UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2010

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

For the transition period from to

Commission File Number: 000-50839

Phase Forward Incorporated

(Exact name of registrant as specified in its charter)

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

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

(888) 703-1122

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer x		Accelerated filer o

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

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

As of August 2, 2010, the registrant had 43,802,827 shares of common stock outstanding.

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PHASE FORWARD INCORPORATED

QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended June 30, 2010

		Page Number
Part I—Financial Information

Item 1.	Condensed Consolidated Balance Sheets as of December 31, 2009 (unaudited) and June 30, 2010 (unaudited)	3

	Condensed Consolidated Statements of Income for the three and six months ended June 30, 2009 (unaudited) and June 30, 2010 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 (unaudited) and June 30, 2010 (unaudited)	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37

Item 4.	Controls and Procedures	38

Part II—Other Information

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	40

Item 5.	Other Information	40

Item 6.	Exhibits	41

Signatures		42

Exhibit Index		43

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Part I—Financial Information

Item 1. Condensed Consolidated Financial Statements

Phase Forward Incorporated

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except per share amounts)

	December 31, 2009			June 30, 2010
Assets
Current assets:
Cash and cash equivalents	$	41,862		$	58,704
Short-term investments	67,241			77,844
Securities settlement agreement	4,345			—
Accounts receivable, net of allowance of $781 and $755, respectively	56,034			43,450
Deferred income taxes	9,521			9,521
Other current assets	14,694			15,426

Total current assets	193,697			204,945

Property and equipment, net	52,840			50,325
Intangible assets, net of accumulated amortization of $7,332 and $10,259, respectively	41,661			38,734
Goodwill	59,027			59,027
Deferred income taxes	5,465			5,465
Restricted cash	962			982
Long-term investments	26,439			—
Other assets	9,865			9,880

Total assets	$	389,956		$	369,358

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	5,909		$	3,728
Accrued expenses and other current liabilities	28,006			21,664
Deferred revenues	85,896			91,203

Total current liabilities	119,811			116,595

Deferred rent, net of current portion	2,115			2,862
Deferred revenue, net of current portion	12,478			13,271
Other long-term liabilities	10,224			9,885

Total liabilities	144,628			142,613

Commitments and contingencies (Note 9)

Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized, none issued	—			—
Common stock, $0.01 par value; 100,000 shares authorized: 43,577 and 43,838 issued, respectively	436			439
Additional paid-in capital	296,572			301,673
Treasury stock, 980 and 2,915 shares at cost, respectively	(14,147		)	(40,111		)
Accumulated other comprehensive income (loss)	71			(1,207		)
Accumulated deficit	(37,604		)	(34,049		)
Total stockholders’ equity	245,328			226,745

Total liabilities and stockholders’ equity	$	389,956		$	369,358

See accompanying notes.

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Phase Forward Incorporated

Condensed Consolidated Statements of Income

(unaudited)

(in thousands, except per share amounts)

	Three Months Ended June 30,					Six Months Ended June 30,
	2009		2010			2009		2010

Revenues:
License	$	14,695	$	15,382		$	28,811	$	30,523
Service	37,806		43,211			72,506		85,270
Total revenues	52,501		58,593			101,317		115,793

Costs of revenues:
License (2)	785		574			1,351		1,140
Service (1), (2)	21,245		25,283			41,144		50,999
Total cost of revenues	22,030		25,857			42,495		52,139

Gross margin:
License	13,910		14,808			27,460		29,383
Service	16,561		17,928			31,362		34,271
Total gross margin	30,471		32,736			58,822		63,654

Operating expenses:
Sales and marketing (1), (2)	8,216		9,154			15,422		18,140
Research and development (1)	9,425		10,031			17,605		19,729
General and administrative (1), (2)	9,715		10,774			17,519		19,958
Total operating expenses	27,356		29,959			50,546		57,827

Income from operations	3,115		2,777			8,276		5,827

Other income:
Interest income	502		276			1,142		592
Other income (expense)	56		(385		)	465		(569		)
Total other income (expense)	558		(109		)	1,607		23

Income before provision for income taxes	3,673		2,668			9,883		5,850
Provision for income taxes	1,446		1,046			3,578		2,295

Net income	$	2,227	$	1,622		$	6,305	$	3,555

Net income per share applicable to common stockholders:
Basic	$	0.05	$	0.04		$	0.15	$	0.09

Diluted	$	0.05	$	0.04		$	0.14	$	0.08

Weighted average number of common shares used in net income per share calculations:
Basic	42,623		42,505			42,527		40,826

Diluted	44,298		44,374			44,190		42,647

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

Costs of service revenues	$	489	$	584	$	965	$	1,220
Sales and marketing	462		387		877		855
Research and development	705		999		1,326		2,035
General and administrative	1,969		1,365		3,026		2,726

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

Costs of license revenues	$	194	$	237	$	349	$	474
Cost of service revenues	260		448		521		895
Sales and marketing	354		739		674		1,479
Research and development	—		28		—		28
General and administrative	28		26		53		52

See accompanying notes.

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Phase Forward Incorporated

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

	Six Months Ended June 30,
	2009			2010

Operating activities

Net income	$	6,305		$	3,555

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	7,699			11,701
Stock-based compensation expense	6,194			6,836
Amortization of leasehold incentive obligation	(396		)	(483		)
Provision for allowance for doubtful accounts	174			25
Deferred income taxes	2,240			—
Amortization of premiums or discounts on investments	100			(148		)
Change in fair value of investments	(464		)	(4,430		)
Change in fair value of securities settlement agreement	(14		)	4,345
Changes in assets and liabilities:
Accounts receivable	518			12,771
Other assets	(1,725		)	(1,397		)
Accounts payable	(2,923		)	(2,150		)
Accrued expenses	(5,325		)	(6,095		)
Deferred revenues	1,642			5,933
Deferred rent	1,175			747

Net cash provided by operating activities	15,200			31,210

Investing activities

Increase (decrease) in restricted cash	500			(20		)
Proceeds from maturities of short-term and long-term investments	19,389			60,365
Purchase of short-term and long-term investments	(47,069		)	(39,846		)
Cash paid for acquisitions, net of cash acquired (1)	(13,629		)	—
Purchase of property and equipment	(11,467		)	(5,834		)

Net cash (used in) provided by investing activities	(52,276		)	14,665

Financing activities

Proceeds from issuance of common stock	1,482			606
Withholding taxes in connection with vesting of restricted stock awards	(1,718		)	(2,337		)
Purchase of treasury stock	—			(25,964		)

Net cash used in financing activities	(236		)	(27,695		)

Effect of exchange rate changes on cash and cash equivalents	483			(1,338		)

Net increase in cash and cash equivalents	(36,829		)	16,842
Cash and cash equivalents at beginning of period	131,550			41,862

Cash and cash equivalents at end of period	94,721			58,704
Short-term and long-term investments at end of period	73,959			77,844
Total cash, cash equivalents and short-term and long-term investments at end of period	$	168,680		$	136,548

(1) Cash paid for acquisition of Waban Software, Inc.
Fair value of assets acquired	$	990		$	—
Liabilities assumed	(3,982		)	—
Acquired intangible assets	8,905			—
Cost in excess of net assets acquired	7,747			—
Cash paid	13,660			—
Less cash acquired	(31		)	—
Cash paid for acquisition	$	13,629		$	—

See accompanying notes.

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Phase Forward Incorporated

Notes to Condensed Consolidated Financial Statements

(unaudited)

(in thousands, except share and per share amounts)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements included herein have been prepared by Phase Forward Incorporated (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such SEC rules and regulations. Management of the Company believes that the disclosures herein are adequate to make the information presented not misleading. In the opinion of management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and reflect all material adjustments (consisting only of those of a normal and recurring nature) which are necessary to present fairly the consolidated financial position of the Company as of June 30, 2010, the results of its operations for the three and six months ended June 30, 2009 and 2010 and its cash flows for the three and six months ended June 30, 2009 and 2010. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2010.

As of June 30, 2010, the Company’s significant accounting policies and estimates, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, have not changed except for the adoption or application of the accounting pronouncements applicable for subsequent periods as set forth in Note 15.

On April 15, 2010, the Company, Oracle Corporation, a Delaware corporation (“Oracle”) and Pine Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of Oracle (“Merger Sub”), entered into an Agreement and Plan of Merger (“the Merger Agreement”), pursuant to which, subject to satisfaction or waiver of the conditions therein, Merger Sub will merge with and into the Company (the “Merger”) with the Company surviving as a wholly-owned subsidiary of Oracle. A description of the Merger Agreement is contained in the Company’s Current Report on Form 8-K filed with the SEC on April 16, 2010.

On April 20, 2010, a lawsuit, Selma Ehrlich et al. v. Phase Forward Incorporated, et al., Civ. A. No. 10-1463, was filed in the Superior Court for Middlesex County, Massachusetts against the Company, the members of the Company’s board of directors, Oracle Corporation, and Pine Acquisition Corporation. The action, brought by plaintiffs who are purported stockholders of the Company, individually and on behalf of a putative class of stockholders, alleged that the board breached fiduciary duties, and that the Company and Oracle aided and abetted the purported breaches, in connection with the proposed Merger. The complaint sought equitable relief, including, among other things, to enjoin consummation of the proposed Merger, rescission of the Merger Agreement and an award of all costs of the action, including reasonable attorneys’ fees. After a hearing, the court issued written decisions dated June 21, 2010 allowing the defendants’ motions to dismiss the complaint and denying the plaintiffs’ request for injunctive relief. The Court entered a final judgment dismissing the complaint on July 1, 2010 and awarding costs. On July 9, 2010, the plaintiffs filed a Notice of Appeal of the Superior Court’s dismissal of the complaint.

2. Revenue Recognition

The Company derives revenues from software licenses and services of its Integrated Clinical Research Suite (“ICRS”) products which can be purchased on a stand-alone basis or bundled together. License revenues are derived principally from the sale of term licenses of its software products and service revenues are derived principally from the Company’s delivery of the hosted solutions of its software products, consulting services and customer support including training, for all of the Company’s products. Revenue arrangements may include one of these single elements, or may incorporate one or more elements in a single transaction or combination of related transactions. In the first quarter of 2010, the Company adopted the guidance of Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, which was ratified by the Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force on September 23, 2009. ASU No. 2009-13 affects accounting and reporting for all multiple-deliverable arrangements.

ASU No. 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable in a sale arrangement. The selling price for each deliverable is based on vendor-specific objective evidence (“VSOE”) if available, third-party evidence (“TPE”) if VSOE is not available, or estimated selling price if neither VSOE or TPE is available. The amendments in this ASU eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement

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to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of the deliverable’s selling price. The Company adopted these standards in the first quarter of 2010, effective as of January 1, 2010 and on a prospective basis thereafter. The adoption of this standard did not materially affect the results of operations for three and six months ended June 30, 2010. See Note 15 for further discussion on the adoption of this standard.

The components of revenue are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2010		2009		2010
License	$	14,695	$	15,382	$	28,811	$	30,523
Application hosting services	29,810		35,680		56,438		69,462
Consulting services	4,701		4,318		9,561		9,525
Customer support	3,295		3,213		6,507		6,283

Total	$	52,501	$	58,593	$	101,317	$	115,793

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

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

The Company generally enters into software term licenses for its software products with its customers for 1 to 5 year periods. These arrangements typically include multiple elements: software license, consulting services and customer support. The Company bills its customers in accordance with the terms of the underlying contract. Generally, the Company bills license fees annually in advance for each year of the license term. Payment terms are generally net 30 days.

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

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

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

Revenues resulting from InForm and OutcomeLogix application hosting services consist of three stages for each clinical trial: the first stage involves application set up, including design of electronic case report forms and edit checks, installation and server configuration of the system; the second stage involves application hosting and related support services; and the third stage involves services required to close out, or lock, the database for the clinical trial. Revenues resulting from Phase Forward IRT and Covance IVRS/IWRS application hosting services also consist of three stages for each clinical trial: the first stage involves application set up, including design and set up for the subject randomization and medication inventory management, installation and server configuration of the system; the second stage involves application hosting and related support services; and the third stage involves services required to close out, or lock, the database for the clinical trial. Services provided for the InForm, Phase Forward IRT, OutcomeLogix and Covance IVRS/IWRS products for the first and third stages are provided on a fixed-fee basis based upon the complexity of the trial and system requirements. Services for the second stage are charged separately as a fixed monthly fee. The Company recognizes revenues from all stages of the InForm, Phase Forward IRT, OutcomeLogix and Covance IVRS/IWRS hosting services ratably over the hosting period. Work performed outside the original scope of work is contracted for separately as an additional fee and is generally recognized ratably over the remaining term of the hosting period. Fees for the first and third stages of the service are billed based upon milestones. Fees for application hosting and related services in the second stage are generally billed quarterly in advance. Bundled into this revenue element are revenues attributable to the software license used by the customer.

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

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

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

In the three and six months ended June 30, 2009 and 2010, no customer accounted for 10% or more of the Company’s total revenues for the period.

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

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

Internal Use Software and Website Development Costs

The Company capitalizes qualifying computer software costs which are incurred during the application development stage, and amortizes them over the software’s estimated useful life. The Company capitalized $172 and $298 during the three months ended June 30, 2009 and 2010, respectively, and $378 and $489 during the six months ended June 30, 2009 and 2010 respectively, related to Company-wide financial systems and outside software development costs associated with the Company’s hosting operation, of which both had certain portions that became operational in 2009 and 2010. Capitalized amounts include software and direct external implementation costs and are classified as “Property and Equipment, net” in the accompanying unaudited condensed consolidated balance sheets. The Company-wide financial system is being amortized over five years while the outside software development costs associated with the Company’s hosting operation is being amortized over three years. Amortization expense was $28 and $123 during

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the three months ended June 30, 2009 and 2010, respectively and $38 and $203 during the six months ended June 30, 2009 and 2010 respectively.

Computer Software Development Costs and Research and Development Expenses

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

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

Prepaid Sales Commissions. For arrangements where revenues are recognized over the relevant contract period, the Company defers related commissions paid to its direct sales force and amortizes them over the period in which the related revenues are recognized.

Royalty Obligations. For arrangements where revenues are recognized over the relevant contract period, the Company defers related software license royalties paid to third parties, and amortizes them over the period in which the related revenues are recognized. The Company’s royalty obligation is based upon the license and customer support revenues earned for certain products in an arrangement. The Company has the right to recover the royalties in the event the arrangement is cancelled.

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

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

The Company deferred and amortized the following amounts for the three months ended June 30, 2009 and 2010:

	Deferred				Amortized
Description	2009		2010		2009		2010
Prepaid Sales Commissions	$	3,123	$	2,595	$	1,965	$	2,275
Royalty Obligations	638		305		819		425
Deferred Set Up Costs	1,295		2,178		985		1,209
Total	$	5,056	$	5,078	$	3,769	$	3,909

The Company deferred and amortized the following amounts for the six months ended June 30, 2009 and 2010:

	Deferred				Amortized
Description	2009		2010		2009		2010
Prepaid Sales Commissions	$	5,107	$	4,920	$	3,709	$	4,448
Royalty Obligations	1,727		839		1,480		792
Deferred Set Up Costs	2,590		4,232		1,902		2,501
Total	$	9,424	$	9,991	$	7,091	$	7,741

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4. Warranties and Indemnification

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

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

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

5. Net Income Per Share

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

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2010			2009			2010
Numerator:
Net income	$	2,227		$	1,622		$	6,305		$	3,555

Denominator:
Weighted-average common shares outstanding	43,159,822			42,835,347			43,091,200			41,178,554
Less weighted-average unvested restricted common stock awards outstanding	(536,429		)	(330,015		)	(564,136		)	(352,197		)
Basic weighted-average common shares outstanding	42,623,393			42,505,332			42,527,064			40,826,357
Dilutive effect of common stock options	1,071,396			975,550			1,093,458			956,653
Dilutive effect of unvested restricted common stock awards and units	603,584			892,889			569,653			864,221
Diluted weighted-average common shares outstanding	44,298,373			44,373,771			44,190,175			42,647,231

Net income per share applicable to common stockholders:
Basic	$	0.05		$	0.04		$	0.15		$	0.09

Diluted	$	0.05		$	0.04		$	0.14		$	0.08

Diluted weighted average common shares outstanding do not include options, awards and units outstanding to purchase 99,883 and 2,814 common equivalent shares for the three months ended June 30, 2009 and 2010, respectively, and do not include options, awards, and units outstanding to purchase 100,138 and 132,706 common equivalent shares for the six months ended June 30, 2009 and 2010, respectively as their effect would have been anti-dilutive.

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

Securities that the Company has the intent and ability to hold to maturity are reported at amortized cost and are classified as held-to-maturity. Securities for which it is not the Company’s intent to hold to maturity are classified as either available-for-sale securities or trading securities. Available-for-sale securities are reported at fair value, with temporary unrealized gains/(losses) excluded from

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earnings and reported as a separate component of stockholders’ equity and other than temporary unrealized losses included in earnings. Trading securities are reported at fair value, with unrealized gains/(losses) included in earnings. The Company’s cash equivalents principally consist of money market funds and corporate bonds with maturities of 90 days or less at the date of purchase. Short-term and long-term investments primarily consist of investment-grade corporate bonds, U.S. government agency notes and auction rate securities (“ARS”) with original maturities of greater than 90 days.

During the three-months ended March 31, 2010, the Company elected to sell certain investments which were classified as held-to-maturity. As a result, the Company determined that all investments should now be classified as available-for-sale, and accordingly, the Company recorded unrealized gains of $286 through other comprehensive income in the three months ended March 31, 2010 to properly record the available-for-sale securities at fair value. During the three-months ended June 30, 2010 the Company recorded an unrealized loss of $(181) through other comprehensive income to properly record the available-for-sale securities at fair value.

Cash, cash equivalents, short-term and long-term investments as of December 31, 2009 and June 30, 2010 consist of the following:

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

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

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

	June 30, 2010
	Contracted	Amortized		Fair Market		Balance Per
Description	Maturity	Cost		Value		Balance Sheet
Cash and cash equivalents	Demand	$	58,704	$	58,704	$	58,704

U.S. agency notes	156 days	$	23,997	$	24,027	$	24,027
Corporate bonds	298 days	41,742		41,817		41,817
Auction rate securities	0 days	12,000		12,000		12,000
Total short-term investments		$	77,739	$	77,844	$	77,844

As of June 30, 2010 all securities are classified as available-for-sale securities. In prior periods and up through the execution of the signed settlement agreement with UBS AG (“UBS”) in November 2008 as further discussed below, the Company held ARS which were classified as available-for-sale because it was the Company’s intent not to hold them to maturity. Upon the execution of the settlement agreement with UBS, the Company elected to make a one-time transfer of the ARS from available-for-sale securities to trading securities. Accordingly, on a prospective basis, all unrealized gains/(losses) for these trading securities have been included in earnings. Interest and dividends on all of the Company’s securities are included in interest income in the accompanying unaudited condensed consolidated statement of income.

As of December 31, 2009 and June 30, 2010, the Company held ARS totaling $23,800 and $12,000, respectively, at par value, which are classified as short-term investments in the accompanying unaudited condensed consolidated balance sheets, and which are recorded at fair value. These ARS are debt instruments issued by various states throughout the United States to finance student loans. The types of ARS that the Company owns are backed by student loans, 95% of which are guaranteed under the Federal Family Education Loan Program, and all have credit ratings of AAA (or equivalent) from a recognized rating agency. Historically, the carrying value of ARS approximated fair value due to the frequent resetting of the interest rates. With the liquidity issues experienced in the global credit and capital markets, the Company’s ARS have experienced multiple failed auctions. While the Company continues to earn and receive interest on these investments at the maximum contractual rate, the estimated fair value of these ARS no longer approximates par value.

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In November 2008, the Company accepted an offer from and entered into an agreement (the “Agreement”) with UBS with respect to all of the Company’s ARS held at that time. As a UBS client who held ARS, the Company received certain rights, which entitled the Company to sell ARS to UBS affiliates during the period from June 30, 2010 to July 2, 2012 for a price equal to par value. In accepting the Agreement, the Company granted UBS the authority to sell or auction the ARS at par at any time up until the expiration date of the Agreement and released UBS from any claims relating to the marketing and sale of ARS. UBS obligations under the Agreement were not secured by its assets and did not require UBS to obtain any financing to support its performance obligations under the Agreement. UBS disclaimed any assurance that it would have sufficient financial resources to satisfy its obligations under the Agreement.

As of December 31, 2009 the Company held $23,800 in ARS at par with a fair value of $23,715. During the six months ended June, 30 2010, $11,800 of the Company’s ARS were called by the respective issuers at par value and $12,000 were liquidated on June 30, 2010 at par value in accordance with the Agreement discussed above. For the three and six months ended June 30, 2010 a gain of $38 and $85, respectively was recorded in the Company’s accompanying unaudited condensed consolidated statements of income in connection with the execution of the Agreement and the liquidation and final settlement of all of the Company’s ARS.

The Company classified the $12,000 of ARS liquidated on June 30, 2010 as short-term investments in the accompanying unaudited condensed consolidated balance sheets as of June 30, 2010 since the transaction did not settle until July 2, 2010.

Refer to Note 14 for further discussion on Fair Value Measurements.

7. Goodwill and Intangible Assets

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

The goodwill resulting from acquisitions is reviewed for impairment on an annual basis. Consistent with prior years, the Company will conduct its annual impairment test of goodwill during the fourth quarter of 2010. For the three and six months ended June 30, 2010, there have been no changes to the goodwill balance and there have been no impairment indicators that would lead the Company to write down an asset.

Intangible assets consist of the following:

		As of December 31, 2009				As of June 30, 2010
Description	Estimated Useful Life	Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Developed technology and know-how	5-15 years	$	21,447	$	3,604	$	21,447	$	4,972
Customer relationships	5-18 years	22,190		2,574		22,190		3,600
Non-compete agreements	2-3 years	610		438		610		489
Trade name	1-8 years	3,140		396		3,140		730
In process research and development	8 years	886		—		886		28
Customer backlog	3 years	720		320		720		440
Total		$	48,993	$	7,332	$	48,993	$	10,259

Amortization expense related to intangible assets for the three months ended June 30, 2009 and 2010 was $836 and $1,477, respectively, and $1,596 and $2,927 for the six months ended June 30, 2009 and 2010, respectively.

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

Year ended December 31,	Amount
2010 (six months ended December 31, 2010)	$	2,681
2011	4,987
2012	4,914
2013	4,543
2014	4,039
2015 and thereafter	17,570
Total	$	38,734

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8. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

	As of December 31,		As of June 30,
	2009		2010
Accrued payroll and related benefits	$	17,278	$	10,822
Accrued royalties	1,867		983
Accrued outside contractors	2,013		2,410
Leasehold incentive obligation (1)	956		1,002
Accrued other expenses	5,892		6,447

Total	$	28,006	$	21,664

(1) In conjunction with the February 2008 lease agreement (see Note 9) the Company was reimbursed for leasehold improvements totaling $8,104. In conjunction with the August 2009 lease agreement (see Note 9), the Company was reimbursed for leasehold improvements totaling $2,163, of which $1,640 was received in 2009 and $523 received in 2010. Both leasehold improvements are recognized in property and equipment in the accompanying condensed consolidated balance sheets, with the corresponding reimbursement recognized as “accrued expenses and other current liabilities” and “other long-term liabilities” on the unaudited condensed consolidated balance sheets. The amount of the incentive is being amortized on a straight-line basis over the lease term as a reduction of rental expense and commenced at the beginning of occupancy. The leasehold improvements in property and equipment will be amortized over the shorter of the lease term or the estimated useful life of the asset. The Company amortized the leasehold incentive obligation as a reduction to rent expense of $198 and $252 in the three months ended June 30, 2009 and 2010, respectively, and $396 and $499 during the six months ended June 30, 2009 and 2010 respectively.

9. Commitments, Contingencies and Restricted Cash

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

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

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On February 13, 2008, the Company entered into a lease (“Headquarters Lease”) with BP Fourth Avenue, LLC (the “Landlord”) to secure office space for the Company’s current corporate headquarters at 77 Fourth Avenue, Waltham, Massachusetts. The commencement date for occupancy under the Headquarters Lease was December 2008. The lease for the Company’s previous corporate headquarters at 880 Winter Street in Waltham, Massachusetts expired in February 2009. The Headquarters Lease provides for the rental of 165,129 square feet of space and has an initial term of 10 years and three months. The Company can, subject to certain conditions, extend this term by exercising up to two consecutive five year options. The Company was not required to pay any rent for the first three months of the initial Headquarters Lease term. After the initial three months, the annual rent under the Headquarters Lease for years one through five is $6,600, or approximately $548 per month. For years six through ten, the annual rent will be $7,200, or approximately $603 per month. The total base rent payable in the initial term is $69,100. In connection with the signing of the Headquarters Lease, the Company has deposited with the Landlord an unconditional, irrevocable letter of credit in Landlord’s favor in the amount of $962, secured by a certificate of deposit. The certificate of deposit has been classified as “Restricted cash” in the accompanying unaudited condensed consolidated balance sheets as of December 31, 2009 and June 30, 2010.

10. Stockholders’ Equity and Stock-Based Compensation

Stock-based Compensation Expense

For stock options issued under the Company’s 2004 Stock Option and Incentive Plan (the “2004 Plan”), the fair value of each option grant is estimated on the date of grant using the Black-Scholes pricing model, and an estimated forfeiture rate is used when calculating stock-based compensation expense for the period. For restricted stock awards and units issued under the Company’s 2004 Plan, the fair value of each grant is calculated based on the Company’s stock price on the date of grant and an estimated forfeiture rate when calculating stock-based compensation expense for the period. During the three months ended June 30, 2009 and 2010, the Company recorded $3,625 and $3,335 of aggregate stock-based compensation expense, respectively, and $6,194 and $6,836 in the six months ended June 30, 2009 and 2010, respectively. As of June 30, 2010, there was $23,491 of unrecognized stock-based compensation expense related to stock-based awards that is expected to be recognized over a weighted average period of 2.39 years.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2010		2009		2010
Restricted stock units and awards	5.25	%	7.00	%	5.25	%	7.00	%
Service-based stock options	9.00	%	9.00	%	9.00	%	9.00	%
Milestone options	12.00	%	12.00	%	12.00	%	12.00	%

Common Stock

In the three and six months ended June 30, 2010, the Company issued 56,653 and 87,552 shares of common stock, respectively, in connection with the exercise of stock options resulting in proceeds of $254 and $386, respectively. In the three and six months ended June 30, 2010, the Company issued 13,667 shares of common stock under the 2004 Employee Stock Purchase Plan (the “ESPP Plan”) resulting in proceeds of $220. Effective June 1, 2010 the Company suspended the ESPP Plan as the number of shares available under the plan had been issued. In the three and six months ended June 30, 2010, the Company released 300,557 and 490,752 shares of common stock in connection with the vesting of restricted stock awards and units. The Company retired 96,665 and 162,420 of these shares to cover withholding taxes in the amount of $1,610 and $2,337. In the three and six months ended June 30, 2010, 10,578 shares of restricted stock vested but were not released. These shares relate to certain members of the Company’s board of directors who have grant agreements which stipulate that shares will be released in a lump sum when they cease to serve on the Company’s board for any reason, or when the Company gets acquired, whichever is earlier.

Stock Option Activity

A summary of stock option activity under the Phase Forward Incorporated 1997 Stock Option Plan, the Phase Forward Incorporated 2004 Stock Option and Incentive Plan and the 2003 Non-Employee Director Stock Option Plan as of June 30, 2010, and changes during the six months then ended, is as follows:

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	Number of Shares		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (2)
Outstanding as of December 31, 2009	1,816,004		$	4.70	3.69
Granted	—		—
Exercised	(87,552	)	4.41			$	985
Canceled	(3,600	)	5.00

Outstanding as of June 30, 2010	1,724,852		$	4.72	3.26	$	20,636

Exercisable as of June 30, 2010	1,645,102		$	4.64	3.19	$	19,808

Vested or expected to vest as of June 30, 2010 (1)	1,720,117		$	4.71	3.26	$	20,587

(1) The vested or expected to vest options at June 30, 2010 include both the vested options and the number of options expected to vest calculated after applying an estimated forfeiture rate to the unvested options.

(2) The aggregate intrinsic value for shares outstanding, exercisable and vested is calculated based on the positive difference between the fair value per share of the Company’s common stock on June 30, 2010 of $16.68, or the date of exercise, as applicable, and the exercise price of the underlying options.

Restricted Stock Awards and Unit Activity

A summary of activity related to restricted common stock awards and unit awards as of June 30, 2010 and changes during the six months ended June 30, 2010, is as follows:

	Number of Shares		Market Price Per Share		Weighted Average Grant Date Fair Value Per Share		Weighted Average Remaining contractual Term (years)	Aggregate Intrinsic Value (2)
Unvested at December 31, 2009	2,931,363		$	10.85 - 23.20	$	15.21
Granted	170,750		11.93 - 16.83
Vested	(501,330	)	11.10 - 23.20
Forfeited	(75,973	)	10.85 - 23.20
Unvested at June 30, 2010	2,524,810		$	10.85 - 23.20	$	15.15	2.39	$	42,114

Expected to be free of restrictions (1)	1,894,628		$	10.85 - 23.20	$	15.17	2.39	$	31,602

(1) The expected to be free of restrictions at June 30, 2010 was calculated by applying an estimated forfeiture rate to the unvested shares.

(2) The aggregate intrinsic value is calculated based on the fair value per share of the Company’s common stock on June 30, 2010 of $16.68.

Stock Repurchase Program

On November 3, 2009, the Company’s Board of Directors authorized the repurchase of up to $40,000 of its common stock, par value $0.01 per share, through a share repurchase program. On February 12, 2010, the Company’s Board of Directors increased the amount available under the share repurchase program by an additional $25,000. As authorized by the program, shares may be purchased in the open market or through privately negotiated transactions in a manner consistent with applicable securities laws and regulations, including pursuant to a Rule 10b5-1 plan maintained by the Company. For the six months ended June 30, 2010 1,934,707 shares of the Company’s common stock had been purchased as part of this repurchase program at an average price of $13.42 per share.

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11. Comprehensive Income

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

Comprehensive income consisted of the following:

	Three Months Ended June 30,					Six Months Ended June 30,
	2009		2010			2009		2010
Net income	$	2,227	$	1,622		$	6,305	$	3,555
Unrealized (loss)/gain on marketable securities	—		(181		)	—		105
Cumulative Translation adjustment	967		(670		)	594		(1,382		)
Comprehensive income	$	3,194	$	771		$	6,899	$	2,278

12. Forward Foreign Exchange Contracts and Foreign Currency Translation

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

The following table summarizes the outstanding forward foreign exchange contracts held by the Company as of December 31, 2009 and June 30, 2010:

		As of December 31, 2009			As of June 30, 2010
Currency	Hedge Type	Local Currency Amount	Approximate U.S. Dollar Equivalent		Local Currency Amount	Approximate U.S. Dollar Equivalent
British pound	Sale	1,000	$	1,612	4,500	$	6,681
Euro	Sale	3,200	4,571		4,300	5,222
			$	6,183		$	11,903

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

Foreign currency translation adjustments are accumulated as a component of other comprehensive income as a separate component of stockholders’ equity. Realized and unrealized foreign currency gains and losses, net of hedging, are accounted for in other income. The Company recorded foreign currency (losses) of $(174) and $(379) in the three months ended June 30, 2009 and 2010, respectively, and $(26) and $(615) in the six months ended June 30, 2010, respectively. As of June 30, 2009 and 2010, the Company recorded $23 and $(124), respectively, of foreign exchange gains/(losses) in other income (expense) as a result of outstanding forward foreign exchange contracts.

13. Income Taxes

The Company’s effective tax rates for the three months ended June 30, 2009 and 2010 were 39% and 39%, respectively, and for the six months ended June 30, 2009 and 2010 were 36% and 39%, respectively. The Company’s effective tax rate for the six months ended June 30, 2010 is higher than the effective tax rate for the six months ended June 30, 2009 principally due to the benefit derived in the prior year from the federal research and development tax credit. The federal research and development tax credit expired effective December 31, 2009 and, as such, the Company has not forecasted a current tax benefit for this item in 2010.

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As of June 30, 2010, the Company had a liability of $1,446 for net unrecognized tax benefits, all of which would favorably impact the Company’s effective tax rate if recognized. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. As of June 30, 2010, the Company had approximately $12 and $7, respectively, of accrued interest and penalties related to unrecognized tax benefits. The Company anticipates a reduction of approximately $81 to the amount of unrecognized tax benefits over the next twelve months associated with lapsing statutes of limitations. The unrecognized tax liability of $1,446 and accrued interest and penalties of $19 are classified as other long-term liabilities on the unaudited condensed consolidated balance sheet.

14. Fair Value Measurements

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

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

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

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

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

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

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

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

The following table sets forth the Company’s financial instruments carried at fair value and using the lowest level of input as of June 30, 2010:

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

Assets:

Money market funds	$	58,704	$	—	$	—	$	58,704
Restricted cash	982		—		—		982
Total cash equivalents and restricted cash	$	59,686	$	—	$	—	$	59,686

U.S. agency notes (1)	$	—	$	24,027	$	—	$	24,027
Corporate bonds (1)	—		41,817		—		41,817
Auction rate securities	—		12,000				12,000
Total short-term investments	$	—	$	77,844	$	—	$	77,844

Total Assets	$	59,686	$	77,844	$	—	$	137,530

(1) Fair value for Level 2 assets was determined using quoted market prices for similar assets. For the three months ended June 30, 2010 the Company’s Level 2 transaction activity included $12,000 of transfers in from level 3, $29,096 of purchases, $7,500 of sales, $12,190 of maturities and $2,000 of settlements. For the six months ended June 30, 2010 the Company’s Level 2 transaction activity included $39,846 of purchases, $9,500 of sales, $29,065 of maturities and $10,000 of settlements.

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The following table sets forth a summary of changes in the fair value of the Company’s Level 3 financial assets for the six months ended June 30, 2010:

	Level 3 Financial
	Assets
Balance, beginning of period	$	23,715
Transfers in (out) of Level 3	(12,000		)
Purchase	—
Sales	—
Issuance	—
Settlement	(11,800		)
Realized gains/(losses)	85
Unrealized gains/(losses) on securities held at period end	—
Balance, end of period	$	—

The Company has also adopted the provisions of FASB ASC No. 825, Financial Instruments, in the first quarter of 2008 which allows companies to choose to measure eligible assets and liabilities at fair value with changes in value recognized in earnings. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to re-measure any of its existing financial assets or liabilities, and did not elect the fair value option for any financial assets and liabilities transacted in the year-ended December 31, 2009. To date, the Company has only elected the fair value option for the put option related to the Company’s ARS that was recorded in conjunction with a settlement agreement with UBS as more fully described in Note 6.

15. Recently Issued Accounting Pronouncements

On January 1, 2010, the Company adopted the guidance of ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, which was ratified by the FASB Emerging Issues Task Force on September 23, 2009. ASU No. 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. The impact of this standard was not material to the Company’s reported results of operations for the three and six months ended June 30, 2010.

On January 21, 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements. The ASU requires reporting entities to provide information about movements of assets among Levels 1 and 2 of the three-tier fair value hierarchy established by FASB ASC 820, Fair Value Measurements. During the three months ended June 30, 2010 the Company had no movements among Levels 1 and 2 of the three-tier fair value hierarchy. Entities will also need to provide a reconciliation of purchases, sales, issuance, and settlements of anything valued with a Level 3 method, which is used to price the hardest to value instruments. The new disclosures and clarifications of existing disclosures were adopted on January 1, 2010. Adoption of this portion of ASU No. 2010-06 did not have an impact on the Company’s consolidated financial position and results of operation. Disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company elected to adopt this portion of ASU No. 2010-06 on January 1, 2010. Adoption of this portion of ASU No. 2010-06 did not have an impact on the Company’s consolidated financial position and results of operation.

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

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

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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.

On April 15, 2010, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Oracle Corporation, a Delaware corporation (“Oracle”) and Pine Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of Oracle (“Merger Sub”), pursuant to which, subject to satisfaction or waiver of the conditions therein, Merger Sub will merge with us (the “Merger”) with the Company surviving as a wholly-owned subsidiary of Oracle. A description of the Merger Agreement is contained in our Current Report on Form 8-K filed with the SEC on April 16, 2010.

On April 20, 2010, a lawsuit, Selma Ehrlich et al. v. Phase Forward Incorporated, et al., Civ. A. No. 10-1463, was filed in the Superior Court for Middlesex County, Massachusetts against us, our board of directors, Oracle Corporation, and Pine Acquisition Corporation. The action, brought by plaintiffs who are purported stockholders of our Company, individually and on behalf of a putative class of stockholders, alleged that the board breached fiduciary duties, and that the Oracle and Phase Forward aided and abetted the purported breaches, in connection with the proposed Merger. The complaint sought equitable relief, including, among other things, to enjoin consummation of the proposed Merger, rescission of the Merger Agreement and an award of all costs of the action, including reasonable attorneys’ fees. After a hearing, the court issued written decisions dated June 21, 2010 allowing the defendants’ motions to dismiss the complaint and denying the plaintiffs’ request for injunctive relief. The Court entered a final judgment dismissing the complaint on July 1, 2010 and awarding costs. On July 9, 2010, the plaintiffs filed a Notice of Appeal of the Superior Court’s dismissal of the complaint.

Sources of Revenues

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

· Electronic Data Capture (EDC)

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

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

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

· Clinical Data Management

· Clintrial, our clinical data management solution;

· 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

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

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· Drug Safety

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

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

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

· Interactive Response Technology (IRT)

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

· Covance IVRS/IWRS, a legacy phone-integrated interactive response technology, which we acquired from Covance, Inc. in August 2009.

We generally offer our software products under term enterprise licenses or as a hosted application solution delivered through a standard Web-browser. The following table details these offerings:

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

(1) 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.

In the three and six months ended June 30, 2009 and 2010, no customer accounted for 10% or more of our total revenues for the period. Our top 20 customers accounted for approximately 59% and 60% of our total revenues, net of reimbursable out-of-pocket expenses, in the three months ended June 30, 2009 and 2010, respectively, and 61% and 58% of our total revenues, net of reimbursable out-of-pocket expenses, in the six months ended June 30, 2009 and 2010, respectively.

Cost of Revenues and Operating Expenses

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

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

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the acquisition of Clarix and Maaguzi.

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

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

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

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

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

Stock-Based Compensation Expenses. Our cost of service revenues, sales and marketing, research and development, and general and administrative expenses include stock-based compensation expense. Stock-based compensation expense is the fair value of outstanding stock options and restricted stock awards and units, which are recognized over the respective stock option and award or unit service periods.

Foreign Currency Translation

With regard to our international operations, we frequently enter into transactions in currencies other than the U.S. dollar. As a result, our revenues, expenses and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the euro, British pound, Australian dollar, Indian rupee, Japanese yen and Romanian leu. In the three months ended June 30, 2009 and 2010, approximately 39% and 33%, respectively, of our revenues were generated in locations outside the United States. In the six months ended June 30, 2009 and 2010, approximately 39% and 35%, respectively, of our revenues were generated in locations outside the United States. The majority of these revenues are in currencies other than the U.S. dollar, as are many of the associated expenses. In periods when the U.S. dollar declines in value as compared to the foreign currencies in which we conduct business, our foreign currency-based revenues and expenses generally increase in value when translated into U.S. dollars.

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Critical Accounting Policies and Estimates

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

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

Revenue Recognition. We derive revenues from software licenses and services of our ICRS products which can be purchased on a stand-alone basis or bundled together. License revenues are derived principally from the sale of term licenses of our software products and service revenues are derived principally from the delivery of the hosted solutions of our software products, consulting services and customer support including training, for all of our products. Revenue arrangements may include one of these single elements, or may incorporate one or more elements in a single transaction or combination of related transactions. In the first quarter of 2010, we adopted the guidance of Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements which was ratified by the Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force on September 23, 2009. ASU No. 2009-13 affects accounting and reporting for all multiple-deliverable arrangements. The adoption of this standard did not materially affect the results of operations for three months and six ended June 30, 2010.

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

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

We generally enter into software term licenses for our products with our customers for 1- to 5-year periods. These arrangements typically include multiple elements: software license, consulting services and customer support. We bill our customers in accordance with the terms of the underlying contract. Generally, we bill license fees annually in advance for each year of the license term. Our payment terms are generally net 30 days.

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

Customer support includes training services, telephone support and software maintenance. We generally bundle customer support with the software license for the entire term of the arrangement. As a result, we generally recognize revenues for all elements, including consulting services, ratably over the term of the software license and support arrangement. We allocate the revenues recognized for these arrangements to the different elements based on management’s estimate of the relative fair value of each element. For our term-based licenses, we allocate to consulting services the anticipated service effort and value throughout the term of the arrangement at an amount that would have been allocated had those services been sold separately to the customer. The value of our consulting services sold within a bundled arrangement is equal to the value of consulting services sold on a stand-alone basis, as the activities performed under both types of arrangements are similar in nature. The remaining value is allocated to license and support services, with 10% of this amount allocated to support services. The customer support services rate of 10% for multi-year term-based licenses reflects a significant discount from the rate for customer support services associated with perpetual licenses due to the reduction in the time period during which the customer can utilize the upgrades and enhancements. We believe this rate is substantive and represents a reasonable basis of allocation. We have allocated the estimated fair value to our multiple element arrangements to provide meaningful disclosures about each of our revenue streams. The costs associated with the consulting and customer support

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services are expensed as incurred. There are instances in which we sell software licenses based on usage levels. These software licenses can be based on estimated usage, in which case the license fee charged to the customer is fixed based on this estimate. When the fee is fixed, the revenues are generally recognized ratably over the contractual term of the arrangement. If the fee is based on actual usage, and therefore variable, the revenues are recognized in the period of use. Revenues from certain follow-on consulting services, which are sold separately to customers with existing software licenses and are not considered part of a multiple element arrangement, are recognized as the services are performed.

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

Revenues resulting from InForm and OutcomeLogix application hosting services consist of three stages for each clinical trial: the first stage involves application set up, including design of electronic case report forms and edit checks, installation and server configuration of the system; the second stage involves application hosting and related support services; and the third stage involves services required to close out, or lock, the database for the clinical trial. Revenues resulting from Phase Forward IRT and Covance IVRS/IWRS application hosting services also consist of three stages for each clinical trial: the first stage involves application set up, including design and set up for the subject randomization and medication inventory management, installation and server configuration of the system; the second stage involves application hosting and related support services; and the third stage involves services required to close out, or lock, the database for the clinical trial. Services provided for InForm, Phase Forward IRT, OutcomeLogix and Covance IVRS/IWRS for the first and third stages are provided on a fixed fee basis based upon the complexity of the trial and system requirements. Services for the second stage are charged separately as a fixed monthly fee. We recognize revenue from all stages of the InForm, Phase Forward IRT, OutcomeLogix and Covance IVRS/IWRS hosting service ratably over the hosting period. Work performed outside the original scope of work is contracted for separately as an additional fee and is generally recognized ratably over the remaining term of the hosting period. Fees for the first and third stages of the services are billed based upon milestones. Fees for application hosting and related services in the second stage are billed quarterly in advance. Bundled into this revenue element are the revenues attributable to the software license used by the customer.

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

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

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

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

Our royalty obligation is based upon the license and customer support revenues earned for certain products in an arrangement. Royalties are paid on a percentage of billings basis for certain of our products, and we have the right to recover royalties in the event an arrangement is cancelled.

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

Accounts Receivable Reserve. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We regularly evaluate the collectability of our trade receivables based on a combination of factors, which may include dialogue with the customer to determine the cause of non-payment, the use of collection agencies, and/or the use of litigation. In the event it is determined that the customer may not be able to meet its full obligation to us, we record a specific allowance to reduce the related receivable to the amount that we expect to recover given all information available to us. We continuously monitor collections from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates in the future. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

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

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

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

For the three months ending June 30, 2009 and 2010, stock-based compensation expense reduced basic earnings per share by $0.05 and $0.05, respectively, and diluted earnings per share by $0.05 and $0.05, respectively. For the six months ending June 30, 2009 and 2010, stock-based compensation expense reduced basic earnings per share by $0.09 and $0.10, respectively, and diluted earnings per share by $0.09 and $0.10, respectively.

Other Significant Estimates

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

Overview of Results of Operations in the Three Months Ended June 30, 2009 and 2010

Total revenues increased by 12%, or $6.1 million, in the three months ended June 30, 2010 (“the 2010 Three Month Period”), compared to the three months ended June 30, 2009 (“the 2009 Three Month Period”), primarily due to an increase in total service revenues of 14%, or $5.4 million, and to a lesser extent, an increase in license revenues of 5%, or $0.7 million. Our revenue growth included a 23% increase in revenues from contract research organizations, or CROs, which increased to $13.8 million from $11.2 million. The increase in services revenues is primarily associated with revenues from application hosting services due to increased production trials under management for our InForm license customers as well as trials under management as a result of our recent acquisitions of Maaguzi and Covance IVRS/IWRS. Through these recent acquisitions and the acquisition of Clarix in 2008, our objective is to provide an Integrated Clinical Research Suite (ICRS) of technology solutions, which consists of multiple products that can be purchased on a stand-alone basis, to automate and integrate the entire clinical development process from study initiation and

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regulatory submission through post-approval trials. Our ability to provide ICRS as a single source vendor and to continue to provide the product functionality and performance that our customers require will be a major factor in our ability to continue to increase revenues.

Our gross margin increased by 7%, or $2.3 million, in the 2010 Three Month Period compared to the 2009 Three Month Period, primarily due to the increase in the services gross margin of $1.4 million resulting from higher services revenues and lower services expense. With the continued shift in our revenues from license revenues to services revenues associated primarily with our recent acquisitions and our ICRS strategy, our ability to continue to maintain our overall gross margins will depend on our ability to continue to increase services efficiencies and lower our cost of delivery.

Operating income in the 2010 Three Month Period of $2.8 million decreased by $0.3 million, or 11%, compared to the 2009 Three Month Period. Operating income for the 2009 Three Month Period and the 2010 Three Month Period included $3.6 million and $3.3 million of stock-based compensation expense, respectively, and $0.8 million and $1.5 million of amortization expense related to acquisitions, respectively. We expect to increase operating income through increased revenues from our recent acquisitions and execution of our ICRS strategy and through our ability to lower services and operating expenses as a percentage of revenues through improved efficiencies throughout our services organization and leveraging our operating expenses as revenues continue to increase.

The results of the 2010 Three Month Period compared to the 2009 Three Month Period were impacted by foreign exchange rate fluctuations, resulting in a decrease in revenue of approximately $1.5 million, or 3% of revenues, and a decrease in expense of approximately $2.2 million, or 5% of expenses.

As of June 30, 2010, we had $136.5 million of unrestricted cash, cash equivalents and short-term investments, an increase of $27.4 million from $109.1 million at December 31, 2009. As of June 30, 2010, we had no outstanding debt.

Revenues

	Three Months Ended June 30,
	2009				2010
			Percentage of				Percentage of		Change
Revenues by Product Line (in thousands) (1)	Amount		Revenues		Amount		Revenues		Amount			%

Electronic data capture	$	38,377	73	%	$	39,692	68	%	$	1,315		3	%
Clinical data management	5,822		11		4,854		8		(968		)	(17	)
Safety	6,079		12		6,072		10		(7		)	NM*
Interactive Response Technology	2,223		4		7,975		14		5,752			259
Total	$	52,501	100	%	$	58,593	100	%	$	6,092		12	%

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

* Not Meaningful

The increase in interactive response technology revenues is primarily related to increased application hosting revenues of $5.7 million. The increase in electronic data capture revenues is primarily due to an increase in license revenues of $1.1 million as well as an increase in application hosting services revenues of $0.3 million. The decrease in clinical data management is primarily due to a decrease in license revenues of $0.7 million as well as a decrease in customer support of $0.3 million. Safety revenues remained relatively unchanged.

	Three Months Ended June 30,
	2009				2010
			Percentage				Percentage		Change
Revenues by Type (in thousands)	Amount		of Revenues		Amount		of Revenues		Amount			%

License	$	14,695	28	%	$	15,382	27	%	$	687		5	%
Application hosting services	29,810		57		35,680		61		5,870			20
Consulting services	4,701		9		4,318		7		(383		)	(8	)
Customer support	3,295		6		3,213		5		(82		)	(2	)
Total	$	52,501	100	%	$	58,593	100	%	$	6,092		12	%

Total revenues increased in the 2010 Three Month Period as compared to the 2009 Three Month Period, primarily due to

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increases in application hosting and license revenues. The increase in the 2010 Three Month Period revenues associated with our application hosting services was partially due to a 17% increase in electronic data capture production trials under management from approximately 968 in the 2009 Three Month Period to approximately 1,129 in the 2010 Three Month Period, which includes application hosting services trials and trials hosted for our InForm license customers. The increase in production trials relates to a relative increase in the number of customers who purchase all trial-related services from us, customers who license InForm and build their own studies. Our application hosting services also increased due to the impact of additional trials under management for our web and phone-integrated Phase Forward IRT product offerings with production trials increasing 162% from 104 in the 2009 Three Month Period to 272 in the 2010 Three Month Period. The increase in license revenues was primarily the result of additional electronic data capture revenues, and to a lesser extent, growth in sales relating to our safety products. The decrease in consulting services was primarily attributable to lower revenue related to consulting services provided for our electronic data capture products. The decrease in customer support revenues was primarily due to decreases in clinical data management products. Our revenues were not significantly impacted by price increases or decreases. Inflation had only a nominal impact on our revenues.

	Three Months Ended June 30,
	2009				2010
			Percentage				Percentage		Change
Revenues by Geography (in thousands)	Amount		of Revenues		Amount		of Revenues		Amount			%

North America	$	31,726	61	%	$	39,341	67	%	$	7,615		24	%

United Kingdom	14,202		27		12,425		21		(1,777		)	(13	)
France	4,284		8		3,940		7		(344		)	(8	)
Asia Pacific	2,289		4		2,887		5		598			26
International subtotal	20,775		39		19,252		33		(1,523		)	(7	)
Total	$	52,501	100	%	$	58,593	100	%	$	6,092		12	%

The increase in revenues worldwide was primarily due to an increase in interactive response technology revenues and electronic data capture revenues of $5.8 million and $1.3 million, respectively. The increase in North American revenues is primarily related to an increase in interactive response technology revenues and electronic data capture revenues of $4.3 million and $3.6 million, respectively. The increase in interactive response technology revenues is primarily a result of increased sales of our Phase Forward IRT product offering. To a lesser extent, the increase is attributable to the 2010 Three Month Period including a full quarter of application hosting services revenues relating to the acquisition of Covance IVRS/IWRS in August 2009, while the 2009 Three Month Period included no revenue related to the acquisition. The decrease in international revenues is primarily related to a decrease in electronic data capture revenues and clinical data management revenues of $2.3 million and $0.9 million, respectively. These decreases were partially off-set by increases in interactive response technology revenues and safety revenues of $1.4 million and $0.2 million, respectively.

Cost of Revenues

	Three Months Ended June 30,
	2009				2010
			Percentage of Related				Percentage of Related		Change
Costs of Revenues (in thousands)	Amount		Revenues		Amount		Revenues		Amount			%

License	$	785	5	%	$	574	4	%	$	(211	)	(27	)%
Services	21,245		56		25,283		59		4,038			19
Total	$	22,030	42	%	$	25,857	44	%	$	3,827		17	%

The cost of license revenues decreased when comparing the 2010 Three Month Period to the 2009 Three Month Period primarily due to a $0.3 million decrease in royalty expenses. The increase in cost of services in the 2010 Three Month Period was primarily due to increases in outside contractor expenses of $1.1 million, and employee-related expenses of $0.8 million related to a headcount increase of 47 people. We also had expense increases for depreciation, network hosting and customer pass-though of $0.8 million, $0.8 million and $0.7 million, respectively.

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Gross Margin

	Three Months Ended June 30,
	2009				2010
			Percentage of Related				Percentage of Related		Change
Gross Margin (in thousands)	Amount		Revenues		Amount		Revenues		Amount		%

License	$	13,910	95	%	$	14,808	96	%	$	898	6	%
Services	16,561		44		17,928		41		1,367		8
Total	$	30,471	58	%	$	32,736	56	%	$	2,265	7	%

The overall gross margin percentage decreased in the 2010 Three Month Period as compared to the 2009 Three Month Period due to a lower service margin percentage. The decrease in the services gross margin percentage was due to higher services expenses as a percentage of related revenues, as well as the inclusion of our Clinical Development Center product from the acquisition of Waban in April 2009, the inclusion of our OutcomLogix product from the acquisition of Maaguzi in July 2009 and the acquisition of Covance IVRS/IWRS in August 2009. The license gross margin percentage increased slightly in the 2010 Three Month Period as compared to the 2009 Three Month Period due to increased sales in products that do not carry an associated royalty expense. It is likely that gross margin, as a percentage of revenues, will fluctuate quarter by quarter due to the timing and mix of license and service revenues, and the type, amount and timing of service required in delivering certain projects.

Operating Expenses

	Three Months Ended June 30,
	2009				2010
			Percentage				Percentage		Change
Operating Expenses (in thousands)	Amount		of Revenues		Amount		of Revenues		Amount		%

Sales and marketing	$	8,216	15	%	$	9,154	16	%	$	938	11	%
Research and development	9,425		18		10,031		17		606		6
General and administrative	9,715		19		10,774		18		1,059		11
Total	$	27,356	52	%	$	29,959	51	%	$	2,603	10	%

Sales and Marketing. Sales and marketing expenses increased in the 2010 Three Month Period primarily due to increases of $0.4 million in both commissions and amortization expenses. We also had increases in employee-related expense of $0.1 million related to a headcount increase of 16 people. We expect that our sales and marketing expense will continue to increase in absolute dollars as commission expense increases with our revenues and as we continue to expand sales coverage and to build brand awareness through what we believe are the most cost effective channels available. We expect that such increases may fluctuate, however, due to the timing of marketing programs.

Research and Development. Research and development expenses increased in the 2010 Three Month Period primarily due to an increase in employee-related expenses of $0.3 million related to a headcount increase of 32 people, and an increase in stock-based compensation expense of $0.3 million. We expect that our research and development costs will continue to increase in absolute dollars as we continue to add features and functionality to our products, introduce additional integrated software solutions to our product suite and expand our product and service offerings.

General and Administrative. General and administrative expenses increased in the 2010 Three Month Period primarily due to increases in professional fees and outside contractor expenses of $1.0 million and $0.8 million, respectively. These increases were partially off-set by a decrease in stock-based compensation expenses of $0.6 million. Professional fees expense in the 2010 Three Month Period includes $1.7 million related to deal costs associated with our acquisition by Oracle, representing an increase in deal costs of $1.3 million from the 2009 Three Month Period. We expect that in the future our general and administrative expenses will increase in absolute dollars as we add personnel and incur additional costs related to the growth of our business and operations.

Other Income

	Three Months Ended June 30,
	2009				2010
			Percentage					Percentage		Change
Other income (in thousands)	Amount		of Revenues		Amount			of Revenues		Amount			%

Interest income	$	502	1	%	$	276		—	%	$	(226	)	(45	)%
Other income (expense), net	56		—		(385		)	—		(441		)	(788	)
Total other income	$	558	1	%	$	(109	)	—	%	$	(667	)	(120	)%

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The decrease in interest income in the 2010 Three Month Period was primarily due to the net decrease in cash and cash equivalents and short and long-term investments. The decrease in other, net in the 2010 Three Month Period was primarily due to the liquidation of our auction rate securities as well as greater losses associated with foreign currency transactions.

Provision for Income Taxes

	Three Months Ended June 30,
	2009				2010
			Percentage				Percentage		Change
Provision for income taxes (in thousands)	Amount		of Revenues		Amount		of Revenues		Amount			%

Provision for income taxes	$	1,446	3	%	$	1,046	2	%	$	(400	)	(28	)%

Our effective tax rate for the 2009 Three Month Period and the 2010 Three Month Period was 39% and 39%, respectively. The federal research and development tax credit expired effective December 31, 2009 and, as such, we have not forecasted a current tax benefit for this item in 2010.

Overview of Results of Operations in the Six Months Ended June 30, 2009 and 2010

Total revenues increased by 14%, or $14.5 million, in the six months ended June 30, 2010 (“the 2010 Six Month Period”), compared to the six months ended June 30, 2009 (“the 2009 Six Month Period”), primarily due to an increase in total service revenues of 18%, or $12.8 million, and to a lesser extent, an increase in license revenues of 6%, or $1.7 million. Our revenue growth included a 22% increase in revenues from contract research organizations, or CROs, which increased to $26.9 million from $22.1 million. The increase in services revenues is primarily associated with revenues from application hosting services due to increased production trials under management for our InForm license customers as well as trials under management as a result of our recent acquisitions of Maaguzi, and Covance IVRS/IWRS.

Our gross margin increased by 8%, or $4.8 million, in the 2010 Six Month Period compared to the 2009 Six Month Period, primarily due to a higher increase in revenues in relation to cost of revenues. The increase in gross margins is primarily due to the increase in the services gross margin of $2.9 million resulting from higher services revenues and lower services expense. With the continued shift in our revenues from license revenues to services revenues associated primarily with our recent acquisitions and our ICRS strategy, our ability to continue to maintain our overall gross margins will depend on our ability to continue to increase services efficiencies and lower our cost of delivery.

Operating income in the 2010 Six Month Period of $5.8 million decreased by $2.4 million, or 30%, compared to the 2009 Six Month Period. Operating income for the 2009 Six Month Period and the 2010 Six Month Period included $6.2 million and $6.8 million of stock-based compensation expense, respectively, and $1.6 million and $2.9 million of amortization expense related to acquisitions, respectively. We expect to increase operating income through increased revenues from our recent acquisitions and execution of our ICRS strategy and through our ability to lower services and operating expenses as a percentage of revenues through improved efficiencies throughout our services organization and leveraging our operating expenses as revenues continue to increase.

The results of the 2010 Six Month Period compared to the 2009 Six Month Period were impacted by foreign exchange rate fluctuations, resulting in a decrease in revenue of approximately $2.1 million, or 2% of revenues, and a decrease in expense of approximately $1.0 million, or 1% of expenses.

Revenues

	Six Months Ended June 30,
	2009				2010
			Percentage of				Percentage of		Change
Revenues by Product Line (in thousands) (1)	Amount		Revenues		Amount		Revenues		Amount			%

Electronic data capture	$	74,903	74	%	$	80,017	69	%	$	5,114		7	%
Clinical data management	11,440		11		9,650		8		(1,790		)	(16	)
Safety	11,462		11		12,260		11		798			7
Interactive Response Technology	3,512		4		13,866		12		10,354			295
Total	$	101,317	100	%	$	115,793	100	%	$	14,476		14	%

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

The increase in interactive response technology revenues is primarily related to increased application hosting revenues of $10.3 million. To a lesser extent the increase is attributable to revenues related to the acquisition of Covance IVRS/IWRS in August 2009. The increase in electronic data capture revenues is primarily due to an increase in application hosting services of $2.7 million as well as an increase in license revenues of $2.5 million. The increase in safety revenues is primarily due to increases in license and consulting revenues of $0.5 million and $0.3 million, respectively. The decrease in clinical data management is primarily due to a decrease in license and customer support revenues of $1.4 million and $0.6 million, respectively.

	Six Months Ended June 30,
	2009				2010
			Percentage				Percentage		Change
Revenues by Type (in thousands)	Amount		of Revenues		Amount		of Revenues		Amount			%

License	$	28,811	29	%	$	30,523	26	%	$	1,712		6	%
Application hosting services	56,438		56		69,462		60		13,024			23
Consulting services	9,561		9		9,525		8		(36		)	*NM
Customer support	6,507		6		6,283		6		(224		)	(3	)
Total	$	101,317	100	%	$	115,793	100	%	$	14,476		14	%

* Not Meaningful

Total revenues increased in the 2010 Six Month Period as compared to the 2009 Six Month Period, due to increases in application hosting and license revenues. The increase in the 2010 Six Month Period revenues associated with our application hosting services was partially due to a 17% increase in electronic data capture production trials under management from approximately 968 in the 2009 Six Month Period to approximately 1,129 in 2010, which includes application hosting services trials and trials hosted for our InForm license customers. The increase in production trials relates to a relative increase in the number of customers who purchase all trial-related services from us, customers who license InForm and build their own studies. Our application hosting services also increased due to the impact of additional trials under management for our web and phone-integrated Phase Forward IRT product offerings with production trials increasing 162% from 104 in the 2009 Six Month Period to 274 in the 2010 Six Month Period. The increase in license revenues was primarily the result of additional electronic data capture revenues, and to a lesser extent, growth in sales relating to our safety products. The decrease in consulting services was primarily attributable to lower revenue related to consulting services provided for our electronic data capture which were slightly off-set by increased revenue related to consulting services provided for our safety products. The decrease in customer support revenues was primarily due to decreases in clinical data management products which were slightly off-set by increased revenue related to electronic data capture products. Our revenues were not significantly impacted by price increases or decreases. Inflation had only a nominal impact on our revenues.

	Six Months Ended June 30,
	2009				2010
			Percentage				Percentage		Change
Revenues by Geography (in thousands)	Amount		of Revenues		Amount		of Revenues		Amount			%

North America	$	62,065	61	%	$	75,185	65	%	$	13,120		21	%

United Kingdom	26,821		27		26,782		23		(39		)	*NM
France	7,935		8		7,698		7		(237		)	(3	)
Asia Pacific	4,496		4		6,128		5		1,632			36
International subtotal	39,252		39		40,608		35		1,356			3
Total	$	101,317	100	%	$	115,793	100	%	$	14,476		14	%

* Not Meaningful

The increase in revenues worldwide was primarily due to an increase in interactive response technology revenues and electronic data capture revenues of $10.4 million and $5.1 million, respectively. The increase in North American revenues is primarily related to an increase in interactive response technology revenues and electronic data capture revenues of $8.1 million and $5.0 million, respectively. The increase in interactive response technology revenues is primarily a result of increased sales of our Phase Forward IRT product offering. To a lesser extent, the increase is attributable to the 2010 Six Month Period including a full quarter of

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application hosting services revenues relating to the acquisition of Covance IVRS/IWRS in August 2009, while the 2009 Six Month Period included no revenue related to the acquisition. The increase in international revenues is primarily related to an increase in interactive response technology revenues, safety revenues and electronic data capture revenues of $2.3 million, $0.7 million and $0.1 million, respectively. These increases were slightly off-set by a decrease in clinical data management revenues of $1.7 million.

Costs of Revenues

	Six Months Ended June 30,
	2009				2010
			Percentage of Related				Percentage of Related		Change
Costs of Revenues (in thousands)	Amount		Revenues		Amount		Revenues		Amount			%

License	$	1,351	5	%	$	1,140	4	%	$	(211	)	(16	)%
Services	41,144		57		50,999		60		9,855			24
Total	$	42,495	42	%	$	52,139	45	%	$	9,644		23	%

The cost of license revenues decreased when comparing the 2010 Six Month Period to the 2009 Six Month Period primarily due to a $0.3 million decrease in royalty expenses. The increase in cost of services in the 2010 Six Month Period was primarily due to increases in employee-related expenses of $3.3 million related to a headcount increase of 47 people, and in depreciation expenses of $1.7 million. We also had expense increases for outside contractors, network hosting and customer pass-though expenses of $1.6 million, $1.4 million and $1.0 million.

Gross Margin

	Six Months Ended June 30,
	2009				2010
			Percentage of Related				Percentage of Related		Change
Gross Margin (in thousands)	Amount		Revenues		Amount		Revenues		Amount		%

License	$	27,460	95	%	$	29,383	96	%	$	1,923	7	%
Services	31,362		43		34,271		40		2,909		9
Total	$	58,822	58	%	$	63,654	55	%	$	4,832	8	%

The overall gross margin percentage decreased in the 2010 Six Month Period as compared to the 2009 Six Month Period due to a lower service margin percentage. The decrease in the services gross margin percentage was due to higher services expenses as a percentage of related revenues, as well as the inclusion of our Clinical Development Center product from the acquisition of Waban in April 2009, the inclusion of our OutcomLogix product from the acquisition of Maaguzi in July 2009 and the acquisition of Covance IVRS/IWRS in August 2009. The license gross margin percentage increased slightly in the 2010 Six Month Period as compared to the 2009 Six Month Period due to increased sales in products that do not carry an associated royalty expense. It is likely that gross margin, as a percentage of revenues, will fluctuate quarter by quarter due to the timing and mix of license and service revenues, and the type, amount and timing of service required in delivering certain projects.

Operating Expenses

	Six Months Ended June 30,
	2009				2010
			Percentage				Percentage		Change
Operating Expenses (in thousands)	Amount		of Revenues		Amount		of Revenues		Amount		%

Sales and marketing	$	15,422	15	%	$	18,140	16	%	$	2,718	18	%
Research and development	17,605		17		19,729		17		2,124		12
General and administrative	17,519		17		19,958		17		2,439		14
Total	$	50,546	49	%	$	57,827	50	%	$	7,281	14	%

Sales and Marketing. Sales and marketing expenses increased in the 2010 Six Month Period primarily due to increases of $0.8 million in both commissions and amortization expenses. We also had an increase in employee-related expense of $0.7 million related to a headcount increase of 16 people, as well as increases in travel and outside contractor expenses of $0.2

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million and $0.1 million, respectively. We expect that our sales and marketing expense will continue to increase in absolute dollars as commission expense increases with our revenues and as we continue to expand sales coverage and to build brand awareness through what we believe are the most cost effective channels available. We expect that such increases may fluctuate, however, due to the timing of marketing programs.

Research and Development. Research and development expenses increased in the 2010 Six Month Period primarily due to an increase in employee-related expenses of $1.6 million related to a headcount increase of 32 people, and an increase related to stock-based compensation of $0.7 million. These increases were partially off-set by a decrease in outside contractor expenses of $0.3 million. We expect that our research and development costs will continue to increase in absolute dollars as we continue to add features and functionality to our products, introduce additional integrated software solutions to our product suite and expand our product and service offerings.

General and Administrative. General and administrative expenses increased in the 2010 Six Month Period primarily due to increases of $1.1 million in each of outside contractor, depreciation and professional fees. These increases were partially off-set by decreases in employee-related expenses and stock-based compensation of $0.4 million and $0.3 million, respectively. Professional fees expense in the 2010 Three Month Period includes $1.9 million related to deal costs associated with our acquisition by Oracle, representing an increase in deal costs of $1.6 million from the 2009 Three Month Period. We expect that in the future our general and administrative expenses will increase in absolute dollars as we add personnel and incur additional costs related to the growth of our business and operations.

Other Income

	Six Months Ended June 30,
	2009				2010
			Percentage					Percentage of		Change
Other income (in thousands)	Amount		of Revenues		Amount			Revenues		Amount			%

Interest income	$	1,142	1	%	$	592		—	%	$	(500	)	(48	)%
Other income (expense), net	465		—		(569		)	—		(1,034		)	(222	)
Total other income	$	1,607	1	%	$	23		—	%	$	(1,584	)	(99	)%

The decrease in interest income in the 2010 Six Month Period was primarily due to the net decrease in cash and cash equivalents and short and long-term investments. The decrease in other, net in the 2010 Six Month Period was primarily due to greater losses associated with foreign currency transactions as well as the liquidation of our auction rate securities.

Provision for Income Taxes

	Six Months Ended June 30,
	2009				2010
			Percentage				Percentage		Change
Provision for income taxes (in thousands)	Amount		of Revenues		Amount		of Revenues		Amount			%

Provision for income taxes	$	3,578	4	%	$	2,295	2	%	$	(1,283	)	(36	)%

Our effective tax rate for the 2009 Six Month Period and the 2010 Six Month Period was 36% and 39%, respectively. Our effective tax rate for the 2010 Six Month Period is higher than the effective tax rate for the 2009 Six Month Period principally due to the benefit derived in the prior year from the federal research and development tax credit. The federal research and development tax credit expired effective December 31, 2009 and, as such, we have not forecasted a current tax benefit for this item in 2010.

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Liquidity and Capital Resources

Our principal sources of liquidity were unrestricted cash, cash equivalents, short and long-term investments totaling $135.5 million and $136.5 million at December 31, 2009 and June 30, 2010, respectively, and accounts receivable of $56.0 million and $43.5 million, respectively. For the periods ended December 31, 2009 and June 30, 2009 and 2010 we had no outstanding debt and, in general, we do not enter into long-term binding purchase commitments. We currently expect to retain any future earnings for use in the operation and expansion of our business, including our stock repurchase program, and do not anticipate paying any cash dividends on our common stock.

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

Substantially all of our long-lived assets at December 31, 2009 and June 30, 2010 are located in the United States.

Net Operating Loss Carryforwards

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

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

Auction Rate Securities

Included within our investment portfolio at December 31, 2009 and June 30, 2010 were $23.8 million and $12.0 million of auction rate securities, or ARS, at par value, which are classified as short-term investments on our unaudited condensed consolidated balance sheets, and recorded at fair market value. These ARS are debt instruments issued by various states throughout the United States to finance student loans. The types of ARS that we own are backed by student loans, 95% of which are guaranteed under the Federal Family Education Loan Program, and all had credit ratings of AAA (or equivalent) from a recognized rating agency.

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

In November 2008, we accepted an offer from and entered into an agreement (the “Agreement”) with UBS with respect to all of our ARS held at that time. As a UBS client who held ARS, we received certain rights, which entitled us to sell ARS to UBS affiliates during the period from June 30, 2010 to July 2, 2012 for a price equal to par value. In accepting the Agreement, we granted UBS the authority to sell or auction the ARS at par at any time up until the expiration date of the Agreement and released UBS from any claims relating to the marketing and sale of ARS. UBS obligations under the Agreement were not secured by its assets and did not require UBS to obtain any financing to support its performance obligations under the Agreement. UBS disclaimed any assurance that it would have sufficient financial resources to satisfy its obligations under the Agreement.

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As of December 31, 2009 we held $23,800 in ARS at par with a fair value of $23,715. During the six months ended June, 30 2010, $11,800 of our ARS were called by the respective issuers at par value and $12,000 were liquidated on June 30, 2010 at par value in accordance with our agreement with UBS discussed above. For the three and six months ended June 30, 2010 a gain of $38 and $85, respectively was recorded in our accompanying unaudited condensed consolidated statements of income in connection with the execution of our agreement with UBS and the liquidation and final settlement of all of our ARS.

We classified the $12.0 million of ARS liquidated on June 30, 2010 as short-term investments in the accompanying unaudited condensed consolidated balance sheets as of June 30, 2010 since the transaction did not settle until July 2, 2010.

Cash Flows

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

Net Cash Provided by Operating Activities. Net cash provided by operating activities was $31.2 million in the six months ended June 30, 2010, which was more than net income of $3.6 million. The difference is primarily due to various changes in working capital accounts of $9.8 million which include changes to accounts receivable and deferred revenue of $12.8 million and $5.9 million, respectively, off-set by changes to accrued expenses and accounts payable of $6.1 million and $2.2 million, respectively. Non-cash adjustments included $11.7 million of depreciation and amortization expense, $6.8 million of stock-based compensation expense, and $4.3 million related to the change in fair value of the securities settlement agreement, partially offset by a $4.4 million change in fair value of our investments.

Net Cash Provided by Investing Activities. Net cash provided by investing activities was $14.7 million during the six months ended June 30, 2010, which was primarily due to proceeds from maturities of short-term and long-term investments of $60.4 million. Cash provided by investing activities was partially offset by the purchase of short and long-term investments of $39.8 million, and the purchase of property and equipment of $5.8 million.

Net Cash Used In Financing Activities. Net cash used in financing activities was $27.7 million in the six months ended June 30, 2010, primarily due to the purchase of treasury stock of $26.0 million.

Contractual Obligations

Our principal commitments consist of obligations under non-cancelable operating leases for office space. The following table of our material contractual obligations as of December 31, 2009 summarizes the aggregate effect that these obligations are expected to have on our cash flows in the periods indicated:

Payments Due by Period

Contractual Obligations (in thousands)

Total

1 year or less

2-3 years

4-5 years

More than
5 years

Phase Forward Inc 10-Q