of credit		(4,000	)		(99,200	)
Net cash used in financing activities		(24,046	)		(4,709	)
Payment for convertible note hedge (call options)		—			(58,972	)
Net decrease in cash and cash equivalents		(15,682	)		(12,022	)
Payments on term loan		(2,679	)		—
Cash and cash equivalents, beginning of period		70,489			56,026
Payments on notes payable		(518	)		(1,076	)
Cash and cash equivalents, end of period	$	54,807		$	44,004
Payments on capital leases		(605	)		(915	)
Excess tax benefits from stock-based compensation		4,636			—
Employee exercises of stock options		5,126			8,728
Repurchase of common stock to treasury		(1,684	)		—
Net cash provided by financing activities		1,342			277,296
Net (decrease) increase in cash and cash equivalents		(59,911	)		95,005
Cash and cash equivalents at beginning of period		208,507			107,057
Cash and cash equivalents at end of period	$	148,596		$	202,062

See accompanying notes.

The TriZetto Group, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Preparation

The accompanying unaudited condensed consolidated financial statements have been prepared by The TriZetto Group, Inc. (the “Company”) in accordance with generally accepted accounting principles for interim financial information that are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2004~~2007, and pursuant to the instructions to Form 10-Q and Article 10 promulgated by Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes to financial statements required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments ~~(consisting of normal recurring accruals)~~ considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, ~~2005~~2008, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2005~~2008, or for any future period. The financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K as filed with the SEC on February 14 15, ~~2005~~2008.

2. Computation of ~~Net~~Earnings ~~Income (Loss)~~ per Share

~~Basic~~The computation of basic earnings per share (“EPS”) is ~~computed~~based byon ~~dividing net income (loss) by~~ the weighted average number of common shares outstanding ~~for~~during ~~the~~each period. ~~Diluted~~The computation of diluted EPS ~~reflects~~is ~~the~~based ~~potential~~on ~~dilution~~the ~~that~~weighted ~~could~~average ~~occur~~number ~~from~~of common shares ~~issuable~~outstanding ~~through~~during ~~stock~~the ~~options~~period ~~and~~plus, ~~warrants.~~when ~~The~~their ~~following~~effect is adilutive, incremental ~~reconciliation~~shares consisting of ~~the~~shares ~~numerator~~subject ~~(net~~to ~~income~~stock ~~(loss))~~options, warrants and ~~the denominator~~shares ~~(number~~issuable upon vesting of ~~shares)~~restricted ~~used~~stock inawards, calculated using the ~~basic~~treasury ~~and~~stock ~~diluted~~method, ~~EPS~~and ~~calculations~~shares ~~(in~~to ~~thousands,~~be ~~except~~issued ~~per~~upon ~~share~~conversion ~~data):~~of convertible debt.

	Three Months EndedJune 30,				Six Months EndedJune 30,
	2005		2004		2005		2004
BASIC AND DILUTED:
Net income (loss)	$	4,979	$	431	$	9,277	$	(3,908	)
Weighted average shares outstanding (basic)		41,988		46,869		41,852		46,811
Effect of dilutive securities:
Unvested common shares outstanding		535		261		531		—
Stock options		2,293		1,103		2,000		—
Adjusted weighted average shares for diluted EPS		44,816		48,233		44,383		46,811
Basic earnings per share	$	0.12	$	0.01	$	0.22	$	(0.08	)
Diluted earnings per share	$	0.11	$	0.01	$	0.21	$	(0.08	)

Emerging Issues Task Force No. 04-08, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share,” requires companies to account for contingently convertible debt using the “if converted” method set forth in Statement of Financial Accounting Standards No. 128, “Earnings per Share,” for calculating diluted EPS. Under the “if converted” method, the after-tax effect of interest expense related to the convertible securities is added back to net income and convertible debt is assumed to have been converted to equity at the beginning of the period, or at such time when the convertible debt became outstanding if issued during the period, and is added to outstanding common shares, unless the inclusion of such shares is anti-dilutive.

IfFor the ~~Company~~three ~~had reported~~and ~~net income in the~~ six months ended June 30, ~~2004~~2008, ~~additional~~approximately ~~common~~2.0 million ~~share~~and ~~equivalents~~2.2 million ofoptions, 1respectively,~~381,315~~ ~~would~~were ~~have~~anti-dilutive ~~been~~and excluded ~~included~~from in the ~~denominator~~table ~~for~~below, ~~diluted~~compared ~~earnings~~to ~~per~~2.0 million ~~share~~and in1.8 million options for the ~~table~~same ~~above~~period in 2007. ~~These~~For ~~common~~the ~~share~~three ~~equivalents~~and six months ended June 30, ~~calculated using~~2008, approximately 10.4 million warrants relating to the ~~treasury~~convertible ~~stock~~debt offering ~~method~~that occurred on April 11, ~~have~~2007 ~~been~~were anti-dilutive and excluded from the ~~diluted~~table ~~earnings~~below. ~~per~~The ~~share~~following ~~calculation~~is ~~because~~a ~~such~~reconciliation ~~equivalents~~of ~~were~~the ~~antidilutive~~computations as of ~~such~~basic ~~date.~~and diluted EPS information for the periods presented (in thousands, except per share data):


	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Numerator:
Net income, as reported	$	4,806	$	3,643	$	8,728	$	9,539
After-tax interest expense on 2.75% convertible debt		384		307		792		712
After-tax interest expense on 1.125% convertible debt		361		234		746		607

Net income for diluted EPS calculation	$	5,551	$	4,184	$	10,266	$	10,858

Denominator:
Weighted average shares outstanding – basic		42,625		44,522		42,473		44,192
2.75% convertible debt converted to common shares		5,305		5,305		5,305		5,305
1.125% convertible debt converted to common shares		10,467		8,512		10,467		8,512
Unvested common shares outstanding		228		767		214		744
Stock options		2,143		2,770		2,072		3,024

Adjusted weighted average shares for diluted EPS		60,768		61,876		60,531		61,777

Basic earnings per share	$	0.11	$	0.08	$	0.21	$	0.22

Diluted earnings per share	$	0.09	$	0.07	$	0.17	$	0.18

3. Comprehensive Income

FASB Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” (“SFAS 130”), establishes standards for reporting and displaying comprehensive income and its components for general-purpose financial statements. Comprehensive income is defined in SFAS 130 as net income plus all revenues, expenses, gains and losses from non-owner sources that are excluded from net income in accordance with U.S. generally accepted accounting principles.

The components of comprehensive income are as follows (in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
Net income	$	4,806		$	3,643	$	8,728		$	9,539
Unrealized loss on non-current auction rate securities		(1,210	)		—		(4,585	)		—

Total comprehensive income	$	3,596		$	3,643	$	4,143		$	9,539

4. Share-Based Awards

The Company recognizes compensation expense for all share-based awards made to its employees and directors. The fair value of stock options is estimated at the grant date using the Black-Scholes option-pricing model. The fair value of restricted stock awards is based on the closing market price of the Company’s common stock on the date of grant. Stock-based compensation expense for time vested options and awards ultimately expected to vest is recognized as compensation cost over the requisite service period using the straight-line single option method. The Company recognizes compensation cost for performance based restricted stock in the period when it is probable that the performance measures will be achieved. The following table is a summary of the amount of stock-based compensation expense recognized in the consolidated statement of operations (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Cost of revenue—services and other	$	335	$	120	$	571	$	774
Cost of revenue—products		106		85		155		130
Research and development		356		424		658		800
Selling, general and administrative		1,587		1,992		3,589		3,829

Total stock based compensation expense before tax	$	2,384	$	2,621	$	4,973	$	5,533

The determination of fair value using the Black-Scholes option-pricing model is affected by various assumptions including the Company’s stock price, expected stock price volatility, risk-free interest rate, expected dividends and projected employee stock option exercise behavior, or expected term. The Company evaluates the assumptions used to value stock awards on a quarterly basis. The following weighted average assumptions were used for the periods presented:


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Expected volatility		39	%		45	%		39	%		45	%
Risk-free interest rate		2.42	%		4.82	%		2.42	%		4.82	%
Expected life		3.94 years			6.25 years			3.94 years			6.25 years
Forfeiture rate		6	%		6	%		6	%		6	%
Expected dividends		—			—			—			—
Weighted average fair value	$	—		$	10.08		$	6.42		$	10.11

Expected volatility is based on a combination of implied volatility from traded options on the Company’s stock and historical volatility of the Company’s stock. The risk-free interest rate is the U.S. Treasury rate on the date of grant having a term equal to the expected life of the option. The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. In the first quarter of 2008, the Company changed the contractual life of new options granted from 10 to five years. As a result, the Company has determined that comparable historical data does not exist and thus, has continued to apply the “simplified method” outlined in Staff Accounting Bulletin No. 107 to calculate expected term. The forfeiture rate is the estimated

3. percentage ~~Stock-~~of options granted that are expected to be forfeited or cancelled before becoming fully vested and is based ~~Compensation~~on historical experience. These estimates will be revised, if necessary, in future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs. The weighted average fair value was $0.00 for the three months ended June 30, 2008 since no stock options were granted during this period.

The ~~Company has the~~ following ~~stock-based compensation plans: (i) the 1998 Long-Term Incentive Plan, which~~ is ~~an amendment and restatement of the 1998 Stock Option Plan, permits the Company to grant other types of awards in addition to stock options, (ii) the RIMS Stock Option Plan,~~ a ~~plan the Company assumed through the acquisition of Resource Information Management~~ ~~Systems,~~summary ~~Inc. in late 2000, and (iii) the Employee Stock Purchase Plan, which allows full-time employees to purchase shares~~ of ~~the Company’s common~~ stock atoption aactivity ~~discount to fair market value. The Company accounts~~ for ~~stock options granted under these plans using~~ the ~~intrinsic~~six ~~value~~months ~~method~~ended ~~as prescribed by Accounting Principles Board (“APB”) Opinion No. 25~~June 30, ~~“Accounting~~2008 ~~for Stock Issued to Employees,” and related Interpretations. The following table illustrates the effect on net income~~ (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), to stock-based employee compensation utilizing the Black-Scholes valuation model (in thousands, except ~~per~~weighted ~~share~~average data):

	Three Months EndedJune 30,							Six Months EndedJune 30,
	Number ofShares			WeightedAverageExercise Price			Weighted AverageRemainingContractual Life	AggregateIntrinsic Value
	2005				2004			2005			2004
Options Outstanding at December 31, 2007	6,953			$	11.55
Net income (loss) as reported	$	4,979			$	431		$	9,277		$	(3,908	)
Granted	1,082				19.19
Add: stock-based employee compensation expense included in reported net income (loss), net of related tax effects		—				—			—			—
Exercised	(546	)			9.19
Deduct: stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,291	)			(1,032	)		(3,148	)		(2,186	)
Cancelled	(210	)			18.57
Pro forma net income (loss)	$	3,688			$	(601	)	$	6,129		$	(6,094	)
Options Outstanding at June 30, 2008	7,279			$	12.66		5.08	$	65,939
Net income (loss) per share
Exercisable at June 30, 2008	4,855			$	10.79		4.56	$	53,912
Basic, as reported	$	0.12			$	0.01		$	0.22		$	(0.08	)
Diluted, as reported	$	0.11			$	0.01		$	0.21		$	(0.08	)
Basic, pro forma	$	0.09			$	(0.01	)	$	0.15		$	(0.13	)
Diluted, pro forma	$	0.08			$	(0.01	)	$	0.14		$	(0.13	)

The ~~Company~~total ~~evaluates the~~intrinsic ~~assumptions~~value ~~used~~of tooptions ~~value~~exercised ~~stock~~during ~~awards~~the ~~under~~six ~~SFAS~~months ~~123~~ended onJune 30, a2008 ~~quarterly basis~~was $6.0 ~~Based on guidance provided in SFAS No~~million. ~~123~~As ~~(Revised~~of ~~2004)~~June 30, ~~“Share-Based Payment” (“SFAS 123R”)~~2008, ~~and SAB No~~$12.6 ~~107,~~million ~~“Share-Based Payment,” in the first quarter~~ of ~~2005,~~total ~~the~~unrecognized ~~Company~~compensation ~~refined~~cost ~~its~~related ~~volatility assumption from 0.50~~ to ~~0.55~~stock ~~based~~options onis ~~implied~~expected ~~volatility, and changed its risk-free interest rate assumption from 3.0%~~ to ~~3.7%~~be torecognized ~~more~~over ~~accurately~~a ~~reflect~~weighted ~~the~~average ~~most~~period ~~current risk-free interest rate at the time~~ of ~~the Company’s most recent stock option grant~~2.31 ~~The Company believes that its current assumptions generate a more representative estimate of fair value~~years.

~~Such~~The ~~pro~~following ~~forma~~table ~~disclosures~~summarizes ~~may~~nonvested ~~not~~restricted bestock ~~representative~~awards as of ~~future~~June 30, ~~pro~~2008 ~~forma~~and ~~compensation~~changes ~~cost~~during ~~because~~the ~~options~~six ~~vest~~months ~~over~~ended ~~several years~~June 30, ~~and~~2008 ~~additional~~(in thousands, ~~grants~~except ~~are~~weighted ~~anticipated~~average todata): ~~be made each year.~~

4. Deferred Stock Compensation


	Number of Shares		Weighted- Average Grant-Date Fair Value
Nonvested at December 31, 2007	636		$	17.29
Granted	—			—
Vested	(76	)		17.58
Forfeited	(86	)		16.67

Nonvested at June 30, 2008	474		$	17.36

~~The~~As ~~following~~of ~~table~~June 30, is2008, ~~a summary~~there ofwas ~~the~~$4.6 ~~amount~~million of ~~amortization~~total ofunrecognized ~~deferred stock~~ compensation, ~~which~~cost ~~relates~~ related to nonvested restricted stock. ~~These~~awards, ~~amounts~~which ~~are~~will ~~included~~be inamortized ~~cost~~over ofthe ~~revenue~~weighted-average ~~and~~remaining ~~operating~~service ~~expenses~~period asof ~~follows~~1.32 ~~(in~~years. ~~thousands):~~

	Three Months EndedJune 30,				Six Months EndedJune 30,
	2005		2004		2005		2004
Cost of revenue – recurring	$	—	$	—	$	—	$	4
Research and development		8		6		14		12
Selling, general and administrative		285		99		530		201
Total	$	293	$	105	$	544	$	217

5. Supplemental Cash Flow Disclosures

The following table is a summary of supplemental cash flow disclosures as follows (in thousands):

	Six Months EndedJune 30,
	2005		2004
	2008		2007
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION
Cash paid for interest	$	~~595~~6,353	$	~~796~~4,490
Cash paid for income taxes		~~542~~5,079		~~169~~6,522
Deferred stock compensation		863		735
NON-CASH INVESTING AND FINANCING ACTIVITIES
Assets acquired through capital lease		~~147~~—		—349
Common stock issued in connection with PDM acquisition		—		8,911

6. ~~Notes Payables and Line of Credit~~

TheTable following table is a summary of the Company’s notes payables and line of credit (in thousands): Contents

	Notes Payable						Line of Credit
	June 30,2005			December 31,2004			June 30,2005		December 31,2004
Revolving credit facility of $50.0 million, interest at the lending institution’s prime rate plus 1% (7.25% at June 30, 2005) payable monthly in arrears	$	—		$	—		$	23,000	$	12,000
Note payable of $3.1 million issued for certain equipment, due in monthly installments through November 2005, interest at LIBOR rate plus 3.13% (6.22% at June 30, 2005)		1,989			2,135			—		—
Note payable of $37.4 million to finance shares repurchased, interest fixed at 5.75%, principal and interest paid in full on January 21, 2005		—			37,415			—		—
Other		961			50			—		—
Total notes payable and line of credit		2,950			39,600			23,000		12,000
Less: current portion		(2,950	)		(39,600	)		—		—
	$	—		$	—		$	23,000	$	12,000

6. Accrued Liabilities

AsAccrued ofliabilities ~~June~~consist ~~30, 2005, the Company had outstanding borrowings on its current revolving credit facility~~ of ~~$23.0 million, with $27.0 million available on this facility. As of June 30, 2005~~ the ~~Company~~following ~~was~~ (in ~~compliance~~thousands): ~~with all of the covenants under the credit facility.~~

On December 21, 2004, the Company and IMS Health Incorporated (“IMS Health”) entered into a Share Purchase Agreement pursuant to which, on the same date, the Company purchased all of the 12,142,857 shares of the Company’s common stock owned by IMS Health for an aggregate purchase price of $82.0 million, or $6.75 per share. The purchase price for the repurchase of shares was paid by delivery of $44.6 million in cash and a Subordinated Promissory Note in the principal amount of $37.4 million. The Subordinated Promissory Note bore interest at the rate of 5.75% and was repaid in full on January 21, 2005 from the Company’s cash accounts. The cash portion of the purchase price was financed with the proceeds of the Company’s sale of 6,600,000 shares of its common stock to Value Act Capital on December 21, 2004.


	June 30, 2008		December 31, 2007
Accrued payroll and benefits	$	26,551	$	34,181
Accrued professional and litigation fees and settlements		985		1,342
Accrued contingent considerations related to acquisitions		13,330		9,772
Accrued employee relations		609		388
Accrued income and other taxes		3,720		1,964
Accrued interest		1,297		1,335
Other		5,509		4,097

	$	52,001	$	53,079

7During the three months ended June 30, 2008, CareKey and PDM stockholders and optionholders earned contingent consideration payments of $8.3 ~~Loss~~million onand ~~Contracts~~$5.0 million, respectively, upon the achievement of certain revenue milestones. Payment is expected to be paid to PDM stockholders and optionholders in the third quarter of 2008 and to CareKey stockholders and optionholders in the first quarter of 2009. The accrual of this contingent consideration increased goodwill by $13.3 million during the three months ended June 30, 2008.

~~During the fourth quarter of 2003, the Company decided to wind-down its outsourcing services to physician group customers~~7. AsDebt a result of this decision, the Company estimated that the existing customer agreements from this business would generate a total loss of $11.3 million until the terms of these agreements expired in 2008. This loss was charged to recurring cost of revenue in the fourth quarter of 2003. Through discussions and negotiations, the Company was able to accelerate the termination of its services agreements with certain physician group customers and implemented cost cutting measures that reduced the expected future costs to support its remaining customers. As a result of these actions, the Company was able to reverse approximately $5.9 million of previously accrued loss on contracts charges in 2004. Early in the second quarter of 2005, the Company executed termination agreements with its two remaining physician group customers. The Company continued to provide outsourced business services through May 2005, when the transition services were completed. The completion of these services to the remaining customers allowed the Company to reverse the remaining balance in its

Debt consists of the following for the periods presented (in thousands):


	Notes Payable						Line of Credit and Term Loan
	June 30, 2008			December 31, 2007			June 30, 2008			December 31, 2007
Long-term convertible debt, due in 2025, interest at 2.75% fixed rate, payable semi-annually in arrears	$	100,000		$	100,000		$	—		$	—
Long-term convertible debt, due in 2012, interest at 1.125% fixed rate, payable semi-annually in arrears		230,000			230,000			—			—
Term loan of $150.0 million, interest at the lending institution’s prime rate plus adjustable applicable margin between 0.00% and 2.00% (prime rate 5.00% at June 30, 2008), payable monthly in arrears; or LIBOR rate plus an adjustable applicable margin of between 1.75% and 3.50%, payable upon maturity date		—			—			64,285			66,964
Revolving credit facility of $100.0 million, interest at the lending institution’s prime rate plus adjustable applicable margin between 0.00% and 2.00% (prime rate 5.00% at June 30, 2008), payable monthly in arrears; or LIBOR rate plus an adjustable applicable margin of between 1.75% and 3.50%, payable upon maturity date		—			—			—			4,000
Other		601			53			—			—

Total debt	$	330,601		$	330,053		$	64,285		$	70,964
Less: Current portion		(601	)		(53	)		(10,714	)		(10,714	)

	$	330,000		$	330,000		$	53,571		$	60,250

2.75% Convertible Senior Notes

In October 2005, the Company issued $100.0 million aggregate principal amount of 2.75% Convertible Senior Notes due 2025 (the “2025 Notes”). The 2025 Notes bear interest at a rate of 2.75%, which is payable in cash semi-annually in arrears on April 1 and October 1 of each year, and commenced on April 1, 2006, to the holders of record on the preceding March 15 and September 15, respectively.

The 2025 Notes are convertible into shares of the Company’s common stock at an initial conversion price of $18.85 per share, or 53.0504 shares for each $1,000 principal amount of 2025 Notes, subject to certain adjustments pursuant to an indenture with Wells Fargo Bank, National Association, as trustee (the “2025 Indenture”). The maximum conversion rate is 68.9655 shares for each $1,000 principal amount of 2025 Notes. Upon conversion of the 2025 Notes, the Company will have the right to deliver shares of its

~~loss~~common onstock, ~~contracts~~cash ~~accrual~~or any combination of $2cash and shares of its common stock.9 ~~million~~The 2025 Notes are convertible (i) prior to October 1, 2020, during any fiscal quarter after the fiscal quarter ending December 31, 2005, if the closing sale price of the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the ~~second~~last trading day of the immediately preceding fiscal quarter exceeds 120% of ~~2005.~~the ~~The~~conversion ~~total~~price ~~amount~~in effect on the last trading day of ~~loss~~the ~~actually~~immediately ~~incurred~~preceding ~~related~~fiscal quarter, (ii) prior to October 1, 2020, during the ~~outsourcing~~five ~~services~~business today period after any five ~~physician~~consecutive ~~group~~trading ~~customers~~day ~~was~~period ~~$2.1~~(the ~~million~~“Note Measurement Period”) in ~~2004~~which ~~and~~the average trading price per $~~403~~1,000 inprincipal amount of 2025 Notes was equal to or less than 97% of the ~~first~~average ~~six~~conversion ~~months~~value of ~~2005.~~the 2025 Notes during the Note Measurement Period, (iii) upon the occurrence of specified corporate transactions, as described in the 2025 Indenture, (iv) if the Company calls the 2025 Notes for redemption, or (v) any time on or after October 1, 2020.

InThe ~~December~~2025 ~~2003~~Notes mature on October 1, ~~the~~2025. ~~Company~~However, ~~negotiated~~on aor ~~settlement~~after ~~regarding~~October 5, ~~out-of-scope~~2010, ~~work~~the ~~related~~Company may from time to ~~one~~time ofat its ~~large~~option redeem ~~fixed~~the ~~fee~~2025 ~~implementation~~Notes, ~~projects.~~in Aswhole ~~a result~~or ofin ~~this~~part, ~~settlement~~for cash, ~~the~~at ~~Company~~a ~~estimated~~redemption ~~that~~price ~~this~~equal ~~project~~to ~~would~~100% ~~generate~~of athe ~~total~~principal ~~loss~~amount of ~~$3.7~~the ~~million~~2025 ~~until~~Notes ~~its~~the ~~completion~~Company redeems, ~~which~~plus ~~was~~any ~~expected~~accrued and unpaid interest to, ~~occur~~but inexcluding, ~~mid-2004~~the redemption date. ~~This~~On ~~loss~~each ~~was~~of October 1, ~~charged~~2010, October 1, to2015 ~~non-recurring~~and ~~cost~~October 1, of2020, ~~revenue~~holders inmay require the ~~fourth quarter~~Company to purchase all or a portion of ~~2003.~~their In2025 ~~2004,~~Notes at a purchase price in cash equal to 100% of the ~~Company~~principal ~~determined~~amount ~~that~~of the ~~large~~2025 ~~fixed~~Notes ~~fee~~to ~~implementation~~be purchased, ~~project~~plus ~~would~~any ~~require~~accrued aand ~~greater~~unpaid ~~effort~~interest to, ~~complete~~but ~~than~~excluding, ~~previously~~the ~~estimated~~purchase date. AsIn ~~a result~~addition, holders may require the Company ~~accrued~~to anrepurchase ~~additional~~all ~~$5.0~~or ~~million~~a portion of ~~loss~~their on2025 ~~contract charges~~Notes upon a fundamental change, as described in the ~~first~~2025 ~~six~~Indenture, ~~months~~at ofa repurchase ~~2004.~~price Inin ~~the~~cash ~~fourth~~equal ~~quarter~~to 100% of ~~2004,~~the principal amount of the ~~Company~~2025 ~~negotiated~~Notes ato ~~settlement~~be ofrepurchased, ~~additional~~plus ~~out-of-scope~~any ~~work~~accrued and unpaid interest to, ~~which~~but ~~decreased~~excluding, the ~~total~~fundamental ~~loss~~change onrepurchase date. Additionally, the ~~project~~2025 Notes may become immediately due and ~~resulted~~payable inupon ~~the~~an ~~reversal~~Event of ~~approximately $455~~Default,~~000~~ ~~of previously~~as ~~accrued~~defined ~~loss~~in onthe ~~contracts~~2025 ~~charges~~Indenture. ~~This~~Pursuant ~~fixed~~to ~~fee~~a ~~implementation~~Registration ~~was~~Rights ~~completed~~Agreement bydated October 5, 2005, the ~~end~~Company offiled with the ~~first~~Securities ~~quarter~~and ~~2005.~~Exchange ~~The~~Commission, ~~total~~a ~~amount~~registration ofstatement ~~loss~~under ~~actually~~the Securities ~~incurred~~Act onfor ~~this~~the ~~project~~purpose ~~was~~of ~~$7.7~~registering ~~million~~for inresale, ~~2004~~the 2025 Notes and ~~$484,000~~all inof the ~~first~~shares ~~quarter~~of its common stock issuable upon conversion of ~~2005~~ the 2025 Notes.

~~The~~1.125% ~~following~~Convertible ~~table~~Senior ~~summarizes~~Notes ~~the activities in the Company’s loss on contracts reserves in the first six months of 2005 (in thousands):~~

	PhysicianGroup			Consulting			Total
Accrued loss on contracts, December 31, 2004	$	3,280		$	484		$	3,764
Net loss applied against accrual		(216	)		(484	)		(700	)
Accrued loss on contracts, March 31, 2005		3,064			—			3,064
Decrease in estimate of loss		(2,877	)		—			(2,877	)
Net loss applied against accrual		(187	)		—			(187	)
Accrued loss on contracts, June 30, 2005	$	—		$	—		$	—

On April 11, 2007, the Company entered into a Purchase Agreement with Deutsche Bank Securities Inc., Goldman, Sachs & Co. and UBS Investment Bank (the “Initial Purchasers”), to sell $230.0 million aggregate principal amount of its 1.125% Convertible Senior Notes due 2012 which included $30 million to cover over-allotments (the “2012 Notes”) in a private placement in reliance on Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). The 2012 Notes have been resold by the Initial Purchasers to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The sale of the 2012 Notes to the Initial Purchasers was consummated on April 17, 2007.

8The aggregate net proceeds received by the Company from the sale of the 2012 Notes was approximately $223 million, after deducting the Initial Purchasers’ discount and offering expenses. ~~Litigation~~The 2012 Notes are the Company’s senior unsecured obligations and rank equal in right of payment with all of the Company’s other senior unsecured debt and senior to all of the Company’s future subordinated debt.

OnThe ~~October~~2012 ~~26,~~Notes ~~2004,~~were aissued ~~jury~~pursuant into ~~California~~an ~~Superior Court~~indenture, ~~County~~dated ~~of Alameda~~April 17, ~~delivered~~ ~~its verdict in the case of Associated Third Party Administrators v. The TriZetto Group~~2007, ~~Inc.,~~by aand ~~dispute involving technology agreements~~ between ~~Associated Third Party Administrators (“ATPA”), a former QicLink™ customer, and~~ the Company. ~~In its verdict, the jury found that the Company made certain misrepresentations to ATPA in connection with the license of QicLink™ software in 2001~~ and ~~awarded~~Wells ~~damages~~Fargo ofBank, ~~approximately~~National ~~$1.85 million~~Association, ~~representing~~as trustee ~~primarily~~ (the ~~amount~~“2012 ~~of the license fee paid by ATPA~~Indenture”). InThe ~~the~~2012 ~~first~~Notes ~~quarter~~bear ofinterest ~~2005,~~at a ~~judgment~~rate ~~was entered by the court, which included, in addition to damages~~ of $1.~~85 million~~125%, ~~approximately~~ ~~$500,000~~which inis ~~pre-judgment~~payable ~~interest~~in ~~and~~cash ~~recoverable~~semi-annually ~~costs.~~in ~~The~~arrears ~~Company~~on ~~recorded~~April 15 anand ~~accrual~~October 15 ~~for~~of ~~the~~each ~~additional $500~~year,~~000~~ ofand ~~costs~~commenced inon ~~the first quarter of 2005 increasing the total accrual for the dispute to $2.35 million. In June 2005~~October 15, the Company entered into a settlement agreement with ATPA in which the Company agreed to pay ATPA $2.2 million to fully resolve the dispute. The Company paid this amount to ATPA in July 2005. In June 20052007, ~~the Company’s insurance carrier agreed~~ to ~~reimburse~~ the ~~Company a total~~ holders of ~~$1.1~~record ~~million~~on of the ~~settlement,~~preceding ~~which~~April 1 ~~was~~and ~~recorded as a receivable as of June 30~~October 1, ~~2005~~respectively. ~~The full amount of this receivable was collected in July 2005.~~

OnThe ~~September~~2012 13Notes are convertible into shares of the Company’s Common stock at an initial conversion price of $21.97 per share, ~~2004~~or 45.5114 shares for each $1,000 ~~McKesson~~principal ~~Information~~amount ~~Solutions~~of ~~LLC~~2012 ~~(“McKesson”)~~Notes, ~~filed~~subject ato ~~lawsuit~~certain ~~against~~adjustments ~~the~~set ~~Company~~forth in the ~~United~~ ~~States~~2012 ~~District~~Indenture. ~~Court~~The maximum conversion rate is 53.4759 shares for ~~the~~each $1,000 ~~District~~principal amount of ~~Delaware~~2012 Notes. InUpon ~~its~~conversion ~~complaint,~~of ~~McKesson~~the ~~alleged~~2012 ~~that~~Notes, the Company ~~made,~~will ~~used,~~have ~~offered~~the ~~for~~right ~~sale~~to deliver shares of its common stock, ~~and/~~cash or ~~sold~~any acombination ~~system~~of ~~that~~cash ~~infringes~~and ~~McKesson’s~~shares ~~United~~of ~~States~~its ~~Patent~~common Nostock. 5The 2012 Notes are convertible (i) prior to January 15,~~253~~ 2012,~~164~~ during any calendar quarter after the calendar quarter ending June 30, ~~entitled~~2007, if the closing sale price of the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading ~~“System~~days ~~And~~ending ~~Method~~on ~~For~~the ~~Detecting~~last ~~Fraudulent~~trading ~~Medical~~day ~~Claims~~of ~~Via~~the ~~Examination~~immediately Ofpreceding ~~Services~~fiscal ~~Codes.”~~quarter ~~McKesson~~exceeds ~~seeks~~130% ~~injunctive~~of ~~relief~~the ~~and~~conversion ~~monetary~~price ~~damages~~in effect on the last trading day of anthe ~~unspecified~~immediately ~~amount,~~preceding ~~including~~fiscal ~~treble~~quarter, ~~damages~~(ii) prior ~~for~~to ~~willful~~January 15, ~~infringement.~~2012, ~~The~~during ~~Company~~the ~~has~~five ~~not~~business ~~accrued~~day ~~any~~period ~~liability~~after ~~related~~any tofive ~~this~~consecutive ~~lawsuit~~trading asday period (the ~~Company~~“Note ~~does~~Measurement ~~not~~Period”) ~~believe~~in aswhich ofthe ~~June~~average ~~30,~~trading ~~2005~~price per $1,000 ~~that~~principal ~~its~~amount ~~liability~~of 2012 Notes was equal to ~~McKesson~~or isless ~~probable~~than ~~and~~97% ~~capable~~of the average conversion value of ~~being~~the ~~reasonably~~2012 ~~estimated.~~Notes ~~The~~during ~~Company’s~~the ~~attorney~~Note ~~and~~Measurement ~~other~~Period, ~~defense~~(iii) upon ~~costs related~~the tooccurrence ~~this~~of ~~matter~~specified ~~are~~corporate ~~being~~transactions, ~~expensed~~as atdescribed in the 2012 Indenture, or (iv) any time ~~such~~on ~~costs~~or ~~are~~after ~~incurred~~January 15, 2012.

InThe ~~addition~~Company toused ~~the~~$59.0 ~~matters~~million ~~described~~of ~~above,~~the ~~and~~aggregate net proceeds from ~~time~~the 2012 Notes to ~~time,~~pay the ~~Company~~net iscost ~~involved~~of ina ~~litigation~~call ~~relating~~option totransaction ~~claims~~entered ~~arising~~into ~~out~~in connection ofwith ~~its~~the ~~operations~~offering. inThe ~~the~~call ~~normal~~option ~~course~~covers ofapproximately ~~business~~10.4 million ~~Although~~shares of the Company’s ~~is unable~~common atstock ~~this~~and ~~time~~is intended to ~~predict~~reduce the ~~outcome~~dilution ofto the ~~McKesson~~Company’s ~~lawsuit,~~common ~~the~~stock ~~Company~~upon ~~believes~~potential ~~that~~future asconversion of ~~June~~the ~~30,~~2012 Notes. ~~2005,~~The itcall ~~was~~option ~~not~~has aan ~~party~~exercise toprice ~~any~~equal ~~other~~to ~~legal proceedings,~~ the ~~adverse~~conversion ~~outcome~~price of ~~which, in management’s opinion, individually or in~~ the ~~aggregate,~~ ~~would~~2012 ~~have~~Notes aand ~~material~~will ~~adverse~~terminate ~~effect~~ on ~~its~~the ~~results~~earlier of ~~operations, financial position or cash flows.~~

9. Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”), which is a revision to SFAS 123 and supersedes APB 25 and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition

~~and Disclosure”~~ (~~“SFAS 148”~~i). the ~~This~~last ~~statement~~day ~~requires~~any ~~that~~of the ~~cost~~2012 ~~resulting~~Notes ~~from~~remain ~~all~~outstanding ~~share-based~~or ~~payment~~(ii) April 15, ~~transactions be recognized in the financial statements~~2012. ~~This~~The ~~statement~~Company ~~establishes~~also ~~fair~~entered ~~value~~into ~~as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply~~ a ~~fair-value~~warrant ~~based~~transaction ~~measurement method~~ in ~~accounting for share-based~~ ~~payment~~connection ~~transactions~~ with ~~employees~~the ~~except~~offering. ~~for~~The ~~equity~~Company ~~instruments~~sold ~~held~~warrants byto ~~employee~~acquire ~~share~~approximately ~~ownership plans~~10.4 million ~~SFAS~~shares ~~123R~~of ~~applies to all awards granted after~~ the ~~required~~Company’s ~~effective~~common ~~date~~stock ~~and~~ to ~~awards~~affiliates ~~modified,~~of ~~repurchased,~~one or ~~cancelled~~more ~~after that date. As~~ of the ~~required~~initial ~~effective~~purchases ~~date, all public entities that used the fair-value-based method~~ for ~~either~~$25.7 ~~recognition or disclosure under Statement 123 will apply this Statement using a modified version of prospective application~~million. ~~Under~~The ~~that~~warrants ~~transition method,~~have ~~compensation~~an ~~cost~~exercise ~~is recognized on or after the required effective date for the portion~~ price of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under Statement 123 for either recognition or pro forma disclosures$31.79 ~~For~~per ~~periods~~share ~~before~~and ~~the required effective date, those entities~~ may ~~elect~~be tosettled ~~apply~~at avarious ~~modified~~dates ~~version~~from ofJuly ~~the~~2012 ~~retrospective~~through ~~application~~December ~~under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by Statement 123~~2012.

InWells ~~April~~Fargo ~~2005,~~Foothill ~~the~~Amended ~~Securities~~ and ~~Exchange~~Restated ~~Commission (“SEC”) approved a new rule that delayed the effective date of SFAS 123R. For most public~~Credit ~~companies,~~Agreement the delay eliminates the comparability issues that would arise from adopting SFAS 123R in the middle of their fiscal years as originally called for by SFAS 123R. Except for this deferral of the effective date, the guidance in SFAS 123R is unchanged. Under the SEC’s rule, SFAS 123R is now effective for public companies for annual, rather than interim, periods that begin after June 15, 2005. The Company is evaluating both the requirements under SFAS 123R and potential adoption dates and has not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123. Such adoption could have a substantial impact on the Company’s consolidated statements of operations and earnings per share.

On January 10, 2007, the Company (together with certain specified subsidiaries, the “Borrowers”) entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with Wells Fargo Foothill, Inc., as the administrative agent and lender (the “Lender”). The Credit Agreement amended and restated the Company’s $100.0 million revolving credit facility with the Lender and provided that the Lender will make available to the Company up to $150.0 million of term debt (the “Term Loan”). The Credit Agreement expires by its terms on January 5, 2011. All borrowings under the Credit Agreement bear interest at a per annum rate equal to either (i) the LIBOR rate plus an adjustable applicable margin of between 1.75% and 3.50% or (ii) Wells Fargo’s prime rate plus an adjustable applicable margin of between 0.0% and 2.0%, at the election of the Company, subject to specified restrictions.

The Company initially drew down $75.0 million from the Term Loan to partially fund its acquisition of Quality Care Solutions, Inc. (“QCSI”) in January 2007. All borrowings under the Term Loan must be repaid in quarterly installments commencing on June 30, 2007 and continuing on the first day of each calendar quarter thereafter through January 5, 2011, in amounts equal to the amount outstanding under the Term Loan on June 30, 2007 with a final balloon payment due January 5, 2011.

On March 31, 2008, the Company entered into Amendments Number Three and Four to the Amended and Restated Credit Agreement dated January 10, 2007, with Wells Fargo Foothill, Inc. Amendment Three sets forth the quarterly trailing twelve month recurring revenue requirements through December 31, 2008. Amendment Four allows the Borrowers to request additional term loan draws through March 31, 2009 and further extends the application of an unused term loan commitment fee through April 1, 2009. In addition, Amendment Four extends the deadline for the Company to repurchase shares of its common stock to March 31, 2009. The guidelines for repurchase still remain in place allowing the Company to repurchase up to $100.0 million of its common stock provided that the Company has liquidity (defined as the sum of unrestricted cash and cash equivalents plus availability of borrowings on its revolving line of credit) in excess of $80.0 million both before and immediately after giving effect to such transaction.

As of June 30, 2008, no additional draws have been made. In the event Borrowers terminate the Credit Agreement prior to its expiration or make certain prepayments, the Borrowers will be required to pay the Lender a termination or prepayment fee equal to 1% of the maximum credit amount in the event of termination or 1% of the prepayment amount in the event of prepayments, subject to specified exceptions. Under the Credit Agreement, the Borrowers have granted the Lender a security interest in all of the assets of the Borrowers.

The Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations on the Borrowers with respect to indebtedness, liens, investments, distributions, mergers and acquisitions, dispositions of assets and transactions with affiliates of the Borrowers. The Credit Agreement also includes financial covenants including minimum EBITDA, minimum liquidity, minimum recurring revenue (which includes outsourced business services and software maintenance revenue) and maximum capital expenditures.

As of June 30, 2008, the Company had no outstanding borrowings on the revolving line of credit and $64.3 million outstanding under the Term Loan, and was in compliance with all applicable covenants and other restrictions under the Credit Agreement. As of June 30, 2008, the Company also had $100.0 million available under its revolving line of credit.

8. Legal Proceedings

On April 15, 2008, Plaintiff David P. Simonetti Rollover IRA filed a Verified Class Action Complaint in the Delaware Court of Chancery, entitled David P. Simonetti Rollover IRA, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. Jeffrey H. Margolis, Donald J. Lothrop, Thomas B. Johnson, Paul F. Lefort, Jerry P. Widman, Nancy H. Handel, L. William Krause, Apax Partners, L.P., TZ Holdings, L.P., TZ Merger Sub, Inc., and The TriZetto Group Inc., Defendants, C.A. No. 3694-VCN (the “Simonetti Litigation”). The complaint sought, among other relief, certification of a class of all common stockholders of TriZetto who allegedly were harmed by the defendants’ actions challenged in the complaint, a declaration that the defendants had breached their fiduciary and other duties, entry of an order requiring defendants to take certain steps in connection with the proposed transaction, compensatory damages, costs and disbursements, including plaintiff’s counsel’s fees and experts’ fees. On May 20, 2008, the plaintiff in the Simonetti Litigation filed a First Amended Complaint, which added allegations that the defendants allegedly failed to disclose material facts regarding the Merger.

~~Cautionary~~In ~~Statement~~addition to the Simonetti Litigation, two putative class action complaints were filed in the Superior Court of the State of California, County of Orange, alleging substantially similar claims as those alleged in the Simonetti Litigation. On May 28, 2008, the two California putative class actions were consolidated (the “Consolidated California Action”), and on June 5, 2008, the Consolidated California Action was stayed in favor of the Simonetti Litigation. On June 10, 2008, the plaintiffs in the Consolidated California Action filed a putative class action complaint in the Delaware Court of Chancery entitled City Of Fort Lauderdale Police And Firefighters’ Retirement System And Police And Fire Retirement System Of The City Of Detroit, Individually and On Behalf of All Others Similarly Situated, v. Jeffrey H. Margolis, et al., C.A. No. 3817-VCN (together with the Simonetti Litigation, the “Delaware Litigation” and collectively with the Consolidated California Action, the “Merger Litigation”). In addition, counsel for plaintiffs’ in the Consolidated California Action appeared as counsel in the Simonetti Litigation and joined in the discovery and briefing in the Simonetti Litigation in connection with the motion to preliminarily enjoin the Merger.

~~This~~On ~~report~~June 27, ~~contains~~2008, ~~forward-looking statements that have been made pursuant to~~ the ~~provisions~~Delaware ofCourt ~~the Private Securities Litigation Reform Act~~ of ~~1995.~~Chancery ~~These~~issued ~~statements~~a ~~relate~~memorandum toopinion ~~future~~and ~~events~~order or(the ~~our future financial performance. In some cases, you can identify forward-looking statements by terminology such as~~ “~~may,~~Order”) ~~“will,”~~in ~~“should,” “forecasts,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or~~ the ~~negative of such terms and other~~ ~~comparable~~Simonetti ~~terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements~~Litigation, ~~you~~granting ~~should specifically consider various factors, including the following risks, which are outlined~~ in ~~more~~ ~~detail~~part ~~in our Form 10-K, filed with the Securities~~ and ~~Exchange~~denying ~~Commission~~in onpart ~~February 14, 2005, under~~ the ~~caption~~plaintiff’s ~~“Risk~~motion ~~Factors”:~~for ~~(i) we have~~ a ~~history~~preliminary ofinjunction ~~operating~~enjoining ~~losses~~the ~~and~~proposed weMerger. ~~cannot~~The ~~predict~~Court ifpreliminarily weenjoined ~~will~~TriZetto ~~be able to sustain profitability in the future, (ii) revenue~~ from aconducting ~~limited number of customers comprises a significant portion of our total revenue, and if these customers terminate~~ or ~~modify~~allowing ~~existing~~any ~~contracts~~vote orby ~~experience~~its ~~business~~stockholders ~~difficulties, it could adversely~~to ~~affect~~approve ~~our~~the ~~earnings,~~proposed ~~(iii)~~Merger ~~our~~until ~~business~~TriZetto ismade ~~changing~~curative ~~rapidly,~~supplemental ~~which~~disclosures ~~could~~relating ~~cause our quarterly operating results~~ to ~~vary~~certain and our stock price to fluctuate, (iv) the intensifying competition we face from both established entities and new entries in the market may adversely affect our revenue and profitability, (v) our sales cycles are long and unpredictable, (vi) consolidation of healthcare payer organizations could decrease the number of our existing and potential ~~customers,~~financial ~~(vii)~~benefits ~~some~~ of ~~our significant customers may develop their own software solutions, which could decrease~~ the ~~demand~~Merger of our products, (viii) we depend on our software application vendor relationships, and if our software application vendors terminate or modify existing contracts or experience business difficulties, or if we are unable to ~~establish~~TriZetto’s ~~new~~financial ~~relationships with additional software application vendors~~advisor, itUBS ~~could~~Securities ~~harm~~LLC ~~our business,~~ (ix“UBS”) ~~we rely on third-party software vendors for components of our software products~~, ~~(x) we have sustained rapid growth,~~ and ~~our~~its ~~inability to manage this growth could harm our business~~affiliates, ~~(xi) our acquisition strategy may disrupt our business and require additional financing, (xii) our need for additional financing is~~upon ~~uncertain~~consummation asof isthe ~~our~~transactions ~~ability~~contemplated toby ~~raise~~the ~~capital~~Merger ~~if required~~Agreement, ~~(xiii)~~based ~~our~~on ~~business~~its ~~will~~interest ~~suffer if our software products contain errors, (xiv) we could lose customers and revenue if we fail to meet the performance standards and other obligations~~ in ~~our contracts,~~certain ~~(xv)~~convertible ifnotes ~~our~~issued ~~ability~~by toTriZetto ~~expand our network~~ and ~~computing~~related ~~infrastructure~~bond ishedge ~~constrained in any way, we could lose customers~~ and ~~damage~~warrant ~~our~~transactions ~~operating~~entered ~~results,~~into ~~(xvi) performance or security problems~~ with ~~our~~TriZetto ~~systems~~in ~~could~~2007 ~~damage our business,~~ (xvii) our success depends on our ability to attract, retain and motivate management and other key personnel, (xviii) we rely on an adequate supply and performance of computer hardware and related equipment from third parties to provide services to larger customers and any significant interruption in the ~~availability or performance of third-party hardware and related equipment could adversely affect our ability to deliver our products to certain customers on a timely basis, (xix) any failure~~“Financial orAdvisor ~~inability to protect our technology and confidential information could adversely affect our business, (xx~~Disclosure”). ifThe ~~our~~Court’s ~~consulting~~Order ~~services~~provided ~~revenue does not grow substantially~~that, ~~our~~upon ~~revenue growth could be adversely impacted~~application, ~~(xxi) part of our business will suffer if health plan customers do not accept Internet solutions, (xxii)~~ the ~~insolvency~~Order ~~of our customers or the inability of our customers to pay for our services~~ could ~~negatively~~be ~~affect~~vacated ~~our~~upon ~~financial~~demonstration condition, (xxiii) changes in government regulation of the healthcare industry could adversely affect our business, and (xxiv) part of our business is subject to government regulation relating to the Internet that ~~could~~TriZetto ~~impair~~had ~~our~~provided ~~operations.~~appropriate ~~These~~curative ~~factors may cause our actual events to differ materially from any forward-looking statement~~disclosure. ~~We do not undertake to update any forward-looking statement.~~

~~Item~~Following 2.the ~~Management~~Court’s ~~Discussion~~Order, ~~and~~counsel ~~Analysis~~for the parties negotiated the contents of the Financial ~~Condition~~Advisor ~~and~~Disclosure. ~~Results~~The parties thereafter entered into a stipulation agreeing upon the substance of ~~Operations~~the Financial Advisor Disclosure and submitted the Financial Advisor Disclosure to the Court for its approval. The Parties jointly requested that the Court vacate its Order preliminarily enjoining the Merger.

WeOn ~~offer~~July 2, a2008, ~~broad~~the ~~portfolio~~Court ofissued ~~proprietary~~an ~~information~~order ~~technology~~approving ~~products~~the ~~and~~parties’ ~~services~~stipulation ~~targeted~~and tovacating the ~~payer industry, which~~preliminary isinjunction ~~comprised~~Order ofdependent health insurance plans and third party benefits administrators. We offer: enterprise administration software, including Facets Extended Enterprise™ and QicLink Extended Enterprise™; specialized component software, including our NetworX™ products for provider network management, CareAdvance™ care management software, HealthWeb® suite of web interface tools, Defined Contribution and Workflow add-on ~~modules~~TriZetto ~~for~~providing ~~Facets®~~the ~~and~~Financial ~~DirectLink™~~Advisor ~~direct~~Disclosure connectivity claims transaction software; software hosting services and business process outsourcing services, which provide variable cost alternatives to licensing software; and strategic, installation, and optimization consulting servicesforthwith. WeTriZetto ~~provide~~provided ~~products~~the ~~and~~Financial ~~services~~Advisor toDisclosure ~~379 unique customers~~ in the ~~health~~Definitive ~~plan~~Additional ~~and benefits administrator markets~~Material, which wewas ~~refer~~filed towith ~~as payers. In~~ the ~~first~~SEC ~~six~~on ~~months of 2005~~July 2, ~~these~~2008 ~~markets represented 87%~~ and ~~13%~~mailed ofto TriZetto’s ~~our~~stockholders ~~total~~on ~~revenue,~~or ~~respectively.~~about ~~As of the end of the second quarter of 2005~~July 3, ~~we were providing de minimis services to physician group customers~~2008.

WeOn ~~measure~~July 8, ~~financial~~2008, ~~performance~~the byparties ~~monitoring~~entered ~~recurring~~into ~~revenue~~a memorandum of understanding (“MOU”) to settle the Merger Litigation. Under the terms of the MOU, the parties agreed in good faith to attempt to agree upon and ~~non-recurring~~execute ~~revenue~~an appropriate Stipulation of Settlement and such other documentation as may be required to secure certification of the Settlement Class (as defined to include all record holders and beneficial owners of TriZetto common stock (excluding defendants, ~~bookings~~their immediate families, and ~~backlog~~affiliates) on any day during the period from April 11, ~~gross~~2008 ~~profit~~(the date that the proposed Merger was publicly announced) to and including the effective date of consummation of the Merger, including the legal representatives, heirs, successors and ~~net~~successors ~~income.~~in ~~Total~~interest, ~~revenue~~transferees and assigns of all such foregoing holders and/or owners, immediate and remote, and any person or entity acting for or on behalf of, or claiming under, any of them and each of them) and obtain pursuant to Delaware Court of Chancery Rules 23(b)(1) and 23(b)(2) final Court approval of the ~~second~~settlement, ~~quarter~~and the dismissal of ~~2005~~the ~~was~~Delaware ~~$72~~Litigation and the Consolidated California Action.5 ~~million~~In ~~compared~~addition to ~~$67.5~~other ~~million~~customary ~~for~~provisions, the ~~same~~settlement ~~period~~will inprovide ~~2004.~~releases ~~Recurring~~to ~~revenue~~all ~~for~~defendants of any claims arising from the ~~second~~process leading ~~quarter~~to the proposed Merger, any of ~~2005~~the ~~was~~transactions ~~$40~~contemplated by the Merger Agreement, and any disclosures made in connection with the Proxy Disclosure.1 ~~million~~In ~~compared~~return, TriZetto agreed to ~~$41.6~~provide ~~million~~additional ~~for~~explanation ~~the~~to ~~same~~TriZetto’s ~~period~~stockholders regarding certain matters disclosed in ~~2004~~the Proxy Disclosure. ~~Non~~This additional explanation was made in a Form 8-~~recurring~~K ~~revenue~~filed ~~for~~on July 9, 2008. In accordance with the ~~second~~agreement ~~quarter~~to settle the Merger Litigation, the shares of ~~2005~~common ~~was~~stock ~~$32.4~~of TriZetto ~~million~~held ~~compared~~by toTriZetto’s ~~$25.9~~executive ~~million~~officers ~~for~~were voted in the aggregate in the same ~~period~~proportion inas ~~2004.~~the ~~Bookings~~vote ~~for~~cast by the ~~second~~other ~~quarter~~stockholders ofvoting ~~2005~~on ~~were~~the ~~$85~~Merger at the Special Meeting.3 ~~million~~The ~~compared~~parties to ~~$120.5~~the ~~million~~litigation ~~for~~are in the process of finalizing the Stipulation of Settlement to be submitted to the Court.

In addition to the matters described above, the Company is involved in litigation from time to time relating to claims arising out of its operations in the normal course of business. Except as discussed above, as of the filing date of this quarterly report on Form 10-Q, the Company was not a party to any other legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on its results of operations, financial position and/or cash flows.

~~same period in 2004. Backlog at June 30, 2005 was $638.~~9 ~~million compared to $566~~.9 ~~million~~Reclassifications at June 30, 2004. Gross profit was $33.4 million for the second quarter in 2005 compared to $24.3 million for the same period in 2004. Net income in the second quarter of 2005 was $5.0 million compared to $431,000 for the same period in 2004. These financial comparisons are further explained in the section below, “Results of Operations.”

WeCertain ~~generate recurring~~reclassifications ~~revenue~~have ~~from~~been ~~several~~made sources, including the provision of outsourcing services, such as software hosting and business process outsourcing services, and the sale of maintenance and support for our proprietary software products. We generate non-recurring revenue from the licensing of our software and from consulting fees for implementation, installation, configuration, business process engineering, data conversion, testing and training related to the use of our proprietary, and third-party licensed products. Cost of revenue includes costs related to the products and services we provide to our customers and costs associated with the operation and maintenance of our customer connectivity centers. These costs include salaries and related expenses for consulting personnel, customer connectivity centers’ personnel, customer support personnel, application software license fees, amortization of capitalized software development costs, telecommunications costs, and maintenance costs. Research and development (“R&D”) expenses are salaries and related expenses associated with the development of software applications prior toyear ~~establishing~~amounts ~~technological feasibility. Such expenses include compensation paid~~ to ~~software~~conform ~~engineering personnel and fees~~ to ~~outside~~current ~~contractors~~year ~~and consultants~~presentation. Selling, general and administrative expenses consist primarily of salaries and related expenses for sales, sales commissions, account management, marketing, administrative, finance, legal, human resources and executive personnel, and fees for certain professional services.

As part of our growth strategy, we intend to increase revenue per customer by continuing to introduce new complementary products and services to our established enterprise software and hosting and business process outsourcing services10. ~~Many~~Fair ~~of these service offerings, including hosting, business process outsourcing, and consulting have a higher cost of revenue, resulting in lower gross profit~~Value ~~margins.~~Measurements ~~Therefore, to the extent that our revenue increases through the sale of these lower margin product and service offerings, our total gross profit margin may decrease.~~

WeIn ~~are~~the ~~continuing~~first toquarter ~~target~~of ~~larger~~2008, ~~health~~the ~~plan~~Company ~~customers.~~adopted ~~This~~Statement ~~has~~of ~~given~~Financial usAccounting ~~the~~Standards ~~opportunity~~No. 157, ~~to sell additional services such~~“Fair asValue ~~software hosting~~Measurements,” ~~business~~(“SFAS ~~intelligence,~~No. 157”) ~~and~~for ~~business~~financial ~~process~~assets ~~outsourcing~~and ~~services~~liabilities. AsThis ~~the~~standard ~~technology~~defines ~~requirements~~fair ofvalue, ~~our~~provides ~~customers~~guidance ~~become~~for ~~more~~measuring ~~sophisticated,~~fair ~~our~~value ~~service~~and ~~offerings~~requires ~~have~~certain ~~become more complex~~disclosures. This ~~has~~standard ~~lengthened~~does ~~our~~not ~~sales~~require ~~cycles~~any new ~~and~~fair ~~made~~value itmeasurements ~~more~~in ~~difficult~~the ~~for~~financial usstatements, but rather applies to ~~predict~~all ~~the~~other ~~timing~~accounting ofpronouncements ~~our~~that ~~software~~require ~~and~~or ~~services~~permit ~~sales~~fair value measurements.

OnSFAS ~~September~~No. 157 1,discusses ~~2003~~valuation techniques, ~~Coventry~~such ~~Health~~as ~~Care,~~the ~~Inc.~~market approach (~~“Coventry”)~~comparable ~~acquired~~market ~~Altius~~prices), ~~Health~~the ~~Plans,~~income ~~Inc.~~approach (~~“Altius”~~present value of future income or cash flow), ~~one~~and the cost approach (cost to replace the service capacity of ~~our~~an ~~outsourced~~asset ~~services~~or ~~customers~~replacement cost). AsThe statement utilizes a ~~result,~~fair ~~our~~value ~~services~~hierarchy ~~agreement~~that ~~with Altius~~prioritizes ~~was~~the ~~terminated~~inputs ~~effective~~to ~~May~~valuation ~~31,~~techniques ~~2004.~~used ~~Revenue~~to ~~from~~measure ~~the~~fair ~~Altius~~value ~~services~~into ~~agreement~~three ~~was~~broad $9levels.3 ~~million~~The infollowing ~~2004~~is ~~through~~a ~~the~~brief ~~date~~description of ~~termination.~~those three levels:

In• ~~late~~Level ~~2003,~~1: aObservable ~~management~~inputs ~~decision~~such ~~was made to exit certain non-strategic and less profitable product offerings and business lines. This decision included winding-down services related to our physician group customers,~~ as ~~well~~quoted asprices ~~the~~(unadjusted) ~~planned~~in ~~elimination~~active ofmarkets ~~our hosting and business process outsourcing services~~ for ~~two~~identical ~~competing~~assets ~~third-party~~or ~~software platforms~~liabilities. Early in the second quarter of 2005, we executed termination agreements with our two remaining physician group customers. We continued to provide outsourced business services through May 2005, when the transition services were completed.

In• ~~December~~Level ~~2004~~2: Inputs, ~~our~~other ~~management~~than ~~and~~quoted ~~administrative services agreement with Preferred Health Networks~~prices, ~~Inc.~~that ~~(“PHN”),~~are ~~was~~observable ~~amended~~for ~~to substantially reduce~~ the ~~scope~~asset ofor ~~our~~liability, ~~hosting~~either ~~and~~directly ~~business~~or ~~process outsourcing services~~indirectly. These ~~reduced~~include ~~services~~quoted ~~are~~prices ~~expected~~for tosimilar ~~terminate~~assets inor ~~August~~liabilities ~~2005,~~in ~~when~~active ~~PHN~~markets ~~completes~~and ~~the wind-down~~quoted ofprices ~~its~~for ~~operations.~~identical ~~Revenue~~or ~~from~~similar ~~the~~assets ~~PHN~~or ~~management~~liabilities ~~and administrative services agreement was $627,000~~ in ~~the~~markets ~~first~~that ~~six~~are ~~months~~not ~~of 2005 and $3~~active.~~1 million for the same period in 2004.~~

~~Critical~~• ~~Accounting~~Level ~~Policies~~3: ~~and~~Unobservable ~~Estimates~~inputs that reflect the reporting entity’s own assumptions.

~~The~~Our ~~discussion~~population ~~and analysis~~ of ~~our~~ financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, ~~revenues~~subject ~~and~~to ~~expenses,~~fair ~~and~~value ~~related~~measurements ~~disclosures of contingent assets~~ and ~~liabilities at~~ the ~~date~~necessary ofdisclosures ~~our financial statements. Those estimates~~ are ~~based~~as onfollows ~~our experience, terms of existing contracts, observance of trends~~ (in ~~the industry, information provided by our customers and information available from other outside sources, which are believed to be reasonable under the circumstances. Actual results may differ from~~thousands): ~~these estimates under different assumptions or conditions.~~


	Fair Value As of June 30, 2008		Fair Value Measurement at June 30, 2008 (Using Fair Value Hierarchy)
	Fair Value As of June 30, 2008		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	148,596	$	148,596	$	—	$	—
Long-term investments		67,715		—		—		67,715

Sub-total		216,311		148,596		—		67,715
Long-term debt		379,347		—		379,347		—

Total	$	595,658	$	148,596	$	379,347	$	67,715

The long-term debt values are based on actual transactions in the Company’s convertible debt instruments. However, given the relatively low number of transactions, the Company used Level 2 measurements to determine the fair value of the Company’s convertible debt instruments as of June 30, 2008 for disclosure purposes. The convertible debt continues to be recorded at carrying value on the Company’s balance sheet.

The long-term investments represent taxable note investments with an auction reset function (“auction rate securities”) collateralized by student loans which are substantially backed by the federal government and state agencies. These instruments were purchased by the Company in January 2008 and classified as available-for-sale. Beginning in February 2008, auctions for the Company’s auction rate securities failed due to conditions in the market. A failed auction results in a lack of liquidity in the securities but does not signify a default by the issuer. Upon an auction failure, the interest rates do not reset at a market rate but instead reset based on a formula contained in the security. As of June 30, 2008, all of the Company’s auction rate securities continue to be rated AAA by Standard & Poor’s or Aaa by Moody’s despite the auction failures.

The Company determined the fair value of the auction rate securities no longer approximated their par value based on a discounted cash flow valuation model that was based on the collateralization of the underlying securities, the credit rating of the investment, the timing of expected future cash flows, and the expected duration until the securities trade again. As a result, the Company concluded that the auction rate securities were temporarily impaired. As of June 30, 2008, the Company had recorded an unrealized loss of approximately $4.6 million to Accumulated Other Comprehensive Income to reflect the revised fair value of the auction rate securities at $67.7 million. Given the uncertainty as to when the securities may be actively traded, the Company has classified the auction rate securities as long-term investments.

The ~~following~~Company ~~critical~~reviewed ~~accounting~~the ~~policies~~classification ~~affect~~of the ~~more~~impairment ~~significant~~charges ~~judgments~~in accordance with Emerging Issues Task Force No. 03-1, “The Meaning of Other-Than-Temporary Impairment and ~~estimates~~Its ~~used~~Application to Certain Investments,” Staff Accounting Bulletin Topic 5M, “Other-Than-Temporary Impairment of Certain Investments in Debt and Equity ~~the~~Securities,” ~~preparation~~and ofFASB ~~our~~Staff ~~consolidated~~Position ~~financial~~Nos. ~~statements~~115-1 and 124-1, “The Meaning of Other-Than-Temporary Impairment and ~~may~~Its ~~potentially~~Application ~~result~~to inCertain ~~materially~~Investments.” ~~different~~A temporary impairment charge results ~~under~~in ~~different~~an ~~assumptions~~unrealized ~~and~~loss ~~conditions~~being recorded in the accumulated other comprehensive income component of stockholders’ equity. WeThe ~~have~~Company ~~identified~~believes this treatment is appropriate because the ~~following~~Company ashas ~~critical~~concluded ~~accounting~~the ~~policies~~loss in value attributable to ~~our~~its ~~company:~~auction rate securities is temporary in nature and the Company has both the ability and intent to hold the auction rate securities until a recovery in market value takes place. The Company will continue to monitor and analyze its auction rate securities investments to determine whether the impairment continues to exist, and if so, how the impairment should be classified.

•The ~~Revenue~~following ~~recognition;~~table provides a summary of changes the fair value of the Company’s auction rate securities as of June 30, 2008 (in thousands):

• Up-front fees;


	Auction Rate Securities
Balance at December 31, 2007	$	—
Purchases, transfers and settlements		72,300
Unrealized loss included in other comprehensive income		(4,585	)

Balance at June 30, 2008	$	67,715

•11. ~~Allowance~~Agreement ~~for~~and ~~doubtful~~Plan ~~accounts;~~of Merger

•On ~~Capitalization~~April 11, 2008, the Company entered into an Agreement and Plan of ~~software~~Merger, ~~development~~as ~~costs;~~amended, (the “Merger Agreement”) with TZ Holdings, L.P., a Delaware limited partnership (“Parent”) and TZ Merger Sub, Inc., a Delaware corporation and indirectly-owned subsidiary of Parent (“Merger Sub”). Parent is controlled by Apax Partners, L.P. (“Apax”). BlueCross BlueShield of Tennessee, Inc. (“BCBST”) and Regence BlueCross BlueShield of Oregon, Regence BlueCross BlueShield of Utah and Regence BlueShield (collectively, the “Regence Group”) are providing a portion of the funding for the transaction and will be equity investors in the surviving corporation.

•The ~~Loss~~Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”) with the Company continuing as the surviving corporation and a wholly-owned subsidiary of Parent. As of the effective date of the Merger, each issued and outstanding share of common stock of the Company will be cancelled and converted into the right to receive $22.00 in cash (the “Merger Consideration”). The transaction is valued at approximately $1.4 billion, including consideration for stock options and shares underlying the Company’s convertible notes. Parent and Merger Sub have obtained equity and debt financing commitments for the transactions contemplated by the Merger Agreement, the aggregate proceeds of which will be sufficient for Parent to pay the aggregate Merger Consideration and all related fees and expenses. Consummation of the Merger is subject to various conditions, including adoption of the Merger Agreement by the Company’s stockholders and other customary closing conditions. The transaction closed on ~~contracts;~~August 4, 2008 (see Note 13, Subsequent Events, below).

•The ~~Impairment~~Merger Agreement contains certain termination rights for both the Company and Parent. The Merger Agreement provides that, upon termination under specified circumstances, the Company would be required to pay Parent a termination fee of ~~goodwill~~$50.0 million. The Merger Agreement further provides that, upon termination under specified circumstances, Parent would be required to pay the Company a reverse termination fee of $65.0 million. The reverse termination fee potentially payable by Parent is guaranteed by BCBST, the Regence Group and ~~other~~certain ~~intangible~~affiliates ~~assets;~~of Apax, in separate limited guarantees.

•12. ~~Litigation~~Recent Accounting ~~accruals;~~Pronouncements

•In ~~Bonus~~December ~~accruals;~~2007, the FASB issued “Business Combinations,” (“FAS 141R”). FAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination, recognizing assets acquired and liabilities assumed arising from contingencies, and determining what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. FAS 141R is effective for fiscal years beginning after December 15, 2008. The Company expects FAS 141R will have an impact on its consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions it consummates after the effective date.

• Income taxes.

This is not a comprehensive list of all of our accounting policies. For a detailed discussion on the application of these and other accounting policies, see Note 2 of Notes to Consolidated Financial Statements included in our Form 10-K as filed with the SEC on February 14, 2005.

Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, the product or service has been delivered, fees are fixed or determinable, collection is probable and all other significant obligations have been fulfilled. Our revenue is classified into two categories: recurring and non-recurring. For the six months ended June 30, 2005, approximately 55% of our total revenue was recurring and 45% was non-recurring.

We generate recurring revenue from several sources, including the provision of outsourcing services, such as software hosting and other business services, and the sale of maintenance and support for our proprietary software products. Recurring services revenue is typically billed and recognized monthly over the contract term, typically three to seven years. Many of our outsourcing agreements require us to maintain a certain level of operating performance. Recurring software maintenance revenue is typically based on one-year renewable contracts. Software maintenance and support revenues are recognized ratably over the contract period. Payment for software maintenance received in advance is recorded on the balance sheet as deferred revenue.

We generate non-recurring revenue from the licensing of our software. We follow the provisions of the Securities and Exchange Commission Staff Accounting Bulletin No. 101, “Revenue Recognition,” as amended, AICPA Statements of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended, EITF 00-3, “Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware,” and EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables.” Software license revenue is recognized upon the execution of a license agreement, upon delivery of the software, when fees are fixed or determinable, when collectibility is probable and when all other significant obligations have been fulfilled. For software license agreements in which customer acceptance is a material condition of earning the license fees, revenue is not recognized until acceptance occurs. For software license agreements that require significant customizations or modifications of the software, revenue is recognized as the customization services are performed. For arrangements containing multiple elements, such as software license fees, consulting services, outsourcing services and maintenance, and where vendor-specific objective evidence (“VSOE”) of fair value exists for all undelivered elements, we account for the delivered elements in accordance with the “residual method.” Under the residual method, the arrangement fee is recognized as follows: (1) the total fair value of the undelivered elements, as indicated by VSOE, is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2 and (2) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. For arrangements in which VSOE does not exist for each undelivered element, including specified upgrades, revenue for the delivered element is deferred and not recognized until VSOE is available for the undelivered element or delivery of each element has occurred. When multiple products are sold within a discounted arrangement, a proportionate amount of the discount is applied to each product based on each product’s fair value or relative list price.

WeIn ~~also~~December ~~generate~~2007, ~~non-recurring~~the ~~revenue~~FASB ~~from~~issued ~~consulting~~“Noncontrolling ~~fees~~Interests ~~for~~in ~~implementation,~~Consolidated ~~installation,~~Financial ~~configuration~~Statement,” ~~business~~(“FAS ~~process~~160”). ~~engineering,~~FAS ~~data~~160 ~~conversion,~~amends ~~testing~~ARB ~~and~~51 ~~training related~~ to ~~the~~establish ~~use~~accounting ~~of our proprietary~~ and ~~third~~reporting ~~party~~standards ~~licensed~~for ~~products.~~the ~~In certain instances, we also generate~~ non-~~recurring~~controlling ~~revenue~~(minority) ~~from~~interest ~~customization~~in ~~services of our proprietary licensed products. We recognize revenue for these services as they are performed, if contracted on~~ a ~~time~~subsidiary and ~~materials~~for ~~basis, or using~~ the ~~percentage~~deconsolidation of ~~completion~~a ~~method,~~subsidiary. ifIt ~~contracted~~clarifies onthat a noncontrolling ~~fixed~~interest ~~fee~~in ~~basis~~a ~~and~~subsidiary ~~when~~should webe ~~can adequately~~reported ~~estimate~~as ~~the~~equity ~~cost~~in of the ~~consulting~~consolidated ~~project.~~financial ~~Percentage of completion is measured based on cost incurred to date compared to total estimated cost at completion~~statements. ~~When~~Consolidated wenet ~~cannot~~income ~~reasonably~~should ~~estimate~~include the ~~cost~~net toincome ~~complete,~~for weboth ~~recognize revenue using~~ the ~~completed~~parent ~~contract~~and ~~method~~the atnoncontrolling ~~such~~interest ~~time~~with ~~that~~disclosure ~~the~~of ~~effort~~both toamounts on ~~complete~~ the ~~consulting~~consolidated ~~project~~statement ~~can be reasonably estimated~~income. WeThe ~~also~~calculation ~~generate~~of ~~non-recurring~~earnings ~~revenue~~per ~~from~~share ~~set-up~~will ~~fees,~~continue ~~which~~to ~~are~~be ~~services,~~based ~~hardware,~~on ~~and~~income ~~software~~amounts ~~associated~~attributable ~~with preparing our customer connectivity center or a customer’s data center in order~~ to ~~ready~~the ~~a specific customer for software hosting services~~parent. WeFAS ~~recognize~~160 ~~revenue~~is effective for ~~these~~fiscal ~~services~~years asbeginning ~~they~~after ~~are~~December 15, ~~performed~~2008. ~~using~~The ~~the~~Company ~~percentage~~is currently ofevaluating ~~completion~~what ~~basis and~~impact, ~~when~~if weany, ~~can~~FAS ~~reasonably~~160 ~~estimate~~will ~~the~~have ~~cost~~on ofits ~~the~~consolidated ~~set-up~~financial ~~project~~statements.

We also generate non-recurring revenue from certain one-time charges including certain contractual fees such as termination fees and change of control fees, and we recognize the revenue for these fees once the termination or change of control is guaranteed, there are no remaining substantive performance obligations, and collection is reasonably assured13. ~~Other~~Subsequent ~~non-recurring~~Events ~~revenue is also generated from fees related to our product related conferences.~~

~~Up-front~~Pursuant ~~Fees.~~to ~~We may pay certain up-front fees in connection with~~ the ~~establishment~~Merger ofAgreement, ~~our~~on ~~hosting~~August 4, ~~and~~2008, ~~outsourcing~~Merger ~~services~~Sub ~~contracts.~~merged ~~The~~with ~~costs are capitalized~~ and ~~amortized~~into ~~over~~TriZetto, ~~the~~with ~~life~~TriZetto ofas the ~~contract~~surviving corporation as a ~~reduction~~result of tothe ~~revenue,~~Merger ~~provided~~and ~~that~~continuing ~~such~~as ~~amounts are recoverable from future revenue under the contract. If~~ an upindirectly-~~front~~owned ~~fee~~subsidiary isof ~~not~~Parent. ~~recoverable~~Pursuant ~~from~~to ~~future~~the ~~revenue,~~terms orof itthe ~~cannot~~Merger beAgreement ~~offset~~and byas ~~contract~~a ~~cancellation~~result ~~penalties~~of ~~paid by~~ the ~~customer~~Merger, ~~the~~each ~~fee~~outstanding ~~will~~share beof ~~written~~the ~~off~~common asstock ~~an expense in~~ (the ~~period~~“Common itStock”) isof ~~deemed~~the ~~unrecoverable.~~Company ~~Unamortized~~was ~~up-front~~converted ~~fees~~into ~~were~~the ~~$4.4~~right ~~million~~to ~~and~~receive $~~863,000~~22.00 ascash ofper ~~June 30, 2005 and 2004, respectively~~share.

Sales Returns and Allowance for Doubtful Accounts. We maintain an allowance for sales returns to reserve for estimated discounts, pricing adjustments, and other sales allowances. The reserve is charged to revenue in amounts sufficient to maintain the allowance at a level we believe is adequate based on historical experience and current trends. We also maintain an allowance for doubtful accounts to reflect estimated losses resulting from the inability of customers to make required payments. We base this allowance on estimates after consideration of factors such as the composition of the accounts receivable aging and bad debt history and our evaluation of the financial condition of the customers. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional sales allowances and bad debt expense may be required. We typically do not require collateral. Historically, our estimates for sales returns and doubtful account reserves have been adequate to cover accounts receivable exposures. We continually monitor these reserves and make adjustments to these provisions when we believe actual credits or other allowances may differ from established reserves.

Capitalization of Software Development Costs. The capitalization of software costs include developed technology acquired in acquisitions and costs incurred by us in developing our products that qualify for capitalization. We capitalize our software development costs, other than costs for internal-use software, in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed”. We capitalize costs associated with product development, coding, and testing subsequent to establishing technological feasibility of the product. Technological feasibility is established after completion of a detailed program design or working model. Capitalization of computer software costs cease upon a product’s general availability release. Capitalized software development costs are amortized over the estimated useful life of the software product starting from the date of general availability.

On a quarterly basis, we monitor the expected net realizable value of the capitalized software for factors that would indicate impairment, such as a decline in the demand, the introduction of new technology, or the loss of a significant customer. As of June 30, 2005, our evaluation determined that the carrying amount of these assets were not impaired.

Loss on Contracts. During the fourth quarter of 2003, we decided to wind-down our outsourcing services to physician group customers. As a result of this decision, we estimated that the existing customer agreements from this business would generate a total loss of $11.3 million until the terms of these agreements expired in 2008. This loss was charged to recurring cost of revenue in the fourth quarter of 2003. Through discussions and negotiations, we were able to accelerate the termination of our services agreements with certain physician group customers and implemented cost cutting measures that reduced the expected future costs to support our remaining customers. As a result of these actions, we were able to reverse approximately $5.9 million of previously accrued loss on contracts charges in 2004. Early in the second quarter of 2005, we executed termination agreements with our two remaining physician group customers. We continued to provide outsourced

~~business~~Item services through May 2005, when the transition services were completed. The completion of these services to the remaining customers allowed us to reverse the remaining balance in the loss on contracts accrual of $2.9 ~~million~~Management’s inDiscussion ~~the~~and ~~second~~Analysis ~~quarter~~ of ~~2005.~~Financial ~~The~~Condition ~~total amount of loss actually incurred related to the outsourcing services to physician group customers was $2.1 million in 2004~~ and ~~$403,000~~ inResults ~~the first six months~~ of ~~2005.~~ Operations

InWe ~~December~~offer ~~2003, we negotiated~~ a ~~settlement~~broad ~~regarding~~portfolio ~~out-~~of~~-scope~~ ~~work~~proprietary ~~related~~software toand ~~one~~services oftargeted ~~our~~to ~~large~~the ~~fixed~~payer ~~fee~~industry, which ~~implementation~~is ~~projects.~~comprised ~~As a result~~ of ~~this~~health ~~settlement,~~insurance weplans ~~estimated~~and ~~that~~third ~~this~~party ~~project~~benefits ~~would generate a total loss of $3~~administrators.7 ~~million~~TriZetto’s ~~until~~predominant ~~its~~software ~~completion,~~products ~~which was~~comprise ~~expected~~six ~~to occur in mid~~enterprise-~~2004.~~class ~~This~~applications ~~loss~~for ~~was~~automating ~~charged~~all ~~to non-recurring cost~~ of ~~revenue~~a inpayer’s ~~the~~core ~~fourth~~administrative ~~quarter of 2003. In 2004~~functions, ~~we determined that the large fixed fee implementation project would require a greater effort to complete than~~and ~~previously~~for ~~estimated.~~automating Ascare amanagement ~~result~~activities, wewhich ~~accrued~~improve anthe ~~additional~~cost ~~$5.0~~and ~~million~~quality of ~~loss~~care onconsumers ~~contract~~receive. ~~charges~~Key inenterprise ~~the~~software ~~first~~product ~~six~~brands ~~months~~include ofFacets®, ~~2004.~~QicLink™, InQNXT™, ~~the~~CareAdvance™ ~~fourth~~and ~~quarter~~NetworX. ofThe ~~2004,~~Company wealso ~~negotiated~~offers a ~~settlement~~number of component ~~additional~~software ~~out-of-scope work~~products, ~~which~~web-based ~~decreased~~applications ~~the total loss on the project~~ and ~~resulted~~add-ons into the ~~reversal~~enterprise ofsoftware ~~approximately $455~~solutions,~~000~~ ofwhich ~~previously~~provide ~~accrued~~supplemental ~~loss~~functionality onor ~~contracts~~further ~~charges.~~enhance ~~This fixed fee implementation was completed by~~ the ~~end~~efficiency ofand ~~the~~throughput ~~first quarter 2005. The total amount~~ of ~~loss actually incurred on this project was $7.7 million in 2004 and $484,000 in~~ the ~~first~~enterprise ~~quarter of 2005~~applications.

~~Impairment~~To ofsupport ~~Goodwill~~these ~~and~~software ~~Other~~products, ~~Intangible~~the ~~Assets.~~Company ~~Under~~provides ~~Financial~~software ~~Accounting~~hosting, ~~Standards~~business ~~Board~~process ~~(“FASB”) Statement No. 142~~outsourcing, ~~“Goodwill~~ and ~~Other~~revenue ~~Intangible~~enhancement ~~Assets” (“Statement 142”)~~services, ~~goodwill~~which ~~and~~give customers ~~intangible~~additional ~~assets~~efficiency, ~~deemed~~revenue toand ~~have~~capital ~~indefinite~~cost ~~lives~~reduction ~~are subject to annual (or more often if indicators of impairment exist) impairment tests using a two-step process prescribed in Statement 142~~opportunities. The ~~first~~company ~~step~~also ~~looks~~provides ~~for indicators~~professional ofconsulting ~~impairment.~~services, Ifwhich ~~indicators of impairment~~ are ~~revealed~~predominantly infocused ~~the~~on ~~first step, then~~ the ~~second~~installation ~~step~~and isoptimization ~~conducted to measure the amount~~ of the ~~impairment,~~company’s ~~if any. We adopted Statement 142 effective as of January 1, 2002. We performed an annual~~software ~~impairment test on March 31, 2005 that did not reveal any indications of impairment~~products.

~~Litigation~~As ~~Accruals. Pending unsettled lawsuits involve complex questions~~ of ~~fact~~June 30, ~~and law and may require expenditure of significant funds. From time to time~~2008, we ~~may~~served ~~enter~~354 ~~into~~unique ~~confidential~~customers ~~discussions regarding~~in the ~~potential~~health ~~settlement~~plan ofand ~~such~~benefits ~~lawsuits;~~administrator ~~however~~markets, ~~there~~which ~~can~~we collectively berefer ~~no assurance that any such discussions will occur or will result in a settlement. Moreover, the settlement of any pending litigation could require us~~ to ~~incur~~as ~~settlement payments and costs~~payers. In the ~~period~~second inquarter ~~which~~of ~~a new legal case arises~~2008, anthese ~~expense~~markets ~~will~~represented be93% ~~accrued if our liability to the other party is probable~~ and ~~can~~7% ~~be reasonably estimated. On a quarterly basis, we review and analyze the adequacy~~ of our ~~accruals for~~total ~~each~~revenue, ~~individual case for all pending litigations~~respectively. ~~Adjustments are recorded as needed to ensure appropriate levels of reserve. We expense our attorney and other defense costs related to litigation at the time such costs are incurred.~~

~~Bonus~~We ~~Accruals.~~measure ~~Our~~financial ~~corporate~~performance ~~bonus~~by ~~model~~monitoring isrevenue, ~~designed~~bookings ~~to project~~and ~~the~~backlog, ~~level~~and ofnet ~~funding~~income. ~~required~~Total ~~under~~revenue in the ~~corporate~~second ~~bonus~~quarter ~~program~~of as2008 ~~approved~~was by$117.0 ~~the~~million ~~Compensation~~compared ~~Committee~~to of$114.8 million for the ~~Board~~same ofperiod ~~Directors~~in 2007. AServices ~~significant~~and ~~portion~~other ofrevenue in the ~~corporate~~second ~~bonus~~quarter ~~program~~of is2008 ~~based~~was on$101.4 million compared to $91.4 million for the ~~Company~~same ~~meeting~~period ~~certain~~in ~~financial objectives,~~2007. ~~including~~Products revenue ~~and~~in ~~earnings~~the ~~per~~second ~~share.~~quarter ~~The~~of ~~expense~~2008 ~~related~~was $15.6 million compared to $23.4 million for the ~~corporate~~same ~~bonus~~period ~~program~~in is2007. ~~accrued~~Bookings in the ~~year~~second quarter of ~~performance~~2008 ~~and~~were ~~paid~~$61.7 inmillion ~~the~~compared ~~first~~to ~~quarter~~$93.8 ~~following~~million for the ~~fiscal~~same ~~year~~period ~~end~~in 2007. ~~The~~Backlog ~~corporate~~at ~~bonus~~June 30, ~~model~~2008 iswas ~~analyzed~~$1.1 onbillion ~~a quarterly~~compared ~~basis~~ to ~~identify~~$944.4 ~~any~~million ~~necessary~~at ~~adjustments~~June 30, ~~based~~2007. onNet ~~financial~~income ~~performance~~ in ~~order~~the second quarter of 2008 was $4.8 million compared to ~~ensure~~$3.6 anmillion ~~appropriate~~for ~~level~~the ofsame ~~accrual~~period atin ~~year-end~~2007. These financial comparisons are further explained in the section below, “Results of Operations.”

~~Income~~We ~~Taxes.~~generate Weservices ~~account~~revenue ~~for~~from ~~income~~several ~~taxes~~sources, ~~under~~including ~~SFAS~~the ~~No.~~provision ~~109~~of outsourcing services, ~~“Accounting~~such ~~for~~as ~~Income~~software ~~Taxes.”~~hosting ~~This~~and ~~statement~~business ~~requires~~process outsourcing services, the sale of maintenance and support for our ~~recognition~~proprietary and certain of ~~deferred~~our ~~tax~~non-proprietary ~~assets~~software products, and ~~liabilities~~from consulting fees for ~~the~~implementation, ~~future~~installation, ~~consequences~~configuration, ofbusiness ~~events~~process ~~that~~engineering, ~~have~~data ~~been~~conversion, ~~recognized~~testing inand ~~our~~training ~~financial~~related ~~statements~~to orthe ~~tax~~use ~~returns~~of our proprietary, and third-party licensed products. ~~The~~We ~~measurement~~generate ofproducts revenue from the ~~deferred~~licensing ~~items~~of isour ~~based~~software. onCost ~~enacted~~of ~~tax~~revenue ~~laws.~~includes Incosts ~~the~~related ~~event~~to the ~~future~~ ~~consequences~~products ofand ~~differences~~services ~~between~~we ~~financial~~provide ~~reporting~~to ~~bases~~our customers and costs associated with the ~~tax~~operation ~~bases~~and maintenance of our ~~assets~~customer connectivity centers. These costs include salaries and ~~liabilities~~related ~~result~~expenses infor aconsulting ~~deferred~~personnel, ~~tax~~customer ~~asset~~connectivity centers’ personnel, ~~SFAS~~customer ~~No.~~support ~~109~~personnel, ~~requires~~application ansoftware ~~evaluation~~license fees, amortization of ~~the~~capitalized ~~probability~~software ofdevelopment ~~being~~costs, ~~able~~telecommunications tocosts, ~~realize~~facility costs, and maintenance costs. Research and development (“R&D”) expenses are salaries and related expenses associated with the ~~future~~development ~~benefits~~of software ~~indicated~~applications byprior ~~such~~to ~~asset~~establishing technological feasibility. ASuch ~~valuation~~expenses ~~allowance~~include ~~related~~compensation paid to asoftware ~~deferred~~engineering ~~tax~~personnel ~~asset~~and isother ~~recorded~~administrative, ~~when~~infrastructure itand isfacility ~~more~~expenses ~~likely~~and ~~than~~fees ~~not~~to ~~that~~outside ~~some~~contractors ~~portion~~and ofconsultants. Selling, ~~all~~general and administrative expenses consist primarily of ~~the~~salaries ~~deferred~~and ~~tax~~related ~~asset~~expenses ~~will~~for besales, ~~not~~sales ~~realized~~commissions, account management, marketing, administrative, finance, legal, human resources and executive personnel, and fees for certain professional services.

~~Recent~~As ~~Accounting~~part ~~Pronouncements~~of our growth strategy, we intend to increase revenue per customer by continuing to introduce new complementary products and services, including new cost and quality of care products and services, to our established enterprise software and hosting and business process outsourcing services. Some of these service offerings, including hosting, business process outsourcing, and consulting have a higher cost of revenue, resulting in lower gross profit margins. Therefore, to the extent that our revenue increases through the sale of these lower margin product and service offerings, our total gross profit margin would likely decrease.

InWe ~~December~~are ~~2004,~~continuing ~~the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”), which is a revision~~ to ~~SFAS~~target ~~123~~larger ~~and~~health ~~supersedes~~plan ~~APB 25 and SFAS 148~~customers. This ~~statement~~has ~~requires~~given ~~that~~us the ~~cost~~opportunity ~~resulting from all share-based payment transactions be recognized in the financial~~to ~~statements.~~sell ~~This~~additional ~~statement~~services ~~establishes~~such ~~fair value~~ as ~~the~~software ~~measurement~~hosting, ~~objective~~business inintelligence, ~~accounting for share-based payment arrangements~~ and ~~requires~~business ~~all~~process ~~entities~~outsourcing ~~to apply a fair-value based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans~~services. ~~SFAS~~As ~~123R applies to all awards granted after~~ the ~~required~~technology ~~effective~~requirements ~~date~~of ~~and~~our tocustomers ~~awards~~become ~~modified,~~more ~~repurchased~~sophisticated, orour ~~cancelled~~service ~~after~~offerings ~~that~~have ~~date.~~become Asmore of the required effective date, all public entities that used the fair-value-based method for either recognition or disclosure under Statement 123 will apply this Statement using a modified version of prospective applicationcomplex. ~~Under~~This ~~that transition method,~~has ~~compensation~~lengthened ~~cost~~our issales ~~recognized~~cycles onand ormade ~~after~~it ~~the~~more ~~required~~difficult ~~effective date~~ for ~~the~~us ~~portion~~to ofpredict ~~outstanding awards for which~~ the ~~requisite~~quarterly ~~service~~timing ~~has~~of ~~not~~our ~~yet~~software ~~been~~and ~~rendered,~~services ~~based~~sales. ~~on the~~

In May 2007, we made a decision to sunset our FACTS™ proprietary software product. A formal plan of restructuring was developed and includes four milestones to complete the final coding and release of FACTS™ 7.0. The final milestone to end sales and support of the FACTS™ software product is approximately March 31, 2009. However, we intend to convert as many of our existing FACTS™ customers as possible to our Facets^®, QNXT^™or QicLink™ software platforms. The plan of restructuring includes the elimination of positions within the research and development group, which was formally communicated to all affected employees late in the second quarter of 2007. To retain key employees and to ensure that the final product milestones are achieved, benefit packages were provided and are contingent upon completion of these milestones. We currently estimate that the total amount of severance expense and retention bonuses to be accrued through the final milestone date on March 31, 2009 is approximately $1.0 million. As of June 30, 2008, we have accrued $736,000 related to severance expense and retention bonuses, which are reflected in cost of revenue – services and other and research and development in the consolidated statement of income. To date, $129,000 of these costs have been paid or otherwise settled.

~~grant-date~~Effective ~~fair~~August ~~value~~2007, ofwe ~~those~~agreed ~~awards~~to ~~calculated~~sell ~~under~~and ~~Statement~~transfer ~~123~~full ~~for~~ownership ~~either~~rights ~~recognition~~of orthe ~~pro~~InAlysis ~~forma~~Personal Analyst ~~disclosures.~~Suite ~~For~~of ~~periods~~business ~~before~~intelligence software (referred to as the ~~required effective~~“Decipher” ~~date~~product), ~~those~~which ~~entities~~we ~~may~~acquired ~~elect~~in toearly ~~apply~~2003. aThe ~~modified~~Decipher ~~version~~software was sold for approximately $1.0 million with payment terms of ~~the~~four ~~retrospective~~equal ~~application~~installments ~~under~~through December 31, ~~which~~2010. ~~financial~~The ~~statements~~first ~~for~~installment ~~prior~~payment ~~periods~~was ~~are~~received ~~adjusted~~and onrecognized aas ~~basis~~income ~~consistent~~in ~~with~~the consolidated statement of income in the ~~pro~~first ~~forma~~quarter ~~disclosures~~of ~~required~~2008. ~~for~~The ~~those~~remaining $750,000 will be recorded as income in the periods ~~by Statement~~cash ~~123~~payments are received.

In ~~April~~December ~~2005~~2007, ~~the~~our ~~Securities~~management and ~~Exchange Commission~~administrative ~~(“SEC”)~~services ~~approved~~agreement awith ~~new~~QualChoice ~~rule that delayed the effective date~~ of ~~SFAS 123R. For most public companies~~Arkansas, ~~the delay eliminates the comparability issues that would arise from adopting SFAS 123R in the middle of their fiscal years as originally called for by SFAS 123R~~Inc. ~~Except~~and ~~for~~QCA ~~this~~Health ~~deferral of the effective date, the guidance in SFAS 123R is unchanged. Under the SEC’s rule, SFAS 123R is now effective for public companies for annual, rather than interim, periods that~~Plan ~~begin~~(“QCA”) ~~after June 15, 2005~~expired. WeIn ~~are~~January ~~evaluating both the requirements under SFAS 123R and potential adoption dates~~2008, ~~and~~we ~~have~~entered ~~not~~into ~~yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123. Such adoption could have~~ a ~~substantial~~new ~~impact~~seven-year onhosting ~~our~~services ~~consolidated~~agreement ~~statements~~with ~~of operations and earnings per share~~QCA.

In February 2008, we granted cash-based performance units in lieu of restricted stock awards. These performance units are aligned with our multi-year strategic revenue targets. The expense for the performance units may be adjusted each period based on the current quarter contribution towards those multi-year revenue targets and the overall likelihood of payment, and therefore, may fluctuate dramatically from period to period. In the first six months of 2008, approximately $595,000 of expense related to performance units was recognized in the consolidated statement of income.

In June 2008, we determined that our Santa Ana facility was not occupied at its maximum capacity, and therefore, transferred the remaining employees to our corporate office in Newport Beach, California. The Santa Ana site was subsequently subleased to a third-party for a portion of the remaining lease term. As a result, we recorded a loss accrual of $103,000 for future obligations related to the facility, which is reflected in selling, general and administrative in the consolidated statement of income.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Those estimates are based on our experience, terms of existing contracts, observance of trends in the industry, information provided by our customers and information available from other outside sources, which are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

The following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements, and may potentially result in materially different results under different assumptions and conditions. We have identified the following as critical accounting policies to our company:

•

Revenue recognition;

•

Up-front payments to customers;

•

Sales returns and allowance for doubtful accounts;

•

Capitalization of software development costs;

•

Goodwill and other intangible assets;

•

Litigation accruals;

•

Self-insurance;

•

Bonus accrual;

•

Income taxes; and

•

Share-based awards.

This listing is not a comprehensive list of all of our accounting policies. For a detailed discussion on the application of these and other accounting policies, see Note 2 of Notes to Consolidated Financial Statements in our annual Form 10-K filed with the Securities and Exchange Commission on February 15, 2008.

Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, the product or service has been delivered, fees are fixed or determinable, collection is reasonably assured and all other significant obligations have been fulfilled. Our revenue is classified into two categories: services and other, and products. For the quarter ended June 30, 2008, approximately 87% of our total revenue was generated from services and other revenue and 13% was from products revenue.

~~REVENUE~~We ~~INFORMATION~~follow the provisions of the Securities and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition,” AICPA Statement of Position 97-2, “Software Revenue Recognition,” as amended (“SOP 97-2”), Emerging Issues Task Force No. 00-3, “Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware,” (“EITF 00-3”), and Emerging Issues Task Force No. 00-21, “Revenue Arrangements with Multiple Deliverable” (“EITF 00-21”).

~~Revenue~~We generate services and other revenue from several sources, including the provision of outsourcing services, such as software hosting and other business services, and the sale of maintenance and support for our proprietary software products. We apply EITF 00-3 to hosting arrangements that include the licensing of software. A software element covered by SOP 97-2 is present in a hosting arrangement if the customer ~~type~~has the contractual right to take possession of the software at any time during the hosting period without significant penalty and ~~revenue~~it ~~mix~~is feasible for the ~~three~~customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. Outsourcing services revenue is typically billed and ~~six~~recognized ~~months~~monthly ~~ended~~over ~~June~~the 30contract term, ~~2005~~generally three to seven years. Many of our outsourcing agreements require us to maintain a certain level of operating performance. We record revenue net of estimated penalties resulting from any failure to maintain this level of operating performance. These penalties have not been significant in the past. Software maintenance and ~~2004,~~support ~~respectively,~~revenues are typically based on one-year renewable contracts and are recognized ratably over the contract period. Software maintenance in which we receive payment in advance is asrecorded ~~follows~~on ~~(in~~the ~~thousands):~~balance sheet as deferred revenue.

	Three Months Ended June 30,								Six Months Ended June 30,
	2005				2004				2005				2004
Revenue by customer type:
Health plans	$	63,429	88	%	$	55,401	82	%	$	125,691	87	%	$	107,848	81	%
Benefits administrators		9,013	12	%		10,769	16	%		18,493	13	%		21,721	16	%
Provider		66	0	%		1,347	2	%		142	0	%		3,698	3	%
Total revenue	$	72,508	100	%	$	67,517	100	%	$	144,326	100	%	$	133,267	100	%
Revenue mix:
Recurring revenue
Outsourced business services	$	20,383	51	%	$	24,950	60	%	$	39,794	50	%	$	51,444	61	%
Software maintenance		19,733	49	%		16,653	40	%		39,345	50	%		32,461	39	%
Recurring revenue total		40,116	100	%		41,603	100	%		79,139	100	%		83,905	100	%
Non-recurring revenue
Software license fees		11,026	34	%		9,764	38	%		27,250	41	%		21,065	43	%
Consulting services		20,827	64	%		15,821	61	%		37,398	58	%		27,653	56	%
Other non-recurring revenue		539	2	%		329	1	%		539	1	%		644	1	%
Non-recurring revenue total		32,392	100	%		25,914	100	%		65,187	100	%		49,362	100	%
Total revenue	$	72,508			$	67,517			$	144,326			$	133,267

We also generate services and other revenue from consulting fees for implementation, installation, configuration, business process engineering, data conversion, testing and training related to the use of our proprietary and third party licensed products. In certain instances, we also generate services revenue from customization services of our proprietary licensed products. We recognize revenue for these services as they are performed. We also generate services revenues associated with preparing our customer connectivity center or a customer’s data center in order to ready a specific customer for software hosting services. These fees are usually separate and distinct from the hosting fees, and performance of the set-up services represents the culmination of the earnings process. We recognize revenue for these services as they are performed. We generate other revenue from certain one-time charges, including certain contractual fees such as termination fees and change of control fees, and we recognize the revenue for these fees once the termination or change of control is guaranteed, there are no remaining substantive performance obligations and collection is reasonably assured. Other revenue is also generated from fees related to our product-related customer conferences, which is recognized as our obligations are performed.

~~Our~~For ~~total~~multiple ~~backlog~~element ~~is defined~~arrangements, such as ~~the~~software ~~revenue~~license, weconsulting ~~expect~~services, tooutsourcing ~~generate~~services inand maintenance, ~~future~~and ~~periods~~where ~~from~~vendor-specific ~~existing~~objective ~~customer~~evidence ~~contracts.~~(“VSOE”) ~~Our~~of ~~12-month~~fair ~~backlog~~value isexists ~~defined~~for asall ~~the~~undelivered ~~revenue~~elements, we ~~expect~~account tofor ~~generate~~the ~~from~~delivered ~~existing~~elements ~~customer~~in ~~contracts~~accordance ~~over~~with the ~~next~~“residual 12method” ~~months.~~of ~~Most~~SOP of97-2 ~~the~~or ~~revenue~~EITF in00-21, as ~~our~~applicable. ~~backlog~~VSOE of fair value is ~~derived~~determined ~~from~~for ~~multi-year~~each ~~recurring~~undelivered ~~revenue~~element ~~contracts~~based ~~(including~~on ~~software~~how ~~hosting,~~it ~~business~~is ~~process~~sold ~~outsourcing~~separately, ITor ~~outsourcing,~~in ~~and~~the ~~software~~case of maintenance, ~~with~~the arenewal ~~period~~rate. ~~ranging~~For ~~from~~arrangements ~~three~~in towhich ~~five~~VSOE ~~years).~~of Wefair ~~classify~~value ~~revenue~~does ~~from~~not ~~software~~exist for each undelivered element, ~~license~~including specified product and ~~consulting~~upgrade ~~contracts~~rights, asrevenue ~~non-recurring.~~for ~~Such~~the ~~revenue~~delivered element is ~~included~~deferred inand not recognized until VSOE of fair value is available for the ~~backlog~~undelivered ~~when~~element or delivery of each element has occurred, unless the ~~revenue~~only ~~from~~undelivered element ~~such~~is ~~software~~a ~~license~~service orin ~~consulting~~which ~~contract~~revenue ~~will~~from bethe delivered element is recognized over athe service period. ~~exceeding~~In 12determining ~~months~~VSOE of fair value for the undelivered elements, no portion of the discount is allocated to specified or unspecified product or upgrade rights.

~~Backlog~~Under ~~can~~the ~~change~~residual ~~due to a number of factors~~method, ~~including~~the ~~unforeseen~~arrangement ~~changes in~~fee ~~implementation~~is ~~schedules,~~recognized ~~contract~~as ~~cancellations~~follows: (~~subject~~1) the tototal ~~penalties~~fair ~~paid~~value byof the ~~customer)~~undelivered elements, oras ~~customer~~indicated ~~financial~~by ~~difficulties.~~VSOE ~~Unless~~of wefair ~~enter~~value, ~~into~~is ~~new~~deferred ~~customer~~and ~~agreements~~subsequently ~~that~~recognized ~~generate~~in ~~enough~~accordance ~~revenue~~with ~~to replace or exceed~~ the ~~revenue~~relevant ~~that~~sections ~~is recognized~~of inSOP ~~any~~97-2 ~~given~~and ~~quarter,~~(2) the ~~our~~difference ~~backlog~~between ~~will~~the ~~decline.~~total ~~Our~~arrangement ~~backlog~~fee atand ~~any~~the ~~date~~amount ~~may~~deferred ~~not indicate demand~~ for ~~our~~the ~~products~~undelivered elements ~~and~~is ~~services~~recognized ~~and~~as ~~may not reflect actual~~ revenue ~~for~~related ~~any~~to ~~period in~~ the ~~future~~delivered elements.

~~Our~~We 12generate products revenue from the licensing of our software. Under SOP 97-~~month~~2, ~~and~~software ~~total~~license ~~backlog~~revenue ~~data~~is recognized upon the execution of a license agreement, upon delivery of the software, when fees are asfixed ~~follows~~or (determinable, when collectibility is probable and when all other significant obligations have been fulfilled. For software license agreements in ~~thousands):~~which customer acceptance is a significant condition of earning the license fees, revenue is not recognized until acceptance occurs. For software license agreements that require significant customization or modification of the software, revenue for the software is recognized on a percentage-of-completion basis as the customization services are performed. Progress to completion under the percentage-of-completion method is generally determined based upon direct labor costs. For software license arrangements that include a right to use the product for a defined period of time or for content subscriptions, revenue is generally recognized ratably over the term of the license.

	6/30/05		3/31/05		12/31/04		9/30/04		6/30/04
12-month backlog:
Recurring revenue	$	153,600	$	148,000	$	144,500	$	147,900	$	145,200
Non-recurring revenue		21,200		24,000		28,600		23,300		19,300
Total	$	174,800	$	172,000	$	173,100	$	171,200	$	164,500
Total backlog:
Recurring revenue	$	615,000	$	580,300	$	555,800	$	558,700	$	544,800
Non-recurring revenue		23,900		24,500		29,200		27,900		22,100
Total	$	638,900	$	604,800	$	585,000	$	586,600	$	566,900

~~Total~~Up-front ~~quarterly~~Payments ~~bookings~~to ~~equal~~Customers. ~~the~~We ~~estimated~~may ~~total~~pay ~~dollar~~certain ~~value~~up-front ofamounts ~~the~~to ~~contracts~~our ~~signed~~customers in connection with the ~~quarter. Bookings~~establishment ~~can~~of ~~vary~~our ~~substantially~~hosting ~~from~~and ~~quarter~~outsourcing toservices ~~quarter~~contracts. Under Emerging Issues Task Force No. 01-9, ~~based~~“Accounting onfor Consideration Given by a ~~number~~Vendor ofto ~~factors,~~a ~~including~~Customer (Including a Reseller of the ~~number~~Vendor’s Products),” ~~and~~these ~~type~~payments ofare ~~prospects~~capitalized inand ~~our~~amortized ~~pipeline,~~over the ~~length~~life of ~~time~~the itcontract ~~takes~~as a ~~prospect~~reduction to ~~reach~~revenue, aprovided ~~decision~~that ~~and~~such ~~sign~~amounts are recoverable from future revenue under the contract,. ~~and~~If ~~the~~an up-front payment is not recoverable ~~effectiveness~~from offuture ~~our~~revenue ~~sales~~or ~~force.~~contract ~~Included~~cancellation inpenalties ~~quarterly~~paid ~~bookings~~by ~~are~~the ~~maintenance~~customer, ~~revenue~~the ~~and~~amount ~~hosting~~will ~~and~~be ~~other~~expensed ~~services~~in ~~revenue~~the upperiod toit ~~seven~~is ~~years~~deemed unrecoverable. ~~Bookings~~Unamortized ~~for~~up-front ~~each~~fees ofwere ~~the~~$4.1 ~~quarters~~million ~~are~~and $5.5 million as ~~follows~~of ~~(in~~June 30, ~~thousands):~~2008 and 2007, respectively.

		06/30/05			3/31/05			12/31/04			9/30/04			6/30/04
Quarterly Bookings		$	85,300		$	53,100		$	58,800		$	75,000		$	120,500

Sales Returns and Allowance for Doubtful Accounts. We maintain a reserve for estimated discounts, pricing adjustments, and other sales allowances. The reserve is charged to revenue in amounts sufficient to maintain the allowance at a level we believe is adequate based on historical experience and current trends. We also maintain an allowance for doubtful accounts to reflect estimated losses resulting from the inability of customers to make required payments. We base this allowance on estimates after consideration of factors such as the composition of the accounts receivable aging and bad debt history and our evaluation of the financial condition of the customers. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional bad debt expense may be required. We typically do not require collateral. Historically, our estimates for sales allowances and doubtful account reserves have been adequate to cover accounts receivable exposures. We continually monitor these reserves and make adjustments to these provisions when we believe actual credits or other allowances may differ from established reserves.

~~RESULTS~~Capitalization OFof ~~OPERATIONS~~Software Development Costs. The capitalization of software costs includes developed technology acquired in acquisitions and costs incurred by us in developing our products that qualify for capitalization. We account for our software development costs, other than costs for internal-use software, in accordance with Statement of Financial Accounting Standards, “Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed.” We capitalize costs associated with product development, coding and testing subsequent to establishing technological feasibility of the product. Technological feasibility is established after completion of a detailed program design or, in its absence, a working model. Capitalization of computer software costs ceases upon a product’s general availability release. Amounts capitalized as software development costs are amortized using the greater of revenues during the period compared to the total estimated revenues to be earned or on a straight-line basis over estimated lives, which is generally deemed to be five years. In some instances, the period between achieving technological feasibility and the general availability of such software is short and software development costs qualifying for capitalization is insignificant. As a result, no costs are capitalized and such costs are expensed in the period incurred.

~~QUARTER~~On ~~ENDED JUNE~~a 30quarterly basis, ~~2005~~we ~~COMPARED~~monitor TOthe ~~THE~~expected ~~QUARTER~~net ~~ENDED~~realizable ~~JUNE~~value of the capitalized software for factors that would indicate impairment, such as a decline in the demand, the introduction of new technology, or the loss of a significant customer. As of June 30, ~~2004~~2008, our evaluation determined that the carrying amount of these assets was not impaired.

~~Revenue.~~Goodwill ~~Total~~and ~~revenue~~Other ~~increased~~Intangible $5Assets.0 ~~million,~~Acquisitions orare ~~7%,~~accounted tofor ~~$72~~using the purchase method of accounting.5 ~~million~~The inpurchase price is allocated to the ~~second~~tangible ~~quarter~~and ofintangible ~~2005~~assets ~~from~~acquired ~~$67.5~~and ~~million~~the ~~for~~liabilities assumed on the basis ~~same~~of ~~period~~their inestimated ~~2004.~~fair Ofmarket ~~this~~values ~~increase,~~on $6the acquisition date.5 ~~million~~The ~~related~~excess toof ~~non-recurring~~the ~~revenue,~~purchase ~~which~~price ~~was offset~~over bythe aestimated ~~decrease~~fair market value of ~~$1.5~~the ~~million~~assets inpurchased ~~recurring~~and ~~revenue.~~liabilities assumed is allocated to goodwill and other intangible assets.

~~Recurring~~Under ~~Revenue.~~Statement ~~Recurring~~of ~~revenue~~Financial ~~includes~~Accounting ~~outsourced~~Standards ~~business~~No. 142, ~~services~~“Goodwill ~~(primarily software hosting~~ and ~~business~~Other ~~process~~Intangible ~~outsourcing)~~Assets,” goodwill and intangible ~~maintenance~~assets ~~fees~~deemed ~~related~~ to ~~our~~have ~~software~~indefinite ~~license~~lives ~~contracts.~~are ~~Recurring~~subject ~~revenue decreased~~to ~~$1.5~~annual ~~million,~~ (or ~~4%,~~more ~~from~~often ~~$41.6~~if ~~million~~indicators ~~in the second quarter~~ of ~~2004~~impairment toexist) ~~$40.1~~impairment ~~million~~tests ~~for~~using ~~the~~a ~~same~~two-step ~~period in 2005~~process. ~~This~~The ~~decrease~~first ~~was~~step ~~the~~looks ~~result~~for indicators of ~~a $4~~impairment.6 ~~million~~If ~~decline~~indicators inof ~~outsourced~~impairment ~~business services, offset in part by an increase of~~are ~~$3.1~~revealed ~~million~~ in ~~software~~the ~~maintenance~~first ~~revenue.~~step, ~~The~~then ~~overall~~the ~~decrease~~second instep ~~outsourced~~is ~~business~~conducted ~~services~~to ~~revenue~~measure ~~primarily resulted from (i) a $3.9 million decline caused by~~ the ~~scheduled~~amount ~~termination~~ of ~~our services for Altius, (ii) a $1.5 million decline resulting from~~ the ~~wind-down of our services for PHN~~impairment, ~~(iii)~~if ~~a $1~~any.5 ~~million~~We ~~decrease~~performed ~~from the planned elimination of~~ our ~~hosting~~annual ~~and~~impairment ~~business~~test ~~process outsourcing services~~ on ~~certain~~March 31, ~~competitive software platforms~~2008, and ~~(iv) a $1.2 million reduction resulting from the planned wind-down of our services to physician group customers. The effect of~~ this ~~$8.1~~test ~~million~~did ~~decline~~not inreveal ~~outsourced~~indications ~~business services revenue was offset in part by $3.5 million~~ of ~~additional revenue from new Facets® hosted customers and increased levels of transaction processing services for our existing benefits administrator customers~~impairment. The increase of $3.1 million in software maintenance revenue resulted primarily from sales of our enterprise and component software in previous quarters, including Facets Extended Enterprise™, QicLink Extended Enterprise™, NetworX™, CareAdvance™ and HealthWeb®, Workflow and HIPAA Gateway™.

~~Non-recurring~~Litigation ~~Revenue~~Accruals. ~~Non-recurring~~Pending ~~revenue~~unsettled ~~includes~~lawsuits ~~software~~involve ~~license~~complex ~~sales,~~questions ~~consulting~~of ~~services~~fact ~~revenue,~~and law and ~~other~~may ~~non-recurring~~require ~~revenue~~expenditure of significant funds. ~~Non-recurring~~From ~~revenue~~time ~~increased~~to ~~$6.5~~time, ~~million~~we may enter into confidential discussions regarding the potential settlement of such lawsuits; however, there can be no assurance that any such discussions will occur or ~~25%~~will result in a settlement. Moreover, the settlement of any pending litigation could require us to ~~$32~~incur settlement payments and costs.4 ~~million~~In the period in ~~the~~which ~~second~~a ~~quarter~~new oflegal ~~2005~~case ~~from~~arises, ~~$25.9~~an ~~million~~expense ~~for~~will be accrued if our liability to the ~~same~~other ~~period~~party inis ~~2004~~probable and can be reasonably estimated. ~~This~~On ~~increase~~a quarterly ~~was~~basis, ~~primarily~~we review and analyze the ~~result~~adequacy of aour ~~$5.0~~accruals ~~million~~for ~~increase~~each inindividual ~~consulting~~case ~~services~~for ~~revenue~~all ~~due to~~pending ~~the~~litigations. ~~higher~~Adjustments ~~utilization~~are ofrecorded ~~consulting~~as ~~resources~~needed onto ~~more~~ensure ~~profitable~~appropriate ~~implementation~~levels ~~projects~~of reserve. Our attorney fees and aother ~~$1.3~~defense ~~million~~costs ~~increase~~related to inlitigation ~~new~~are ~~software~~expensed ~~license~~as ~~sales~~incurred.

~~Cost of Revenue~~Self-Insurance. ~~Cost~~Effective ~~of revenue decreased $4.~~January 1 ~~million~~, ~~or 10%~~2006, ~~from~~we ~~$43.2~~became ~~million~~self-insured infor ~~the~~certain losses ~~second~~related ~~quarter of 2004~~ to ~~$39.1~~employee ~~million~~health ~~for~~and ~~the~~dental ~~same period in 2005~~benefits. ~~The~~We ~~overall~~record ~~decrease~~a inliability ~~recurring~~based ~~cost~~on ofan ~~revenue~~estimate of ~~$4.2~~claims ~~million~~incurred ~~primarily~~but ~~resulted~~not ~~from~~recorded ~~(i)~~determined ~~reduced~~based ~~costs~~on ofactuarial ~~$2.9~~analysis ~~million associated with the scheduled termination~~ of ~~our~~historical ~~services~~claims ~~for~~experience ~~Altius,~~and ~~(ii)~~historical aindustry $1data.2 ~~million~~We ~~reduction~~maintain individual ~~resulting~~and ~~from~~aggregate ~~the planned wind~~stop-~~down~~loss ofcoverage ~~our~~with ~~services to physician group customers, (iii)~~ a ~~decline~~third ofparty ~~$1.0~~insurer ~~million related~~ to ~~the~~limit ~~wind-down of~~ our ~~services~~total exposure for ~~PHN,~~these ~~and~~programs. ~~(iv)~~Our aself-insurance ~~net~~liability ~~$900,000~~contains ~~increase~~uncertainties inbecause ~~costs to support~~ the ~~additional~~calculation ~~outsourced~~requires ~~business~~management ~~services revenue~~to ~~from~~make ~~new~~assumptions ~~Facets® hosted customers~~ and ~~existing benefits administrator customers.~~apply ~~The~~judgment ~~net increase of $900,000 represented higher incentive compensation costs, which were offset in part by a decrease in costs related~~ to ~~reduced~~estimate ~~outsourced contractor expenses from~~ the ~~completion~~ultimate ofcost ~~certain~~to ~~internal~~settle ~~and~~reported ~~customer~~claims ~~related data center projects~~ and ~~other~~claims ~~reduced~~incurred ~~costs~~but ~~related~~not toreported ~~cost~~as ~~containment efforts. The increase in non-recurring cost~~ of ~~revenue~~the ofbalance ~~$2.0~~sheet ~~million resulted primarily from (i) an increase of $1~~date.1 ~~million~~We indo ~~the~~not ~~amortization~~believe ofthat ~~capitalized~~there ~~software~~is ~~development products~~a ~~related~~reasonable tolikelihood ~~the~~that ~~general~~there ~~release~~will ofbe ~~additional products and (ii)~~ a ~~$1.0~~material ~~million~~change ~~royalty expense~~ in the ~~second~~future assumptions ~~quarter~~or ofestimates ~~2005~~we ~~associated~~use ~~with~~to acalculate ~~third~~our self-~~party~~insurance ~~vendor~~liability. ~~Additionally~~However, ~~total~~if ~~net~~actual ~~loss~~results onare ~~contracts~~not ~~decreased~~consistent ~~$1.9~~with ~~million~~our ~~due~~assumptions toand ~~a higher~~estimates, ~~amount~~we ofmay ~~reversal~~be ofexposed ~~these charges in the current quarter as compared~~ to ~~the~~losses ~~same~~or ~~period~~gains inthat ~~2004,~~could asbe ~~described below~~material.

Loss on Contracts. In the second quarter of 2005, we executed termination agreements with our two remaining physician group customers, allowing us to reverse the remaining balance in our loss on contracts accrual of $2.9 million, which reduced our total cost of revenue by an equal amount. In the second quarter of 2004, we reversed $4.9 million of previously accrued recurring loss on contracts charges due to the accelerated termination of certain physician group contracts and the reduction of costs to support these remaining contracts. Additionally, in the second quarter of 2004, we recorded $3.9 million of non-recurring loss on contracts charges, which represented incremental hours required to complete a certain fixed fee implementation. This fixed fee implementation project was completed by the end of the first quarter of 2005.

AsBonus aAccrual. ~~percentage~~Our bonus model is designed to project the level of ~~total~~funding required under the bonus program as approved by the Compensation Committee of the Board of Directors. A significant portion of the bonus program is based on the Company meeting certain financial objectives, such as revenue, ~~cost~~free cash flow, and pro-forma earnings (adjusted EBITDA). The expense related to the bonus program is accrued in the year of ~~revenue~~performance ~~approximated~~and ~~54%~~paid in the ~~second~~first quarter offollowing ~~2005~~the fiscal year end. The bonus model is analyzed and ~~64% for~~adjusted ~~the~~on ~~same~~a ~~period~~quarterly inbasis ~~2004~~as necessary based on achievement of targets.

~~Gross~~Income ~~Margin~~Taxes. AsWe aaccount ~~percentage~~for income taxes under Statement of ~~total~~ ~~revenue~~Accounting Financial Standards No. 109, ~~the~~“Accounting ~~overall~~for ~~gross~~Income ~~margin~~Taxes” ~~increased~~(“SFAS toNo. 109”). ~~46%~~This instatement requires the ~~second~~recognition ~~quarter~~ of ~~2005~~deferred ~~from~~tax ~~36%~~assets and liabilities for the ~~same~~future ~~period~~consequences inof ~~2004.~~events ~~The~~that ~~increase~~have inbeen ~~gross~~recognized ~~margin percentage~~ in ~~the~~our financial ~~second~~statements ~~quarter~~or oftax ~~2005~~returns. ~~was~~The ~~primarily~~measurement ~~the result~~ of ~~(i)~~the ~~higher~~deferred ~~utilization~~items ~~of consulting~~is ~~resources~~based on ~~more~~enacted ~~profitable~~tax ~~implementation~~laws. ~~projects,~~In ~~(ii)~~the ~~higher~~event ~~software~~the ~~license~~future ~~sales,~~consequences ~~(iii)~~of ~~management’s~~differences ~~decision~~between tofinancial ~~exit~~reporting ~~certain~~bases ~~non-strategic~~ and ~~less~~the ~~profitable~~tax ~~product~~bases ~~offerings~~of ~~and~~our ~~business~~assets ~~lines,~~ and ~~(iv)~~liabilities ~~reductions~~result in ~~cost~~ ~~related~~a todeferred ~~the~~tax ~~cost~~asset, ~~containment~~SFAS ~~efforts~~No. 109 ~~initiated~~requires inan ~~the~~evaluation ~~second quarter~~ of ~~2004.~~the ~~The~~probability ~~overall~~of ~~increase~~being inable ~~gross~~to ~~margin~~realize ~~was~~the ~~partially~~future ~~offset~~benefits indicated by ~~increases~~such inan ~~third-party~~asset. ~~vendor~~A ~~royalty~~valuation ~~expenses~~allowance ~~incurred~~related into ~~the~~a ~~second~~deferred ~~quarter~~tax ofasset ~~2005.~~is Werecorded ~~intend~~when ~~to increase~~it ~~revenue~~is ~~per~~more ~~customer~~likely bythan not ~~increasing~~that ~~sales~~some ofportion ~~complementary~~or ~~product~~the ~~and~~entire ~~service~~deferred ~~offerings,~~tax ~~such~~asset aswill ~~hosting,~~not ~~business~~be ~~process~~realized. ~~outsourcing~~We ~~and~~review ~~consulting,~~the ~~which~~need ~~have~~for ~~higher~~a ~~costs~~valuation ofallowance ~~revenue.~~on Toa ~~the~~quarterly ~~extent~~basis ~~our~~and ~~revenue~~believe ~~increases~~that ~~through~~there ~~the~~is ~~sale of~~sufficient ~~these~~certainty ~~lower~~regarding ~~margin~~the ~~product~~realizability ~~and~~of ~~service~~substantially ~~offerings,~~all of our deferred ~~total~~tax ~~gross profit margin may decrease~~assets.

~~Research~~On ~~and Development (R&D) Expenses. R&D expenses increased $571~~January 1,~~000,~~ ~~or 7%~~2007, towe ~~$8.4~~adopted ~~million~~FASB inInterpretation ~~the second quarter of 2005 from $7~~No.9 48, ~~million~~“Accounting for ~~the~~Uncertainty ~~same period~~ in ~~2004. This net increase was~~Income ~~due~~Taxes” ~~primarily~~(“FIN to48”). ~~increased~~FIN ~~spending~~48 ~~related~~applies to ~~the~~all ~~development~~tax ofpositions ~~our~~accounted ~~proprietary software~~ for ~~the~~under ~~health~~SFAS ~~plan and benefits administrator markets~~No. ~~Most of our R&D expense was used to develop CareAdvance™ care management software and to continue our development of Facets Extended Enterprise™~~ 109, ~~which~~“Accounting ~~is a substantial upgrade of our flagship software~~ for ~~health~~Income ~~plans.~~Taxes,” Weand ~~also~~defines ~~made~~the ~~several~~confidence ~~enhancements~~level ~~to QicLink™,~~that a ~~proprietary~~tax ~~software~~position ~~product~~must ~~for~~meet ~~benefits~~in ~~administrators~~order ~~and HealthWeb®, our web-enabled platform, which allows health plans~~ to ~~exchange~~be ~~information~~recognized ~~on a~~in ~~secure basis over~~ the financial ~~Internet~~statements. AsThis ainterpretation ~~percentage~~requires ofthat ~~total revenue, R&D expenses approximated 12% in~~ the ~~second~~tax ~~quarter~~effects of ~~2005 and 2004. R&D expenses, as~~ a ~~percentage~~position ofbe ~~total~~recognized ~~R&D~~only ~~expenditures~~if ~~(which~~it ~~includes~~is ~~capitalized~~“more-likely-than-not” ~~R&D expenses~~to ofbe ~~$2.0~~sustained ~~million~~by in the ~~second~~taxing ~~quarter~~authority as of ~~2005~~the ~~and~~reporting $2date.2 ~~million~~We ~~for~~recognize ~~the~~interest ~~same~~and/or penalties ~~period~~associated inwith ~~2004),~~uncertain ~~was~~tax ~~81%~~positions in ~~the~~income ~~second~~tax ~~quarter of 2005 and 79% for the same period in 2004~~expense.

~~Selling,~~Share-Based ~~General~~Awards. ~~and~~Under ~~Administrative~~the ~~(SG&A)~~fair ~~Expenses.~~value recognition ~~SG&A~~provisions ~~expenses~~of ~~increased~~FASB ~~$4.3~~Statement ~~million~~No. 123R, or“Share-Based ~~30%~~Payment,” to(“SFAS ~~$18.8~~123R”), ~~million~~stock-based ~~in the~~compensation ~~second~~cost ~~quarter~~is ofestimated ~~2005~~at ~~from~~the ~~$14.4~~grant ~~million~~date ~~for~~based on the ~~same~~award’s ~~period~~fair-value inand ~~2004.~~is ~~The~~recognized ~~overall~~as ~~increase~~expense ratably ~~resulted~~over ~~primarily~~the ~~from~~requisite ~~(i)~~service $1period.3 ~~million~~We inuse ~~higher~~the ~~personnel~~Black-Scholes ~~costs,~~option-pricing ~~including~~model ~~higher~~to ~~incentive~~calculate ~~compensation~~fair ~~and~~value ~~costs~~which ~~associated~~requires ~~with~~the ~~certain~~input ~~senior staff~~of ~~additions~~highly insubjective ~~late~~assumptions. ~~2004~~These ~~and~~assumptions ~~(ii)~~include aestimating ~~$2.4~~the ~~million~~length ~~increase~~of intime ~~professional~~employees ~~fees~~will ~~for~~retain their ~~legal~~vested ~~support,~~stock ~~compliance~~options ~~and~~before ~~strategic~~exercising ~~planning~~them (“expected term”), ~~offset~~the inestimated ~~part~~volatility byof aour ~~$1.1~~common ~~million~~stock ~~insurance~~price ~~reimbursement~~over ~~related~~the toexpected term and the ~~ATPA~~number ~~litigation~~of ~~settlement.~~options ~~SG&A expenses~~that ~~also~~will ~~increased~~ultimately ~~$1.7~~not ~~million~~complete ~~for~~their ~~certain~~vesting ~~unusual~~requirements (“forfeitures”). ~~items~~The ~~which~~assumptions ~~negatively~~used ~~affected~~in calculating the ~~period~~fair ~~comparison,~~value ~~including~~of ashare-based ~~$1.1~~payment ~~million~~awards ~~increase~~represent ~~due~~management’s ~~primarily~~best toestimates, ~~the~~but ~~collection~~these ofestimates ainvolve ~~fully~~inherent ~~reserved~~uncertainties ~~note~~and ~~receivable~~the inapplication ~~the~~of ~~second~~management ~~quarter~~judgment. ofAs a ~~2004~~result, if factors change and an ~~approximately~~we ~~$500,000~~use ~~increase~~different ~~primarily~~assumptions, ~~related~~our tostock-based ~~lease~~compensation ~~termination~~could ~~costs~~be ~~associated~~materially ~~with~~different in the ~~closure~~future. ofIn aaddition, ~~facility.~~if Asour aactual ~~percentage~~forfeiture ofrate ~~total~~is ~~revenue,~~materially ~~selling~~different from our estimate, ~~general~~stock-based ~~and~~compensation expense ~~administrative~~could ~~expenses~~be ~~approximated~~significantly ~~26%~~different from what we have recorded in the ~~second~~current ~~quarter~~period. ofWe ~~2005 compared~~recognize toshare-based ~~21%~~compensation ~~for~~cost over the ~~same~~requisite service period inusing ~~2004~~the straight-line single option method.

~~Amortization~~Recent ofAccounting ~~Other Intangible~~Pronouncements Assets. Amortization of other intangible assets decreased $303,000, or 26%, from $1.2 in the second quarter of 2004 to $857,000 for the same period in 2005. The decrease was due primarily to certain intangible assets acquired in fiscal year 2002, which were fully amortized in early 2005.

~~Interest~~In December 2007, ~~Income.~~the ~~Interest~~FASB ~~income~~issued ~~increased~~“Business ~~$90~~Combinations,~~000,~~” or(“FAS ~~98%~~141R”). FAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, tothe ~~$182~~liabilities assumed,~~000~~ and any non-controlling interest in the ~~second~~acquiree. ~~quarter~~The ofstatement ~~2005~~also ~~from~~provides ~~$92,000~~guidance for recognizing and measuring the ~~same~~goodwill ~~period~~acquired in ~~2004~~the business combination, recognizing assets acquired and liabilities assumed arising from contingencies, and determining what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. ~~The~~FAS ~~increase~~141R is ~~due~~effective ~~primarily~~for tofiscal ~~higher~~years ~~interest~~beginning after ~~rates~~December 15, in2008. We expect FAS 141R will have an impact on our ~~investment~~consolidated ~~accounts~~financial statements when effective, but the nature and ~~higher~~magnitude ~~interest~~of the specific effects will depend upon the nature, terms and size of the acquisitions we ~~earned~~consummate inafter ~~our~~the ~~operating~~effective ~~account~~date.

~~Interest~~In ~~Expense~~December 2007, the FASB issued “Noncontrolling Interests in Consolidated Financial Statement” (“FAS 160”). ~~Interest~~FAS 160 amends ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a ~~expense~~noncontrolling ~~decreased~~interest ~~$146,000~~in ora ~~45%,~~subsidiary ~~from~~should ~~$324,000~~be reported as equity in the ~~second~~consolidated ~~quarter~~financial ofstatements. ~~2004~~Consolidated tonet ~~$178,000~~income should include the net income for both the ~~same~~parent ~~period~~and inthe ~~2005~~noncontrolling interest with disclosure of both amounts on the consolidated statement income. The ~~decrease~~calculation ~~relates~~of ~~primarily~~earnings per share will continue to ~~lower~~be ~~balances~~based on ~~our~~income ~~capital~~amounts ~~leases~~attributable to the parent. FAS 160 is effective for fiscal years beginning after December 15, ~~notes~~2008. ~~payable~~We ~~and~~are ~~lower~~currently evaluating ~~borrowings~~the impact, if any, FAS 160 will have on our ~~revolving~~consolidated ~~line of~~financial ~~credit~~statements.

Provision for Income Taxes. Provision for income taxes was $361,000 in the second quarter of 2005 compared to $200,000 for the same period in 2004. The provision for income taxes increased primarily due to applicability of Alternative Minimum Tax on current year operating income. The Company’s effective tax rate was 6.4% for the six-month period ended June 30, 2005, which was lower than the Federal statutory rate primarily due to the decrease in valuation allowance, which occurred as a result of projected utilization of net operating loss (“NOLs”) carryovers. The effective tax rate for the six-month period ended June 30, 2004 represented a negative amount.

~~SIX~~Revenue ~~MONTHS~~Information ~~ENDED JUNE 30, 2005 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2004~~

Revenue. ~~Total~~by ~~revenue~~customer ~~increased~~type ~~$11.1~~and ~~million,~~revenue ormix ~~8%,~~for ~~to $144.3 million in~~ the ~~first~~three and six months ofended ~~2005~~June 30, ~~from~~2008, ~~$133.3~~and ~~million for the same period in 2004. Of this increase~~2007, ~~$15.8 million related to non-recurring revenue~~respectively, ~~which~~is ~~was~~as ~~offset~~follows by(amounts ~~a decrease of $4.8 million~~ in ~~recurring~~thousands): ~~revenue.~~

Recurring Revenue. Recurring revenue includes outsourced business services (primarily software hosting and business process outsourcing) and maintenance fees related to our software license contracts. Recurring revenue decreased $4.8 million, or 6%, from $83.9 million in the first six months of 2004 to $79.1 million for the same period in 2005. This decrease was the result of an $11.7 million decline in outsourced business services, offset in part by an increase of $6.9 million in software maintenance revenue. The overall decrease in outsourced business services revenue primarily resulted from (i) a $9.3 million decline caused by the scheduled termination of our services for Altius, (ii) a $3.2 million reduction resulting from the planned wind-down of our services to physician group customers, (iii) a $3.1 million decrease from the planned elimination of our hosting and business process outsourcing services on certain competitive software platforms, and (iv) a $3.0 million decline resulting from the wind-down of our services for PHN. The effect of this $18.6 million decline in outsourced business services revenue was offset in part by $6.9 million of additional revenue primarily from new Facets® hosted customers and increased levels of transaction processing services for our existing benefits administrator customers. The increase of $6.9 million in software maintenance revenue resulted primarily from sales of our enterprise and component software in previous quarters, including Facets Extended Enterprise™, QicLink Extended Enterprise™, NetworX™, CareAdvance™ and HealthWeb®, Workflow and HIPAA Gateway™.


	Three Months Ended June 30,								Six Months Ended June 30,
	2008				2007				2008				2007
Revenue by customer type:
Health plans	$	109,389	93	%	$	104,740	91	%	$	208,415	93	%	$	209,031	92	%
Benefits administration		7,628	7	%		10,095	9	%		15,422	7	%		19,307	8	%

Total revenue	$	117,017	100	%	$	114,835	100	%	$	223,837	100	%	$	228,338	100	%

Revenue mix:
Services and other revenue
Outsourced business services	$	24,255	21	%	$	23,273	20	%	$	48,277	22	%	$	47,441	21	%
Software maintenance		34,281	29	%		30,755	27	%		67,516	30	%		60,568	26	%
Consulting services and other		42,905	37	%		37,404	33	%		75,695	34	%		73,198	32	%

Services and other revenue total		101,441				91,432				191,488				181,207

Products revenue
Perpetual license fees		10,650	9	%		19,775	17	%		22,758	10	%		40,260	18	%
Term license fees		4,926	4	%		3,628	3	%		9,591	4	%		6,871	3	%

Products revenue total		15,576				23,403				32,349				47,131

Total revenue	$	117,017	100	%	$	114,835	100	%	$	223,837	100	%	$	228,338	100	%

~~Non-recurring~~Our ~~Revenue.~~total ~~Non-recurring~~backlog ~~revenue~~is ~~includes~~defined ~~software~~as ~~license~~the ~~sales,~~revenue ~~consulting~~we ~~services~~expect ~~revenue,~~to ~~and~~generate ~~other~~in ~~non-recurring~~future ~~revenue.~~periods from existing ~~Non~~customer contracts. Our 12-~~recurring~~month ~~revenue~~backlog ~~increased~~is ~~$15.8~~defined ~~million,~~as orthe ~~32%,~~revenue we expect to ~~$65.2~~generate ~~million~~from inexisting customer contracts over the ~~first~~next ~~six~~12 months. Most of ~~2005~~the revenue in our backlog is derived from ~~$49.4~~multi-year ~~million~~service ~~for~~revenue ~~the~~contracts ~~same~~(including software ~~period~~hosting, inbusiness ~~2004.~~process ~~This~~outsourcing, ~~increase~~IT ~~was~~outsourcing, ~~primarily~~and ~~the~~software ~~result~~maintenance ofwith aperiods ~~$9.7~~up ~~million~~to ~~increase~~seven inyears), term software license fees, and consulting ~~services~~contracts. Consulting revenue ~~due~~ tois ~~the~~included ~~higher~~in ~~utilization~~the ofbacklog ~~consulting~~when ~~resources~~the onrevenue ~~more~~from ~~profitable~~such consulting ~~implementation~~contract ~~projects~~is ~~and~~expected ato ~~$6.2~~be ~~million~~recognized ~~increase~~over ina ~~new~~period ~~software~~exceeding ~~license~~12 ~~sales~~months.

~~Cost~~Backlog ofcan ~~Revenue.~~change ~~Cost~~due ofto ~~revenue~~a ~~decreased~~number ~~$12.0~~of ~~million~~factors, including orunforeseen ~~13%,~~changes ~~from $90.7 million~~ in ~~the~~implementation ~~first~~schedules, ~~six~~contract ~~months~~cancellations of(subject ~~2004~~ to ~~$78.7~~penalties ~~million~~paid ~~for~~by the ~~same period in 2005. The overall decrease in recurring cost of revenue of $13.1 million primarily resulted from (i~~customer), ~~reduced~~or ~~costs~~customer offinancial $7difficulties.2 ~~million~~In ~~associated~~such ~~with~~event, ~~the~~unless ~~scheduled~~we ~~termination~~enter ofinto ~~our~~new ~~services~~customer ~~for~~agreements ~~Altius,~~that ~~(ii)~~generate ~~a $3.2 million reduction resulting from the~~enough ~~planned~~revenue ~~wind-down of our services~~ to ~~physician~~replace ~~group~~or ~~customers,~~exceed ~~(iii)~~the arevenue ~~decrease~~we ofexpect ~~$2.1 million related~~ to ~~reduced~~generate ~~outsourced contractor expenses~~ from ~~the~~our ~~completion~~backlog ofin ~~certain~~any ~~internal~~given ~~and customer related data center projects~~quarter, ~~(iv)~~our abacklog ~~decline~~will ~~of $2~~decline.0 ~~million~~Our ~~related~~backlog toat ~~the~~any ~~wind-down~~date ofmay ~~our~~not ~~services~~indicate demand for ~~PHN,~~our products and ~~(v) a $1.4 million net increase in costs to support the additional outsourced business~~ services ~~revenue from new Facets® hosted customers~~ and ~~existing~~may ~~benefits~~not ~~administrator~~reflect ~~customers.~~actual ~~The~~revenue ~~net~~for ~~increase of $1.4 million represented higher incentive~~any ~~compensation~~period ~~costs, which were offset~~ in ~~part by reduced costs related to cost containment efforts. The increase in non-recurring cost of revenue of $3.1 million resulted primarily from (i) an increase of $2.1 million in~~ the ~~amortization of capitalized software development products related to the general release of additional products, (ii) an increase of $2~~future.1 ~~million~~Our ~~from royalty expense associated with a third~~12-~~party~~month ~~vendor,~~ and ~~(iii) a decrease in costs due to reduced personnel and third-party contractor expenses. Additionally,~~ total ~~net~~backlog ~~loss~~data onare ~~contracts decreased $2.0 million due to a higher amount of reversal of these charges in the six months ended June 30, 2005~~ as ~~compared~~follows ~~to the same period~~ (in ~~2004,~~thousands): ~~as described below.~~

Loss on Contracts. We executed termination agreements with our two remaining physician group customers in the second quarter of 2005, allowing us to reverse the remaining balance in our loss on contracts accrual of $2.9 million, which reduced our total cost of revenue by an equal amount. In the first six months of 2004, we reversed $5.9 million of previously accrued recurring loss on contracts charges due to the accelerated termination of certain physician group contracts and the reduction of costs to support these remaining contracts. Additionally, in the first six months of 2004, we recorded $5.0 million of non-recurring loss on contracts charges, which represented incremental hours required to complete a certain fixed fee implementation. This fixed fee implementation project was completed by the end of the first quarter of 2005.


	6/30/08		3/31/08		12/31/07		9/30/07		6/30/07
12-month backlog	$	313,000	$	310,600	$	238,400	$	225,500	$	229,000

Total backlog	$	1,117,600	$	1,144,800	$	982,600	$	941,100	$	944,400

AsTotal ~~a percentage~~quarterly ofbookings equal the estimated total ~~revenue~~dollar value of the contracts signed in the quarter. Bookings can vary substantially from quarter to quarter, ~~cost~~based on a number of ~~revenue~~factors, ~~approximated~~including ~~55%~~the number and type of prospects in our pipeline, the ~~first~~length ~~six~~of ~~months~~time it takes a prospect to reach a decision and sign the contract, and the effectiveness of ~~2005~~our sales force. Included in quarterly bookings are up to seven years of maintenance revenue and ~~68%~~hosting and other services revenue. Bookings for each of the ~~same~~quarters ~~period~~are as follows (in ~~2004.~~thousands):

Gross Margin. As a percentage of total revenue, the overall gross margin increased to 46% in the first six months of 2005 from 32% for the same period in 2004. The increase in gross margin percentage in the first six months of 2005 was primarily the result of (i) higher utilization of consulting resources on more profitable implementation projects, (ii) higher software license sales, (iii) management’s decision to exit certain non-strategic and less profitable product offerings and business lines, and (iv) reductions in cost related to the cost containment efforts initiated in the second quarter of 2004. The overall increase in gross margin was partially offset by increases in third-party vendor royalty expenses incurred in the first six months of 2005.


	6/30/08		3/31/08		12/31/07		9/30/07		6/30/07
Quarterly bookings	$	61,700	$	236,400	$	163,200	$	74,500	$	93,800

~~Research~~RESULTS ~~and~~OF ~~Development~~OPERATIONS (R&D) Expenses. R&D expenses increased $1.9 million, or 13%, to $16.9 million in the first six months of 2005 from $15.0 million for the same period in 2004. This net increase was due primarily to increased spending related to the development of our proprietary software for the health plan and benefits administrator markets. Most of our R&D expense was used to develop CareAdvance™ care management software and to continue our development of Facets Extended Enterprise™, which is a substantial upgrade of our flagship software for health plans. We also made several enhancements to QicLink™, a proprietary software product for benefits administrators and HealthWeb®, our web-enable platform, which allows health plans to exchange information on a secure basis over the Internet. As a percentage of total revenue, R&D expenses approximated 12% in the first six months of 2005 and 11% for the same period in 2004. R&D expenses, as a percentage of total R&D expenditures (which includes capitalized R&D expenses of $4.1 million in the first six months of 2005 and $4.6 million for the same period in 2004), was 80% in the first six months of 2005 and 76% for the same period in 2004.

~~Selling,~~Quarter ~~General~~Ended ~~and Administrative (SG&A) Expenses. SG&A expenses increased $8.4 million~~June 30, or2008 ~~29%,~~Compared to ~~$36.9 million in~~ the ~~first~~Quarter ~~six~~Ended ~~months of 2005 from $28.5 million for the same period in 2004. The overall increase resulted primarily from (i) $3.1 million in higher personnel costs~~June 30, including higher incentive compensation and costs associated with certain senior staff additions in late 2004 and higher commission expenses incurred related to the timing of new contracts signed, (ii) a $32007.~~0 million~~ increase in professional fees for legal support, compliance and strategic planning, offset in part by a $1.1 million insurance reimbursement related to the ATPA litigation settlement, and (iii) approximately $1.2 million in other expenses such as travel, sales and marketing, and other increased corporate support costs. SG&A expenses also increased $2.2 million for certain unusual items which negatively affected the period comparison, including a $1.1 million increase due primarily to the collection of a fully reserved note receivable in the second quarter of 2004, and a $1.1 million increase primarily related to lease termination costs associated with certain facility closures. As a percentage of total revenue, selling, general and administrative expenses approximated 26% in the first six months of 2005 compared to 21% for the same period in 2004.

~~Amortization of Other Intangible Assets~~Revenue. ~~Amortization~~Total ofrevenue ~~other~~increased ~~intangible assets decreased~~ $~~371~~2.2 million,~~000,~~ or 182%, ~~from~~to $2117.10 million in the ~~first~~second ~~six~~quarter ~~months~~ of ~~2004~~ to2008 from $1114.78 million for the same period in ~~2005~~2007. ~~The~~This ~~decrease~~increase was ~~due~~ primarily related to ~~certain~~an ~~intangible~~increase ~~assets~~of ~~acquired~~$10.0 inmillion ~~fiscal year 2002, which were fully amortized~~ in ~~early~~services ~~2005,~~and ~~partially~~other revenue offset by ~~the~~a ~~amortization~~decrease ofin ~~intangible assets acquired~~products inrevenue ~~the second quarter~~ of ~~2004~~$7.8 million.

~~Interest~~Services ~~Income~~and Other Revenue. ~~Interest~~Services ~~income~~and other revenue includes outsourced business services (primarily software hosting and business process outsourcing), maintenance fees related to our software license contracts, consulting services and other revenue. Services and other revenue increased $~~110~~10.0 million,~~000,~~ or 4211%, to $~~371,000~~101.4 million in the second ~~first~~quarter ~~six months~~ of ~~2005~~2008 from $~~261,000~~91.4 million for the same period in ~~2004~~2007. The net increase isconsisted ~~due~~of $5.5 million in consulting and other services revenue, $3.5 million in software maintenance revenue, and $1.0 million in outsourced business services revenue. Consulting and other services revenue related primarily to ~~higher~~new ~~interest~~implementation ~~rates~~contracts signed in ~~our~~late ~~investment~~2007 ~~accounts~~and early 2008. Higher software maintenance revenue was triggered by large software license sales in late 2007 and ~~higher~~early 2008, ~~interest~~as ~~earned~~well as annual pricing improvements in ~~our~~maintenance ~~operating~~tied ~~account~~to increases in the consumer price index. The increase in outsourced business services revenue is partially attributable to new hosting agreements and increased membership for new and existing customers offset by termination agreements, including the QCA services agreement.

~~Interest~~Products ~~Expense~~Revenue. ~~Interest~~Products revenue, ~~expense~~which includes software license sales, decreased $~~199~~7.8 million,~~000~~ or 2733%, from $~~736,000~~23.4 million in the ~~first~~second ~~six~~quarter ~~months~~ of ~~2004~~2007 to $~~537,000~~15.6 million for the same period in ~~2005~~2008. The decrease ~~relates~~was due primarily to ~~lower~~a ~~balances~~decrease onin ~~our~~perpetual ~~capital~~license ~~leases,~~fees ~~notes payable, and lower borrowings on our revolving line~~ of $9.1 ~~credit,~~million offset ~~in part~~ by ~~interest~~ ~~incurred~~an onincrease ~~the IMS Health note payable issued~~ in ~~December~~term ~~2004,~~license ~~which~~fees ~~was~~of ~~fully~~$1.3 ~~repaid in January 2005~~million.

~~Provision~~Cost of Revenue – Services and Other. Cost of revenue for ~~Income~~services ~~Taxes~~and other includes costs for outsourced business services, consulting services and maintenance revenue. ~~Provision~~Cost of revenue for ~~income~~services ~~taxes~~and ~~was~~other increased $~~636~~500,000, or 1%, to $50.9 million in the ~~first~~second ~~six~~quarter ~~months~~ of ~~2005~~2008 ~~compared~~from to $~~400,000~~50.4 million for the same period in ~~2004~~2007. ~~The provision~~This ~~for~~increase ~~income~~primarily ~~taxes~~related ~~increased~~to ~~primarily~~higher ~~due~~compensation toand ~~applicability~~related costs of ~~Alternative~~$2.8 ~~Minimum~~million ~~Tax~~from onincreased ~~current~~headcount, ~~year~~scheduled ~~operating~~salary ~~income.~~increases, ~~The~~and ~~Company’s~~an ~~effective~~allocation ~~tax~~of ~~rate~~labor ~~was~~costs ~~6.4%~~from research and development for developers’ ~~the~~time ~~six-month~~spent ~~period~~on ~~ended~~support ~~June~~and ~~30,~~maintenance ~~2005~~projects. In addition, ~~which~~higher ~~was~~telecommunication ~~lower~~costs ~~than~~and ~~the Federal~~an ~~statutory~~increase ~~rate~~in ~~primarily~~infrastructure ~~due~~and technology investment of $1.0 million contributed to the ~~decrease~~overall inincrease. ~~valuation~~These ~~allowance,~~increases ~~which~~were partially ~~occurred~~offset asby a$1.1 ~~result~~million offrom ~~projected~~lower utilization of ~~net~~outsourced ~~operating~~contractors ~~loss~~on ~~(“NOLs”)~~implementation ~~carryovers~~projects and a $2.1 ~~The~~million ~~effective~~reduction ~~tax~~in ~~rate~~overall ~~for~~costs from the ~~six-month~~termination ~~period~~of ~~ended~~the ~~June~~QCA 30services agreement. As a percentage of total revenue, ~~2004~~cost of ~~represented~~revenue afor ~~negative~~services ~~amount~~and other approximated 43% in the second quarter of 2008 compared to 44% for the same period in 2007.

~~LIQUIDITY~~Cost ~~AND~~of Revenue – ~~CAPITAL~~Products. ~~RESOURCES~~Cost of revenue for products, excluding the amortization of acquired technology, decreased $500,000, or 10%, from $4.8 million in the second quarter of 2007 compared to $4.3 million for the same period in 2008. The decrease was primarily the result of lower amortization expense of $550,000 for capitalized R&D and $200,000 in lower investment in infrastructure and technology, offset by higher compensation and related costs of $300,000 from increased headcount and scheduled salary increases. As a percentage of total revenue, cost of revenue for products approximated 4% in the second quarter of both 2008 and 2007.

~~Since~~Gross ~~inception~~Margin. Gross margin, weexcluding ~~have~~the ~~financed~~amortization ~~our operations~~of ~~primarily~~acquired ~~through~~technology, aincreased ~~combination~~slightly ofto ~~cash~~53% ~~flows~~in ~~from~~the ~~operations,~~second ~~private~~quarter ~~financings,~~of ~~borrowing~~2008 ~~under~~compared ~~our~~to ~~debt~~52% ~~facility,~~for ~~public~~the ~~offerings~~same ofperiod ~~our~~in ~~common~~2007. ~~stock,~~Gross ~~and~~margin ~~cash~~was ~~obtained~~favorably ~~from~~impacted ~~our~~by ~~acquisitions.~~a higher-margin Asmix of ~~June~~services ~~30,~~and ~~2005~~other revenue, weoperating ~~had~~efficiencies ~~cash~~ and ~~cash equivalents~~pricing ~~totaling~~improvements ~~$56.4~~offset ~~million,~~by ~~which~~a ~~includes~~lower ~~$1.5~~volume ~~million~~of inproducts ~~restricted cash~~revenue.

~~Cash~~Research ~~provided~~and byDevelopment ~~operating~~(R&D) ~~activities~~Expenses. R&D expenses remained relatively flat from $16.4 million in the ~~first~~second ~~six~~quarter ~~months~~ of ~~2005~~2007 ~~was~~to $1216.95 million. ~~Net~~for ~~cash~~the ~~provided~~same ~~during~~period ~~the~~for ~~period~~2008. ~~resulted~~Lower ~~from~~compensation ~~net~~and ~~income~~related ofcosts of $91.34 million ~~and~~were aimpacted ~~net~~by ~~increase~~an allocation of ~~$10.3~~costs ~~million~~to ~~from~~services ~~non-cash charges~~and ~~such~~other asdue ~~depreciation~~to developers’ time spent on support and ~~amortization,~~maintenance ~~benefit~~projects. ~~from~~This ~~doubtful~~decrease ~~accounts~~was ~~and~~largely ~~sales~~offset ~~allowance,~~by ~~amortization~~a of$1.2 ~~deferred~~million ~~stock~~increase ~~compensation~~due to increased expense of software development costs and an increase in other ~~intangible~~costs ~~assets~~of $350,000 ~~loss~~related onprimarily ~~contracts~~to ~~and~~higher ~~loss~~utilization onof ~~disposal~~outsourced ofcontractors ~~assets~~and facility-related costs. ~~The~~As ~~net~~a ~~cash~~percentage ~~provided~~of ~~was offset~~total inrevenue, ~~part~~R&D byexpenses aapproximated ~~net~~14% ~~decrease~~for both the second quarter of $62008 and 2007.7 ~~million~~R&D inexpenses, ~~operating~~as ~~asset~~a ~~and~~percentage ~~liability~~of ~~accounts.~~total AsR&D ofexpenditures ~~December~~(which ~~31,~~includes ~~2004,~~capitalized weR&D ~~had~~expenses ~~NOL~~of ~~carry~~$900,000 ~~forwards~~in the second quarter of 2008 and $~~102~~2.91 million, for ~~which~~ the ~~related~~same ~~deferred~~period ~~tax~~in ~~assets~~2007), ~~are~~was ~~fully~~95% ~~reserved~~in ~~for~~the onsecond quarter ~~our~~of ~~balance~~2008 ~~sheet and~~compared ~~will~~with be89% ~~applied~~for ~~against~~the ~~future~~same ~~taxable~~period ~~income~~in 2007.

Selling, General and Administrative (SG&A) Expenses. SG&A expenses increased $3.1 million, or 11%, to $32.4 million in the second quarter of 2008 from $29.3 million for the same period in 2007. The increase was driven primarily by transaction costs of $2.1 million associated with the definitive merger agreement to sell the company to Apax Partners, $1.2 million in higher compensation and related costs impacted by increased headcount and scheduled salary increases, and a $700,000 increase due to executive severance expense. These increases were offset by a $900,000 decrease in the utilization of outsourced contractors, primarily for corporate strategy projects. As a percentage of total revenue, selling, general, and administrative expenses approximated 28% in the second quarter of 2008 compared to 26% for the same period in 2007.

Amortization of Intangible Assets. Amortization of intangible assets is comprised of acquired technology and acquired other intangible assets. In total, amortization of intangible assets increased $200,000, or 9%, to $2.8 million in the second quarter of 2008 from $2.6 million for the same period in 2007 due to adjustments for the final valuation of intangible assets from the PDM and QCSI acquisitions.

~~Cash~~Interest ~~used~~Income. inInterest ~~investing~~income ~~activities~~decreased of $41.63 inmillion, ~~the~~or ~~first~~45%, ~~six~~from ~~months of 2005 was primarily the result of~~ $4.2.8 million in ~~capitalization~~the ofsecond ~~software~~quarter ~~development~~of 2007 ~~costs~~to ~~and~~ $1.65 million infor ~~property~~the ~~and~~same ~~equipment~~period ~~and~~in ~~software~~2008. ~~licenses,~~The ~~offset~~decrease inwas ~~part~~driven by ~~proceeds~~lower ~~from~~balances ~~the~~in ~~net~~our ~~sale~~operating ofcash ~~$1.2~~and ~~million~~investment ~~in short-term investments~~accounts.

~~Cash~~Interest Expense. ~~used~~Interest inexpense ~~financing~~decreased ~~activities of~~ $~~24.0~~400,000, ~~million~~or in12%, ~~the~~from ~~first six months of 2005 was primarily the result of payments made to reduce principal outstanding amounts on notes payable and capital lease obligations of~~ $403.75 million, ~~which~~in ~~included~~ the ~~repayment~~second inquarter ~~full~~ of ~~our~~2007 ~~note payable~~ to ~~IMS Health of~~ $373.41 million ~~to finance~~for the ~~shares~~same ~~repurchased~~period in ~~December 2004, and $28~~2008.0 ~~million~~The todecrease ~~repay~~in ~~borrowings~~expense ~~on our revolving line of credit. This use of cash~~ was ~~offset~~driven ~~in part~~ by ~~$39.0~~lower ~~million of proceeds from~~ borrowings ~~under~~on our ~~revolving~~ credit facility, ~~$1.5~~lower principal ~~million~~balance ofand ~~proceeds~~interest ~~from~~rates ~~new~~on ~~debt~~the ~~financing~~term ~~primarily~~loan, ~~for~~and the ~~renewal~~payoff of ~~our~~certain ~~insurance~~capital ~~premiums,~~lease ~~and $4~~obligations.2 ~~million~~These ofdecreases ~~proceeds~~were ~~from~~partially ~~the~~offset ~~issuance~~by ofan ~~common~~increase ~~stock~~in interest related to ~~employee~~our ~~exercises~~convertible ofdebt ~~stock options and purchase of common stock~~notes.

Change in Fair Value of Derivative Liabilities. In ~~November~~the ~~2001~~second quarter of 2007, weit ~~entered~~was ~~into~~determined anthat ~~agreement~~upon ~~with~~execution anof ~~equipment~~the ~~financing~~2012 Notes, we did not have ~~company~~sufficient ~~for~~authorized $3and unissued shares available to settle all of our commitments that would require the issuance of stock during the maximum period those commitments could remain outstanding.1 ~~million~~As a result, ~~specifically~~warrants to ~~finance~~purchase approximately 3.0 million shares of the ~~acquisition~~Company’s common stock did not meet the definition of ~~certain~~an ~~equipment.~~equity ~~Principal~~instrument and ~~interest~~were isrecorded ~~payable~~as ~~monthly~~a ~~and~~derivative ~~the~~financial ~~note~~instrument isliability. ~~due~~A charge to earnings of $2.5 million was also recorded to reflect the increase in ~~November~~the ~~2005~~fair value of the warrant liability. ~~Interest~~The ~~accrues~~situation ~~monthly~~was atresolved ~~LIBOR~~in ~~rate~~the ~~plus~~third 3quarter of 2007.~~13%.~~ As of June 30, ~~2005~~2008, ~~there~~the ~~was a~~Company ~~principal~~had ~~balance~~sufficient ofauthorized ~~approximately~~shares ~~$2.0~~to ~~million~~settle ~~remaining~~all onof ~~the~~its ~~note~~commitments.

InProvision ~~December~~for ~~2004,~~Income weTaxes. ~~entered~~Provision ~~into~~for aincome ~~Credit~~taxes ~~Agreement~~was ~~with a lending institution, which established a revolving credit facility of~~ $503.08 million, ~~subject~~for tothe asecond ~~maximum~~quarter of ~~two~~2008 ~~times~~compared ~~our~~to ~~trailing twelve months EBITDA and fixed percentages of our recurring revenues~~$4. ~~The new Credit Agreement expires on January~~ 5, ~~2008.~~million ~~Principal~~for ~~outstanding under~~ the ~~facility~~same ~~bears~~period ~~interest~~in 2007. atThe ~~the~~effective ~~lending~~tax ~~institution’s prime~~ rate ~~plus~~was 144.02% ~~and~~for ~~unused portions of~~ the ~~facility~~second ~~are subject~~quarter toof ~~unused~~2008 ~~facility~~compared ~~fees. In the event we terminate the Credit Agreement prior~~ to ~~its expiration, we will be required to pay the lending institution a termination fee equal to 1~~55.4% for ~~each full or partial year remaining under~~ the ~~Credit Agreement,~~same ~~subject~~period ~~to specific exceptions. Under the Credit Agreement, we have granted the lending institution a security interest~~ in ~~substantially all of our assets~~2007. The ~~Credit~~decrease ~~Agreement~~to ~~contains~~the ~~customary~~effective ~~affirmative~~tax ~~and~~rate ~~negative~~was ~~covenants~~primarily ~~for credit~~due ~~facilities~~to ofclaiming ~~this type, including limitations on~~ the ~~company~~Federal ~~with~~section ~~respect~~199 tomanufacturing ~~indebtedness~~deduction, ~~liens,~~various ~~investments, distributions, mergers and acquisitions, dispositions of assets and transactions with our affiliates. The Credit Agreement also~~state ~~includes~~R&D ~~financial~~tax ~~covenants~~credits ~~including minimum EBITDA, minimum liquidity, minimum recurring revenue~~ and ~~maximum~~changes ~~capital~~to ~~expenditures.~~state ~~The~~income ~~Credit~~taxes ~~Agreement~~in ~~replaces our prior credit facility~~2008, ~~which~~as ~~expired~~well onas ~~December~~no ~~11,~~tax ~~2004.~~benefit Asfor ofthe ~~June~~charge ~~30,~~to ~~2005, we~~earnings ~~had~~from ~~outstanding~~the ~~borrowings~~change ~~on our current revolving credit facility of $23.0 million, with $27.0 million available on this facility. As of June 30, 2005, we were~~ in ~~compliance~~fair ~~with~~value ~~all~~ of the ~~covenants~~warrant ~~under~~liability ~~the~~in ~~credit facility~~2007.

InSix ~~December~~Months ~~2004~~Ended June 30, we2008 ~~entered~~Compared ~~into a Share Repurchase Agreement pursuant~~ to ~~which~~ ~~we purchased all of~~ the ~~12,142,857~~Six ~~shares~~Months ofEnded ~~our common stock owned by IMS Health for an aggregate purchase price of $82.0 million~~June 30, ~~or $6~~2007.75 per share. The shares owned by IMS Health were acquired in connection with the acquisition of Erisco in October 2000. The purchase price for the repurchase of shares was paid by delivery of $44.6 million in cash and a Subordinated Promissory Note in the principal amount of $37.4 million. The Subordinated Promissory Note bore interest at the rate of 5.75% and was due and paid in full on January 21, 2005 from our cash accounts. The cash portion of the purchase price was financed with the proceeds of the sale of 6,600,000 shares of our common stock to ValueAct Capital on December 21, 2004.

~~As of June 30, 2005, we have outstanding seven unused standby~~Revenue. ~~letters~~Total ofrevenue ~~credit~~decreased ~~in the aggregate amount of~~ $14.25 million, ~~which~~or ~~serve as security deposits for certain capital leases~~2%, ~~property~~from ~~and insurance policy~~$228.3 Wemillion ~~are~~for ~~required~~the tofirst ~~maintain~~six amonths ~~cash~~of ~~balance~~2007 ~~equal~~ to ~~the outstanding letters of credit, which is classified as restricted cash on our balance sheet~~$223.8 Inmillion ~~addition,~~for ~~approximately~~the ~~$363,000~~same isperiod ~~held~~ in ~~a money market account in accordance to a lease purchase transaction agreement entered into on March 22, 2001, whereby lease receivables were sold to a leasing company~~2008. AsThis adecrease ~~result~~consisted of ~~this transaction, we were required to establish~~ a ~~credit reserve of 25% of the lease transaction purchase price in a special deposit account~~$14.8 ~~The~~million ~~funds~~decrease ~~are~~related ~~being~~to ~~held~~products asrevenue ~~collateral~~offset ~~until~~by ~~all~~an ~~payments~~increase ~~on these lease~~in ~~receivables~~services ~~are~~and ~~paid~~other inrevenue ~~full~~of ~~to the leasing company~~$10.3 ~~This amount is also classified as restricted cash on our balance sheet~~million.

~~The~~Services ~~following~~and ~~tables~~Other ~~summarize~~Revenue. Services and other revenue includes outsourced business services (primarily software hosting and business process outsourcing), maintenance fees related to our ~~contractual~~software ~~obligations~~license contracts, consulting services and other ~~commercial~~revenue. ~~commitments~~Services (and other revenue increased $10.3 million, or 6%, to $191.5 million in ~~thousands):~~the first six months of 2008 from $181.2 million during the same period in 2007. The net increase consisted of a $7.0 million increase in software maintenance revenue, $2.5 million in consulting and other services revenue, and $800,000 in outsourced business services revenue. Higher software maintenance revenue was triggered by large software license sales in late 2007 and early 2008, as well as annual pricing improvements in maintenance tied to increases in the consumer price index. The increases in consulting and other services revenue related primarily to new implementation contracts signed in late 2007 and in the first quarter of 2008. The increase in outsourced business services revenue is partially attributable to new hosting agreements and increased membership for new and existing customers offset by termination agreements, including the QCA services agreement.

	Payments (including interest) Due by Period
Contractual obligations	Total		Less than1 Year		2-3Years		4-5Years		After 5Years
Short-term debt	$	2,950	$	2,950	$	—	$	—	$	—
Capital lease obligations		3,657		2,960		697		—		—
Operating leases		44,484		11,410		15,559		9,412		8,103
Other obligations		6,200		6,200		—		—		—
Total contractual obligations	$	57,291	$	23,520	$	16,256	$	9,412	$	8,103

Products Revenue. Products revenue, which includes software license sales, decreased $14.8 million, or 31%, from $47.1 million in the first six months of 2007 to $32.3 million for the same period in 2008. The decrease was due primarily to a decrease in perpetual license fees of $17.5 million offset by an increase in term license fees of $2.7 million.

Cost of Revenue – Services and Other. Cost of revenue for services and other includes costs for outsourced business services, consulting services and maintenance revenue. Cost of revenue for services and other decreased $1.3 million, or 1%, from $100.0 million in the first six months of 2007 to $98.7 million for the same period in 2008. This decrease primarily related to $4.2 million of lower overall costs from the termination of the QCA services agreement, $2.6 million from lower utilization of outsourced contractors, and a decrease in overall travel of $900,000. These decreases were partially offset by higher compensation and related costs of $5.2 million from increased headcount, scheduled salary increases, and an allocation of labor costs from research and development for developers’ time spent on support and maintenance projects. In addition, telecommunication costs, infrastructure and technology investment, and professional fees increased a total of $1.3 million. As a percentage of total revenue, cost of revenue for services and other approximated 44% in the first six months of both 2008 and 2007.

Cost of Revenue – Products. Cost of revenue for products, excluding the amortization of acquired technology, decreased $1.1 million, or 10%, from $10.0 million in the first six months of 2007 compared to $8.9 million for the same period in 2008. The overall decrease was the result of lower amortization expense of $700,000 for capitalized R&D, $200,000 in lower compensation and related costs, and $200,000 in decreased investment in infrastructure and technology. As a percentage of total revenue, cost of revenue for products approximated 4% for the first six months of both 2008 and 2007.

	Amount of Commitment Expiration per Period
Other commercial commitments	Total AmountsCommitted		Less Than1 Year		2-3Years		4-5Years		After 5Years
Line of credit	$	23,000	$	—	$	23,000	$	—	$	—
Standby letters of credit		1,181		789		—		—		392
Credit reserve		363		363		—		—		—
Total other commercial commitments	$	24,544	$	1,152	$	23,000	$	—	$	392

Gross Margin. Gross margin, excluding the amortization of acquired technology, remained flat at 52% in the first six months of 2008 compared to the same period in 2007. Gross margin was favorably impacted by a higher-margin mix of services and other revenue, operating efficiencies and pricing improvements which were offset by a lower volume of products revenue.

~~Other~~Research ~~obligations include~~and Development (iR&D) $4Expenses.0 ~~million~~R&D ~~related~~expenses todecreased a$700,000, ~~commitment~~or to2%, ~~pay~~from ~~a customer in connection with a long-term hosting services agreement and (ii)~~ $232.2 million ~~for damages and other fees associated with a judgment~~ in the ~~case~~first ofsix ~~Associated Third Party~~months ~~Administrators v. The TriZetto Group, Inc. The $4.0 million relates to a commitment to pay an upfront fee~~ of ~~$8.0~~2007 ~~million~~ to ~~a customer in connection with a long-term hosting services agreement, of which~~ $431.05 million ~~has~~for ~~been paid in~~ the ~~first~~same ~~six months~~period offor ~~2005~~2008. ~~(payments~~Lower ~~are~~compensation ~~made~~and inrelated ~~equal~~costs ~~monthly installments~~ of ~~approximately~~ $~~667,000)~~2.2 ~~The~~million ~~upfront~~were ~~fee~~impacted isby ~~being~~an ~~amortized~~allocation ~~equally over the term~~ of ~~the~~costs ~~contract as a reduction~~ to ~~revenue. The long-term hosting~~ services ~~agreement~~and ~~includes~~other ~~a termination~~due ~~provision~~to ~~whereby~~developers’ ~~the~~time ~~customer~~spent ison ~~required~~support toand ~~reimburse~~maintenance usprojects. ~~for~~This decrease ~~the~~was ~~difference~~largely ofoffset ~~the~~by a $81.01 million ~~payment~~increase ~~and~~due ~~what has been amortized up~~ to ~~the~~increased ~~date~~expense of ~~termination.~~software Indevelopment ~~addition,~~costs onand ~~October~~an ~~26,~~increase ~~2004, a jury in California Superior Court, County~~ of ~~Alameda~~$400,000 ~~delivered its verdict~~ in ~~the~~facility-related ~~case of Associated Third Party Administrators v~~costs. ~~The~~As ~~TriZetto Group Inc.,~~ a ~~dispute~~percentage ~~involving~~of ~~technology~~total ~~agreements between us and Associated Third Party Administrators~~revenue, aR&D ~~former~~expenses ~~QicLink™~~approximated ~~customer.~~14% Infor ~~its~~both ~~verdict,~~ the first ~~jury~~six ~~awarded~~months ~~damages~~ of ~~approximately~~2008 ~~$1.85~~and ~~million~~2007. InR&D ~~the first quarter of 2005~~expenses, as a ~~judgment~~percentage ~~was~~of ~~entered~~total byR&D ~~the~~expenditures ~~court,~~ (which ~~included,~~includes incapitalized ~~addition~~R&D toexpenses ~~damages~~ of $12.857 million, ~~approximately $500,000~~ in ~~pre-judgment interest and recoverable costs increasing~~ the ~~total~~first ~~accrual~~six ~~for~~months ~~the~~of ~~dispute~~2008 toand $23.358 million. ~~In June~~for ~~2005,~~ the ~~Company~~same ~~entered~~period ~~into a settlement agreement with ATPA~~ in ~~which the Company agreed to pay ATPA $2.2 million to fully resolve the dispute. The Company paid this amount to ATPA in July 2005. In June 2005~~2007), ~~the~~was ~~Company’s~~92% ~~insurance~~in ~~carrier agreed to reimburse~~ the ~~Company~~first asix ~~total~~months of ~~$1.1~~2008 ~~million~~compared ofwith ~~the~~89% ~~settlement,~~for ~~which~~the ~~was~~same ~~recorded~~period ~~as a receivable as of June 30, 2005. The full amount of this receivable was collected~~ in ~~July 2005~~2007.

~~Based~~Selling, onGeneral ~~our~~and ~~current~~Administrative ~~operating~~(SG&A) ~~plan,~~Expenses. SG&A weexpenses ~~believe~~increased ~~that~~$4.1 ~~existing cash~~million, ~~cash equivalents~~or ~~and~~7%, ~~short-term~~to ~~investment~~$61.2 ~~balances,~~million ~~cash~~in ~~forecasted~~the byfirst ~~management~~six tomonths beof ~~generated~~2008 byfrom ~~operations~~$57.1 ~~and~~million ~~borrowings~~for ~~from~~the ~~existing~~same ~~credit~~period ~~facilities~~in ~~will~~2007. beThe ~~sufficient~~increase towas ~~meet~~driven ~~our~~primarily ~~working~~by ~~capital~~transaction ~~and~~costs ~~capital~~of ~~requirements~~$2.9 ~~for~~million atassociated ~~least~~with the ~~next~~definitive 12merger ~~months.~~agreement ~~However~~to sell the company to Apax Partners, if$3.8 ~~events~~million orin ~~circumstances~~higher ~~occur~~compensation ~~such~~and ~~that~~related wecosts doimpacted ~~not~~by ~~meet~~increased ~~our~~headcount ~~operating~~and ~~plan~~scheduled assalary ~~expected~~increases, wean ~~may~~increase bein ~~required~~sales toand ~~seek~~marketing ~~additional~~expenses ~~capital~~of $900,000 resulting from the annual Payer conference and~~/or~~ ~~reduce~~an ~~certain~~overall ~~discretionary~~increase ~~spending,~~in ~~which~~trade ~~could~~show ~~have~~activity, and a ~~material~~$700,000 ~~adverse~~increase ~~effect~~due ~~on our~~to ~~ability~~executive toseverance ~~achieve~~expense. ~~our~~These ~~business~~increases ~~objectives~~were offset by a $2.1 Wemillion ~~may~~decrease ~~seek~~in ~~additional~~the ~~financing~~utilization of outsourced contractors primarily for corporate strategy projects, ~~which~~$1.3 ~~may~~million ~~include~~in ~~debt~~decreased investment in infrastructure and~~/or~~ ~~equity~~technology, ~~financing~~and ora ~~funding~~reduction ~~through~~in ~~third~~recruiting ~~party~~and ~~agreements.~~relocation ~~There~~fees ~~can~~of be$600,000 noattributed ~~assurance~~to ~~that~~the ~~any~~accounting ~~additional~~department ~~financing~~transition ~~will~~to beColorado ~~available~~last onyear. As a ~~acceptable~~percentage ~~terms,~~of iftotal atrevenue, ~~all.~~selling, ~~Any~~general, ~~equity~~and ~~financing~~administrative ~~may~~expenses ~~result~~approximated 27% in ~~dilution~~the tofirst ~~existing~~six ~~stockholders~~months ~~and~~of ~~any~~2008 ~~debt~~compared ~~financing~~to ~~may~~25% ~~include~~for ~~restrictive~~the ~~covenants~~same period in 2007.

Interest Income. Interest income increased $100,000, or 4%, to $3.7 million in the first six months of 2008 from $3.6 million for the same period in 2007. The net increase was driven by higher balances in our operating cash account and offset by lower balances in our investment accounts.

Interest Expense. Interest expense increased $200,000, or 3%, to $6.3 million in the first six months of 2008 from $6.1 million for the same period in 2007. The decrease in expense was driven by lower borrowings on our credit facility, lower principal balance and interest rates on the term loan, and the payoff of certain capital lease obligations. These decreases were partially offset by an increase in interest related to our convertible debt notes.

Change in Fair Value of Derivative Liabilities. In the second quarter of 2007, it was determined that upon execution of the 2012 Notes, we did not have sufficient authorized and unissued shares available to settle all of our commitments that would require the issuance of stock during the maximum period those commitments could remain outstanding. As a result, warrants to purchase approximately 3.0 million shares of the Company’s common stock did not meet the definition of an equity instrument and were recorded as a derivative financial instrument liability. A charge to earnings of $2.5 million was recorded to reflect the increase in the fair value of the warrant liability. The situation was resolved in the third quarter of 2007. As of June 30, 2008, the Company had sufficient authorized shares to settle all of its commitments.

Provision for Income Taxes. Provision for income taxes was $6.4 million for the first six months of 2008 compared to $9.0 million for the same period in 2007. The effective tax rate was 42.4% for the first six months of 2008 compared to 48.3% for the same period in 2007. The decrease to the effective tax rate was primarily due to claiming the Federal section 199 manufacturing deduction, various state R&D tax credits and changes to state income taxes in 2008, as well as no tax benefit for the charge to earnings from the change in fair value of the warrant liability in 2007.

LIQUIDITY AND CAPITAL RESOURCES

Capital Resources

As of June 30, 2008, cash available to fund our operations included cash and cash equivalents totaling $148.6 million. Our principal sources of liquidity include cash from operations, borrowings under our debt facility, proceeds from the issuance of convertible debt, cash obtained from our acquisitions, employee exercises of stock options and private financings, described as follows:

•

In October 2005, we issued $100.0 million aggregate principal amount of 2.75% Convertible Senior Notes due 2025 (the “2025 Notes”). The 2025 Notes are convertible, at the holder’s option in certain circumstances, into shares of our common stock at an initial conversion price of $18.85 per share, or 53.0504 shares for each $1,000 principal amount of 2025 Notes, subject to certain adjustments. The maximum conversion rate is 68.9655 shares for each $1,000 principal amount of 2025 Notes. The 2025 Notes bear interest at a rate of 2.75%, which is payable in cash semi-annually.

•

In January 2007, we amended and restated our Credit Agreement, initially established December 21, 2004, to add a term loan of up to $150.0 million and to extend the expiration date of the Credit Agreement, including our $100.0 million revolving credit facility, to January 5, 2011. As of June 30, 2008, we no had outstanding borrowings on the revolving line of credit and were in compliance with all applicable covenants and other restrictions under the Credit Agreement. In January 2007, we borrowed $75.0 million under the term loan to help fund our acquisition of QCSI, of which $64.3 million was outstanding as of June 30, 2008. We can borrow up to an additional $75.0 million under the term loan through and including March 31, 2009, at which time no additional funds can be borrowed under the term loan.

•

In April 2007, we issued $230.0 million aggregate principal amount of 1.125% Convertible Senior Notes due 2012 (the “2012 Notes”). The 2012 Notes are convertible, at the holder’s option in certain circumstances, into shares of our common stock at an initial conversion price of $21.97 per share, or 45.5114 shares for each $1,000 principal amount of 2012 Notes, subject to certain adjustments. The maximum conversion rate is 53.4759 shares for each $1,000 principal amount of 2012 Notes. The 2012 Notes bear interest at an annual rate of 1.125%, which is payable in cash semi-annually.

In January 2008, we invested $72.3 million in taxable note investments with an auction reset function (“auction rate securities”) collateralized by student loans which are substantially backed by the federal government and state agencies. Beginning in February 2008, auctions for our auction rate securities failed due to conditions in the market. A failed auction results in a lack of liquidity in the securities but does not signify a default by the issuer. Upon an auction failure, the interest rates do not reset at a market rate but instead reset based on a formula contained in the security. As of June 30, 2008, all of our auction rate securities continue to be rated AAA by Standard & Poor’s or Aaa by Moody’s despite the auction failures.

As of June 30, 2008, we determined the fair value of the auction rate securities no longer approximated their par value based on a discounted cash flow valuation model that was based on the collateralization of the underlying securities, the credit rating of the investment, the timing of expected future cash flows, and the expected duration until the securities trade again. As a result, we concluded that the auction rate securities were temporarily impaired and recorded an unrealized loss of approximately $4.6 million to reflect the revised fair value of the auction rate securities at $67.7 million. Given the uncertainty as to when the securities may be actively traded we have classified the auction rate securities as long-term investments.

We reviewed the classification of the impairment charges in accordance with the appropriate accounting literature, and concluded the impairment is temporary as of June 30, 2008. A temporary impairment charge results in an unrealized loss being recorded in the accumulated other comprehensive income component of stockholders’ equity. We believe this treatment is appropriate because the loss in value attributable to our auction rate securities is temporary in nature and we have the ability and intent to hold the auction rate securities until a recovery in market value takes place. We will continue to monitor and analyze our auction rate securities investments to determine whether the impairment continues to exist, and if so, how the impairment should be classified.

Based on our current operating plan, we believe that existing cash and cash equivalents balances, cash forecasted by management to be generated by operations and borrowings from existing credit facilities will be sufficient to meet our working capital and capital requirements for at least the next 12 months. However, if events or circumstances occur such that we do not meet our operating plan as expected, we may be required to seek additional capital and/or reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. We may seek additional financing, which may include debt and/or equity financing or funding through third party agreements. There can be no assurance that any additional financing will be available on acceptable terms, if at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.

Summary of Cash Activities

As of June 30, 2008, we had cash and cash equivalents totaling $148.6 million. Significant cash flow activities for the six months ended June 30, 2008 and 2007 are as follows (in thousands):


	Six Months Ended June 30,
	2008			2007
Cash provided by operating activities	$	30,150		$	27,132
Purchase of investments		(77,200	)		(195,640	)
Sale of investments		4,900			142,575
Purchase of property and equipment and software licenses		(5,946	)		(9,333	)
Capitalization of software development costs		(2,685	)		(3,829	)
Purchase of intangible assets		(850	)		—
Acquisitions, net of cash acquired		(9,622	)		(143,196	)
Proceeds from revolving line of credit, debt financings, notes payable and capital leases		1,066			428,731
Payments on revolving line of credit, notes payable and capital leases		(7,802	)		(160,163	)
Employee exercises of stock options and purchase of common stock		5,126			8,728
Excess tax benefits from stock-based compensation		4,636			—
Repurchase of common stock to treasury		(1,684	)		—

Cash and cash equivalents decreased $59.9 million in the first six months of 2008 from $208.5 million at December 31, 2007 to $148.6 million at June 30, 2008. This decrease was primarily due to the purchase of investments of $77.2 million, a cash payment of $9.6 million to former QCSI stockholders, warrantholders, and optionholders (which included a $2.6 million Holdback payment along with a $7.0 million contingent consideration earned as of December 31, 2007), $8.6 million for capital spending, payments on our debt (including our revolving line of credit) of $7.8 million, a $1.7 million payment for the repurchase of common stock, and a $1.0 million purchase of intangible assets. These cash outflows were offset by cash provided by operating activities of $30.2 million, $5.1 million in proceeds from employee option exercises, sale of investments of $4.9 million, $4.6 million of tax benefits related to stock-based compensation, and net proceeds from debt financing of $1.0 million.

Commitments and Contingencies

The following tables summarize our estimated contractual obligations and other commercial commitments as of June 30, 2008 (in thousands):


	Payments (including interest) Due by Period
Contractual obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Short-term debt	$	601	$	601	$	—	$	—	$	—
Capital lease obligations		1,675		776		899		—		—
Operating leases		70,180		17,876		23,798		9,377		19,129
Convertible debt		388,506		5,338		10,675		238,087		134,406

Total contractual obligations	$	460,962	$	24,591	$	35,372	$	247,464	$	153,535


	Amount of Commitment Expiration per Period
Other commercial commitments	Total Amounts Committed		Less Than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Term loan	$	71,408	$	13,770	$	57,638	$	—	$	—
Standby letters of credit		1,990		1,000		308		—		682

Total other commercial commitments	$	73,398	$	14,770	$	57,946	$	—	$	682

Convertible debt represents scheduled principal and interest payments for our 2025 Notes and 2012 Notes, which includes $100.0 million and $230.0 million aggregate principal amounts, respectively. The 2025 Notes bear interest at a rate of 2.75%, which is payable in cash semi-annually in arrears on April 1 and October 1 of each year, and commenced on April 1, 2006, to the holders of record on the preceding March 15 and September 15, respectively. The 2025 Notes mature on October 1, 2025. However, on or after October 5, 2010, we may from time to time at our option redeem the 2025 Notes, in whole or in part, for cash, at the applicable

redemption date. Additionally, holders of the 2025 Notes may require us to purchase all or a portion of their 2025 Notes in cash on each of October 1, 2010, October 1, 2015 and October 1, 2020. The 2012 Notes bear interest at a rate of 1.125%, which is payable in cash semi-annually in arrears on April 15 and October 15 of each year, and commenced on October 15, 2007, to the holders of record on the preceding April 1 and October 1, respectively. The 2012 Notes mature on April 15, 2012.

As of June 30, 2008, we had five unused standby letters of credit outstanding in the aggregate amount of $2.0 million, which serve as security deposits for certain operating leases.

Excluded from the tables above are certain potential payments to CareKey stockholders and optionholders as these payments are contingent upon the achievement of financial milestones and are payable in either cash or stock at our election. CareKey stockholders and optionholders are entitled to receive additional contingent consideration payments upon the achievement of certain revenue milestones during the period beginning upon acquisition and ending December 31, 2008. In addition, further consideration payable in cash or stock at our election, may be paid to former CareKey stockholders and optionholders if, prior to December 31, 2008, the acquired CareKey products generate revenues in excess of certain revenue milestones and/or if a negotiated multiple of software maintenance revenues of acquired CareKey products during the fiscal year ended December 31, 2009 exceed total purchase consideration made to those former CareKey stockholders and optionholders. As of June 30, 2008, $8.3 million of contingent considerations had been earned. This amount is payable as of March 31, 2009.

Also excluded from the tables above are certain potential payments to former PDM stockholders and optionholders. PDM security holders may be entitled to receive additional contingent consideration of $8.0 million on or before December 31, 2009 subject to reduction if certain revenue thresholds are not satisfied during the applicable measurement period or to the extent TriZetto is entitled to claims for indemnification as specified in the Merger Agreement. Additional contingent consideration of $5.0 million may be paid on June 30, 2009 if certain specified revenue thresholds are satisfied, provided that in no event will the aggregate consideration of all payments exceed $42.0 million. The contingent consideration is payable in a combination of cash and common stock.

Due to the uncertainty with respect to the timing of future cash flows associated with the Company’s cumulative unrecognized tax benefits recorded in accordance with FIN 48 at June 30, 2008, the Company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities as it relates to the $11.0 million of unrecognized tax benefits.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not currently have any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet or other contractually narrow or limited purposes.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Market risk associated with adverse changes in financial and commodity market prices and rates could impact our financial position, operating results or cash flows. We are exposed to market risk due to changes in interest rates such as the prime rate and LIBOR. This exposure is directly related to our normal operating and funding activities. ~~Historically, and as of June 30, 2005, we have not used derivative instruments or engaged in hedging activities.~~

The interest rate on our $50100.0 million revolving credit facility and $150.0 million term loan is a per annum rate equal to either (i) the LIBOR rate plus an adjustable applicable margin of between 1.75% and 3.50% or (ii) the lending institution’s prime rate plus 1an adjustable applicable margin of between 0.0% and 2.0%, at our election, subject to specified restrictions, and is payable monthly in arrears or upon maturity date. The revolving credit facility ~~expires~~and term loan expire in January ~~2008~~2011. As of June 30, ~~2005~~2008, we had outstanding no borrowings on the ~~current~~ revolving ~~credit~~line ~~facility~~ of credit and $2364.03 million outstanding borrowings on the term loan.

In ~~November~~October ~~2001~~2005, we ~~entered~~issued $100.0 million aggregate principal amount of 2.75% Convertible Senior Notes due 2025 (the “2025 Notes”). The 2025 Notes are convertible into anshares ~~agreement~~of ~~with~~our common stock at an ~~equipment~~initial ~~financing~~conversion ~~company~~price of $18.85 per share, or 53.0504 shares for each $3.1,000 ~~million~~principal amount of 2025 Notes, ~~specifically~~subject to ~~finance~~ certain ~~equipment~~adjustments. ~~Principal~~The ~~and~~maximum ~~interest~~conversion rate is ~~payable~~68.9655 ~~monthly~~shares ~~and~~for ~~the~~each ~~note~~$1,000 isprincipal ~~due~~amount inof ~~November~~2025 ~~2005~~Notes. ~~Interest~~The ~~accrues~~2025 Notes were issued pursuant to ~~monthly~~an Indenture, dated October 5, 2005, by and between us and Wells Fargo Bank, National Association, as trustee. The 2025 Notes bear interest at ~~LIBOR~~a rate ~~plus~~of 32.1375%., Aswhich is payable in cash semi-annually in arrears on April 1 and October 1 of ~~June~~each 30year, ~~2005~~and commenced on April 1, we2006, ~~had~~to ~~outstanding~~the ~~borrowings~~holders of ~~$2.0~~record ~~million~~on the preceding March 15 and September 15, respectively.

In ~~December~~April ~~2004~~2007, we ~~entered~~issued ~~into~~$230.0 amillion ~~Share~~aggregate ~~Repurchase~~principal ~~agreement~~amount ~~with~~of ~~IMS~~1.125% ~~Health~~Convertible toSenior ~~purchase~~Notes ~~all~~due of2012 (the ~~12,142,857~~“2012 Notes”). The 2012 Notes are convertible into shares of our common stock ~~owned~~at byan ~~IMS~~initial conversion price of ~~Health~~$21.97 ~~The~~per ~~purchase~~share, ~~price~~or ~~was~~45.5114 ~~paid~~shares byfor ~~delivery~~each $1,000 principal amount of ~~$44~~2012 Notes, subject to certain adjustments.6 ~~million~~The inmaximum ~~cash~~conversion ~~and~~rate ais ~~Subordinated~~53.4759 ~~Promissory~~shares ~~Note~~for ineach ~~the~~$1,000 principal amount of ~~$37.4~~2012 ~~million~~Notes. The ~~Subordinated~~2012 ~~Promissory~~Notes ~~Note~~were ~~bore~~issued pursuant to an Indenture, dated April 17, 2007, by and between us and Wells Fargo Bank, National Association, as trustee. The 2012 Notes bear interest at ~~the~~a rate of 51.75125%, ~~and~~which ~~was~~is ~~due~~payable ~~and~~in ~~paid~~cash semi-annually in ~~full~~arrears on April 15 and ~~January~~October 15 21of each year, ~~2005~~and commenced on October 15, 2007, to the holders of record on the preceding April 1 and October 1, respectively.

~~Changes~~25 ~~in interest rates have no impact on our other debt as all of our other notes have fixed interest rates between 4% and 7%.~~

WeTable manageof interest rate risk by closely managing our borrowings on our credit facility based on our operating needs in order to minimize the interest expense incurred. As a result, we do not believe that near-term changes in interest rates will result in a material effect on our future earnings, fair values or cash flows. Contents

We manage interest rate risk by investing excess funds in cash equivalents and short-term investments bearing variable interest rates, which are tied to various market indices. We also manage interest rate risk by closely managing our borrowings on our credit facility based on our operating needs in order to minimize the interest expense incurred. As a result, we do not believe that near-term changes in interest rates will result in a material effect on our future earnings, fair values or cash flows.

Item 4.

Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal ~~financial~~accounting officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ~~(the “Exchange Act”)~~. Based on this evaluation, our principal executive officer and our principal ~~financial~~accounting officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Additionally, there were no changes in our internal controls over financial reporting during the quarter ended June 30, ~~2005~~ 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

2326

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

On ~~October 26~~April 15, ~~2004~~2008, Plaintiff aDavid ~~jury~~P. inSimonetti ~~California~~Rollover ~~Superior~~IRA ~~Court,~~filed ~~County~~a ofVerified ~~Alameda,~~Class ~~delivered~~Action ~~its~~Complaint ~~verdict~~ in the ~~case~~Delaware Court of ~~Associated~~Chancery, ~~Third~~entitled ~~Party~~David ~~Administrators v~~P. ~~The~~ ~~TriZetto~~Simonetti ~~Group,~~Rollover ~~Inc.~~IRA, aIndividually ~~dispute~~and ~~involving~~On ~~technology~~Behalf ~~agreements~~of ~~between~~All ~~Associated~~Others ~~Third~~Similarly ~~Party~~Situated, ~~Administrators (“ATPA”)~~Plaintiff, av. ~~former~~Jeffrey ~~QicLink™ customer~~H. Margolis, ~~and~~Donald ~~the Company~~J. ~~In its verdict~~Lothrop, ~~the~~Thomas ~~jury~~B. ~~found~~Johnson, ~~that~~Paul ~~the~~F. ~~Company~~Lefort, ~~made~~Jerry ~~certain~~P. ~~misrepresentations~~Widman, toNancy ~~ATPA~~H. inHandel, ~~connection with~~L. ~~the~~William ~~license~~Krause, ofApax ~~QicLink™~~Partners, ~~software in 2001 and awarded damages of approximately $1~~L.~~85 million~~P., ~~representing~~TZ ~~primarily~~Holdings, ~~the amount of the license fee paid by ATPA~~L.P., InTZ ~~the~~Merger ~~first quarter of 2005~~Sub, ~~a judgment was entered by the court which included~~Inc., inand ~~addition~~The toTriZetto ~~damages~~Group ~~of $1~~Inc.~~85 million~~, ~~approximately $500~~Defendants,~~000~~ inC.A. ~~pre~~No. 3694-~~judgment interest~~VCN ~~and~~(the ~~recoverable~~“Simonetti ~~costs~~Litigation”). The ~~Company~~complaint ~~recorded~~sought, anamong ~~accrual~~other ~~for the additional $500~~relief,~~000~~ certification of ~~costs~~a inclass ~~the~~of ~~first~~all ~~quarter~~common stockholders of ~~2005~~TriZetto ~~increasing~~who ~~the~~allegedly ~~total~~were ~~accrual~~harmed ~~for~~by the ~~dispute~~defendants’ toactions ~~$2.35~~challenged ~~million.~~in Inthe ~~June 2005~~complaint, ~~the Company entered into~~ a ~~settlement agreement~~declaration ~~with~~that ~~ATPA in which~~ the ~~Company~~defendants ~~agreed~~had tobreached ~~pay~~their ~~ATPA~~fiduciary ~~$2.2~~and ~~million~~other toduties, ~~fully~~entry ~~resolve~~of ~~the~~an ~~dispute.~~order ~~The~~requiring ~~Company~~defendants ~~paid~~to ~~this~~take ~~amount~~certain tosteps ~~ATPA~~ in ~~July~~connection ~~2005.~~with Inthe ~~June~~proposed ~~2005~~transaction, ~~the~~compensatory ~~Company’s~~damages, ~~insurance~~costs ~~carrier~~and ~~agreed~~disbursements, toincluding ~~reimburse~~plaintiff’s counsel’s ~~the~~fees ~~Company~~and aexperts’ ~~total~~fees. ofOn ~~$1.1 million~~May 20, of2008, the ~~settlement,~~plaintiff ~~which~~in ~~was~~the ~~recorded~~Simonetti asLitigation filed a ~~receivable~~First asAmended ofComplaint, ~~June~~which ~~30,~~added ~~2005.~~allegations ~~The~~that ~~full~~the ~~amount~~defendants ofallegedly ~~this~~failed ~~receivable~~to ~~was~~disclose ~~collected~~material infacts ~~July~~regarding ~~2005~~the Merger.

OnIn ~~September~~addition ~~13,~~to ~~2004~~the Simonetti Litigation, ~~McKesson~~two ~~Information~~putative ~~Solutions~~class ~~LLC~~action ~~(“McKesson”)~~complaints were filed ain ~~lawsuit~~the ~~against~~Superior Court of the ~~Company~~State of California, County of Orange, alleging substantially similar claims as those alleged in the ~~United~~Simonetti ~~States~~Litigation. ~~District~~On ~~Court for~~May 28, 2008, the ~~District~~two ofCalifornia ~~Delaware.~~putative Inclass ~~its~~actions ~~complaint~~were consolidated (the “Consolidated California Action”), ~~McKesson~~and on ~~alleged~~June 5, ~~that~~2008, the ~~Company~~Consolidated ~~has~~California ~~made~~Action was stayed in favor of the Simonetti Litigation. On June 10, ~~used~~2008, ~~offered~~the ~~for~~plaintiffs ~~sale,~~in ~~and/or~~the ~~sold~~Consolidated California Action filed a ~~system~~putative ~~that~~class ~~infringes~~action ~~McKesson’s~~complaint ~~United~~in ~~States~~the ~~Patent~~Delaware ~~No.~~Court ~~5,253,164,~~of Chancery entitled ~~“System~~City Of Fort Lauderdale Police And ~~Method~~Firefighters’ ~~For Detecting~~Retirement ~~Fraudulent~~System ~~Medical~~And ~~Claims~~Police ~~Via~~And ~~Examination~~Fire OfRetirement ~~Services~~System ~~Codes.”~~Of ~~McKesson~~The ~~seeks~~City ~~injunctive~~Of ~~relief~~Detroit, Individually and ~~monetary~~On ~~damages~~Behalf of anAll ~~unspecified~~Others ~~amount~~Similarly Situated, ~~including~~v. ~~treble~~Jeffrey ~~damages~~H. ~~for~~Margolis, ~~willful~~et al., ~~infringement~~C.A. ~~The~~No. 3817-VCN ~~Company~~(together ~~has~~with ~~not~~the ~~accrued~~Simonetti ~~any~~Litigation, ~~liability related~~the to“Delaware ~~this~~Litigation” ~~lawsuit~~and ascollectively with the ~~Company~~Consolidated ~~does~~California ~~not~~Action, ~~believe~~the as“Merger ofLitigation”). ~~June~~In 30addition, ~~2005,~~counsel ~~that~~for ~~its~~plaintiffs’ ~~liability~~in the toConsolidated ~~McKesson~~California isAction ~~probable~~appeared ~~and~~as ~~capable~~counsel ofin ~~being~~the ~~reasonably~~Simonetti ~~estimated.~~Litigation ~~The~~and ~~Company’s~~joined ~~attorney~~in ~~and~~the ~~other~~discovery ~~defense~~and ~~costs~~briefing ~~related~~in tothe ~~this~~Simonetti ~~matter~~Litigation ~~are~~in ~~being expensed~~connection atwith the ~~time~~motion ~~such~~to ~~costs~~preliminarily ~~are~~enjoin ~~incurred~~the Merger.

InOn ~~addition~~June 27, to 2008, the ~~matters~~Delaware ~~described~~Court ~~above,~~of ~~and~~Chancery ~~from~~issued ~~time~~a tomemorandum ~~time,~~opinion and order (the ~~Company~~“Order”) isin ~~involved~~the Simonetti Litigation, granting in ~~litigation~~part ~~relating~~and todenying ~~claims~~in ~~arising~~part ~~out~~the ofplaintiff’s ~~its~~motion ~~operations~~for ina ~~the~~preliminary ~~normal~~injunction ~~course~~enjoining ofthe ~~business~~proposed Merger. ~~Although~~The ~~the~~Court ~~Company~~preliminarily isenjoined ~~unable~~TriZetto atfrom ~~this~~conducting ~~time~~or toallowing ~~predict~~any ~~the~~vote ~~outcome~~by ofits stockholders to approve the proposed Merger ~~McKesson~~until ~~lawsuit,~~TriZetto itmade ~~believes~~curative ~~that~~supplemental asdisclosures ofrelating ~~June~~to ~~30,~~certain ~~2005,~~potential financial benefits of the ~~Company~~Merger ~~was~~to ~~not~~TriZetto’s afinancial ~~party~~advisor, toUBS ~~any~~Securities ~~other~~LLC ~~legal~~(“UBS”), ~~proceedings~~and its affiliates, upon consummation of the transactions ~~adverse~~contemplated ~~outcome~~by ofthe ~~which~~Merger Agreement, based on its interest in ~~management’s~~certain ~~opinion,~~convertible ~~individually~~notes orissued by TriZetto and related bond hedge and warrant transactions entered into with TriZetto in 2007 (the ~~aggregate~~“Financial Advisor Disclosure”). The Court’s Order provided that, ~~would~~upon ~~have~~application, athe ~~material~~Order ~~adverse~~could ~~effect~~be ~~on its~~vacated ~~results~~upon ofdemonstration ~~operations,~~that ~~financial~~TriZetto ~~position~~had orprovided ~~cash~~appropriate ~~flows~~curative disclosure.

~~Item~~Following 4.the ~~Submission~~Court’s Order, counsel for the parties negotiated the contents of ~~Matters~~the toFinancial Advisor Disclosure. The parties thereafter entered into a ~~Vote~~stipulation agreeing upon the substance of ~~Security~~the ~~Holders~~Financial Advisor Disclosure and submitted the Financial Advisor Disclosure to the Court for its approval. The Parties jointly requested that the Court vacate its Order preliminarily enjoining the Merger.

~~The~~On ~~Company’s 2005 Annual Meeting of Stockholders (“Annual Meeting”) was held on May 11~~July 2, ~~2005. At the Annual Meeting~~2008, the ~~Company’s stockholders:~~Court ~~(a)~~issued ~~elected~~an ~~two~~order ~~Class~~approving ~~III~~the ~~Directors~~parties’ ~~with~~stipulation ~~terms~~and ~~expiring~~vacating at the ~~2008~~preliminary injunction ~~Annual~~Order ~~Meeting~~dependent ofon ~~Stockholders;~~TriZetto ~~(b)~~providing ~~approved~~the aFinancial ~~special~~Advisor ~~stock~~Disclosure ~~option~~forthwith. ~~exchange~~TriZetto ~~program~~provided ~~and~~the ~~related~~Financial ~~amendments~~Advisor toDisclosure ~~our~~in ~~1998~~the ~~Long-Term~~Definitive ~~Incentive~~Additional ~~Plan;~~Material, ~~(c)~~which ~~approved amendments~~was tofiled ~~our~~with ~~Amended~~the ~~and~~SEC ~~Restated~~on ~~Employee~~July 2, ~~Stock~~2008 ~~Purchase Plan;~~ and ~~(d)~~mailed ~~ratified~~to TriZetto’s ~~the~~stockholders ~~appointment~~on ofor ~~Ernst~~about ~~& Young LLP as our independent registered public accountants for the year ending December 31~~July 3, ~~2005~~2008.

~~Following~~On July 8, 2008, the ~~Annual~~parties ~~Meeting~~entered into a memorandum of understanding (“MOU”) to settle the Merger Litigation. Under the terms of the MOU, ~~two~~the parties agreed in good faith to attempt to agree upon and execute an appropriate Stipulation of Settlement and such other documentation as may be required to secure certification of the Settlement Class I(as ~~Directors~~defined to include all record holders and beneficial owners of TriZetto common stock (excluding defendants, ~~having~~their ~~terms~~immediate ~~expiring~~families, and affiliates) on any day during the period from April 11, 2008 (the date that the proposed Merger was publicly announced) to and including the effective date of consummation of the Merger, including the legal representatives, heirs, successors and successors in interest, transferees and assigns of all such ~~2006~~foregoing holders and/or owners, immediate and ~~three~~remote, ~~Class~~and IIany ~~Directors~~person or entity acting for or on behalf of, ~~having~~or ~~terms~~claiming ~~expiring~~under, inany ~~2007~~of them and each of them) and obtain pursuant to Delaware Court of Chancery Rules 23(b)(1) and 23(b)(2) final Court approval of the settlement, ~~continued~~and the dismissal of the Delaware Litigation and the Consolidated California Action. In addition to other customary provisions, the settlement will provide releases to all defendants of any claims arising from the process leading to the proposed Merger, any of the transactions contemplated by the Merger Agreement, and any disclosures made in ~~office~~connection with the Proxy Disclosure. In return, TriZetto agreed to provide additional explanation to TriZetto’s stockholders regarding certain matters

~~The~~27 ~~following table sets forth the results of voting at the Annual Meeting:~~

	For	Against	Abstentions		BrokerNon-Votes
Matters
Election of Directors for a term expiring at the
Annual Meeting of Stockholders in 2008*
• Donald J. Lothrop	34,195,282	3,051,476		*		*
• Jeffrey H. Margolis	34,273,192	2,973,566		*		*
Approval of special stock option exchange program and amendments to 1998 Long-Term Incentive Plan	23,990,046	5,371,528	23,973		7,861,211
Approval of amendments to Amended and Restated Employee Stock Purchase Plan	29,120,963	245,105	19,479		7,861,211
Ratification of appointment of Ernst & Young LLP as independent registered public accountants for 2005	35,302,658	1,932,598	11,502		0

* With respect to the election of directors, the form of proxy permitted stockholders to check boxes indicating votes either “For All” or “Withhold Authority”, or to vote “For All Except” and to name exceptions; votes relating to directors designated above as “Against” include votes cast as “Withhold Authority” and for named exceptions.

disclosed in the Proxy Disclosure. This additional explanation was made in a Form 8-K filed on July 9, 2008. In accordance with the agreement to settle the Merger Litigation, the shares of common stock of TriZetto held by TriZetto’s executive officers were voted in the aggregate in the same proportion as the vote cast by the other stockholders voting on the Merger at the Special Meeting. The parties to the litigation are in the process of finalizing the Stipulation of Settlement to be submitted to the Court.

Item 1A.

Risk Factors

Cautionary Statement

This report, and other documents and statements provided or made by us, contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These statements may include statements about our future revenues, profits, results, the market for our products and services, future service offerings, industry trends, client and partner relationships, our operational capabilities, future financial structure and uses of cash or proposed transactions. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “forecasts,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of such terms and other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the following risks:

We cannot predict if we will be able to sustain our positive net income.

We may not be able to sustain or increase our current level of revenue or positive net income. We currently derive our revenue primarily from providing hosted solutions, software licensing and maintenance, and other services such as consulting. We depend on the continued demand for healthcare information technology and related services. We plan to continue investing in administrative infrastructure, research and development, sales and marketing, and acquisitions. If we are not able to sustain our current levels of revenue or maintain our profitability, our operations may be adversely affected.

Revenue from a limited number of customers comprises a significant portion of our total revenue, and if these customers terminate or modify existing contracts or experience business difficulties, it could adversely affect our earnings.

As of June 30, 2008, we were providing services to 354 unique customers. One of our customers, the Regence Group, represented approximately 10.1% of our consolidated revenue in the first six months of 2008. Although we typically enter into multi-year customer agreements, a majority of our customers are able to reduce or cancel their use of our services before the end of the contract term, subject to monetary penalties. We also provide services to some hosted customers without long-term contracts. In addition, many of our contracts are structured so that we generate revenue based on units of volume, which include the number of members, number of workstations or number of users. If our customers experience business difficulties and the units of volume decline or if a customer ceases operations for any reason, we will generate less revenue under these contracts and our operating results may be materially and adversely impacted.

Our operating expenses are relatively fixed and cannot be reduced on short notice to compensate for unanticipated contract cancellations or reductions. As a result, any termination, significant reduction or modification of our business relationships with any of our significant customers could have a material adverse effect on our business, financial condition, operating results and cash flows.

Our business is changing rapidly, which could cause our quarterly operating results to vary and our stock price to fluctuate.

Our quarterly operating results have varied in the past, and we expect that they will continue to vary in future periods. Our quarterly operating results can vary significantly based on a number of factors, such as:

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our mix of products and services revenue;

•

whether our customers choose to license our software under terms and conditions that require revenues to be deferred or recognized ratably over time rather than upfront;

•

our ability to add new customers and renew existing accounts;

•

selling additional products and services to existing customers;

•

long and unpredictable sales cycles;

•

meeting project milestones and customer expectations;

•

seasonality in information technology purchases;

•

the timing of new customer sales; and

•

general economic conditions.

Variations in our quarterly operating results could cause us to not meet the earnings estimates of securities analysts or the expectations of our investors, which could affect the market price of our common stock in a manner that may be unrelated to our long-term operating performance.

We base our expense levels in part upon our expectations concerning future revenue, and these expense levels are relatively fixed in the short-term. If we do not achieve our expected revenue targets, we may not be able to reduce our short-term spending in response. Any shortfall in revenue would have a direct impact on our results of operations.

The intensifying competition we face from both established entities and new entries in the market may adversely affect our revenue and profitability.

The market for our technology and services is highly competitive and rapidly changing and requires potentially expensive technological advances. Many of our competitors and potential competitors have significantly greater financial, technical, product development, marketing and other resources, and greater market recognition than we have. Many of our competitors also have, or may develop or acquire, substantial installed customer bases in the healthcare industry. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion, and sale of their applications or services than we can devote.

Our competitors can be categorized as follows:

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information technology and outsourcing companies, such as Perot Systems Corporation, IBM, Affiliated Computer Services, DST Systems Inc., Electronic Data Systems Corporation and Infocrossing (Wipro);

•

healthcare information software vendors, including DST Systems Inc., Perot Systems Corporation, Electronic Data Systems Corporation, and Plexis Healthcare Systems in the health plan market, as well as Mphasis Healthcare Solutions (formerly Eldorado Computing) and SBPA in the benefits administration market, and MMC 2020, Gorman and Dynamics in the Medicare Advantage market;

•

healthcare information technology consulting firms, such as First Consulting Group Inc. (being acquired by CSC), Proxicom (acquired by iCrossing) and the consulting divisions or former affiliates of the major accounting firms, such as Deloitte Consulting and Accenture;

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healthcare e-commerce and portal companies, such as BenefitFocus, HLTH Corporation (formerly Emdeon/WebMD), Healthation, HealthTrio, AVOLENT, and edocs;

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enterprise application integration vendors such as Vitria, SeeBeyond, TIBCO, Fuego (acquired by BEA) and M2;

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care management software and service companies such as McKesson, MEDecision, HealthTrio, Landacrop, HLTH Corporation (WebMD), and Click4Care;

•

network management vendors such as Portico and McKesson;

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consumer retail software and services companies such as CareGain and FiServ; and

•

health plans, themselves, some of whom are providing hosting and BPO services to the marketplace and leveraging capabilities across the aggregated membership of multiple organizations.

Further, other entities that do not presently compete with us may do so in the future, including major software information systems companies and financial services entities.

We believe our ability to compete will depend in part upon our ability to:

•

enhance our current technology and services;

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respond effectively to technological changes;

•

introduce new capabilities for current and new market segments;

•

meet the increasingly sophisticated needs of our customers; and

•

maintain and continue to develop partnerships with vendors.

Increased competition may result in price reductions, reduced margins, and loss of market share, any of which could have a material adverse effect on our results of operations. In addition, pricing, margins, and market share could be negatively impacted further as a greater number of available products in the marketplace increases the likelihood that product and service offerings in our markets become more fungible and price sensitive.

Our sales and implementation cycles are long and unpredictable.

We have experienced and continue to experience long and unpredictable sales cycles, particularly for contracts with large customers, or customers purchasing multiple products and services. Enterprise software typically requires significant capital expenditures by customers, and the decision to outsource IT-related services is complicated and time-consuming. Major purchases by large payer organizations typically range from nine to 12 months or more from initial contact to contract execution. The prospects currently in our pipeline may not sign contracts within a reasonable period of time or at all.

In addition, our implementation cycle has ranged from 12 to 24 months or longer from contract execution to completion of implementation. During the sales cycle and the implementation cycle, we will expend substantial time, effort, and financial resources preparing contract proposals, negotiating the contract, and implementing the solution. We may not realize any revenue to offset these expenditures, and, if we do, accounting principles may not allow us to recognize the revenue during corresponding periods, which could harm our future operating results. Additionally, any decision by our customers to delay implementation may adversely affect our revenues.

Consolidation of healthcare payer organizations and benefits administrators could decrease the number of our existing and potential customers.

There has been and continues to be acquisition and consolidation activity among healthcare payers and benefits administrators. Mergers or consolidations of payer organizations in the future could decrease the number of our existing and potential customers. The acquisition of a customer could reduce our revenue and have a negative impact on our results of operations and financial condition. A smaller overall market for our products and services could also result in lower revenue and margins. In addition, healthcare payer organizations are increasing their focus on consumer directed healthcare, in which consumers interact directly with health plans through administrative services provided by health plans to employer groups. These services compete with the services provided by benefits administrators and could result in additional consolidation in the benefits administration market.

Some of our significant customers may develop their own software solutions, which could decrease the demand for our products.

Some of our customers in the healthcare payer industry have, or may seek to acquire, the financial and technological resources necessary to develop software solutions to perform the functions currently serviced by our products and services. Additionally, consolidation in the healthcare payer industry could result in additional organizations having the resources necessary to develop similar software solutions. If these organizations successfully develop and utilize their own software solutions, they may discontinue their use of our products or services, which could materially and adversely affect our results of operations.

We depend on our software application vendor relationships, and if our software application vendors terminate or modify existing contracts or experience business difficulties, or if we are unable to establish new relationships with additional software application vendors, it could harm our business.

We depend, and will continue to depend, on our licensing and business relationships with third-party software application vendors. Our success depends significantly on our ability to maintain our existing relationships with our vendors and to build new relationships with other vendors in order to enhance our services and application offerings and remain competitive. Although most of our licensing agreements are perpetual or automatically renewable, they are subject to termination in the event that we materially breach such agreements. We may not be able to maintain relationships with our vendors or establish relationships with new vendors. The software, products or services of our third-party vendors may not achieve or maintain market acceptance or commercial success. Accordingly, our existing relationships may not result in sustained business partnerships, successful product or service offerings or the generation of significant revenue for us.

Our arrangements with third-party software application vendors are not exclusive. These third-party vendors may not regard our relationships with them as important to their own respective businesses and operations. They may reassess their commitment to us at any time and may choose to develop or enhance their own competing distribution channels and product support services. If we do not maintain our existing relationships or if the economic terms of our business relationships change, we may not be able to license and offer these services and products on commercially reasonable terms or at all. Our inability to obtain any of these licenses could delay service development or timely introduction of new services and divert our resources. Any such delays could materially adversely affect our business, financial condition, operating results and cash flows.

Our licenses for the use of third-party software applications are essential to the technology solutions we provide for our customers. Loss of any one of our major vendor agreements may have a material adverse effect on our business, financial condition, operating results and cash flows.

We rely on third-party software vendors for components of our software products.

Our software products contain components developed and maintained by third-party software vendors, and we expect that we may have to incorporate software from third-party vendors in our future products. We may not be able to replace the functions provided by the third-party software currently offered with our products if that software becomes obsolete, defective, or incompatible with future versions of our products or is not adequately maintained or updated. Any significant interruption in the availability of these third-party software products or defects in these products could harm the sale of our products unless and until we can secure or develop an alternative source. Although we believe there are adequate alternate sources for the technology currently licensed to us, such alternate sources may not be available to us in a timely manner, may not provide us with the same functions as currently provided to us or may be more expensive than products we currently use.

We have sustained rapid growth, and our inability to manage this growth could harm our business.

We have rapidly and significantly expanded our operations since inception and may continue to do so in the future. This growth has placed, and may continue to place, a significant strain on our managerial, operational, and financial resources, and information systems. If we are unable to manage our growth effectively, it could have a material adverse effect on our business, financial condition, operating results, and cash flows.

Our acquisition strategy may disrupt our business and require additional financing.

Since our initial public offering in October 1999, we have made ten acquisitions. A significant portion of our historical growth has occurred through acquisitions and we may continue to seek strategic acquisitions as part of our growth strategy. We compete with other companies to acquire businesses, making it difficult to acquire suitable companies on favorable terms or at all. Acquisitions may require significant capital, typically entail many risks, and can result in difficulties integrating operations, personnel, technologies, products and information systems of acquired businesses.

We may be unable to successfully integrate companies that we have acquired or may acquire in the future in a timely manner. If we are unable to successfully integrate acquired businesses, we may incur substantial costs and delays or other operational, technical or financial problems. In addition, the integration of our acquisitions may divert our management’s attention from our existing business, which could damage our relationships with our key customers and employees.

To finance future acquisitions, we may issue equity securities that could be dilutive to our stockholders. We may also incur debt and additional amortization expenses related to goodwill and other intangible assets as a result of acquisitions. The interest expense related to this debt and additional amortization expense may significantly reduce our profitability and have a material adverse effect on our business, financial condition, operating results and cash flows. Acquisitions may also result in large one-time charges as well as goodwill and intangible assets and impairment charges in the future that could negatively impact our operating results.

Our need for additional financing is uncertain as is our ability to raise capital if required.

If we are not able to sustain our positive net income, we may need additional financing to fund operations or growth. We may not be able to raise additional funds through public or private financings at any particular point in the future or on favorable terms. Future financings could adversely affect our common stock and debt securities.

Our business will suffer if our software products contain errors.

The proprietary and third party software products we offer are inherently complex. Despite our testing and quality control procedures, errors may be found in current versions, new versions or enhancements of our products. Significant technical challenges may also arise with our products because our customers purchase and deploy those products across a variety of computer platforms and integrate them with a number of third-party software applications and databases. If new or existing customers have difficulty deploying our products or require significant amounts of customer support, our costs would increase. Moreover, we could face possible claims and higher development costs if our software contains undetected errors or if we fail to meet our customers’ expectations. As a result of the foregoing, we could experience:

•

loss of or delay in revenue and loss of market share;

•

loss of customers;

•

damage to our reputation;

•

failure to achieve market acceptance;

•

diversion of development resources;

•

increased service and warranty costs;

•

legal actions by customers against us which could, whether or not successful, increase costs and distract our management; and

•

increased insurance costs.

We could lose customers and revenue if we fail to meet contractual obligations including performance standards and other material obligations.

Many of our service agreements contain performance standards and other post contract obligations. Our failure to meet these standards or breach other material obligations under our agreements could trigger remedies for our customers including termination, financial penalties and refunds that could have a material adverse effect on our business, financial condition, operating results and cash flows.

If our ability to expand our network and computing infrastructure is constrained in any way, we could lose customers and damage our operating results.

We must continue to expand and adapt our network and technology infrastructure to accommodate additional users, increased transaction volumes, changing customer requirements and technological obsolescence. We may not be able to accurately project the rate or timing of increases, if any, in the use of our hosted solutions or be able to expand and upgrade our systems and infrastructure to accommodate such increases. We may be unable to expand or adapt our network infrastructure to meet additional demand or our customers’ changing needs on a timely basis, at a commercially reasonable cost or at all. Our current information systems, procedures and controls may not continue to support our operations while maintaining acceptable overall performance and may hinder our ability to exploit the market for healthcare applications and services. Service lapses could cause our users to switch to the services of our competitors, which could have a material adverse effect on our business, financial condition, operating results and cash flows.

Performance or security problems with our systems could damage our business.

Our customers’ satisfaction and our business could be harmed if we, or our customers, experience any system delays, failures, or loss of data.

Although we devote substantial resources to avoid performance problems, errors may occur. Errors in the processing of customer data may result in loss of data, inaccurate information, and delays. Such errors could cause us to lose customers and be liable for damages. We currently process a substantial number of our customers’ transactions and data at our data centers in Colorado. Although we have safeguards for emergencies and we have contracted backup processing for our customers’ critical functions, the occurrence of a major catastrophic event or other system failure at any of our facilities could interrupt data processing or result in the loss of stored data. In addition, we depend on the efficient operation of telecommunication providers that have had periodic operational problems or experienced outages.

A material security breach could damage our reputation or result in liability to us. We retain confidential customer and federally protected patient information in our data centers. Therefore, it is critical that our facilities and infrastructure remain secure and that our facilities and infrastructure are perceived by the marketplace to be secure. Despite the implementation of security measures, our infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties, or similar disruptive problems.

Our services agreements generally contain limitations on liability, and we maintain insurance with appropriate coverage limits for general liability and professional liability to protect against claims associated with the use of our products and services. However, the contractual provisions and insurance coverage may not provide adequate coverage against all possible claims that may be asserted. In addition, appropriate insurance may be unavailable in the future at commercially reasonable rates. A successful claim in excess of our insurance coverage could have a material adverse effect on our business, financial condition, operating results, and cash flows. Even unsuccessful claims could result in litigation or arbitration costs and may divert management’s attention from our existing business.

Our success depends on our ability to attract, retain and motivate management and other key personnel.

Our success depends in large part on the continued services of management and key personnel. Competition for personnel in the healthcare information technology market is intense, and there are a limited number of persons with knowledge of, and experience in, this industry. We do not have employment agreements with most of our executive officers, so any of these individuals may terminate his or her employment with us at any time. The loss of services from one or more of our management or key personnel, or the inability to hire additional management or key personnel as needed, could have a material adverse effect on our business, financial condition, operating results, and cash flows. Although we currently experience relatively low rates of turnover for our management and key personnel, the rate of turnover may increase in the future. In addition, we expect to further grow our operations and our needs for additional management and key personnel will increase. Our continued ability to compete effectively in our business depends on our ability to attract, retain, and motivate these individuals.

We rely on an adequate supply and performance of computer hardware and related equipment from third parties to provide services to larger customers and any significant interruption in the availability or performance of third-party hardware and related equipment could adversely affect our ability to deliver our products to certain customers on a timely basis.

As we offer our hosted solution services and software to a greater number of customers and particularly to larger customers, we may be required to obtain specialized computer equipment from third parties that can be difficult to obtain on short notice. Any delay in obtaining such equipment may prevent us from delivering large systems to our customers on a timely basis. We also may rely on such equipment to meet required performance standards. We may have no control over the resources that third parties may devote to service our customers or satisfy performance standards. If such performance standards are not met, we may be adversely impacted under our service agreements with our customers.

Any failure or inability to protect our technology and confidential information could adversely affect our business.

Our success depends in part upon proprietary software and other confidential information. The software and information technology industries have experienced widespread unauthorized reproduction of software products and other proprietary technology. We rely on a combination of copyright, patent, trademark and trade secret laws, confidentiality procedures, and contractual provisions to protect our intellectual property. However, these protections may not be sufficient, and they do not prevent independent third-party development of competitive products or services.

We execute confidentiality and non-disclosure agreements with certain employees and our suppliers, as well as limit access to and distribution of our proprietary information. The departure of any of our management and technical personnel, the breach of their confidentiality and non-disclosure obligations to us, or the failure to achieve our intellectual property objectives could have a material adverse effect on our business, results of operations and financial condition. We have had, and may continue to have, employees leave us and go to work for competitors. If we are not successful in prohibiting the unauthorized use of our proprietary technology or the use of our processes by a competitor, our competitive advantage may be significantly reduced which would result in reduced revenues.

Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.

We cannot be certain that our products do not infringe issued patents or other intellectual property rights of others. In addition, because patent applications in the United States and many other countries are not publicly disclosed until a patent is issued, applications covering technology used in our software products may have been filed without our knowledge. We may be subject to legal proceedings and claims from time to time, including claims of alleged infringement of the patents, trademarks and other intellectual property rights of third parties by us or our licensees in connection with their use of our products. Intellectual property litigation is expensive and time-consuming and could divert our management’s attention away from running our business and seriously harm our business. If we were to discover that our products violated the intellectual property rights of others, we would have to obtain licenses from these parties in order to continue marketing our products without substantial reengineering. We might not be able to obtain the necessary licenses on acceptable terms or at all, and if we could not obtain such licenses, we might not be able to reengineer our products successfully or in a timely fashion. If we fail to address any infringement issues successfully, we would be forced to incur significant costs, including damages and potentially satisfying indemnification obligations that we have with our customers, and we could be prevented from selling certain of our products.

If our consulting services revenue does not grow substantially, our revenue growth could be adversely impacted.

Our consulting services revenue represents a significant component of our total revenue and we anticipate that it will continue to represent a significant percentage of total revenue in the future. The level of consulting services revenue depends upon the healthcare industry’s demand for outsourced information technology services and our ability to deliver products that generate implementation and follow-on consulting services revenue. Our ability to increase services revenue will depend in part on our ability to increase the capacity of our consulting group, including our ability to recruit, train and retain a sufficient number of qualified personnel.

The insolvency of our customers or the inability of our customers to pay for our services could negatively affect our financial condition.

Healthcare payers are often required to maintain restricted cash reserves and satisfy strict balance sheet ratios promulgated by state regulatory agencies. In addition, healthcare payers are subject to risks that physician groups or associations within their organizations become subject to costly litigation or become insolvent, which may adversely affect the financial stability of the payer. If healthcare payers are unable to pay for our services because of their need to maintain cash reserves or failure to maintain balance sheet ratios or solvency, our ability to collect fees for services rendered would be impaired and our financial condition could be adversely affected.

Changes in government regulation of the healthcare industry could adversely affect our business.

During the past several years, the healthcare industry has been subject to increasing levels of government regulation of, among other things, reimbursement rates and certain capital expenditures. In addition, proposals to substantially reform Medicare, Medicaid, and the healthcare system in general have been or are being considered by Congress. These proposals, if enacted, may further increase government involvement in healthcare, lower reimbursement rates, and otherwise adversely affect the healthcare industry which could adversely impact our business. The impact of regulatory developments in the healthcare industry is complex and difficult to predict, and our business could be adversely affected by existing or new healthcare regulatory requirements or interpretations.

Participants in the healthcare industry, such as our payer customers, are subject to extensive and frequently changing laws and regulations, including laws and regulations relating to the confidential treatment and secure transmission of patient medical records, and other healthcare information. Legislators at both the state and federal levels have proposed and enacted additional legislation relating to the use and disclosure of medical information, and the federal government may enact new federal laws or regulations in the near future. Pursuant to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the Department of Health and Human Services has issued a series of regulations setting forth security, privacy and transactions standards for all health plans, clearinghouses, and healthcare providers to follow with respect to individually identifiable health information. Many of our customers are also subject to state laws implementing the federal Gramm-Leach-Bliley Act, relating to certain disclosures of nonpublic personal health information and nonpublic personal financial information by insurers and health plans.

Our payer customers must comply with HIPAA, its regulations, and other applicable healthcare laws and regulations. In addition, we may be deemed to be a covered entity subject to HIPAA because we offer our customers products that convert data to a HIPAA compliant format. Accordingly, we must comply with certain provisions of HIPAA and in order for our products and services to be marketable, they must contain features and functions that allow our customers to comply with HIPAA and other healthcare laws and regulations. We believe our products currently allow our customers to comply with existing laws and regulations. However, our products may require modification in the future. If we fail to offer solutions that permit our customers to comply with applicable laws and regulations, our business will suffer.

We perform billing and claims services that are governed by numerous federal and state civil and criminal laws. The federal government in recent years has imposed heightened scrutiny on billing and collection practices of healthcare providers and related entities, particularly with respect to potentially fraudulent billing practices, such as submissions of inflated claims for payment and upcoding. Violations of the laws regarding billing and coding may lead to civil monetary penalties, criminal fines, imprisonment, or exclusion from participation in Medicare, Medicaid and other federally funded healthcare programs for our customers and for us. Any of these results could have a material adverse effect on our business, financial condition, operating results, and cash flows.

In addition, laws governing healthcare payers are often not uniform among states. This could require us to undertake the expense and difficulty of tailoring our products in order for our customers to be in compliance with applicable state and local laws and regulations.

Part of our business is subject to government regulation relating to the Internet that could impair our operations.

The Internet and its associated technologies are subject to increasing government regulation. A number of legislative and regulatory proposals are under consideration by federal, state, local, and foreign governments, and agencies. Laws or regulations may be adopted with respect to the Internet relating to liability for information retrieved from or transmitted over the Internet, on-line content regulation, user privacy, taxation and quality of products and services. Many existing laws and regulations, when enacted, did not anticipate the methods of the Internet-based hosted, software and information technology solutions we offer. We believe, however, that these laws may be applied to us. We expect our products and services to be in substantial compliance with all material federal, state and local laws and regulations governing our operations. However, new legal requirements or interpretations applicable to the Internet could decrease the growth in the use of the Internet, limit the use of the Internet for our products and services or prohibit the sale of a particular product or service, increase our cost of doing business, or otherwise have a material adverse effect on our business, results of operations and financial conditions. To the extent that we market our products and services outside the United States, the international regulatory environment relating to the Internet and healthcare services could also have an adverse effect on our business.

Increased leverage as a result of our convertible note offerings may harm our financial condition and results of operations.

On October 5, 2005, we completed a private placement of $100.0 million aggregate principal amount of our 2.75% Convertible Senior Notes due 2025 (the “2025 Notes”). On April 17, 2007, we completed a private placement of $230.0 million aggregate principal amount of our 1.125% Convertible Senior Notes due 2012 (the “2012 Notes,” and together with the 2025 Notes, defined as the “Notes”). The indebtedness under the Notes constitutes senior unsecured obligations and will rank equal in right of payment with all of the Company’s existing and future senior unsecured debt and senior to all of the Company’s future subordinated debt. The Notes were issued pursuant to indentures with Wells Fargo Bank, National Association, as trustee (the “Indentures”).

As of June 30, 2008, our total consolidated long-term debt was $384.5 million. In addition, the Indentures do not restrict our ability to incur additional indebtedness, and we may choose to incur additional debt in the future. Our level of indebtedness could have important consequences to you, because:

•

it could affect our ability to satisfy our debt obligations under the Notes or our credit facility;

•

a substantial portion of our cash flows from operations will have to be dedicated to interest and principal payments of our debt obligations and may not be available for operations, expansion, acquisitions or other purposes;

•

it may impair our ability to obtain additional financing in the future;

•

it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and

•

it may make us more vulnerable to downturns in our business, our industry or the economy in general.

Our ability to make payments of principal and interest on our indebtedness depends upon our future performance, which will be subject to our success in marketing our products and services, general economic conditions and financial, business and other factors affecting our operations, many of which are beyond our control. If we are not able to generate sufficient cash flow from operations in the future to service our indebtedness, we may be required, among other things:

•

to seek additional financing in the debt or equity markets;

•

to refinance or restructure all or a portion of our indebtedness;

•

to sell assets; and/or

•

to reduce or delay planned expenditures on research and development and/or commercialization activities.

Such measures might not be sufficient to enable us to service our debt. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms or at all.

We have certain repurchase and payment obligations under the Notes and we may not be able to repurchase such Notes or pay the amounts due upon conversion of the Notes when necessary.

On various dates, holders of certain of the Notes may require us to purchase, for cash, all or a portion of their Notes at 100% of their principal amount, plus any accrued and unpaid interest. If a fundamental change occurs, as defined in the Indentures, including a change in control transaction, holders of such Notes may also require us to repurchase, for cash, all or a portion of their Notes. In addition, upon conversion of such Notes if we have made an irrevocable election to settle conversion in cash, we would be required to satisfy our conversion obligation up to the principal amount of the Notes in cash. Our ability to repurchase the Notes and settle the conversion of the Notes in cash is effectively subordinated to our senior credit facility and may be limited by law, by the Indentures, by the terms of other agreements relating to our senior debt and by indebtedness and agreements that we may enter into in the future which may replace, supplement or amend our existing or future debt. Our failure to repurchase the Notes or make the required payments upon conversion would constitute an event of default under the Indentures, which would in turn constitute a default under the terms of our senior credit facility and other indebtedness at that time.

Our common stock price has been, and may continue to be, volatile and our shareholders may not be able to resell shares of our stock at or above the price paid for such shares.

The price for shares of our common stock has exhibited high levels of volatility with significant volume and price fluctuations, which makes our common stock unsuitable for many investors. For example, for the six months ended June 30, 2008, the closing price of our common stock ranged from a high of $21.71 to a low of $15.81. The fluctuations in price of our common stock have occasionally been related to our operating performance. These broad fluctuations may negatively impact the market price of shares of our common stock. The price of our common stock has also been influenced by:

•

fluctuations in our results of operations or the operations of our competitors or customers;

•

failure of our results of operations to meet the expectations of stock market analysts and investors;

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changes in stock market analyst recommendations regarding us, our competitors or our customers; and

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the timing and announcements of new products or financial results by us or our competitors.

Future issuances of common stock may depress the trading price of our common stock.

Any future issuance of equity securities, including the issuance of shares upon conversion of the Notes, could dilute the interests of our existing stockholders and could substantially decrease the trading price of our common stock. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy, to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of outstanding warrants or options or for other reasons.

Our stockholder rights plan and charter documents could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders.

Our stockholder rights plan and certain provisions of our certificate of incorporation and Delaware law are intended to encourage potential acquirers to negotiate with us and allow our Board of Directors the opportunity to consider alternative proposals in the interest of maximizing shareholder value. However, such provisions may also discourage acquisition proposals or delay or prevent a change in control, which in turn, could harm our stock price.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth all purchases made by us of our common stock during each month within the second quarter of 2008.


Month	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
April 1, 2008 – April 30, 2008 ⁽¹⁾	107	$	20.99	—	—
May 1, 2008 – May 31, 2008 ⁽²⁾	1,817	$	21.05	—	—
June 1, 2008 – June 30, 2008	—			—	—

Total	1,924	$	21.05	—	—

(1)	All 107 shares repurchased in April were in connection with the satisfaction of employee tax obligations upon the vesting of restricted stock awards.

(2)	All 1,817 shares repurchased in May were in connection with the satisfaction of employee tax obligations upon the vesting of restricted stock awards.

Item 4.

Submission of Matters to a Vote of Security Holders


Proposal 1	Votes For	Votes Against	Votes Abstained
To adopt the Agreement and Plan of Merger, dated as of April 11, 2007, by and among TZ Holdings, L.P., TZ Merger Sub, Inc. and TriZetto.	34,152,269	48,018	8,297

Item 6.

Exhibits

The following exhibits are filed as part of this report:

EXHIBITNUMBER		DESCRIPTION
10.1		Amendment to 1998 Long-Term Incentive Plan, dated April 7, 2005 (incorporated by reference to Appendix B of Trizetto’s proxy statement on Schedule 14A filed with the SEC on April 18, 2005)
10.2		Amended and Restated Employee Stock Purchase Plan, effective April 17, 2005 (incorporated by reference to Appendix C of Trizetto’s proxy statement on Schedule 14A filed with the SEC on April 18, 2005)
31.1		Certification of CEO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of ~~CFO~~Principal Accounting Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of CEO and ~~CFO~~Principal Accounting Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

25* Previously filed.

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.

	THE TRIZETTO GROUP, INC.
Date: August 5, 2005	By:	/s/ JAMES C. MALONE
Date: August 8, 2008	By:	/s/ Carl Long
		James C. Malone (Principal Financial Officer and Duly Authorized Officer)
		Carl Long (Principal Accounting Officer and Duly Authorized Officer)

2638

EXHIBIT INDEX

EXHIBITNUMBER		DESCRIPTION
EXHIBIT NUMBER		DESCRIPTION
10.1		Amendment to 1998 Long-Term Incentive Plan, dated April 7, 2005 (incorporated by reference to Appendix B of Trizetto’s proxy statement on Schedule 14A filed with the SEC on April 18, 2005)
10.2		Amended and Restated Employee Stock Purchase Plan, effective April 17, 2005 (incorporated by reference to Appendix C of Trizetto’s proxy statement on Schedule 14A filed with the SEC on April 18, 2005)
31.1		Certification of CEO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of ~~CFO~~Principal Accounting Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of CEO and ~~CFO~~Principal Accounting Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

27* Previously filed.

Table of Contents

TheTable following table is a summary of the Company’s notes payables and line of credit (in thousands): Contents

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