UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q      

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

COMMISSION FILE NUMBER: 000-24539

ECLIPSYS CORPORATION

1750 Clint Moore Road
Boca Raton, Florida
33487
(Address of principal executive offices)

561-322-4321
(Telephone number of registrant)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days. Yes þ No o

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

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

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ECLIPSYS CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2004

INDEX

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     PART I.

     ITEM 1.

ECLIPSYS CORPORATION
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands)

     The accompanying notes are in integral part of these unaudited condensed consolidated financial statements

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ECLIPSYS CORPORATION
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)

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

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ECLIPSYS CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)

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

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ECLIPSYS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements of Eclipsys Corporation, or the Company, and the notes thereto have been prepared in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission, or SEC. These unaudited condensed consolidated financial statements do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America. However, such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of results for the interim periods presented.

     The results of operations for the three and six months ended June 30, 2004 are not necessarily indicative of annual results. The Company manages its business as one reportable segment.

     The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and the notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 that was filed with the SEC on March 15, 2004.

2. ACQUISITION

     In March 2004, the Company acquired CPM Resource Center, LTD or CPMRC. CPMRC provides consulting services and clinical content principally to improve and enhance the care process primarily related to the workflow of nurses and interdisciplinary healthcare professionals who provide the majority of hands-on care at the point of service. CPMRC’s evidence–based content and practice guidelines are incorporated in the latest release of our clinical product. The Company paid $2.5 million in cash and issued 184,202 shares of common stock for CPMRC, for total consideration of $5.0 million. Additionally, the prior owners of CPMRC may earn an additional $12.5 million over the next 5 year period based on future operating results. The operating results of CPMRC are reflected with those of the Company for the three and six months ended June 30, 2004, from the date of acquisition. The Company did not present unaudited pro forma results of operations of Eclipsys and CPMRC for the three and six months ended June 30, 2004 and 2003 because our pro forma results for those periods would not be materially different from our actual results for those periods.

     As a result of the acquisition, the Company recorded approximately $1.7 million in non amortizable goodwill and $3.2 million in amortizable intangible assets. Amortizable intangible assets include customer relationships and intellectual property and will be amortized over a seven and five year period, respectively. The non amortizable goodwill is not tax deductible.

3. STOCK-BASED COMPENSATION

     The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations. Under this method, compensation cost for stock options is measured as the excess, if any, of the estimated market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company provides the additional disclosures required under Statement of Financial Accounting Standards, or SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure.”

     The Company has adopted the disclosure-only provisions of SFAS 123. Had compensation cost for the Company’s stock option grants described above been determined based on the fair value at the grant date for awards in 2003 and 2004, consistent with the provisions of SFAS 123, the Company’s net loss and loss per share would have been the pro forma amounts indicated below for the three and six month periods ended June 30, 2004 (in thousands, except per share data):

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4. MARKETABLE SECURITIES

     Marketable securities consist of funds that are highly liquid and are classified as available-for-sale. Marketable securities are recorded at fair value, and unrealized gains and losses are recorded as a component of other comprehensive income.

5. ACCOUNTS RECEIVABLE

     Accounts receivable was comprised of the following (in thousands):

     The non-current portion of unbilled accounts receivable is included in other assets and was $1.3 million as of June 30, 2004 and $962,000 as of December 31, 2003.

6. WARRANTY RESERVE

     The agreements that we use to license our software to our customers include a limited warranty. The warranty provides that the product, in its unaltered form, will perform substantially in accordance with the related documentation. Through September 30, 2003, Eclipsys had not incurred any material warranty costs related to its products. Due to the SunriseXA response time issues that we identified during the fourth quarter of 2003, we recorded a warranty accrual of $4.4 million at December 31, 2003. During the first three months of 2004, the Company recorded an additional $450,000 provision related to the response time issues. Warranty costs are charged to costs of systems of services revenues when they are probable and reasonably estimable. A summary of the activity in our warranty reserve was as follows (in thousands):

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7. GOODWILL AND OTHER INTANGIBLE ASSETS

     The components of goodwill and other intangible assets were as follows (in thousands):

     The estimated amortization for the next five fiscal years is as follows (in thousands):

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8. OTHER COMPREHENSIVE LOSS

     The components of other comprehensive loss were as follows (in thousands):

9. LEGAL ACTION

     As previously disclosed, from July through September 2002, the Company and three of its then current officers were named in a series of complaints filed by purported shareholders. Each complaint sought certification as a class and monetary damages, and alleged that the Company and the named officers violated federal securities laws. These complaints were ultimately consolidated into a single case, which was dismissed by the District Court in November 2003 and was re-filed by the plaintiffs in December 2003 in the form of a Second Amended Complaint. The Company then moved to dismiss the Second Amended Complaint.

     On April 1, 2004, the District Court issued an order granting the Company’s motion and dismissing in its entirety the plaintiffs’ Second Amended Complaint. In the order, the District Court granted the plaintiffs fifteen days to file a further amended complaint that conformed to applicable law as well as the District Court’s ruling. The deadline for the plaintiffs to file a further amended complaint expired on April 16, 2004. The plaintiffs did not file a further amended complaint prior to the District Court’s deadline. In addition, on May 10, 2004, the plaintiffs consented to dismissal of the lawsuit and, in so doing, waived all rights to appeal the dismissal.

     The Company is involved in other litigation from time to time that is incidental to its business. In the opinion of management, after consultation with legal counsel, the ultimate outcome of such litigation will not have a material adverse effect on our financial position, results of operations or cash flows.

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     ITEM 2.

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

     This report contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “intends,” and similar expressions are intended to identify forward-looking statements. The important factors discussed under the caption “Certain Factors That May Affect Future Operating Results,” presented below, could cause actual results to differ materially from those indicated by forward-looking statements made herein. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Overview

     The following should be read in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, which are included elsewhere in this document and with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 as filed with the SEC on March 15, 2004.

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

     Our Internet website address is www.eclipsys.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on FORM 8-K and amendments thereto that have been filed with the Securities and Exchange Commission, or SEC, are available to you free of charge through a hyperlink on our website.

Background

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

     We initially grew through a series of strategic acquisitions that were completed in 1999. Our acquisitions were focused on acquiring strong customer bases and advanced software pertaining to the healthcare industry.

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

     In March 2004, we acquired CPMRC. CPMRC provides consulting services and clinical content principally to improve and enhance the care process primarily related to the workflow of nurses and interdisciplinary healthcare professionals who provide the majority of hands-on care at the point of service. CPMRC’s evidence–based content and practice guidelines are incorporated in the latest release of our clinical product. We expect this integration of the CPMRC content within the SunriseXA framework to improve clinical, financial and customer satisfaction by improving the healthcare delivery process.

Product Development

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

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

     In October 2003, we identified and announced some response time issues within components of SunriseXA. Although some of our SunriseXA software components had been implemented in and were working at some customer sites, we determined that the software did not produce acceptable response times for some complex, high-volume hospital environments. To address this issue, we implemented a strategy to allow SunriseXA customers to continue their deployment of SunriseXA which would, at the same time, allow us to continue the development of our advanced SunriseXA solutions. This strategy was to replace the affected SunriseXA components with components from our SCM product, which is our prior generation, core clinical product. The response time issue resulted in a product delivery delay for some of our advanced SunriseXA functionality. The announcement of these issues also impacted the implementation schedules for a number of our customers. As expected, this announcement has had an adverse effect on our sales for the first half of 2004.

     In connection with the response time issue, we recorded a $1.2 million write-down of capitalized software development costs to net realizable value for some SunriseXA components in the third quarter of 2003. The write-down was included in the costs of systems and services revenue. Also, we believe that the correction of the response time issue is covered by the warranties that we provide to our customers. We intend to continue to remediate the problem for our customers. Accordingly, we established a warranty reserve of $4.4 million in the fourth quarter of 2003, and recorded an additional $450,000 reserve in the first quarter of 2004, related to estimated incremental costs associated with this issue. This provision reflected our estimate of warranty-related costs that includes, among other things, implementation and third-party costs for affected customers. Through June 30, 2004, we had expended approximately $1.3 million in warranty costs related to remediation of the response time issue. As of June 30, 2004 the warranty reserve balance was $3.6 million. Actual warranty costs could differ materially from management’s estimate. Professional services revenue and cash flows have been and will continue to be negatively impacted as we fulfill these obligations.

     In June 2004, the Company released Sunrise Clinical Manager 3.5 XA. The general availability of this release fulfilled a key deliverable expected by our customers in connection with the SunriseXA response time issue. This release was consistent with our strategy and contains enhanced functionality as planned by the Company. Sunrise Clinical Manager 3.5 XA went live at two customer sites in July of 2004.

Operational Initiatives

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

     The change in our contracting model has had a material effect on our business. Most notably, our revenues, gross margins, and cash flows have been affected by our adoption of this approach. Because customers now pay us over time for software and services, our revenue is spread over a longer time period, while a significant portion of our operating expenses remain relatively fixed. For example, in 2003 our gross margins, operating margins, and cash flows from operating activities were negatively impacted from lower upfront software payments. However, we believe that this new contracting model will provide for more predictable revenues on a year over year basis. We believe that over time, our margins will trend back toward historical levels.

     Based upon the foregoing, we consumed cash in 2003 because the cash collections under our new contracting method from new contract signings was not sufficient to offset our higher operating expenses that we incurred. To fund these initiatives, we used a portion of our cash on hand. During 2004, we expect to continue to utilize cash in connection with these initiatives.

     We believe that the most significant issue that we face for the remainder of 2004 is our ability to sign new business.

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Critical Accounting Policies

     We believe there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amount of revenue and other significant areas involving management’s judgments and estimates. On an ongoing basis, management evaluates and adjusts its estimates and judgments, if necessary. These significant accounting policies relate to revenue recognition, allowance for doubtful accounts, software development and our warranty reserve. Please refer to Note 2 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 as filed with the SEC on March 15, 2004, for further discussion of our accounting policies, which have not changed materially since that filing.

Revenue Recognition

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

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

     We recognize revenues in accordance with the provisions of Statement of Position, or SOP, No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-9, Staff Accounting Bulletin, or SAB 104, “Revenue Recognition” and Emerging Issues Task Force, or EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” SOP 97-2 and SAB 101, as amended, require among other matters, that there be a signed contract evidencing an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. For those license arrangements in which the fee is not considered fixed or determinable, the license revenue is recognized as payments become due. For arrangements where vendor specific objective evidence or VSOE, only exists for all undelivered elements, we account for the delivered elements in accordance with the “residual method” prescribed by SOP 98-9.

     For software license arrangements that are bundled with services and maintenance where services are considered essential to the functionality of the software, we recognize revenues using the percentage-of-completion method. Under these arrangements, software license fees and implementation fees are recognized over the implementation period, which has typically ranged from 12 to 24 months. Under the percentage-of-completion method, revenues are recognized based upon the proportion of labor hours incurred in relation to the total labor hours estimated under the agreement. Determining factors for percentage-of-completion include the nature of services required and the provision for payments of software and services upon the achievement of implementation milestones. Under the percentage-of-completion method, revenue and profit are recognized throughout the term of the contract, based upon estimates of the total labor hours to be incurred and revenues to be generated throughout the term of the contract. Changes in estimates of total labor hours and the related effect on the timing of revenues and profits are recognized in the period in which they are determinable. Accordingly, changes in these estimates could occur and could have a material effect on our operating results in the period of change.

     We also enter into arrangements that typically include multiple software products (including the right to future products within the suites purchased and/or platform protection rights that do not qualify as exchange rights), implementation and consulting services, maintenance and, where desired by the customer, outsourcing and remote hosting services. The customer is entitled to these elements throughout the term of the arrangements, which generally range from 7 to 10 years. Payments are due annually, quarterly or monthly over the term of the arrangement. For these arrangements, revenue is recognized monthly over the term of the agreement. In these arrangements, we capitalize related direct costs consisting of third party software costs and direct software implementation costs. These costs are amortized over the term of the arrangement.

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

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Allowance for Doubtful Accounts

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

Capitalized Software Development Costs

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

     On October 20, 2003, we announced response time issues with some components of SunriseXA, the newest version of our Sunrise suite of products. To address the issue, we announced a strategy to allow our SunriseXA customers to continue their deployment of SunriseXA, while enabling us to continue the development of our advanced SunriseXA components. Our strategy is to replace the affected SunriseXA components with certain components from our SCM product. As a result, in 2003 we recorded a $1.2 million write-down of capitalized software development costs for certain SunriseXA components to net realizable value. The write-down was included in the cost of systems and services revenues.

Warranty Reserve

     The agreements that we use to license our software to our customers includes a limited warranty. The warranty provides that our software, in its unaltered form, will perform substantially in accordance with the related documentation. Through September 30, 2003, we did not incur any material warranty costs related to our products. Due to the response time issues that we identified in October 2003, we recorded a warranty reserve of $4.4 million at December 31, 2003, and recorded an additional $450,000 provision during the first quarter of 2004, related to the estimated incremental costs associated with this issue. Through June 30, 2004, we have expended approximately $1.3 million in warranty costs related to remediation of the response time issue. Warranty costs are charged to cost of revenues when they are probable and reasonably estimable. In determining this warranty reserve, we used significant judgments and estimates for the additional professional service hours and third party costs that will be necessary to remedy this issue on a customer-by-customer basis. The timing and amount of our warranty reserve could have been different if we had used other judgments or assumptions in our evaluation.

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THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003

Eclipsys Corporation
Statement of Operations Data — Unaudited
(in thousands)

RESULTS OF OPERATIONS

     Total revenues increased $10.3 million, or 16.2%, to $73.6 million for the quarter ended June 30, 2004 compared to $63.4 million for the same period in 2003.

     Systems and services revenues increased $10.2 million, or 17.5%, to $68.6 million for the quarter ended June 30, 2004 compared to $58.4 million for the same period in 2003. The improvement is primarily due to an increase of $7.6 million of revenues generated from arrangements which generally provide for revenue recognition on a monthly basis. These revenues included license fees, remote hosting services, software and hardware maintenance fees, and outsourcing services. This increase is primarily the result of new contracts signed prior to the second quarter of 2004. We expect these types of contracts will continue to represent a significant, and potentially growing, proportion of our new contracts. However, because these contracts are characterized by payments being spread over a longer period of time compared to traditional licensing arrangements, we expect cash flows will continue to be negatively impacted in the near future.

     In addition, the professional services portion of systems and services revenues increased $2.3 million as customers moved forward with implementation activities including several activations during the period. We expect professional services to continue to fluctuate in future periods based on several factors, including the timing of future releases, available customer resources and other customer decisions.

     Finally, network services increased $2.4 million as a result of increased activities at numerous customer sites. These increases were partially offset by a reduction of $2.1 million of license fees. We expect both networking services and license fees (other than those recognized on a monthly basis) to continue to fluctuate in future periods.

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     Hardware revenues for the quarter ended June 30, 2004 remained substantially unchanged compared to the same period in 2003. We expect hardware revenues to continue to fluctuate in future periods.

     Costs of systems and services revenues increased $7.9 million, or 23.3%, to $41.8 million, for the quarter ended June 30, 2004 compared to $33.9 million for the same period in 2003. Gross margins on systems and services revenues were 39.1% for the quarter ended June 30, 2004 compared to 41.9% for the same period in 2003. The increase in costs of systems and services revenues were primarily related to higher costs associated with providing our remote hosting and outsourcing services as revenues increased in these areas and to higher third party costs including royalties.

     Costs of hardware revenues were substantially flat at $4.3 million for the quarter ended June 30, 2004 compared to $4.2 million for the same period in 2003. Gross margins on hardware revenues decreased to 14.0% for the quarter ended June 30, 2004 compared to 16.8% for the same period in 2003.

     Sales and marketing expenses decreased $2.3 million, or 12.8%, to $15.5 million for the quarter ended June 30, 2004 compared to $17.7 million for the same period in 2003. The decrease in sales and marketing expenses was primarily related to a decrease in payroll related costs, including the realignment of sales and marketing functions during the first quarter of 2004. Sales and marketing is expected to increase during the second half of 2004 due to the timing of contract signings and the timing of key marketing events.

     Research and development expenses increased $1.0 million or 7.4% to $14.5 million for the quarter ended June 30, 2004 compared to $13.5 million for the same period in 2003. The increase in research and development expenses was due primarily to an increase in the number of development employees. The increase in headcount in this area is consistent with our product development initiative implemented throughout 2003. Capitalized software development costs decreased $1.0 million or 20.8% to $3.9 million for the quarter ended June 30, 2004 compared to $4.9 million for the same period in 2003. The decrease in capitalized software development costs was due to decreased costs associated with coding, testing and other related activities for Sunrise Clinical Manager 3.5 XA. Amortization of capitalized software development costs, which is included as a component of costs of systems and systems revenues, was flat at $1.9 million for the quarter ended June 30, 2004 and for the same period in 2003. Amortization expense is expected to increase starting in the third quarter of 2004 due to the release of Sunrise Clinical Manager 3.5 XA.

     General and administrative expenses increased approximately $1.0 million primarily due to increased legal costs. Legal costs increased due to litigation incurred in the ordinary course of business. We expect legal fees to be lower for the remainder of 2004.

     Depreciation and amortization increased $0.8 million, or 31.8%, to $3.3 million, for the quarter ended June 30, 2004 compared to $2.5 million for the same period in 2003. The increase was primarily the result of higher depreciation related to fixed assets purchased in our continued effort to expand capacity at our Technology Solutions Center.

     Interest income decreased $0.6 million or 72.9% to $0.2 million for the quarter ended June 30, 2004 compared to $0.8 million for the same period in 2003. This decrease was due to a decline in yields and lower cash and marketable security balances from the same period last year.

     As a result of these factors, we had a net loss of $10.0 million for the quarter ended June 30, 2004 compared to a net loss of $11.0 million for the same period in 2003.

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SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003

Eclipsys Corporation
Statement of Operations Data — Unaudited
(in thousands)

RESULTS OF OPERATIONS

     Total revenues increased $21.8 million, or 18.1%, to $142.0 million for the six months ended June 30, 2004 compared to $120.2 million for the same period in 2003.

     Systems and services revenues increased $18.3 million, or 16.4%, to $130.4 million for the six months ended June 30, 2004 compared to $112.1 million for the same period in 2003. The improvement is primarily due to an increase of $16.9 million of revenues generated from arrangements which generally provide for revenue recognition on a monthly basis. These revenues included license fees, remote hosting services, software and hardware maintenance fees, and outsourcing services. This increase is primarily the result of new contracts signed prior to the second quarter of 2004. We expect these types of contracts will continue to represent a significant, and potentially growing, proportion of our new contracts. However, because these contracts are characterized by payments being spread over a longer period of time compared to traditional licensing arrangements, we expect cash flows will continue to be negatively impacted in the near future.

     Additionally, the professional services portion of systems and services revenues increased $4.1 million primarily due to increased activities including several customer activations. We expect professional services to continue to fluctuate in future periods based on several factors, including the timing of future releases, available customer resources and other customer decisions.

     Finally, network services increased $1.6 million as a result of increased activities at numerous customer sites. These increases were partially offset by a reduction of $4.4 million of license fees as less of the new contracts signed were recognized on a traditional basis. We expect both networking services and license fees (other than those recognized on a monthly basis) to continue to fluctuate in future periods.

     Hardware revenues increased $3.5 million, or 42.7%, to $11.6 million for the six months ended June 30, 2004 compared to $8.1 million for the same period in 2003. We expect hardware revenues to continue to fluctuate in future periods.

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     Costs of systems and services revenues increased $14.9 million, or 22.4%, to $81.7 million for the six months ended June 30, 2004 compared to $66.7 million for the same period in 2003. Gross margins on systems and services revenues were 37.4% for the six months ended June 30, 2004 compared to 40.5% for the same period in 2003. The increase in costs of systems and services revenues were primarily related to higher costs associated with providing our remote hosting and outsourcing services as revenues increased in these areas and higher third party costs including royalties.

     Costs of hardware revenues increased $3.1 million, or 45.6%, to $10.0 million for the six months ended June 30, 2004 compared to $6.8 million for the same period in 2003. Gross margins on hardware revenues decreased to 14.2% for the six months ended June 30, 2004 compared to 15.9% for the same period in 2003.

     Sales and marketing expenses decreased $3.6 million, or 10.4%, to $30.7 million for the six months ended June 30, 2004 compared to $34.3 million for the same period in 2003. The decrease in sales and marketing expenses was primarily related to decreases in payroll related costs, including the realignment of sales and marketing functions which was completed during the first quarter of 2004.

     Research and development expenses increased $2.9 million, or 11.0%, to $29.4 million for the six months ended June 30, 2004 compared to $26.5 million for the same period in 2003. The increase in research and development expenses was due primarily to an increase in the number of development employees. The increase in headcount in this area is consistent with our product development initiative implemented throughout 2003. Capitalized software development costs were $8.5 million for the six months ended June 30, 2004 and $7.6 million for the same period in 2003. Amortization of capitalized software development costs, which is included as a component of costs of systems and services revenues increased $0.1 million or 2.9% to $3.8 million for the six months ended June 30, 2004 compared to $3.7 million for the same period in 2003. Amortization expense is expected to increase starting in the third quarter of 2004 due to the release of Sunrise Clinical Manager 3.5 XA.

     General and administrative expenses increased approximately $800,000 primarily due to legal costs. Legal costs increased due to litigation incurred in the ordinary course of business. We expect legal fees to be lower the remainder of 2004.

     Depreciation and amortization increased $1.5 million, or 31.0%, to $6.4 million for the six months ended June 30, 2004 compared to $4.9 million for the same period in 2003. The increase was primarily the result of higher depreciation related to fixed assets purchased in our continued effort to expand our research and development infrastructure and to increase capacity at our Technology Solutions Center.

     Interest income decreased $1.1 million, or 60.8%, to $0.7 million for the six months ended June 30, 2004 compared to $1.7 million for the same period in 2003. This decrease was due to a decline in yields and lower cash and marketable security balances from the same period last year.

     As a result of these factors, we had a net loss of $23.0 million for the six months ended June 30, 2004 compared to a net loss of $24.0 million for the same period in 2003.

LIQUIDITY AND CAPITAL RESOURCES

     During the quarter ended June 30, 2004, operations used $3.4 million of cash, primarily related to higher research and development costs and the impact of our change in contracting method that spreads payments over a longer period of time. Investing activities used $6.7 million of cash, consisting of $3.9 million for the funding of capitalized software development costs and $2.8 million for the purchase of property and equipment. Financing activities provided $1.4 million of cash, from the exercise of stock options and proceeds from the employee stock purchase plan. For the six months ended June 30, 2004 operations used $13.0 million of cash, primarily related to the payment of year end 2003 and current year bonuses, incremental payrolls, and the impact of our contracting model that spreads payments over a longer period of time. Investing activities used $58.6 million of cash, consisting of $40.8 million purchase of marketable securities, $8.5 million for the funding of capitalized software development costs, $6.8 million for the purchase of property and equipment and $2.5 million for the acquisition of CPMRC in March 2004. The purchase of property plant and equipment is primarily related to our continued investment in the infrastructure of our Technology Solutions Center for the expansion of our remote hosting services; and financing activities provided $4.6 million from the exercise of stock options and proceeds from the employee stock purchase plan.

     As of June 30, 2004, our principal source of liquidity is our combined cash and marketable securities balance of $125.5 million. It is likely that we will continue to have negative cash flows in the near future as we continue the development of our SunriseXA products. Additionally, our contracting method will result in lower cash flows during the early stages of customer contracts. We expect this will continue to impact our short term cash position. Furthermore, we expect that capital expenditures will increase in the second half of 2004 as we continue to invest in our Technology Solutions Center.

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     Our future liquidity requirements will depend on a number of factors including, among other things, the timing and level of our new sales volumes, the cost of our development efforts related to SunriseXA, the success and market acceptance of our future product releases, and other related items. As of June 30, 2004 we did not have any material commitments for capital expenditures. We believe that our current cash and marketable securities balances, combined with our anticipated cash collections from customers will be adequate to meet our liquidity requirements through 2004.

CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

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

     We continue to face some risks relating to our SunriseXA strategy

     In October 2003, we announced the existence of certain response time issues within some components of SunriseXA, the newest version of our Sunrise family of products. We concluded that the root cause of the issue was in the technical design of SunriseXA, which did not adequately support the throughput required in the highly interactive patient care environment. After substantial analysis, we announced and are pursuing a strategy that we believe will address these issues. Our strategy is to replace the affected SunriseXA components with certain components from our SCM product, which is our prior generation, core clinical product. Although we believe that the release of Sunrise Clinical Manager 3.5 XA in June 2004 was a significant milestone in the implementation of our Sunrise XA strategy, we continue to face a variety of risks and uncertainties in this regard including among others, the following:

	•		We may encounter technical obstacles and delays in implementing this approach. As we continue to implement our strategy, it is possible that we could discover additional problems with our software.
	•		It is possible future releases of SunriseXA, with anticipated additional features for our products, may be delayed. This could result in delayed or lost sales.
	•		Customers who are currently implementing SunriseXA have faced delays in their implementations. As a result, existing SunriseXA customers could attempt to cancel their contracts with us or seek financial or other concessions from us.
	•		As a result of the changes we will make to our SunriseXA product offering, potential customers may find such products less appealing, which could decrease demand for our products.
	•		Operating results for the year ended December 31, 2003 reflect a $1.2 million write-down of capitalized software development costs related to certain SunriseXA components and a warranty reserve of $4.4 million related to the anticipated costs associated with the SunriseXA response time issue. In the first quarter of 2004, an additional $450,000 provision was recorded for estimated incremental costs. Although we believe that these reserves are adequate to cover any potential losses, it is possible that we will discover additional facts that lead us to conclude that additional write-offs or reserves may be required.

     These issues could harm our relationships with customers generally and our reputation in the marketplace. This announcement has had an adverse effect on our 2004 sales. Additionally, it is possible that this issue may continue to temporarily make sales more challenging for the affected SunriseXA applications.

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

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

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

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

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

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

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

     We had a net loss of $56.0 million for the year ended December 31, 2003. We also had net losses of $29.8 million in 2002, $34.0 million in 2000, $9.4 million in 1999, $35.3 million in 1998, and $126.3 million in 1997. In 2001, we had net income of $4.4 million, although we had a loss from operations of $1.6 million. We may continue to incur net losses and cannot predict when, or if, we will be profitable in the future.

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

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

	•		our progress in implementing our strategy to address our SunriseXA response time issues and the level of costs associated with that effort;
	•		the timing, size and complexity of our product sales and implementations;
	•		overall demand for healthcare information technology;
	•		the financial condition of our customers and potential customers;
	•		market acceptance of new services, products and product enhancements by us and our competitors;
	•		product and price competition;
	•		the relative proportions of revenues we derive from software, services and hardware;
	•		changes in our operating expenses;
	•		the timing and size of future acquisitions;
	•		personnel changes;
	•		the performance of our products;
	•		significant estimates made by management in the application of generally accepted accounting principles; and

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•

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

     It is difficult to predict the timing of revenues that we receive from product sales, because the sales cycle can vary depending upon several factors. These include the size and terms of the transaction, the changing business plans of the customer, the effectiveness of the customer’s management, general economic conditions and the regulatory environment. In addition, the timing of our revenue recognition could vary considerably depending upon the extent to which our customers elect to license our products under arrangements where revenues are recognized monthly. Generally, less revenue is recognized under these arrangements during the first 12 to 24 months compared to our more traditional licensing arrangements. We will also continue to offer contracts using our more traditional licensing arrangements. Because a significant percentage of our expenses will be relatively fixed, a variation in the timing of sales and implementations could cause significant variations in operating results from quarter to quarter. We believe that period-to-period comparisons of our historical results of operations are not necessarily meaningful. Stockholders should not rely on these comparisons as indicators of future performance.

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

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

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

     We operate in a market that is intensely competitive. Our principal competitors include Cerner Corporation, Epic Systems Corporation, GE Medical Systems, IDX Systems Corporation, McKesson Corporation, QuadraMed and Siemens AG. We also face competition from providers of practice management systems, general decision support, database systems and other segment-specific applications, as well as from healthcare IT consultants. A number of existing and potential competitors are more established than we are, and have greater name recognition and financial, technical and marketing resources than we do. We expect that competition will continue to increase. Increased competition could harm our business.

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

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

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

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

	•		requiring us to seek FDA clearance of a pre-market notification submission demonstrating that a product is substantially equivalent to a device already legally marketed, or to obtain FDA approval of a pre-market approval application establishing the safety and effectiveness of the product;
	•		requiring us to comply with rigorous regulations governing the pre-clinical and clinical testing, manufacture, distribution, labeling and promotion of medical devices; and
	•		requiring us to comply with the FDA Act regarding general controls including establishment registration, device listing, compliance with good manufacturing practices, reporting of specified device malfunctions and adverse device events.

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

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

     The demand for health care information systems is affected by state and federal laws and regulations that govern the collection, use, transmission and other disclosures of electronic health information. These laws and regulations may change rapidly and may be unclear or difficult to apply.

     Federal regulations under the Health Insurance Portability and Accountability Act of 1996, or HIPPA imposes national health data standards on (i) health care providers that conduct electronic health transactions; (ii) health care clearinghouses that convert health data between HIPAA-compliant and non-compliant formats; and (iii) health plans. Collectively, these groups are known as Covered Entities. The HIPAA standards prescribe transaction formats and code sets for electronic health transactions; protect individual privacy by limiting the uses and disclosures of individually identifiable health information; and require Covered Entities to implement administrative, physical and technological safeguards to ensure the confidentiality, integrity, availability and security of individually identifiable health information in electronic form. Though we are not a Covered Entity, most of our customers are and require that our software and services adhere to HIPAA standards.

     There are several HIPAA compliance deadlines for Covered Entities. The final compliance deadline for the transaction and code set standards was October 16, 2003. The compliance deadline for the privacy standards was April 14, 2003 for most Covered Entities. The compliance deadline for the security standards for most Covered Entities is April 20, 2005. Any failure or perception of failure of our products or services to meet HIPAA standards could adversely affect demand for our products and services and force us to expend significant capital, research and development and other resources to modify our products or services to address the privacy and security requirements of our customers.

     States may adopt privacy standards that are more stringent than the federal HIPAA privacy standards. This may lead to different restrictions for handling individually identifiable health information. As a result, our customers may demand information technology solutions and services that are adaptable to reflect different and changing regulatory requirements. In the future, federal or state governmental authorities may impose additional restrictions on the collection, use, transmission and other disclosures of health information. We cannot predict the potential impact that these future rules, as finally approved, may have on our business. However, the demand for our products and services may decrease if we are not able to develop and offer products and services that can address the regulatory challenges and compliance obligations facing our customers.

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

     We provide products that, among other things, assist in clinical decision-making, provide access to patient medical histories and assist in creating patient treatment plans. If our software fails to provide accurate and timely information, customers could assert liability claims against us. Litigation with respect to liability claims, regardless of its outcome, could result in substantial cost to us, divert management’s attention from operations and decrease market acceptance of our products. We attempt to limit by contract our liability for damages arising from negligence, errors or mistakes. In addition, we require that our customers approve all system rules and protocols. Despite these precautions, the limitations of liability set forth in our contracts may not be enforceable or may not otherwise protect us from liability for damages. We maintain general liability insurance coverage, including coverage for errors or omissions. However, this coverage may not continue to be available on acceptable terms or may not be available in sufficient amounts to cover one or more large claims against us. In addition, the insurer might disclaim coverage as to any future claim. One or more large claims could exceed our available insurance coverage.

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

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

     An important element of our business strategy has been expansion through acquisitions. Since 1997, we have completed ten acquisitions.

Any future acquisitions would involve a number of risks, including the following:

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

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

     Our success depends, in significant part, upon the continued services of our key technical, marketing, sales and management personnel, and on our ability to continue to attract, motivate and retain highly qualified employees. Competition for these employees is intense. In addition, the process of recruiting personnel with the combination of skills and attributes required to execute our business strategy can be difficult, time-consuming and expensive. We believe that our ability to implement our strategic goals depends to a considerable degree on our senior management team. The loss of any member of that team could hurt our business.

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

     The market for our products and services is characterized by rapidly changing technologies, evolving industry standards and new product introductions and enhancements that may render existing products obsolete or less competitive. As a result, our position in the HIT market could erode rapidly due to unforeseen changes in the features and functions of competing products, as well as the pricing models for such products. Our future success will depend in part upon our ability to enhance our existing products and services, particularly our ability to continue to release our products onto the .NET Framework under the SunriseXA initiative, and to develop and introduce new products and services to meet changing customer requirements. The process of developing products and services such as those we offer is extremely complex and is expected to become increasingly complex and expensive in the future as new technologies are introduced. If we are unable to enhance our existing products or develop new products to meet changing customer requirements, demand for our products could suffer.

We depend on licenses from third parties for rights to the technology used in several of our products, and if we are unable to continue these relationships and maintain our rights to this technology, our business could suffer

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

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

     We are dependent upon our proprietary information and technology. Our means of protecting our proprietary rights may not be adequate to prevent misappropriation. The laws of some foreign countries may not protect our proprietary rights as fully as do the laws of the United States. Also, despite the steps we have taken to protect our proprietary rights, it may be possible for unauthorized third parties to copy aspects of our products, reverse engineer our products or otherwise obtain and use information that we regard as proprietary. In some limited instances, customers can access source-code versions of our software, subject to contractual limitations on the permitted use of the source code. Although our license agreements with these customers attempt to prevent misuse of the source code, the possession of our source code by third parties increases the ease and likelihood of potential misappropriation of such software. Furthermore, others could independently develop technologies similar or superior to our technology or design around our proprietary rights. In addition, infringement or invalidity claims or claims for indemnification resulting from infringement claims could be asserted or prosecuted against us. Regardless of the validity of any claims, defending against these claims could result in significant costs and diversion of our resources. The assertion of infringement claims could also result in injunctions preventing us from distributing products. If any claims or actions are asserted against us, we might be required to obtain a license to the disputed intellectual property rights, which might not be available on reasonable terms or at all.

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

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

     Our charter documents contain additional anti-takeover devices including:

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

     Section 203 of the Delaware corporate statute may inhibit potential bids to acquire our company. We are subject to the anti-takeover provisions of the Delaware corporate statute, which regulate corporate acquisitions. Delaware law will prevent us from engaging, under specified circumstances, in a business combination with any interested stockholder for three years following the date that the interested stockholder became an interested stockholder, unless our board of directors or a supermajority of our uninterested stockholders agree. For purposes of Delaware law, a business combination includes a merger or consolidation involving us and the interested stockholder, and the sale of more than 10% of our assets. In general, Delaware law defines an interested stockholder as any holder beneficially owning 15% or more of the outstanding voting stock of a corporation and any entity or person affiliated with or controlling or controlled by the holder.

     These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our common stock. As a result, these provisions may prevent the market price of our common stock from increasing substantially in response to actual or rumored takeover attempts. These provisions may also prevent changes in our management.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

     Investments in both fixed-rate and floating-rate interest-earning instruments carry a degree of interest rate risk. Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating-rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if forced to sell securities that have seen a decline in market value due to changes in interest rates. The following table illustrates potential fluctuation in annualized interest income based upon hypothetical values for blended interest rates and cash and marketable securities account balances.

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

     We account for cash equivalents and marketable securities in accordance with SFAS No. 115. “Accounting for Certain Investments in Debt and Equity Securities.” Cash equivalents are short-term highly liquid investments with original maturity dates of three months or less. Cash equivalents are carried at cost, which approximates fair market value. Marketable securities consist of funds that are highly liquid and are classified as available-for-sale. Marketable securities are recorded at fair value, and unrealized gains and losses are recorded as a component of other comprehensive income.

     We do not currently enter into foreign currency hedge transactions. Through June 30, 2004, foreign currency fluctuations have not had a material impact on our financial position or results of operations.

ITEM 4. CONTROLS AND PROCEDURES

     Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a — 15 (e) and 15d — 15 (e) under the Exchange Act) as of June 30, 2004. Based on this evaluation, Eclipsys’ chief executive officer and chief financial officer concluded that, as of June 30, 2004, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms.

     No change in our internal control over financial reporting (as defined in Rules 13a — 15 (f) and 15d — 15 (f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.

ITEM 1. LEGAL PROCEEDINGS

     As previously disclosed, from July through September 2002, the Company and three of its then current officers were named in a series of complaints filed by purported shareholders. Each complaint sought certification as a class and monetary damages, and alleged that the Company and the named officers violated federal securities laws. These complaints were ultimately consolidated into a single case, which was dismissed by the District Court in November 2003 and was re-filed by the plaintiffs in December 2003 in the form of a Second Amended Complaint. The Company then moved to dismiss the Second Amended Complaint.

     On April 1, 2004, the District Court issued an order granting the Company’s motion and dismissing in its entirety the plaintiffs’ Second Amended Complaint. In the order, the District Court granted the plaintiffs fifteen days to file a further amended complaint that conformed to applicable law as well as the District Court’s ruling. The deadline for the plaintiffs to file a further amended complaint expired on April 16, 2004. The plaintiffs did not file a further amended complaint prior to the District Court’s deadline. In addition, on May 10, 2004, the plaintiffs consented to dismissal of the lawsuit and, in so doing, waived all rights to appeal the dismissal.

     The Company is involved in other litigation from time to time that is incidental to its business. In the opinion of management, after consultation with legal counsel, the ultimate outcome of such litigation will not have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     (c.) In March 2004, the Company issued 184,202 shares of its common stock, valued at $2.5 million, to the stockholders of CPM Resource Center, LTD, or CPMRC, in connection with the Company’s acquisition of CPMRC. This issuance was made pursuant to the exemption from registration provided under Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     At the Annual Meeting of Stockholders held on June 1, 2004, the stockholders voted upon two proposals: (i) the election of two Class III directors for a three-year term, or Proposal One, and (ii) the ratification of the selection of PricewaterhouseCoopers LLP by the board of directors as the Company’s independent auditors for the current fiscal year, or Proposal Two.

     The outcome of the voting on Proposal One was as follows:

     The outcome of the voting on Proposal Two was as follows:

     Our Proxy Statement filed pursuant to Section 14 of the Securities Exchange Act contains a detailed discussion of the proposals that the stockholders were asked to vote upon.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)		Exhibits: See Index to exhibits.
(b)		Reports on Form 8-K:

     (1) On July 28, 2004, Eclipsys filed a report on Form 8-K relating to its financial results for the fiscal quarter ended June 30, 2004, as presented in a press release on July 28, 2004.

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SIGNATURES

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

	ECLIPSYS CORPORATION
Date: August 9, 2004	/s/ Robert J. Colletti
	Robert J. Colletti Senior Vice President and Chief Financial Officer (Principal financial officer and duly authorized officer)

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ECLIPSYS CORPORATION
EXHIBIT INDEX

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