UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission File Number: 000-50839

Phase Forward Incorporated
(Exact name of registrant as specified in its charter)

77 Fourth Avenue
Waltham, Massachusetts 02451
(Address of principal executive offices)
(888) 703-1122
(Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:
None

          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No ý

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

          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 ý  No o

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

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

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

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

          Aggregate market value of the voting stock held by non-affiliates of the registrant.

          Shares of voting stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The registrant has no shares of non-voting stock authorized or outstanding.

          Number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

DOCUMENTS INCORPORATED BY REFERENCE

          Portions of the registrant's definitive Proxy Statement for the registrant's 2010 Annual Meeting of Stockholders, which is expected to be filed pursuant to Regulation 14A within 120 days of the registrant's fiscal year ended December 31, 2009, are incorporated by reference into Part III of the Form 10-K. With the exceptions of the portions of the Proxy Statement expressly incorporated by reference, such document shall not be deemed filed with this Form 10-K.

Table of Contents

PHASE FORWARD INCORPORATED
ANNUAL REPORT ON
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2009

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PART I

        This Annual Report on Form 10-K ("Annual Report") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, and is subject to the "safe harbor" created by those sections. This Annual Report contains express or implied forward-looking statements relating to, among other things, Phase Forward's expectations and assumptions concerning management's forecast of financial performance, the performance of Phase Forward's products and services, future business and operations plans of Phase Forward's customers, the ability of Phase Forward's customers to realize benefits from the use of Phase Forward's products and services, the performance of Phase Forward's competitors and future changes in competitive factors, external pricing pressures, the impact on Phase Forward's securities portfolio due to illiquid credit markets/general market conditions, Phase Forward's corporate documents and their effect on shareholder action, changes in government regulations (e.g. HIPAA regulations), and management's plans, objectives and strategies. Some of the forward-looking statements can be identified by the use of forward-looking terms such as "believes," "expects," "may," "will," "should," "could," "seek," "intends," "plans," "estimates," "anticipates" or other comparable terms. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking statements. We urge you to consider the risks and uncertainties discussed elsewhere in this Annual Report under "Item 1A. Risk Factors" in evaluating our forward-looking statements. We have no plans to update our forward-looking statements to reflect events or circumstances occurring after the date of this report. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.

Item 1.    Business

Overview

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

        Our electronic data capture and clinical data management products are designed to offer our customers enterprise-level automation of time-consuming, paper-based clinical trial processes and to scale securely, reliably and cost-effectively for clinical trials involving substantial numbers of clinical sites and patients worldwide. Our clinical data analysis systems consist of a clinical data repository and a statistical computing environment, which we refer to collectively as our Clinical Development Center. Our drug safety products are designed to enable customers to detect, analyze and manage product safety throughout the product life cycle. Our interactive response technologies, or IRT, are designed to streamline the randomization process and drug supply chain management of our customers' clinical trials. Our integrated clinical research suite products are supported by comprehensive consulting and training services and application hosting and support capabilities on a global scale. Our integrated clinical research suite is comprised of four general categories that include the following software products, which we generally offer under term enterprise licenses or as a hosted application solution delivered through a standard Web-browser:

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Electronic Data Capture (EDC)

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



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



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



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Clinical Data Management



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Clintrial™, our clinical data management solution;



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



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Clinical Development Center, which includes our controlled clinical data repository product for storing and managing clinical trials data (both data and metadata), as well as our metadata-driven controlled statistical control environment for automation and tracking of routine and repetitious statistical programming and analysis, which we acquired as a result of the acquisition of Waban Software, Inc. in April 2009.



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Drug Safety



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



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



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



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Interactive Response Technology (IRT)



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



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Covance IVRS/IWRS, a legacy phone-integrated interactive response technology, which we acquired from Covance, Inc. in August 2009. (While we have existing trials running on the Covance IVRS/IWRS system, we do not intend to sell this offering or implement any new trials for use on this system.)

Our Strategy

        Our objective is to provide an ICRS of technology solutions to automate and integrate the management of the entire clinical development process from study initiation and regulatory submission through post-approval trials and pharmacovigilance with a single source of accountability and delivery. Also, for each component of our Integrated Clinical Research Suite, our objective is to become the standard for electronic data capture, data management, interactive response technology, drug safety reporting and signal detection in global clinical trial and drug safety monitoring activities. Key strategic directives include:

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Increase penetration within our customer base for existing solutions.  We believe that there is a significant opportunity to increase the use of our InForm, OutcomeLogix and Phase Forward IRT solutions within our customer base. Furthermore, the decentralized nature of many of our customers offers us the opportunity to increase use of our currently-deployed software products, services and hosted solutions within their enterprises by targeting additional functional areas and business units.

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Expand adoption of additional solutions within our existing customer base.  We believe that there is a significant opportunity to migrate existing customers that are utilizing one or more of our product offerings to a comprehensive solution that integrates additional components of our integrated clinical research suite of software products on an enterprise-wide basis. We believe that a large percentage of our current customers would benefit from the integration of our software solutions and the related benefits of delivery from a single vendor, and we intend to continue to pursue these cross-selling opportunities.



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Expand the customer base for our software products, services and hosted solutions. We believe that adoption growth for electronic data capture, clinical data management, interactive response technology, drug safety reporting and signal detection solutions and other automation solutions is at varying stages for our different products and service offerings in the clinical trial and safety monitoring marketplace. Our current base of over 335 customers includes pharmaceutical, biotechnology and medical device companies, as well as academic institutions, governmental regulatory agencies and CROs of all sizes. We intend to secure additional customers by leveraging our industry position and domain expertise in technology development, sales and customer support.



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Continue to capitalize on our technology position and expand our product offerings. Our domain expertise and advanced technologies, some of which we acquired through the acquisition of other companies or businesses, have enabled us to become well-positioned as a single-source vendor of an end-to-end integrated clinical research suite to pharmaceutical, biotechnology, medical device companies and CROs, as well as academic institutions, governmental regulatory agencies and other entities engaged in clinical trial and safety monitoring activities. We intend to strengthen our position by leveraging our technology development resources to enhance our current product offerings and to introduce additional integrated software solutions to our suite. In addition to continuing to enhance our existing software products, services and hosted solutions through internal development, we intend to develop new software products, services and hosted solutions through internal development, possible acquisitions and relationships with third-party technology providers with the intent of strengthening our market position. For instance, in 2009 we added the OutcomeLogix and Clinical Development Center solution to our product portfolio as a result of our acquisitions of Maaguzi, LLC and Waban Software, Inc, respectively.



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Continue to provide a superior level of global customer service and support.  In light of the critical importance of the clinical trial and drug safety monitoring activities of our global customers, the delivery of a high level of multinational customer service and multilingual support with deep regulatory expertise is essential, and we believe a significant differentiating characteristic of our business strategy. We intend to leverage the knowledge and extensive expertise of our employees in the areas of clinical trial management and drug development, drug supply management, drug safety and regulatory approval to provide customers with exceptional support and consulting services that accelerate the adoption of our technologies.

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Our Business Model

        Our software solutions are generally provided to our customers for enterprise adoption through multi-year term licenses of generally two to five years with periodic fees or as fully-hosted solutions for customers who prefer a hosted solution, as detailed in the following table.

        While we have existing trials running on the Covance IVRS/IWRS system, we do not intend to sell this offering or implement any new trials for use on this system.

        We may in the future make products that are presently available under either a term license or on a hosted application basis (but not both) available to customers under both modes of offering.

        Our pricing model and the contractual nature of our services and support solutions, which generally requires us to recognize revenue ratably over the life of a contract, provides us with a level of multi-year financial reporting stability. We believe this business model differentiates us from many of our competitors, as our current and potential customers frequently look to long-term financial stability as a key criterion in evaluating a vendor to utilize in the clinical development process.

Our Software Solutions and Services

        While we offer our software solutions as part of an integrated clinical research suite, any of our products may be licensed or used as a hosted solution on a stand-alone basis, subject to availability in the desired mode of offering. Our software solutions also offer integration capabilities with certain complementary commercial or internally-developed applications used by our customers. We believe that all of our software products, services and hosted solutions may be used in a manner that will allow our customers to comply with current applicable global regulatory requirements, including applicable rules established by the U.S. Food and Drug Administration, or FDA, and other governmental regulatory authorities, regarding the use of software in the clinical development process. We have a dedicated team that monitors regulatory developments applicable to our customers and their clinical trial and drug safety monitoring activities.

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        Our product line is comprised of four general categories (electronic data capture, clinical data management, drug safety and interactive response technology) that include the following primary product and service offerings:

Electronic Data Capture

        InForm is our Internet-based electronic data capture software solution that helps reduce the inefficiencies, inaccuracies and costs associated with paper-based clinical data collection methodologies that are traditionally employed at the remote sites where clinical trial participants are monitored. Through the InForm platform, our customers can deploy customized electronic case report forms, or eCRFs, in multiple languages for on-site clinical data input, which incorporate automated edit checking and deliver enterprise-level visibility to data at an accelerated rate previously unavailable through paper-based clinical trial data collection approaches. Our InForm product also includes an integrated reporting module that gives users timely visibility to the operating efficiencies of the trial and into the clinical data as it is collected. InForm's Internet-based platform and automated site assessment capabilities facilitate rapid, cost efficient multi-site deployment. InForm is highly scalable and has been utilized by our customers to run clinical trials involving, collectively, hundreds of thousands of patients across multiple continents. In addition to its availability through term licenses, customers may elect to use InForm through our fully-hosted deployment program, which includes application hosting as well as clinical trial site assessment, training and support. An offline version of our InForm product is also offered where network connections are not reliable or available. We also offer modules and add-on products for the InForm software, which include:

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Central Coding™, which enables automatic or manual coding of clinical drug names and indications, adverse event terms and patient medical history. The Central Coding product may also be used with our Clintrial solution.



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Central Designer™, a tool to facilitate the creation of electronic case report forms easier through a centralized development environment with a flexible and intuitive user interface, as well as through increased use of templates and reuse of study components. The Central Designer product may also be used with our Clintrial solution.



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InForm Adapter, which provides a set of published Web services interfaces that enable the secure, and in some instances bi-directional, exchange of data and information with the InForm environment.



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InForm CRF Submit, a module that streamlines the preparation process for archives and electronic submissions to regulatory agencies by producing Adobe® Portable Document Format (PDF) editions of the InForm electronic eCRFs.



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InForm Architect™, a tool that allows users without extensive coding knowledge to design electronic case report forms.

        LabPas is our software solution for Phase I clinic automation. The LabPas workflow and sample management software targets the critical quality and resource needs of Phase I clinical research. The LabPas product supports the deployment of personal digital assistants, or PDAs, to enable clinicians to scan patient and collection vessel barcodes, providing real-time electronic data entry for collection times, comments, dosing, vital signs and adverse events. LabPas has additional modules for trial subject recruitment, management of storage conditions for collected samples and for laboratory information management.

        OutcomeLogix is our electronic patient reported outcomes, or ePRO, and late phase solution. The OutcomeLogix software enables the collection and management of patient reported outcome information directly from patients through a standard Web-browser. This solution is designed to facilitate improvements in patient reporting compliance, quality and efficiencies compared to paper-based data collection and management methods. The OutcomeLogix software also provides a data collection and management solution tailored to the specific requirements of late phase studies such as observational studies and registries.

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Clinical Data Management

        Clintrial is our clinical data management software solution that allows customers to input, monitor, correct, code and analyze clinical data collected through integration with our InForm platform or third party solutions, as well as through traditional paper-based methods. Our Clintrial platform employs comprehensive tools for automated data entry control and tracking, error checking, industry-standard clinical coding, quality assurance and data import/export. Clintrial features an architecture that can manage thousands of clinical trials per customer and accommodate highly intricate study designs with little degradation of performance over a large amount of data.

        WebSDM is our solution for validating and reviewing clinical trial data. Developed through a Cooperative Research and Development Agreement, or CRADA, with the U.S. Food and Drug Administration, or FDA, WebSDM helps customers validate and review clinical trial data represented according to industry data standards established by CDISC. The WebSDM product loads and validates datasets and permits customers to browse both the clinical data and any discrepancies identified during the validation process, so that data problems may be addressed prior to submission of New Drug Applications to the FDA.

        Clinical Development Center is our controlled solution for storing and integrating clinical data and information in a central repository, and automating and managing statistical analysis, reporting and submissions. The Clinical Development Center solution consists of a Clinical Data Repository, which is a secure and managed environment for receiving, integrating, transforming and storing clinical data, information and standards, and a Statistical Control Environment, which is a controlled solution to automate and track the statistical analysis process, providing end-to-end traceability of data, analysis and reports.

Drug Safety

        Empirica Trace is our drug safety software solution that helps customers comply with the complex global safety regulations and reporting deadlines associated with clinical research, post-approval marketing and drug surveillance by expediting the clinical evaluation and tracking of adverse events. Through Empirica Trace, our customers can enter adverse event data from multiple sources, code, reconcile and analyze the data reports, and then submit required adverse event reports to regulatory authorities via electronic or paper-based methods. Our Empirica Trace product provides customers with near real-time visibility of drug safety data, thereby facilitating compliance with regulatory reporting deadlines and more timely identification of therapeutics that may pose risks to patients. Our Empirica Trace product also includes a reporting module that enables users to generate various reports containing safety and adverse event data. The current version of the Empirica Trace product integrates with our Electronic Case Submissions Module, or Empirica Gateway, automating the exchange of electronic case safety information with regulatory agencies, affiliates and partners.

        Empirica Signal is our drug safety software solution for data mining and signal management that allows customers to detect safety signals in databases of adverse event reports. It can be used in conjunction with in-house adverse event databases (such as customer databases containing adverse event reports collected through use of our Empirica Trace solution), or large databases of reports gathered by public health agencies such as the FDA and the World Health Organization. We also offer an extended version of Empirica Signal, called Signal Management, which is a workflow solution that helps large organizations to assemble and track information on drug-event combinations of interest and to prioritize work among multiple safety reviewers.

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        Empirica Study (formerly known as CTSD) is our drug safety software solution for clinical trials signal detection that supports customers in the early detection of drug safety problems during clinical development. Empirica Study manages a repository of clinical trial data and allows users to specify, execute and interpret data mining runs to detect differences in the safety profile of the drug under development and the corresponding profile for placebo or other comparator treatments. This repository supports the loading of data in formats meeting standards established by CDISC, which develops and supports global, platform-independent data standards that enable information system interoperability to improve medical research and related areas of healthcare. Our Empirica Study product includes built-in safety screens for differences in reported adverse events, critical laboratory values, vital signs, ECG measurements, and other data collected during a clinical trial. Empirica Study also supports workflow for managing and documenting the resolution of any safety signals that are identified.

Interactive Response Technology

        Phase Forward IRT is our Web-integrated interactive response technology that helps streamline the randomization process and drug supply chain management of our customers' clinical trials. It is presently offered only on a hosted application basis. Phase Forward IRT is used for subject randomization, predictive medication inventory management, and operational management and reporting in clinical trials. By automating the randomization process and centralizing the overall supply chain for dispensing medical kits, our Phase Forward IRT solution helps our customers better manage their medical kit inventories, which reduces drug waste and helps keep costs under control. The Phase Forward IRT operational and reporting functionalities are accessed via a Web interface through a standard Web-browser. We also provide a related module, Phase Forward IRT Forecasting, which enables customers to develop and test forecasts for supplies strategies pre- and post-study go-live. By linking to live studies running in Phase Forward IRT, customers can compare forecasts to actual data to facilitate review and potential amendment of strategies.

        Covance IVRS/IWRS is a legacy phone-integrated interactive response technology which we acquired from Covance Inc. in August 2009. While we have existing trials running on the Covance IVRS/IWRS system, we do not intend to sell this offering or implement any new trials for use on this system.

Integrated Offerings

        While we offer our software solutions as part of an integrated clinical research suite, any of our products may be licensed or used as a hosted solution on a stand-alone basis (subject to availability in the desired mode of offering). We intend to continue to develop integration across the components of our integrated clinical research suite to provide value and efficiencies to our customers.

Services

        Our products are supported by comprehensive consulting and training services and application hosting and support capabilities on a global scale. In addition to our U.S. headquarters, we have offices with services personnel in Australia, Belgium, France, India, Japan, Romania and the United Kingdom.

        Application Hosting Services.    In addition to making our InForm, LabPas, Clintrial, WebSDM, Clinical Development Center and Empirica software products available to customers through licenses, we offer our InForm, LabPas, WebSDM, Clinical Development Center and Empirica software products as hosted application solutions delivered through a standard Web-browser, with customer support and training services. Our Interactive Response Technology and OutcomeLogix solutions are presently available only on a hosted application basis. To date, our hosted solutions have been related primarily to our InForm and Phase Forward IRT offering. In the future we may make products that are currently available only through licenses available as hosted applications and products that are currently available only as hosted applications available through licenses.

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        Consulting Services.    Consulting services include the design and documentation of the processes related to our customers' use of our products and services in their clinical trials and safety monitoring activities. Consulting services also include project planning and management services, guidance on best practices in using our software products, data management and configuration services for data mining and reporting, as well as implementation services consisting of application architecture design, systems integration, installation and validation. Consulting services can be sold on a stand-alone basis or as part of a bundled arrangement. In some circumstances, we sell additional follow on consulting services to a customer at a later date even if the customer purchased consulting services at the time of the initial license purchase under a bundled arrangement.

        Customer Support.    We have a multinational professional services organization to support our software products and hosted solutions worldwide. Our multilingual technical support staff is available 24 hours per day, seven days per week. Customer support includes training services, telephone support and software maintenance. We bundle customer support in our software term licenses.

Our Customers

        As of December 31, 2009, we had over 335 customers, including all of the top 10 pharmaceutical companies and 19 of the top 20 pharmaceutical companies as measured in terms of total revenues. In determining the number of customers, we have treated all affiliated entities as one customer, even if we have customer relationships with more than one entity or group within a larger organization. Our representative customers include leading pharmaceutical, biotechnology, medical device companies, regulatory agencies, academic institutions, CROs and other entities engaged in clinical trial and safety monitoring activities. Some of our representative customers include:

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Sales and Marketing

        We sell our products and services through a direct sales force and through relationships with CROs and other channel arrangements. Our marketing efforts focus on raising awareness for our products and services and generating qualified sales leads. As of December 31, 2009, we had 99 employees in sales and marketing.

        Direct Sales.    Our direct sales force, which is the source of the majority of our revenues, is operated out of six field offices, as well as our headquarters in Waltham, Massachusetts. In addition, follow-on sales are accomplished by the efforts of sales professionals, sales engineers, project managers and other consulting services professionals.

        Channel Arrangements.    In Japan, we have established channel relationships to market and sell our InForm, Clintrial and Empirica Trace products. We also have channel relationships in the United States, Europe and Asia with a number of major CROs that enable them to market and sell our hosted solutions.

        Marketing.    Our marketing strategy is to generate qualified sales leads, build our brand and establish our technology solutions as the standard for electronic data capture, clinical data management, drug safety and interactive response in the clinical trial and safety monitoring marketplace. Our principal marketing initiatives target key executives and decision makers within our existing and prospective customers, and include:

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hosting of an annual international user conference in the United States and regional conferences in Europe and Japan;



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participation in, and sponsorship of, user conferences for complementary products and services, trade shows, workshops, seminars and industry events;



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publication of articles and opinion pieces in trade magazines and journals;



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participation in industry standards and bodies;



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press and industry analyst relations; and



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webinars, direct mail and email campaigns.

        The marketing organization also works closely with our customers, our direct sales organization and CROs to collect and prioritize customer feedback to help guide our product development efforts.

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Research and Development

        We believe that our future success will depend on our ability to continue to enhance and broaden our software products, services and hosted solutions to meet the evolving needs of clinical trial sponsors and other entities engaged in clinical trial and drug safety monitoring activities. As of December 31, 2009, we had 218 employees in research and development. Our research and development efforts are focused on developing new, complementary software solutions, as well as enhancing our existing software solutions through the addition of increased functionality and integration among our various products, as well as through integration of third-party software. From time to time, we supplement our internal research and development resources with outside developers. Our research and development expenses were $20.1 million in 2007, $25.5 million in 2008 and $37.5 million in 2009.

Technology

        The technology incorporated into our products is designed to provide customers with ease of use, efficiency, flexibility, data visibility and system scalability to handle high-volume, global trials and drug safety monitoring activities. Our products are generally designed using Web-based technologies, enabling rapid and global deployment whether hosted by Phase Forward or licensed by our customers. Most of our products employ HTTP and HTTPS architecture for end user access over a web interface. We use leading-edge programming technologies such as .NET framework, Java and XML, and established standards including service oriented architecture (SOA), C# and C++. A few of our products are client/server based and designed for controlled deployment internally on customer networks. All of our products operate with one or more database server(s) running either Oracle or SQL databases.

        Our products employ different reporting functionality, including proprietary reporting capabilities or third-party tools. For example, our InForm product is integrated with IBM's Cognos ReportNet® software. Our Phase Forward IRT product utilizes VXML standards to facilitate telephone and web integration. Certain products support multi-lingual interfaces, including Japanese. We design our products to meet emerging industry standards such as those published by the International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use ("ICH') and CDISC. For example, our Empirica Trace drug safety software and its Empirica Gateway module support electronic submissions to the FDA and to the EMEA Eudravigilance system using the ICH E2B message format.

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Competition

        The market for electronic data collection, clinical data management, drug safety and interactive response systems is highly competitive, rapidly evolving, fragmented and is subject to changing technology, shifting customer needs, changes in laws and regulations, and frequent introductions of new products and services. We compete with systems and paper-based processes utilized by existing or prospective customers, as well as other commercial vendors of electronic data capture applications, clinical data management systems, drug safety software and interactive response technology, including:

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vendors of electronic data capture, clinical data management, drug safety and interactive response product suites, particularly Oracle Clinical, a business unit of Oracle Corporation, and Perceptive Informatics, a subsidiary of PAREXEL International Corporation;



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vendors of stand-alone electronic data capture, data management, drug safety, Phase I clinic automation and interactive response products, such as: ArisGlobal LLC; Datatrak International, Inc.; DrugLogic, Inc.; Logos Technologies Ltd.; Medidata Solutions Worldwide, Inc.; and SAS Institute;



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systems developed internally by existing or prospective customers;



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CROs with internally developed or acquired electronic data capture solutions, clinical data management systems, drug safety systems, Phase I clinic automation solutions or interactive response technology; and



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consulting firms and systems integrators offering services for clinical trial or drug safety implementations.

        Our ability to remain competitive will depend to a great extent upon our ongoing performance in the areas of product development, customer support and service delivery. We believe that the principal competitive factors in our market include the following:

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the ability to provide a broad integrated clinical research suite from a single vendor;



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product functionality and breadth of integration among electronic data capture, clinical data management, drug safety and interactive response solutions;



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performance, security, scalability, flexibility and reliability of the solutions;



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low total cost of ownership and demonstrable benefits for customers;



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speed and ease of implementation and integration;



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reputation and financial stability of the vendor;



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global reach and depth of expertise and quality of consulting, help-desk, training and other services; and



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sales and marketing capabilities, and the quality of customer support.

        We believe that we generally compete favorably with our competitors on the basis of these factors. However, some of our competitors and potential competitors have greater name recognition, longer operating histories and significantly greater resources. There can be no assurance that our current or prospective competitors will not offer or develop products or services that are superior to, or that achieve greater market acceptance than, our products and services.

Government Regulation

        The software solutions that we design, market and sell are used by organizations that are subject to a complex array of U.S. federal and state laws and regulations, including regulation by the FDA, as well as additional regulations by foreign governments.

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        The conduct of clinical trials of drugs, biological products and medical devices is subject to regulation by the FDA and other regulatory bodies. Postmarket safety monitoring and reporting is also subject to regulation by FDA and other regulatory bodies. FDA regulations govern many aspects of the clinical trial process, including recordkeeping, reporting, data privacy, and protection of human subjects. Postmarket safety monitoring and reporting is also subject to various regulations. Use of our software products, services and hosted solutions by entities engaged in these activities must be done in a manner that is compliant with these regulations and should be done in a manner that follows applicable regulatory guidance. Failure to do so could, for example, have an adverse impact on a clinical trial sponsor's ability to obtain regulatory approval of new drugs, biological products or medical devices. If our product and service offerings fail to allow our customers and potential customers to operate in a manner that is compliant with applicable regulations and follows regulatory guidance, clinical trial sponsors and other entities engaged in clinical trial and safety monitoring activities may be unwilling to use our software products, services and hosted solutions. Accordingly, we design our product and service offerings to allow our customers and potential customers to operate in a manner that is compliant with applicable regulations and follows applicable regulatory guidance. We also expend considerable time and effort monitoring regulatory developments that could impact the use of our products and services by our customers and use this information in designing or modifying our product and service offerings.

        The following is an overview of some of the regulations that our customers and potential customers are required to comply with in the conduct of clinical trials and postmarket safety reporting, as well as in some of the other activities in which our customers may engage.

Government Regulation of Clinical Trials and Adverse Event Reporting

        Demand for our software products, services and hosted solutions is largely a function of the regulatory requirements associated with the investigation and approval of drugs, biologics and medical devices, as well as the monitoring of and reporting on the safety of these products. The clinical testing of drugs, biologics and medical devices is subject to regulation by the U.S. Food and Drug Administration, or FDA, and other governmental authorities worldwide. The use of software during the clinical trial process must adhere to the regulations pertaining to Good Clinical Practices and other various codified FDA regulations, and should adhere to regulatory guidance such as the Consolidated Guidance for Industry from the International Conference on Harmonisation regarding Good Clinical Practice for Europe, Japan and the United States and other guidance documents. The use of software to assist in postapproval adverse event reporting must adhere to FDA's adverse event reporting regulations for drugs, devices and biological products. Our products, services and hosted solutions are developed using our domain expertise and are designed to allow compliance with applicable rules and regulations, and conformance with applicable guidance. The foregoing regulations and regulatory guidance are subject to change at any time. Changes in regulations and regulatory guidance to either more or less stringent conditions could adversely affect our business and the software products, services and hosted solutions we make available to our customers. Further, a material violation by us or our customers of Good Clinical Practices could result in a warning letter from the FDA, the suspension or termination of clinical trials, investigator disqualification, debarment, the rejection or withdrawal of a product marketing application, criminal prosecution or civil penalties, any of which could have a material adverse effect on our business, results of operations or financial condition.

        In recent years, efforts have been made to streamline the drug approval process and coordinate U.S. standards with those of other developed countries. Changes in the level of regulation, including a relaxation in regulatory requirements or the introduction of simplified drug approval procedures, could have a material adverse effect on the demand for our software products, services and hosted solutions. Several competing proposals to reform the system of health care delivery in the United States have been considered and are currently being considered by Congress and the Executive Branch.

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To date, none of the proposals has been adopted. While it is difficult to predict the impact of any proposal which may be adopted in the future, proposals that cause or contribute to a reduction in clinical research and development expenditures could have a material adverse impact on the demand for our software products, services and hosted solutions. For example, proposals to place caps on drug prices could limit the profitability of existing or planned drug development programs, making investment in new drugs and therapies less attractive to pharmaceutical companies. Likewise, a proposal for government-funded universal health care could subject expenditures for health care to governmental budget constraints and limits on spending. Finally, the uncertainty surrounding the possible adoption and impact of any health care reforms could cause our customers to delay planned research and development until some of these uncertainties are resolved.

Regulation of the use of Electronic Systems in Clinical Trials

        In addition to the aforementioned regulations and regulatory guidance, the FDA has developed regulations and regulatory guidance concerning electronic records and electronic signatures. The regulations pertaining to electronic records and electronic signatures are codified in 21 CFR Part 11, and FDA recommendations incorporating 21 CFR Part 11 considerations into clinical trials are provided in a guidance document entitled Computerized Systems Used in Clinical Trials. This regulatory guidance stipulates that computerized systems used to create, modify, maintain, archive, retrieve or transmit clinical trial data intended for submission to the FDA must meet certain standards for attributability, accuracy, retrievability, traceability, inspectability, validity, security and dependability. Other guidance documents have been issued that also contain recommendations regarding the implementation of 21 CFR Part 11. We have designed our software to incorporate regulatory requirements and guidelines, but we cannot assure you that the design of our software solutions will continue to reflect regulatory requirements and guidelines as they change. Any changes in applicable regulations that are inconsistent with the design of any of our software solutions or which reduce the overall level of record-keeping or other controls or performances of clinical trials may have a material adverse effect on our business and operations. If we fail to offer solutions that allow our customers to comply with applicable regulations, it could result in the suspension or termination of on-going clinical trials, the disqualification of data for submission to regulatory authorities, or the withdrawal of approved marketing applications.

Regulation of the Internet

        The U.S. government and the governments of some states and foreign countries have also attempted to regulate activities on the Internet. Any new legislation or regulation regarding the Internet could decrease our potential revenues or otherwise harm our business, financial condition and operating results. For instance, proposed federal, state and foreign privacy regulations and other laws restricting the collection, use and disclosure of personal information could limit our customers' ability to use the information in our databases to generate revenues or subject us to additional administrative or compliance burdens or potential liabilities.

Regulation of Personally Identifiable and Medical Information

        Regulation of the use, protection and disclosure of personal and medical information is complex and growing. Federal legislation in the United States, known as the Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes a number of requirements on the use and disclosure of "protected health information" which is individually identifiable, including standards for the use and disclosure by the health care facilities and providers who are involved in clinical trials. HIPAA also imposes on these healthcare facilities and providers standards to assure the confidentiality of health information stored or processed electronically, including a series of administrative, technical and physical security procedures. There are also state privacy laws concerning personal and medical information that impose similar or additional requirements. This may affect us in several ways.

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Many users of our products and services are directly regulated under HIPAA and such state privacy laws, and to the extent our products cannot be utilized in a manner that is consistent with the users' HIPAA compliance requirements, our products will likely not be selected. In addition, we may be directly affected by HIPAA and similar state privacy laws, including recently adopted Massachusetts data security regulations, which impose stringent information security requirements to all businesses and persons that own, license, store or maintain certain personal information about Massachusetts residents. Under HIPAA and such state privacy laws, to the extent we perform functions or activities on behalf of customers that are regulated by these privacy laws, such customers may be required to obtain satisfactory assurance, in the form of a written agreement or certification that we will comply with a number of the same HIPAA or state law requirements. We may be burdened with compliance with such agreements or certifications, and breach of such an agreement or certification may result in contractual liability to our customer or other adverse consequences. Regulation of personal and medical information generally is increasing at the state and federal levels in the United States and elsewhere, and such regulations may negatively affect our business.

Intellectual Property

        Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing the proprietary rights of others. We rely upon a combination of trademark, trade secret, copyright, patent and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we attempt to protect our intellectual property and proprietary information by requiring our employees and consultants to enter into confidentiality, non-competition and assignment of inventions agreements. These legal protections afford only limited protection for our technology. We have registered trademarks and service marks in the United States and abroad, and applications for the registration of additional trademarks and service marks. Our principal trademarks are our company name "Phase Forward", the company name of our subsidiary, "Lincoln Technologies", and our product names, "InForm", "Clintrial", "Clintrace", "Empirica", "WebSDM", "LabPas", and "OutcomeLogix." We may or may not choose to register some or all of our trademarks. If we apply for trademark registration, we cannot predict whether registrations will be approved or, if approved, will provide meaningful protection. In addition, we have been granted a patent by the U.S. Patent and Trademark Office. We cannot predict whether this patent will provide meaningful protection. Our agreements with employees, consultants and others who participate in development activities could be breached. We may not have adequate remedies for any breach, and our trade secrets may otherwise become known or independently developed by our competitors or other third parties. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and effective copyright, patent, trademark and trade secret protection may not be available in those jurisdictions.

        We have licensed in the past, and expect that we may license in the future, certain of our proprietary rights, such as trademarks, technology or copyrighted material, to third parties. Due to rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product and service developments and enhancements to existing products and services are more important than the various legal protections of our technology to establishing and maintaining a technology leadership position.

        In addition, we license, and expect to continue to license, third-party technologies and other intellectual property rights that are incorporated into some elements of our services and solutions.

        Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our software solutions or to obtain and use information that we regard as proprietary. The laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Any such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, operating results or financial condition.

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There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology. Any failure to meaningfully protect our intellectual property and other proprietary rights could have a material adverse effect on our business, operating results or financial condition.

        In addition, if any of our software solutions is covered by third-party patents or other intellectual property rights, we could be subject to infringement actions. We cannot assure you that our software solutions do not infringe patents held by others or that they will not in the future. Any infringement claims made against us could cause us to incur substantial costs defending against the claim, even if the claim is without merit, and could distract our management from our business. Moreover, any settlement of or adverse judgment resulting from such claims could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology.

        Any required licenses, however, may not be available to us on acceptable terms, if at all. If we do not obtain any required licenses, we could encounter delays in product introductions if we attempt to design around the technology at issue or to find another provider of suitable alternative technology to permit us to continue offering the applicable software solution. In addition, we generally provide in our customer agreements that we will indemnify our customers against third-party infringement claims relating to our technology provided to the customer, which could obligate us to fund significant amounts.

Business Segments and Geographic Information

        We view our operations and manage our business as one operating segment. For information regarding net revenues by geographic regions for each of the last three years, see the notes to our 2009 consolidated financial statements contained in this Annual Report.

        For information regarding risks and dependencies associated with foreign operations, see risk factors listed in the "Item 1A. Risk Factors" contained in this Annual Report.

Employees

        As of December 31, 2009, we had a total of 939 employees, with 413 employees at our headquarters in Waltham, Massachusetts, 197 at other locations in the United States, and 329 employees in our Australia, Belgium, France, India, Japan, Romania and United Kingdom offices. Of these employees, 503 are in services, 218 are in research and development, 99 are in sales and marketing and 119 are in general and administration. We also retain outside contractors from time to time to supplement our services and research and development staff on an as needed basis. None of our employees are covered by a collective bargaining agreement. We consider our relations with our employees to be good.

Available Information

        We were incorporated in Delaware in 1997. We maintain a number of subsidiaries in the United States and abroad, including Lincoln Technologies, Inc., Clarix LLC, Waban Software, Inc. and Maaguzi LLC in the United States, Phase Forward Europe Limited in the United Kingdom, Phase Forward SAS in France, Phase Forward Software Services India Private Limited and Waban Software Private Limited in India, Phase Forward Pty. Limited in Australia, Phase Forward Japan KK in Japan, Phase Forward, SPRL in Belgium and Phase Forward Software SRL in Romania. We also maintain Phase Forward Securities Corporation, a Massachusetts securities corporation. Our Internet website address is http://www.phaseforward.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished

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pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as reports relating to our securities filed by others pursuant to Section 16 of such act, are available through the investor relations page of our internet website accessible at www.phaseforward.com free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the "SEC"). The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

Item 1A.    Risk Factors

        We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This discussion highlights some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer.

Risks Related to Our Company

Our operating results may fluctuate and could cause the market price of our common stock to fall rapidly and without notice.

        Our revenues and operating results are difficult to predict and may fluctuate from quarter to quarter, particularly because of the evolving market in which we operate and our term license model. Our results of operations in any given quarter will be based on a number of factors, including:

•

the timing and mix of license and services revenues, and the amount and type of service required in delivering certain projects;



•

changes in the timing of our operating expenses;



•

the impact of the current ongoing global financial crisis on our business and our customers' businesses;



•

the integration success of our recent acquisitions, and the timing, size and integration success of potential future acquisitions;



•

changes in our customers' purchasing patterns;



•

the financial condition of our current and potential customers;



•

our ability to introduce new products and services and enhancements to our existing products and services on a timely basis;



•

the timing of our product sales and the length of our sales and implementation cycles;



•

new competitors and introduction of enhanced products from new or existing competitors;



•

our ability to hire and retain qualified personnel;



•

changes in the regulatory environment related to the clinical trial and safety evaluation and monitoring market;



•

the extent to which our software products, services and hosted solutions achieve or maintain market acceptance; and



•

unforeseen legal expenses, including litigation costs.

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        A significant portion of our operating expenses are relatively fixed in nature and planned expenditures are based in part on expectations regarding future revenues. Accordingly, unexpected revenue shortfalls or operating expenses may decrease our gross margins and could cause significant changes in our operating results from quarter to quarter. Results of operations in any quarterly period should not be considered indicative of the results to be expected for any future period. In addition, our future quarterly operating results may fluctuate and may not meet the expectations of securities analysts or investors. If this occurs, the trading price of our common stock could fall substantially either suddenly or over time.

We may lose or delay revenues related to our hosted solutions and consulting services if our customers terminate or delay their contracted projects with us.

        Certain of our hosted and other service and consulting contracts are subject to cancellation by our customers at any time with limited notice. Entities engaged in clinical trials may terminate or delay a clinical trial for various reasons including the failure of the tested product to satisfy safety or efficacy requirements, unexpected or undesired clinical results, decisions to de-emphasize a particular product or forego a particular clinical trial, decisions to downsize clinical development programs, insufficient patient enrollment or investigator recruitment and production problems resulting in shortages of required clinical supplies. In the case of our hosted solutions, any termination or delay in the clinical trials would likely result in a consequential delay or termination in those customers' service contracts. We have experienced terminations and delays of our customer service contracts in the past and expect to experience additional terminations and delays in the future. Because we do not recognize any portion of a hosted service contract's revenues until the implementation cycle is complete, the termination or delay of our customers' clinical trials could result in decreased or delayed revenues under these contracts which could materially harm our business.

We may acquire or make investments in companies or technologies that could cause disruption of our business and loss of value or dilution to our stockholders.

        From time to time, we evaluate potential investments in, and acquisitions of, complementary technologies, services and businesses. We have made in the past, and may make in the future, acquisitions or significant investments in other businesses. For example, we acquired Lincoln Technologies, Inc., or Lincoln, in 2005, Green Mountain Logic, Inc., or Green Mountain, in 2007, Clarix LLC, or Clarix, in 2008, and each of Waban Software, Inc., or Waban, Maaguzi LLC, or Maaguzi, and the Interactive Voice and Web Response Service business of Covance, Inc. in 2009. Entering into an acquisition entails many risks, any of which could harm our business, including:

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difficulties in integrating the operations, technologies, products, existing contracts and personnel of the target company and realizing the anticipated synergies of the combined businesses;



•

managing the risks and challenges of entering markets or types of businesses in which we have limited or no direct experience;



•

the price we pay or other resources that we devote may exceed the value we eventually realize or the value we could have realized if we had allocated the purchase price or other resources to another opportunity;



•

potential loss of key employees, customers and strategic alliances from either our current business or the target company's business;



•

the diversion of management's attention from other business concerns; and



•

assumption of unanticipated problems or latent liabilities, such as problems with the quality of the target company's products.

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        In addition, we could discover deficiencies withheld from us in an acquisition due to fraud or otherwise not uncovered in our due diligence prior to the acquisition. These deficiencies could include problems in internal controls, data adequacy and integrity, product quality and regulatory compliance, any of which could result in us becoming subject to penalties or other liabilities. Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm our financial results. If any of the foregoing were to occur, our financial condition and results of operations could be materially adversely impacted. In addition, if we finance any future acquisitions by issuing equity securities or convertible debt, our existing stockholders may be diluted or the market price of our stock may be adversely affected. The failure to successfully evaluate and execute acquisitions or investments or otherwise adequately address these risks could materially harm our business and financial results.

The global nature of our business exposes us to multiple risks.

        For the year ended 2009, approximately 39% of our revenues were derived from international operations. For the same period, approximately 25% of our revenues were in currencies other than the U.S. dollar. We expect that our international operations will continue to account for a significant portion of our revenues. As a result of our international operations, we are exposed to many risks and uncertainties, including:

•

fluctuations in foreign currency exchange and interest rates;



•

the impact of the current global financial crisis on our business and our customers' businesses;



•

potential fluctuations in foreign economies;



•

difficulties in staffing, managing and supporting operations in multiple countries;



•

difficulties in enforcing agreements and collecting receivables through foreign legal systems and other relevant legal issues;



•

tariff and international trade barriers;



•

fewer legal protections for intellectual property and contract rights abroad;



•

different and changing legal and regulatory requirements in the jurisdictions in which we currently operate or may operate in the future;



•

difficulties in obtaining any necessary governmental authorizations for the export of our products to certain foreign jurisdictions;



•

government currency control and restrictions on repatriation of earnings; and



•

political and economic changes, hostilities and other disruptions in regions where we currently operate or may operate in the future.

        Negative developments in any of these areas in one or more countries could result in a reduction in demand for our software products, services and hosted solutions, the cancellation or delay of orders already placed, threats to our intellectual property, difficulty in collecting receivables, and a higher cost of doing business, any of which could adversely affect our business, results of operations or financial condition. Moreover, with regard to our international operations, we frequently enter into transactions in currencies other than the U.S. dollar and we incur operating expenses in currencies other than the U.S. dollar. This creates a foreign currency exchange risk for us that could have a material adverse effect on our results of operations and financial condition. Although from time to time, we enter into forward foreign exchange contracts to hedge the foreign currency exposure of non-U.S. dollar denominated third-party and intercompany receivables and cash balances, we cannot assure you that these contracts will be successful in mitigating our foreign currency exposure risk.

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Some of our investments are subject to significant market risk.

        At December 31, 2009, we held $135.5 million in cash, cash equivalents, short-term and long-term investments. Although we do not issue or invest in financial instruments or their derivatives for trading or speculative purposes, these assets are exposed to a variety of market risks, including changes in interest rates and the market value of our investments. In addition, included within our investment portfolio at December 31, 2008 and 2009 were $24.1 million and $23.8 million, respectively, of auction rate securities, or ARS, at par value. The types of ARS that we own are backed by student loans, 95% of which are guaranteed under the Federal Family Education Loan Program, and all had credit ratings of AAA (or equivalent) from a recognized rating agency. The ARS are classified as long-term investments and short-term investments in our accompanying consolidated balance sheet included in this Annual Report for the year ended December 31, 2008 and 2009, respectively, and are recorded at fair market value. Historically, the carrying value of ARS approximated fair market value due to the frequent resetting of the interest rates. The auctions have historically provided a liquid market for these securities as investors could readily sell their investments at auction. Auctions are held every 28 days. Following successful auctions in January 2008, substantially all of our ARS have subsequently experienced failed auctions, as the amount of securities submitted for sale has exceeded the amount of purchase orders due to the liquidity issues experienced in the global credit and capital markets. The result of a failed auction is that these ARS continue to pay interest in accordance with their terms until the next successful auction; however, liquidity will be limited until there is a successful auction or until such time as other markets for these ARS investments develop, unless an alternative liquidation opportunity is presented to the ARS holder. We performed a fair value calculation of our ARS as of December 31, 2008 and concluded that the fair value was $18.0 million, a decline of $6.0 million from par value. As of December 31, 2009, $0.3 million of the ARS were called by the respective issuers at par value and we concluded that the fair value of the remaining ARS was $19.4 million. As a result of the recent instability in the market for auction rate securities, there may be a future decline in the value of our auction rate securities. A further decline in the value of these securities that is not temporary could materially adversely affect our liquidity and income.

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

Ongoing uncertainty in the financial markets in the United States and elsewhere in the world may adversely affect our operating results and financial condition.

        As widely reported, financial markets in the United States, Europe and Asia have been experiencing ongoing disruption and uncertainty in the last two years, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. Governments have taken unprecedented actions intended to address extreme market conditions that include severely restricted credit and declines in real estate values. While currently these conditions have not impaired our ability to access credit markets and finance operations, there can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies. These economic developments affect businesses in a number of ways. The current tightening of credit in financial markets adversely affects the ability of our customers and suppliers to obtain financing for significant purchases and operations, and could result in a decrease in demand for our products and services.

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Our customers' ability to pay for our software solutions may also be impaired, which may lead to an increase in our allowance for doubtful accounts and write-offs of accounts receivable. Our global business is also adversely affected by decreases in the general level of economic activity, such as decreases in business and consumer spending. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions in the United States and other countries. Should these economic conditions result in our not meeting our revenue growth objectives, our operating results and financial condition could be adversely affected.

The loss of one or more major customers could materially and adversely affect our results of operations and financial condition.

        Our top five customers accounted for approximately 28% of our revenues during 2009. The loss of any of our major customers could have a material adverse effect on our results of operations or financial condition. We may not be able to maintain our customer relationships, and our customers may delay performance under or fail to renew their agreements with us, which could adversely affect our results of operations or financial condition. Any reduction in the amount of revenue that we derive from these customers, without an offsetting increase in new sales to other customers, could have a material adverse effect on our operating results. A significant change in the liquidity or financial position of any of these customers could also have a material adverse effect on the collectability of our accounts receivables, our liquidity and our future operating results.

Our business could be seriously harmed by our dependence on a limited number of suppliers.

        We depend upon a limited number of suppliers for specific components of our software products and hosted solutions. We may increase our dependence on certain suppliers as we continue to develop and enhance our software and service solutions. Our dependence on a limited number of suppliers leaves us vulnerable to having an inadequate supply of required components, services capacity, price increases, delayed supplier performance and poor component and services quality. For instance, we rely on Oracle Corporation to supply the database component of most of our software solutions and on SunGard Data Systems Inc. to provide server facilities for some of our hosting services. Oracle Corporation also offers a software package that is competitive with our products and services. If we are unable to obtain components for our software solutions from third-party suppliers in the quantities and of the quality that we need, on a timely basis or at acceptable prices, we may not be able to deliver our software products, services and hosted solutions on a timely or cost-effective basis to our customers, and our business, results of operations and financial condition could be seriously harmed. Moreover, delays or interruptions in our service, including without limitation delays or interruptions resulting from a change in suppliers, may reduce our revenues, cause customers to terminate their contracts and adversely affect our customer renewals. If these companies were to terminate their arrangements with us or we were otherwise required to find alternative suppliers to provide the required capacity and quality on a timely basis, sales of our products and services would be delayed. To qualify a new supplier and familiarize it with our products, quality standards and other requirements is a costly and time-consuming process. We cannot assure you that we would be able to establish alternative relationships on acceptable terms.

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Interruptions or delays in service from our third-party providers could impair the delivery of our hosted solutions and other services and harm our business.

        We host some of our software solutions and information technology systems at third-party facilities. Consequently, the occurrence of a natural disaster, technical or service lapses, other unanticipated problems at the facilities of our third-party providers or a combination of one or more of the foregoing factors could result in unanticipated interruptions in our customers' access to our hosted solutions or impair our access to our information technology systems. Our hosted services may also be subject to sabotage, intentional acts of malfeasance and similar misconduct due to the nature of the Internet. In the past, Internet users have occasionally experienced difficulties with Internet and online services due to system or security failures. We cannot assure you that our business interruption insurance will adequately compensate our customers or us for losses that may occur. Even if covered by insurance, any failure or breach of security of our systems could damage our reputation and cause us to lose customers. Further, certain of our hosted solutions are subject to service level agreements that guarantee up to 99% server availability. In the event that we fail to meet those levels, whether resulting from an interruption in service caused by our technology or that of a third-party provider, we could be subject to customer credits or termination of these customer contracts.

We may be required to spend substantial time and expense before we recognize a significant portion of the revenues, if any, attributable to our customer contracts.

        The sales cycle for some of our software solutions frequently takes in excess of nine months from initial customer contact to contract execution. During this time, we may expend substantial time, effort and financial resources without realizing any revenues with respect to the potential sale. In addition, while we generally begin recognizing revenues upon the execution of our agreements for software term licenses and related services, it may be difficult for us to rapidly increase our revenues through additional sales in any period, as license revenues and, when applicable, related services revenues, from new customers are recognized over the applicable license term, typically one to five years. As a result, we may not recognize significant revenues, if any, from some customers despite incurring considerable expense related to our sales, implementation, and service delivery processes. Even if we do realize revenues from a contract, our term license model may keep us from recognizing a significant portion of these revenues (including revenues for related services) during the same period in which sales, implementation, and service delivery expenses were incurred. Timing differences of this nature could cause our service gross margins and profitability to fluctuate significantly from quarter to quarter. In addition, if we enter into an agreement with a customer that specifies or otherwise requires that we deliver a specific product or version that is not yet generally available, our term license pricing model may prevent us from recognizing a significant portion of the license and related service revenues under that contract until delivery of such specified product or version occurs. Accordingly, delays in product or version release dates, whether caused by factors such as unforeseen technology issues or otherwise, could further negatively impact the timing of our revenue under such contracts. Similarly, a decline in new or renewed software term licenses in any one quarter will not necessarily be fully reflected in the revenues in that quarter and may negatively affect our revenues in future quarters. This could also cause our operating results to fluctuate from quarter to quarter.

Failure of our technology and products could harm our business and operating results.

        The technology underlying our software products and hosted solutions processes vast amounts of clinical and safety data. Customers relying on our products to collect, manage and report clinical and safety information, randomize patients, and manage inventory and clinical trial operations may have a greater sensitivity to product errors and security vulnerabilities than customers of software products in general. In the past, failures of our technology and human error have negatively impacted the data capture, management or reporting capabilities of our products, and new errors may be detected in the future.

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Any delay or failure of our technology may result in the disruption of our customers' clinical trial or safety evaluation and monitoring processes and could harm our business and operating results. Product or service errors, as well as any difficulties in introducing, installing and maintaining new products and versions or difficulties training customers and their staffs on the utilization of new products and versions, could materially and adversely affect our reputation, result in loss of revenue or delay in revenue recognition, result in significant costs to us and impair our ability to sell our products and services in the future. The costs incurred in correcting any defects or errors may be substantial and could adversely affect our operating margins. In addition, security breaches, whether intentional or accidental, could expose us to a risk of loss of data, litigation and possible liability.

If we are unable to retain our personnel and hire additional skilled personnel, we may be unable to achieve our goals.

        Our future success depends upon our ability to attract, train and retain highly skilled employees and contract workers, particularly our management team, sales and marketing personnel, professional services personnel and software engineers. Each of our executive officers and other employees could terminate his or her relationship with us at any time. The loss of any member of our management team might significantly delay or prevent the achievement of our business or development objectives and could materially harm our business. In addition, because of the technical nature of our software products, services and hosted solutions and the dynamic market in which we compete, any failure to attract and retain qualified direct sales, professional services and product development personnel, as well as our contract workers, could have a material adverse affect on our ability to generate sales, successfully develop new software products, services and hosted solutions or software enhancements or deliver services and solutions as requested by our customers.

Our software products and hosted solutions are at varying stages of market acceptance and the failure of any of our products to achieve or maintain wide acceptance would harm our operating results.

        We began offering our InForm electronic data capture software solution for clinical trials in December 1998. Although the Clintrial and Empirica Trace products were introduced over 10 years ago, we did not begin offering these products until after our acquisition of Clinsoft Corporation, or Clinsoft, in 2001. We began offering our, Empirica Signal, Empirica Study and WebSDM products after our August 2005 acquisition of Lincoln, our LabPas product after our October 2007 acquisition of Green Mountain, our IRT solution after our September 2008 acquisition of Clarix, our Clinical Development Center solution after our April 2009 acquisition of Waban, and our OutcomeLogix solution after our July 2009 acquisition of Maaguzi. Continued use of our InForm, Clintrial, WebSDM an Empirica software products and, and broad and timely acceptance of our LabPas, Phase Forward IRT, Clinical Development Center and OutcomeLogix products, as well as integrated solutions combining one or more of our software products, is critical to our future success and is subject to a number of significant risks, some of which are outside our control. These risks include:

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our customers' and prospective customers' desire for and acceptance of our electronic data capture, clinical data management, drug safety and interactive response technology solutions;



•

our ability to meet product development and release schedules;



•

our software products and hosted solutions' ability to support large numbers of users and manage vast amounts of data;



•

our ability to significantly expand our internal resources and increase our capital and operating expenses to support the anticipated growth and continued integration of our software products, services and hosted solutions; and

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•

our customers' ability to use our software products and hosted solutions, train their employees and successfully deploy our technology in their clinical trial and safety evaluation and monitoring activities.

        Our failure to address, mitigate or manage these risks would seriously harm our business, particularly if the failure of any or all of our software products or hosted solutions to achieve market acceptance negatively affects our sales of our other products and services.

Failure to manage our rapid growth effectively could harm our business.

        We have been experiencing an ongoing period of rapid growth as a result of personnel hiring and acquisitions that places a significant strain on our operational and financial resources and our personnel. For example, in the year ended 2009 alone, the number of our employees increased from 718 to 939. We have also experienced rapid growth in the number of clinical trials we host, the number of customer relationships we manage and the number of end-users of our products. To manage our anticipated future growth effectively, we must continue to maintain and may need to enhance our information technology infrastructure, financial and accounting systems and controls and manage expanded operations in geographically distributed locations. We will also be required to attract, integrate, train and retain a significant number of qualified sales and marketing personnel, professional services personnel, software engineers and other management personnel. Our failure to manage our rapid growth effectively could have a material adverse effect on our business, operating results or financial condition.

Claims that we or our technologies infringe upon the intellectual property or other proprietary rights of a third party may require us to incur significant costs, to enter into royalty or licensing agreements or to develop or license substitute technology.

        We have been, and may in the future be, subject to claims that our technologies infringe upon the intellectual property or other proprietary rights of a third party. For instance, in February 2006, we settled a lawsuit against us and one of our customers which alleged that we infringed a patent claimed to be owned by the plaintiffs. We incurred substantial professional fees in connection with this claim and agreed to make a one-time payment of $8.5 million in order to settle this litigation. In addition, the vendors who provide us with technology that we use in our technology could become subject to similar infringement claims. Although we believe that our software solutions do not infringe the patents or other intellectual property rights of any third party, we cannot assure you that our technology does not infringe patents or other intellectual property rights held or owned by others or that they will not in the future. Any future claims of infringement could cause us to incur substantial costs defending against the claim, even if the claim is without merit, and could distract our management from our business. Moreover, any settlement or adverse judgment resulting from the claim could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. There can be no assurance that we would be able to obtain a license from the third party asserting the claim on commercially reasonable terms, if at all, that we would be able to successfully develop alternative technology on a timely basis, if at all, or that we would be able to obtain a license from another provider of suitable alternative technology to permit us to continue offering, and our customers to continue using, the applicable technology. In addition, we generally provide in our customer agreements that we will indemnify our customers against third-party infringement claims relating to our technology provided to the customer, which could obligate us to fund significant amounts. Infringement claims asserted against us or our vendors may have a material adverse effect on our business, results of operations or financial condition.

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We may be unable to adequately protect, and we may incur significant costs in defending, our intellectual property and other proprietary rights.

        Our success depends on our ability to protect our intellectual property and other proprietary rights. We rely upon a combination of trademark, trade secret, copyright, patent and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we attempt to protect our intellectual property and proprietary information by requiring certain of our employees and consultants to enter into confidentiality, non-competition and assignment of inventions agreements. To the extent that our intellectual property and other proprietary rights are not adequately protected, third parties might gain access to our proprietary information, develop and market products or services similar to ours, or use trademarks similar to ours, each of which could materially harm our business. Existing U.S. federal and state intellectual property laws offer only limited protection. Moreover, the laws of other countries in which we market our software products, services and hosted solutions may afford little or no effective protection of our intellectual property. If we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, the proceedings could be burdensome and expensive, even if we were to prevail. The failure to adequately protect our intellectual property and other proprietary rights may have a material adverse effect on our business, results of operations or financial condition.

In the course of conducting our business, we possess or could be deemed to possess personal medical information in connection with the conduct of clinical trials, which if we fail to keep properly protected, could subject us to significant liability.

        Our software solutions are used to collect, manage and report information in connection with the conduct of clinical trial and safety evaluation and monitoring activities. This information is or could be considered to be personal medical information of the clinical trial participants or patients. Regulation of the use and disclosure of personal medical information is complex and growing. Increased focus on individuals' rights to confidentiality of their personal information, including personal medical information, could lead to an increase of existing and future legislative or regulatory initiatives giving direct legal remedies to individuals, including rights to damages, against entities deemed responsible for not adequately securing such personal information. In addition, courts may look to regulatory standards in identifying or applying a common law theory of liability, whether or not that law affords a private right of action. Since we receive and process personal information of clinical trial participants and patients from customers utilizing our hosted solutions, there is a risk that we could be liable if there were a breach of any obligation to a protected person under contract, standard of practice or regulatory requirement. If we fail to properly protect this personal information that is in our possession or deemed to be in our possession, we could be subjected to significant liability.

We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders.

        We anticipate that our current cash and cash equivalents will be sufficient to meet our current needs for general corporate purposes for at least the next twelve months. However, we may need or desire additional financing to execute on our current or future business strategies, including to:

•

enhance our operating infrastructure;



•

develop new or enhance existing software products, services and hosted solutions; or



•

otherwise respond to competitive pressures; or



•

acquire businesses or technologies.

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        If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we incur debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our business activities. We cannot assure you that additional financing will be available on terms favorable to us, or at all. In this regard, the availability of such financing may be adversely impacted by current economic conditions, including the effects of the recent disruptions to the credit and financial markets in the United States and worldwide. If adequate funds are not available or are not available on acceptable terms, when we desire them, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our software products, services and hosted solutions, or otherwise respond to competitive pressures would be significantly limited.

We could incur substantial costs resulting from product liability claims relating to our products or services or our customers' use of our products or services.

        Any failure or errors in a customer's clinical trial, post-approval or adverse event reporting obligations caused or allegedly caused by our products or services could result in a claim for substantial damages against us by our customers or the clinical trial participants, regardless of our responsibility for the failure. Although we are generally entitled to indemnification under our customer contracts against claims brought against us by third parties arising out of our customers' use of our products, we might find ourselves entangled in lawsuits against us that, even if unsuccessful, divert our resources and energy and adversely affect our business. Further, in the event we seek indemnification from a customer, we cannot assure you that a court will enforce our indemnification right if challenged by the customer obligated to indemnify us or that the customer will be able to fund any amounts for indemnification owed to us. We also cannot assure you that our existing general liability insurance coverage will continue to be available on reasonable terms or will be available in amounts sufficient to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim.

We and our products and services could be subjected to governmental regulation, requiring us to incur significant compliance costs or to cease offering our products and services.

        The clinical trial process and safety evaluation, monitoring and reporting activities are subject to extensive and strict regulation by the FDA, as well as other regulatory authorities worldwide. Our electronic data capture, management and safety products and services could be subjected to state, federal and foreign regulations. We cannot assure you that our products and service offerings will comply with applicable regulations and regulatory guidelines as they develop or as they may be applied in the future. If our products or services fail to comply with any applicable government regulations or guidelines, we could incur significant liability or be forced to cease offering our applicable products or services. Also, conforming our products and services to any applicable regulations and guidelines could substantially increase our operating expenses.

        In recent years, efforts have been made to streamline the drug approval process and coordinate U.S. standards with those of other developed countries. Changes in the level of regulation, including a relaxation in regulatory requirements or the introduction of simplified drug approval procedures, could have a material adverse effect on the demand for our software products, services and hosted solutions. Several competing proposals to reform the system of health care delivery in the United States have been considered and are currently being considered by Congress and the Executive. To date, none of the proposals has been adopted. While it is difficult to predict the impact of any proposal which may be adopted in the future, proposals that cause or contribute to a reduction in clinical research and development expenditures could have a material adverse impact on the demand for our software products, services and hosted solutions.

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For example, proposals to place caps on drug prices could limit the profitability of existing or planned drug development programs, making investment in new drugs and therapies less attractive to pharmaceutical companies. Likewise, a proposal for government-funded universal health care could subject expenditures for health care to governmental budget constraints and limits on spending. Finally, the uncertainty surrounding the possible adoption and impact of any health care reforms could cause our customers to delay planned research and development until some of these uncertainties are resolved.

Risks Related to Our Industry

We depend primarily on the pharmaceutical, biotechnology and medical device industries and are therefore subject to risks relating to changes in these industries.

        Our business depends on the clinical trial, post-approval and safety evaluation and monitoring activities conducted or sponsored by pharmaceutical, biotechnology and medical device companies and other entities engaged in these activities. General economic downturns, increased consolidation or decreased competition in the industries in which these companies operate could result in fewer products under development or decreased pressure to accelerate product approval which, in turn, could materially adversely impact our revenues. Recent disruptions in the world credit and equity markets as well as the related failures of several large financial institutions may also result in a global downturn in spending on clinical trial, post-approval and safety evaluation and monitoring activities. Any significant downturn in demand and spending for such solutions could lead to increased pressure on us to reduce prices or offer reduced services, and could adversely affect our business, results of operations, and financial condition. The adverse effects of any sustained downturn in demand or spending may be exacerbated by our research and development investments, strategic investments and merger and acquisition activity, as well as customer service and support, which may continue at the same or greater spending levels despite any such downturn. Our operating results may also be adversely impacted by other developments that affect these industries generally, including:

•

changes in general business conditions;



•

the discovery of safety issues with approved products or products in clinical development;



•

changes in the purchasing patterns of entities conducting clinical research and monitoring safety;



•

changes in government regulation;



•

the assertion of product liability claims;



•

changes in governmental price controls or third-party reimbursement practices; and



•

changes in medical practices.

        In addition, any decrease in research and development expenditures or in the size, scope or frequency of clinical trial, post approval and safety evaluation and monitoring activities conducted or sponsored by pharmaceutical, biotechnology or medical device companies or other entities as a result of the foregoing or other factors could materially adversely affect our operations or financial condition.

We operate in a highly competitive industry and if we are not able to compete effectively, our business and operating results will be harmed.

        The market for our software products, services and hosted solutions is characterized by rapidly changing technologies, evolving industry standards and frequent new product and service introductions and enhancements that may render existing products and services obsolete. Accordingly, we are susceptible to rapid and significant declines in market share due to unforeseen changes in the features, functions or pricing of competing products.

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Barriers to entry are relatively low and, with the introduction of new technologies and new market entrants, we expect that competition will increase. Increased competition is likely to result in pricing pressures, which could negatively impact our sales, gross margins or market share. Our failure to compete effectively could materially adversely affect our business, financial condition or results of operations.

        Some of our current competitors, as well as many of our potential competitors, have greater name recognition, longer operating histories and significantly greater resources. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, regulations and laws, or customer requirements. In addition, current and potential competitors have established, and may in the future establish, cooperative relationships with vendors of complementary products, technologies or services to increase the availability of their products to the marketplace. Accordingly, new competitors or alliances may emerge that have greater market share, larger customer bases, more widely adopted proprietary technologies, greater marketing expertise and larger sales forces than we have, which could put us at a competitive disadvantage. Further, in light of these advantages, even if our products and services are more effective than the product or service offerings of our competitors, current or potential customers might accept competitive products and services in lieu of purchasing our software products, services and hosted solutions. We cannot assure you that we can maintain or enhance our competitive position against current and future competitors.

Changing customer or prospective customer requirements could decrease the demand for our products and services, which would adversely affect our revenues and operating results.

        Our future success will depend in large part on our ability to enhance and broaden our software products, services and hosted solutions to meet the evolving needs of our customers and prospective customers. To achieve our goals, we need to effectively respond to our customers' and prospective customers' needs, technological changes and new industry standards and developments in a timely manner. If we are unable to enhance our existing product and service offerings or develop or acquire new products and services to meet changing requirements, demand for our software products, services and hosted solutions could suffer and our revenues and operating results could be materially adversely affected. We could also incur substantial costs if we need to modify our products or services, or information technology infrastructure, to adapt to technological changes or new industry standards or developments.

Changes in regulations and regulatory guidance applicable to our customers or potential customers and the approval process for their products may result in our inability to continue to do business.

        Demand for our software products, services and hosted solutions is largely a function of regulation and regulatory guidance associated with the approval and safety tracking of drugs, biological products and medical devices imposed upon the clinical trial process and post-approval activities by the U.S. federal government and related regulatory authorities such as the U.S. Food and Drug Administration, or FDA, and by foreign governments. In recent years, efforts have been made to streamline the FDA approval process and coordinate U.S. standards with those of other developed countries. Any change in the scope of applicable regulations and regulatory guidance could alter the type or amount of clinical trial or safety evaluation and monitoring spending or negatively impact interest in our software products, services and hosted solutions. Any regulatory reform that limits or reduces the research and development or safety spending of our customers or potential customers upon which our business depends could have a material adverse effect on our revenues or gross margins.

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        In addition, any failure to conform our software products, services and hosted solutions to domestic or international changes in regulations and regulatory guidance applicable to our customers or potential customers and the approval process for their products may result in our inability to continue to do business. Changing our software products, services and hosted solutions to allow our customers to comply with future changes in regulation or regulatory guidance, either domestically or internationally, could cause us to incur substantial costs. We cannot assure you that our product and service offerings will allow our customers and potential customers to stay in compliance with regulations and regulatory guidance as they develop. If our product and service offerings fail to allow our customers and potential customers to operate in a manner that is compliant with applicable regulations and regulatory guidance, clinical trial sponsors and other entities engaged in clinical trial and safety evaluation and monitoring activities may be unwilling to use our software products, services and hosted solutions.

Consolidation among our clients could cause us to lose clients, decrease the market for our products and result in a reduction of our revenues.

        Our customer base could decline because of consolidation, and we may not be able to expand sales of our products and services to new clients. Consolidation in the pharmaceutical, biotechnology and medical device industries and among CROs has increased in recent years, and this trend could continue in light of the global economic downturn. In addition, new companies or organizations that result from such consolidation may decide that our products and services are no longer needed because of their own internal processes or the use of alternative systems. As these entities consolidate, competition to provide products and services to industry participants will become more intense and the importance of establishing relationships with large industry participants will become greater. These industry participants may try to use their market power to negotiate price reductions for our products and services. Also, if consolidation of larger current customers occurs, the combined organization may represent a larger percentage of business for us and, as a result, we are likely to rely more significantly on the combined organization's revenues to continue to achieve growth.

Risks Related to our Common Stock

The market price and trading volume of our common stock may be volatile, which could result in substantial losses for investors purchasing shares in the public markets and subject us to securities class action litigation. The current market price of our common stock may not be indicative of future market prices and we may be unable to sustain or increase the value of an investment in our common stock.

        The trading price of our common stock may fluctuate significantly and, accordingly, may not be indicative of future trading prices and we may be unable to sustain or increase the value of an investment in our common stock. Some of the factors that may cause the market price of our common stock to fluctuate include:

•

changes in general economic, industry and market conditions;



•

changes in estimates of our financial results or recommendations by securities analysts;



•

changes in estimates of the market size and opportunities available to us;



•

guidance of our expected future results, which is different than reported expectations of securities analysts



•

investors' general perception of us;



•

financial results that are below estimates of such results;



•

period-to-period fluctuations in our financial results or those of companies that are perceived to be similar to us;



•

changes in market valuations of similar companies;

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•

announcements by us or our competitors of significant products, contracts, acquisitions or strategic alliances;



•

success of competitive products and technologies;



•

future issuances of securities or the incurrence of debt by us, or other changes in our capital structure;



•

the failure of any of our software products, services and hosted solutions to achieve or maintain commercial success;



•

regulatory developments in the United States and foreign countries;



•

additions or departures of key personnel; and



•

litigation involving our company or our general industry or both.

        In addition, the stock market in general, and the NASDAQ Stock Market and the market for technology companies in particular, have experienced extreme price and volume fluctuations that may have been unrelated or disproportionate to the operating performance of the listed companies. There have been dramatic fluctuations in the market prices of securities of technology companies such as us. These price fluctuations may be rapid and severe and may leave investors little time to react. Broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. Sharp drops in the market price of our common stock expose us to securities class-action litigation. Such litigation could result in substantial expenses and a diversion of management's attention and resources, which would seriously harm our business, financial condition, and results of operations.

Sales of large blocks of our common stock could cause the market price of our common stock to drop significantly, even if our business is doing well.

        Some stockholders may acquire or own large blocks of shares of 5% or more of our outstanding capital. We cannot predict the effect that public sales of these shares or the availability of these shares for sale will have on the market price of our common stock, if any. If our stockholders, and particularly our directors and officers, sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business.

        In the future, we may also issue additional shares to our employees, directors or consultants, in connection with corporate alliances or acquisitions, and issue additional shares in follow-on offerings to raise additional capital. Due to these factors, sales of a substantial number of shares of our common stock in the public market could occur at any time. Such sales could reduce the market price of our common stock.

        On November 3, 2009, our board of directors authorized the repurchase of up to $40.0 million of our common stock, par value $0.01 per share, through a share repurchase program. We completed this repurchase program on February 16, 2010. In 2009, 942,862 shares of our common stock had been purchased as part of this repurchase program at an average price of $14.86 per share. On February 12, 2010, our board of directors increased the amount available under the share repurchase program by an additional $25.0 million. As authorized by the program, shares may be purchased in the open market or through privately negotiated transactions in a manner consistent with applicable securities laws and regulations, including pursuant to a Rule 10b5-1 plan. This share repurchase program does not obligate us to acquire any specific number of shares and may be extended, suspended or discontinued at any time. All repurchases are expected to be funded from cash and cash equivalents.

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While our board of directors has approved the share purchasing guidelines, the timing of the repurchases and the exact number of shares of common stock to be purchased will be determined at our management's discretion, and will depend upon market conditions and other factors, including price, corporate and regulatory requirements and alternative investment opportunities. The new repurchase program is currently scheduled to terminate on December 31, 2010.

Delaware law and our corporate documents may prevent or frustrate a change in control or a change in management that stockholders believe is desirable.

        Provisions of our certificate of incorporation and bylaws and Delaware law may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:

•

limitations on the removal of directors;



•

advance notice requirements for stockholder proposals and nominations;



•

the inability of stockholders to act by written consent or to call special meetings; and



•

the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval, which could be used to institute a stockholders rights plan, or a poison pill, that would work to dilute the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our board of directors.

        The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions of our certificate of incorporation. In addition, absent approval of our board of directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote.

        In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

        The existence of the foregoing provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.

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Item 1B.    Unresolved Staff Comments

        As of the date of the filing of this Annual Report, there were no unresolved comments regarding our periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of our 2009 fiscal year.

Item 2.    Properties

        Our corporate headquarters are located at 77 Fourth Avenue, Waltham, Massachusetts, where we lease approximately 165,129 square feet. The term of the lease expires in 2019, subject to extension under certain conditions for up to two additional five-year terms. We also lease approximately 44,907 square feet of office space in West Conshohocken, Pennsylvania. The term of this lease expires in 2019, subject to extension under certain conditions for up to two additional five-year terms. In addition we lease approximately 14,960 square feet of office space in Maidenhead, England under a lease that expires in May 2012, and we lease smaller offices for our regional locations and individual offices in various locations to accommodate field sales and service personnel. We believe these facilities and additional or alternative space available to us will be adequate to meet our needs for the foreseeable future.

Item 3.    Legal Proceedings

        From time to time and in the ordinary course of business, we are subject to various claims, charges and litigation. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, we do not believe that we are currently a party to any material legal proceedings.

Item 4.    Submission of Matters to a Vote of Security Holders

        No matters were submitted to a vote of security holders in the quarter ended December 31, 2009.

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PART II

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

Stock Market Information

        Our common stock is traded on the NASDAQ Global Select Market under the symbol PFWD. Prior to January 2, 2009 our common stock was traded on the NASDAQ Global Market. The following table sets forth the high and low sales prices as quoted on the NASDAQ Global Market for the periods indicated, as adjusted to the nearest cent. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

        On February 19, 2010 the last reported sale price of our common stock on The NASDAQ Global Select Market was $12.02 per share.

Holders

        As of February 19, 2010 there were approximately 142 stockholders of record of our common stock based on the records of our transfer agent.

Dividends

        We currently intend to retain any earnings to fund the operation, development, and expansion of our business. We have not paid any cash dividends on our capital stock in the last two fiscal years and do not currently anticipate paying any cash dividends on our capital stock in the foreseeable future.

Issuer Purchases of Equity Securities

        Under the terms of our 2004 Amended and Restated Stock Option and Incentive Plan, or the 2004 Plan, we have issued shares of restricted stock to our employees. On the date that these restricted shares vest, we withhold, via a net exercise provision pursuant to our applicable restricted stock agreements and the 2004 Plan, the number of vested shares (based on the closing price of our common stock on such vesting date) equal to tax withholdings required by us. Up until May 2009 the shares withheld from the grantees to settle their tax liability were reallocated to the number of shares available for issuance under the 2004 Plan; in May 2009 the 2004 Plan was amended and shares withheld from the grantees to settle taxes are no longer reallocated to the number of shares available for issuance. For the year ended December 31, 2009, we withheld an aggregate of 204,623 common shares under restricted stock awards at an average price of $14.11 per share.

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers

        On November 3, 2009, our board of directors authorized the repurchase of up to $40.0 million of our common stock, par value $0.01 per share, through a share repurchase program. We completed this repurchase program on February 16, 2010. In 2009, 942,862 shares of our common stock had been purchased as part of this repurchase program at an average price of $14.86 per share. On February 12, 2010, our board of directors increased the amount available under the share repurchase program by an additional $25.0 million. As authorized by the program, shares may be purchased in the open market or through privately negotiated transactions in a manner consistent with applicable securities laws and regulations, including pursuant to a Rule 10b5-1 plan maintained by us.

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

        Through February 16, 2010, we repurchased 2,877,569 shares of our common stock for an aggregate purchase price, including applicable brokers' fees, of $40.0 million pursuant to this stock repurchase program.

        The following table sets forth our purchases of equity securities for the three months ended December 31, 2009:

Equity Compensation Plan Information

        See Part III, Item 12 for information regarding securities authorized for issuance under our equity compensation plans.

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Stock Performance Graph

        The information contained in the performance graph shall not be deemed to be "soliciting material" or to be "filed" with the Securities and Exchange Commission, and such information shall not be incorporated by reference into any future filing under the Securities Act or Exchange Act, except to the extent that Phase Forward specifically incorporates it by reference into such filing.

        This graph compares the performance of Phase Forward common stock with the performance of the NASDAQ Composite Index and the NASDAQ Computer & Data Processing Stocks Index. This graph assumes a $100 investment in Phase Forward common stock at the $8.17 per share closing price on December 31, 2004. Historical stock performance is not necessarily indicative of future price performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Phase Forward Incorporated, The NASDAQ Composite Index
And The NASDAQ Computer & Data Processing Index

*

$100 invested on 12/31/04 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

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Item 6.    Selected Financial Data

SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)

        The selected historical financial data set forth below as of December 31, 2008 and 2009 and for the years ended December 31, 2007, 2008 and 2009 are derived from our audited consolidated financial statements, which are included elsewhere in this Annual Report. The selected historical financial data set forth below as of December 31, 2005, 2006 and 2007 and for the years ended December 31, 2005 and 2006 are derived from audited consolidated financial statements, which are not included in this Annual Report.

        The following selected consolidated financial data should be read in conjunction with our consolidated financial statements, the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations "included elsewhere in this Annual Report. The historical results are not necessarily indicative of the results to be expected for any future period.

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(1)

On August 25, 2005, we acquired all of the outstanding capital stock of Lincoln Technologies, Inc. ("Lincoln"). Accordingly, the results of Lincoln have been included in the accompanying consolidated financial statements since the date of acquisition.

(2)

Cost of revenues and operating expenses include stock-based compensation expense, as follows: