Cautionary Statement on Risks Associated With Forward-Looking Statements

You should read the following discussion in conjunction with our Condensed Consolidated Financial Statements and related notes. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. The words "believe," "expect," "target," "goal," "project," "anticipate," "predict," "intend," "plan," "estimate," "may," "will," "should," "could," and similar expressions and their negatives are intended to identify such statements. Forward-looking statements are not guarantees of future performance, anticipated trends or growth in businesses, or other characterizations of future events or circumstances and are to be interpreted only as of the date on which they are made. We undertake no obligation to update or revise any forward-looking statement. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described below and elsewhere in this Quarterly Report on Form 10-Q, and in other documents we file with the SEC from time to time.

Financial Statement Overview

The Company experienced changes between the 2009 and 2008 periods which affect the comparability of the periods. These changes include a strategic initiative that began in February 2008 to increase overall product development capacity through a partnering arrangement with Tata Consultancy Services ("TCS"). Concurrent with this partnering arrangement, we reduced our overall workforce by 69 employees, primarily in the services and software development areas. The 2008 period includes severance costs of $0.6 million related to this workforce reduction, salary and benefits for these employees for approximately one month, and costs incurred related to the commencement of the Company's relationship with TCS. The 2009 period reflects only external consulting costs associated with the partnering services.

The 2008 period also includes a $1.1 million loss on sale of assets associated with our April 2008 sale of substantially all of the assets of our wholly owned subsidiaries, QuadraMed International Pty Limited in Australia and QuadraMed International Limited in the United Kingdom. The products contained within these subsidiaries focused on standalone lab and radiology products installed in the United Kingdom, Australia and New Zealand. The 2008 period includes four months of revenue, personnel cost, operating expenses and amortization of intangible assets associated with these products that are not included in the 2009 period.

Additionally, the 2009 period includes one-time severance and accelerated stock compensation costs totaling $1.7 million associated with changes in our executive team.

A significant difference in operating cash flows between periods relates to the timing of payments received and payments disbursed for our contract with the Department of Veterans Affairs. The license period for our Department of Veterans Affairs Task Order begins on October 1 of each year and ends on September 30 of the following year, thus spanning the fourth quarter of our calendar year through the third quarter of our following calendar year. Our annual license fee from the Department of Veterans Affairs was $18.3 million for the period October 1, 2007 to September 30, 2008 ("FY 2008") and $19.9 million for the period October 1, 2008 to September 30, 2009 ("FY 2009"). These fees were billed in advance and paid in lump sum by the Department of Veterans Affairs with the FY 2008 payment received in our first quarter of 2008 and the FY 2009 payment received in our fourth quarter of 2008. Upon receipt of these payments, we in turn remitted approximately 44% of the amount received to our subcontractors (recorded as royalty expense) in accordance with the terms of our agreements with them. Thus, during our fiscal year ended December 31, 2008, we received payments totaling $38.2 million and disbursed approximately $16.7 million; in addition, we incurred approximately $1.6 million of direct internal costs related to each fiscal year of our contract with the Department of Veterans Affairs. As a result, in respect of our contract with the Department of Veterans Affairs, we had total net cash provided during 2008 of approximately $19.8 million covering the FY 2008 and FY 2009 licensing periods.

Because of the aforementioned prepayment made in the fourth quarter of 2008, even though we recognized license revenue and subcontractor royalty expense during the nine months ended September 30, 2009, we did not have cash receipts from the Department of Veterans Affairs license for the period. We were awarded a one year renewal of the Department of Veterans Affairs Task Order on October 21, 2009 covering the 2009 period from October 1, 2009 to September 30, 2010.

On October 21, 2009, the Department of Veterans Affairs awarded the Company a Task Order contract under the existing BPA between the Company and the Department of Veterans Affairs. The Task Order has a stated value of approximately $24.1 million and includes (i) a renewal of the Department of Veterans Affairs term license for the Company's Encoder Product Suite and
(ii) related training services for all Department of Veterans Affairs Medical Centers nationwide for the federal government's fiscal year 2010, which extends from October 1, 2009 to September 30, 2010. We have billed $20.5 million in annual license fees for this license period. Upon collection of amounts due from the Department of Veterans Affairs, we expect to pay approximately $8.8 million, or 43%, in royalties to our subcontractors for this contract. On October 29, 2009, the Department of Veterans Affairs paid the Company $20.5 million against the Task Order representing payment in full of the annual license fee.

Net income for the nine months ended September 30, 2009 was $3.8 million compared to $4.6 million for the same period in 2008. This decrease between periods primarily resulted from a decrease of $2.2 million in income from operations between periods associated primarily with a decrease in revenues, offset by a $1.3 million change in our income tax expense. Our income from operations between periods was impacted by the items described above and a $5.2 million decrease in revenue between periods. Our 2008 period included $1.4 million of revenue associated with our completion of an analysis of certain older contracts and service agreements for which amounts were previously recorded as deferred revenue. As a result of this analysis, it was determined that services had been completed and that no further service obligations were outstanding. Accordingly, the amounts previously deferred were recognized as revenue. Our 2008 period also included $1.1 million of revenue associated with a correction of an error in prior periods. Net loss attributable to common shareholders for the nine months ended September 30, 2009 was $0.4 million, or ($0.05) per basic and diluted share, compared to income of $0.4 million, or $0.05 per basic and diluted share in the 2008 period. Net (loss) income attributable to common shareholders includes a preferred stock dividend payment of $4.1 million in each of the respective periods.

As of September 30, 2009, we had $19.0 million in unrestricted cash and investments, compared to $27.9 million as of December 31, 2008. The $8.9 million decrease in cash and investment was primarily a result of the timing of cash collections from customers, in particular the Department of Veterans Affairs, and the payment of operating expenses. Our Days Sales Outstanding ("DSO") was 69 at September 30, 2009 compared to DSO of 49 at September 30, 2008 and 51 at December 31, 2008. The increase in our DSO is related primarily to the timing of milestone billings.

Results of Operations (unaudited)

The following table sets forth selected data for the three month periods ended
September 30, 2009 and 2008. Percentages are expressed as a percentage of total
revenues, except for cost of revenue, which is expressed as a percentage of the
related revenue classification.



                                                                  Three months ended
                                                                    September 30,
                                                             2009                    2008
Revenue
Services                                               $  5,803      16 %      $  5,930      16 %
Maintenance                                              16,849      47 %        18,205      47 %
Installation and other                                    3,064       9 %         3,153       8 %

Services and other revenue                               25,716      72 %        27,288      71 %
Term Licenses                                             8,500      24 %         8,099      21 %
Perpetual Licenses                                        1,446       4 %         3,127       8 %

License revenue                                           9,946      28 %        11,226      29 %
Hardware revenue                                            140       0 %            75       0 %

Total revenue                                            35,802     100 %        38,589     100 %

Cost of revenue
Cost of services and other revenue                       10,502      41 %        11,487      42 %
Royalties and other                                       3,592      36 %         3,671      33 %
Amortization of acquired technology and
capitalized software                                        219       2 %           245       2 %

Cost of license revenue                                   3,811      38 %         3,916      35 %
Cost of hardware revenue                                    217     155 %            64      85 %

Total cost of revenue                                    14,530      41 %        15,467      40 %

Gross margin                                             21,272      59 %        23,122      60 %

Operating expenses
General and administration                                4,876      14 %         5,027      13 %
Software development                                      9,316      26 %         8,328      22 %
Sales and marketing                                       4,247      12 %         4,968      13 %
Loss on sale of assets                                       -        0 %            46       0 %
Amortization of intangible assets and depreciation          856       2 %           761       2 %

Total operating expenses                                 19,295      54 %        19,130      50 %

Income from operations                                 $  1,977                $  3,992

The following table sets forth selected data for the nine month periods ended September 30, 2009 and 2008. Percentages are expressed as a percentage of total revenues, except for cost of revenue, which is expressed as a percentage of the related revenue classification.

                                                                 Nine months ended
                                                                   September 30,
                                                           2009                     2008
Revenue
Services                                             $  16,441      16 %      $  17,102      15 %
Maintenance                                             49,349      46 %         51,734      46 %
Installation and other                                   9,133       9 %          9,614       9 %

Services and other revenue                              74,923      71 %         78,450      70 %
Term Licenses                                           25,925      24 %         23,651      21 %
Perpetual Licenses                                       5,454       5 %          9,260       8 %

License revenue                                         31,379      29 %         32,911      29 %
Hardware revenue                                           387       0 %            505       1 %

Total revenue                                          106,689     100 %        111,866     100 %

Cost of revenue
Cost of services and other revenue                      31,615      42 %         34,324      44 %

Royalties and other                                     10,944      35 %         11,365      35 %
Amortization of acquired technology and
capitalized software                                       676       2 %            756       2 %

Cost of licenses revenue                                11,620      37 %         12,121      37 %
Cost of hardware revenue                                   361      93 %            328      65 %

Total cost of revenue                                   43,596      41 %         46,773      42 %

Gross margin                                            63,093      59 %         65,093      58 %

Operating expenses
General and administration                              16,619      16 %         14,907      13 %
Software development                                    25,937      24 %         25,362      23 %
Sales and marketing                                     13,117      12 %         14,105      13 %
Loss on sale of assets                                      -        0 %          1,161       1 %
Amortization of intangible assets and
depreciation                                             2,387       2 %          2,400       2 %

Total operating expenses                                58,060      54 %         57,935      52 %

Income from operations                               $   5,033                $   7,158

Revenue

Revenue is recognized during the respective periods from various sources, including but not limited to amounts initially recorded as deferred revenue for which the Company has now completed its contractual commitments; service revenue relating to installation, consulting and training; maintenance contracts that renew periodically, typically on an annual basis; and revenues recognized on a cash-basis.

Total revenue. Total revenue for the three months ended September 30, 2009 was $35.8 million, a decrease of $2.8 million or 7%, compared to $38.6 million for the three months ended September 30, 2008. Total revenue for the nine months ended September 30, 2009 was $106.7 million, a decrease of $5.2 million, or 5%, from $111.9 million for the nine months ended September 30, 2008. The decrease between the three months ended September 30, 2009 and the three months ended September 30, 2008 was primarily due to fewer implementations and services completed in the 2009 period compared to 2008 for the Care and Patient Revenue Management, Smart Identity Management and Health Information Suite products as well as decreased maintenance revenue for QCPR and Care and Patient Revenue Management products. The decrease between the nine months ended

September 30, 2009 and September 30, 2008 was also related to fewer implementations and services completed between periods and decreased maintenance revenue. The three and nine month periods ended September 30, 2008 included approximately $0.4 million and $1.4 million of non-recurring revenue related to the closeout of older contracts previously included in deferred revenue. After a thorough analysis of these contracts, we determined that all services had been completed, that no further obligations were outstanding, and that all cash had been collected; consequently, we recognized license revenue of approximately $1.1 million and services revenue of approximately $0.3 million from these contracts during the nine months ended September 30, 2008. In addition, in the third quarter of 2008, approximately $1.1 million of maintenance revenue was included related to the correction of an error in revenue recognized in prior periods. The error was determined to be immaterial. If these amounts were removed from the 2008 periods, the declines in revenue from 2008 to 2009 would have been only $1.3 million for the three month period and $2.7 million for the nine month period.

Services and other revenue. Services and other revenue consists of professional services, such as implementation and installation services, training, maintenance (which consists of technical support and product upgrades), and reimbursable expenses. Professional services are typically provided over a period of three to nine months for the Health Information Management Suite and two to three years for our Care and Patient Revenue Management and QCPR products. These services are provided subsequent to the signing of a software license agreement and are integral to the delivery of our software licenses to our customer. Our maintenance revenue depends on both new licenses of our software products and renewals of maintenance agreements by our existing customer base.

Services revenue for the three months ended September 30, 2009 was $5.8 million compared to $5.9 million for the three months ended September 30, 2008. The net decrease of $0.1 million was principally due to fewer services completed for our Smart Identity Management products, which was partially offset by increased services for our QCPR products. Services revenue was 16% of our total revenue for both of the three month periods ended September 30, 2009 and 2008.

Services revenue for the nine month period ended September 30, 2009 of $16.4 million decreased from $17.1 million for the same period in 2008. Services revenue was 16% and 15% of our total revenue for the nine months ended September 30, 2009 and 2008, respectively. The overall decrease in services revenue between periods was primarily due to fewer services completed for our Smart Identity Management and our Care and Patient Revenue Management products, partially offset by increased services related to our QCPR products.

Maintenance revenue for the three months ended September 30, 2009 was $16.8 million compared to $18.2 million for the three months ended September 30, 2008. Maintenance revenue as a percentage of total revenue was 47% for both periods. The decrease in the three month periods was related to our QCPR product and our Care and Patient Revenue Management products. This decrease is partially attributed to the $1.1 million of one-time maintenance revenue recognized in the three months ended September 30, 2008, as described above.

Maintenance revenue for the nine months ended September 30, 2009 was $49.3 million compared to $51.7 million for the nine months ended September 30, 2008. Maintenance revenue was 46% of total revenue during both periods. The decrease in the nine month periods was due to lower QCPR maintenance revenue in the 2009 period compared to the 2008 period. Our 2008 maintenance revenue included higher amounts associated with deferred maintenance revenue acquired with our acquisition of the QCPR business from Misys that was generally recognized during the 2008 period. The sale of our Lab and Radiology products in April 2008 as well as the $1.1 million of one-time maintenance revenue recognized as described above also attributed to the decrease in the nine months ended September 30, 2009 compared to the corresponding period in 2008.

Installation revenue related to the Health Information Management Suite term licenses is recognized ratably over the license term. Installation and other revenue for Health Information Management Suite perpetual licenses, Patient Access and government solution products are typically recognized upon completion of

implementation. The installation and other revenue for many of our other products, including Care and Patient Revenue Management and QCPR products, is recognized on a contract basis of accounting.

Installation and other services revenue decreased by $0.1 million to $3.1 million for the three months ended September 30, 2009 from $3.2 million during the three months ended September 30, 2008. The decrease resulted primarily from the timing of the completion of installations between periods. Installation and other services revenue was approximately 9% and 8% of our total revenues for the three months ended September 30, 2009 and 2008, respectively.

Installation and other services revenue for the nine months ended September 30, 2009 was $9.1 million compared to $9.6 million for the nine months ended September 30, 2008. The $0.5 million decrease between periods resulted primarily from the timing of the completion of installations for our Government and Smart Identity Management and Health Information Management Suite products between periods, offset by increases associated with our QCPR products. Installation and other services revenue was 9% of our total revenues for both periods.

Licenses. License revenue consists of fees and licenses for our owned, proprietary software, as well as third-party owned software that we bundle into our suite of products. Overall, license revenue decreased $1.3 million, or 12%, to $9.9 million for the three months ended September 30, 2009 from $11.2 million for the three months ended September 30, 2008. License revenue was approximately 28% and 29% of our total revenue for the respective 2009 and 2008 periods. Licenses revenue was $31.3 million for the nine months ended September 30, 2009 compared to $32.9 million for the nine months ended September 30, 2008. License revenue was approximately 29% of our total revenue during both periods. The decreases in both the three and nine month periods were primarily related to completion of significant projects in 2008 for our Scheduling and Health Information Management Suite perpetual license products. A decrease in the license revenue related to the Care and Patient Revenue Management products was offset by an increase in the QCPR products. The aforementioned one-time license revenue recorded in 2008 related to the closeout of older contracts previously included in deferred revenue also attributed to approximately $1.1 million of the decrease in the nine months ended September 30, 2009 compared to the corresponding period in 2008.

Term license revenue increased 5%, or $0.4 million, to $8.5 million in the three months ended September 30, 2009 from $8.1 million in the same quarter last year. For the nine months ended September 30, 2009, term license revenue increased 9%, or $2.2 million, to $25.9 million from $23.7 million in the same period last year. The increase for the three month period was mainly attributable to project completions of Health Information Suite products sold as limited term licenses, whereas the increase for the nine month period was mainly due to increased term licenses revenue from the Government products.

Perpetual license revenue decreased 55%, or $1.7 million, to $1.4 million in the third quarter of 2009 from $3.1 million in the same quarter last year. Perpetual license revenue for the nine months ended September 30, 2009 was $5.5 million compared to $9.3 million for the nine months ended September 30, 2008, representing a decrease of approximately 41%, or $3.8 million. The decrease in the three months ended September 30, 2009 compared to the corresponding period in 2008 was primarily due to the completions of significant projects in the third quarter of 2008 for the Health Information Suite perpetual licenses and Scheduling products. Approximately $1.1 million of the decrease in the nine month period was attributed to the aforementioned one-time license revenue recognized in the 2008 periods related to the closeout of older contracts that were previously included in deferred revenue. The decrease in the nine month periods was also mainly related to the decreased completions of Scheduling and Health Information Suite perpetual license products in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.

Hardware. Hardware revenue consists of the sale of third-party hardware purchased specifically for use by our customers. Hardware revenue was $0.1 million for each of the three month periods and was less than 1% of total revenue during both three month periods.

Hardware revenue for the nine months ended September 30, 2009 of $0.4 million decreased compared to $0.5 million for the same period last year. Hardware revenue was 1% or less of total revenue during both nine month periods. Our hardware revenue may fluctuate from period to period based on the completion of hardware installations for our customers; however, we do not expect hardware installations to be a significant part of our ongoing revenue.

The following table is a summary roll-forward schedule of deferred revenue (in thousands):

                                                For the Three Months Ended
                                                       September 30,
                                                  2009                2008
        Deferred revenue, beginning balance   $      45,955        $   50,920
        Add: revenue deferred                        32,262            28,376
        Less: deferred revenue recognized           (35,213 )         (34,563 )

        Deferred revenue, ending balance      $      43,004        $   44,733


                                                 For the Nine Months Ended
                                                       September 30,
                                                  2009                2008
        Deferred revenue, beginning balance   $      53,190        $   36,111
        Add: revenue deferred                        92,982           112,945
        Less: deferred revenue recognized          (103,168 )        (104,323 )

        Deferred revenue, ending balance      $      43,004        $   44,733

Deferred revenue includes amounts billed to or received from customers for which revenue has not been recognized. Fluctuation of the deferred revenue balance depends on the timing associated with reaching billing milestones and revenue recognition criteria. Deferred revenue is typically increased when the Company invoices a customer based on the terms of the contracts and is decreased when revenue is recognized based on percentage of completion or attainment of a milestone, or the passage of time in the case of a contract recognized ratably. The majority of the Company's revenue flows through our deferred revenue accounts and is attributable to favorable payment terms such as execution payments and achievements of billing milestones prior to meeting all revenue recognition requirements. Deferred revenue tends to be greater in the first quarter of each year compared to subsequent quarters due to the issuance of annual maintenance invoices and in the fourth quarter due to the issuance of invoices related to our government solution products. The annual license term for our Department of Veterans Affairs contract begins on October 1 of each year.

The deferred revenue balance decreased approximately $10.2 million to $43.0 million at September 30, 2009 compared to $53.2 million at December 31, 2008. The September 30, 2009 balance was comprised of $12.8 million in deferred license revenue, $19.4 million in deferred maintenance revenue and $10.8 million in deferred services and other revenue. The balance as of December 31, 2008 was comprised of $28.2 million in deferred license revenue, $18.0 million in . . .