Amicas 10Q 2007 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2007


o		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 000-25311

AMICAS, Inc.

(Exact name of registrant as specified in its charter)


Delaware		59-2248411
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

20 Guest Street, Boston MA 02135
(Address of principal executive offices, including zip code)

(617) 779-7878
(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.Yesþ Noo

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

Large Accelerated Filero Accelerated Filerþ Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ

As of November 8, 2007 there were 44,773,431 shares of the registrant’s common stock, $.001 par value, outstanding.

AMICAS, Inc.

Form 10-Q

INDEX


	Page
Part I. Financial Information

Item 1. Financial Statements (unaudited)

Condensed Consolidated Balance Sheets — September 30, 2007 and December 31, 2006		2

Condensed Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2007 and 2006		3

Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2007 and 2006		4

Notes to Condensed Consolidated Financial Statements — September 30, 2007		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3. Quantitative and Qualitative Disclosures about Market Risk 23

Item 4. Controls and Procedures		24

Part II. Other Information

Item 1. Legal Proceedings		24

Item 1A. Risk Factors		24

Item 5. Other Information		35

Item 6. Exhibits		36

Signatures		37
EX-10.1 Separation agreement, dated October 25, 2007 by and between AMICAS, Inc. and Peter McClennen
EX-31.1 Certification of Chief Executive Officer Pursuant to Section 302
EX-31.2 Certification of Chief Financial Officer Pursuant to Section 302
EX-32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906

For further information, refer to the AMICAS, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the Securities and Exchange Commission on March 16, 2007.

AMICAS, Vision Series, Rad Stream, Office Solutions and AMICAS Insight Services are trademarks, service marks or registered trademarks of AMICAS, Inc. All other trademarks and company names mentioned are the property of their respective owners.

Part I. Financial Information

Item 1. Financial Statements (unaudited)

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)
(in thousands, except share data)


	September 30,			December 31,
	2007			2006

Assets
Current assets:
Cash and cash equivalents	$	7,778		$	7,331
Marketable securities		67,337			64,436
Accounts receivable, net of allowances of $752 and $1,050, respectively		11,536			11,387
Computer hardware held for resale		102			94
Prepaid expenses and other current assets		3,645			4,635

Total current assets		90,398			87,883


Property and equipment, less accumulated depreciation and amortization of $6,671 and $6,155, respectively		1,222			1,369
Goodwill		27,313			27,313
Acquired/developed software, less accumulated amortization of $7,502 and $6,035, respectively		8,498			7,665
Other intangible assets, less accumulated amortization of $1,636 and $1,316, respectively		1,764			2,084
Other assets		552			557

Total assets	$	129,747		$	126,871


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses	$	7,920		$	7,155
Accrued employee compensation and benefits		1,369			897
Deferred revenue, including unearned discounts of $0 and $336, respectively		10,866			10,867

Total current liabilities		20,155			18,919


Other liabilities, primarily unearned discounts re: outsourced printing services		—			397


Commitments and contingencies (NOTE D)

Stockholders’ equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized; none issued		—			—
Common stock, $.001 par value; 200,000,000 shares authorized, 51,296,823 and 51,066,966 shares issued, respectively		51			51
Additional paid-in capital		228,725			226,764
Accumulated other comprehensive income (loss)		32			(4	)
Accumulated deficit		(97,576	)		(97,616	)
Treasury stock, at cost, 6,523,392 shares		(21,640	)		(21,640	)

Total stockholders’ equity		109,592			107,555

Total liabilities and stockholders’ equity	$	129,747		$	126,871

See Accompanying Notes to Condensed Consolidated Financial Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)
(in thousands, except per share data)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006

Revenues
Maintenance and services	$	9,739		$	9,100		$	28,530		$	27,267
Software licenses and system sales		3,562			2,702			9,706			10,726

Total revenues		13,301			11,802			38,236			37,993


Costs and expenses
Cost of revenues:
Maintenance and services (a)		4,149			3,827			12,335			11,105
Software licenses and system sales, including amortization of software costs of $489, $489, $1,468 and $1,468, respectively		1,971			2,015			5,160			6,220
Selling, general and administrative (b)		5,290			4,671			16,147			15,904
Research and development (c)		2,112			2,175			6,412			6,630
Depreciation and amortization		300			297			836			944

		13,822			12,985			40,890			40,803

Operating loss		(521	)		(1,183	)		(2,654	)		(2,810	)
Interest income		992			978			2,879			2,765

Income (loss) from continuing operations, before income taxes		471			(205	)		225			(45	)

Provision for (Benefit from) income taxes		97			(32	)		185			63

Income (loss) from continuing operations		374			(173	)		40			(108	)
(Loss) gain on sale of discontinued operations, net of taxes $0, $478, $0 and $248, respectively		—			478			—			230

Net income	$	374		$	305		$	40		$	122


Earnings (loss) per share
Basic:
Continuing operations	$	0.01		$	(0.00	)	$	0.00		$	(0.00	)
Discontinued operations		—			0.01			—			0.00

	$	0.01		$	0.01		$	0.00		$	0.00


Diluted:
Continuing operations	$	0.01		$	(0.00	)	$	0.00		$	(0.00	)
Discontinued operations		—			0.01			—			0.00

	$	0.01		$	0.01		$	0.00		$	0.00


Weighted average number of shares outstanding
Basic		44,762			45,114			44,627			47,087
Diluted		45,663			45,114			45,504			47,087


(a)		– includes $29,000, $14,000, $77,000 and $37,000 in stock-based compensation expense for the three and nine months ended September 30, 2007 and September 30, 2006, respectively.

(b)		– includes $0.4 million, $0.4 million, $1.3 million and $1.2 million in stock-based compensation expense for the three and nine months ended September 30, 2007 and September 30, 2006, respectively.

(c)		– includes $67,000, $54,000, $0.2 million and $0.1 million in stock-based compensation expense for the three and nine months ended September 30, 2007 and September 30, 2006, respectively.

See Accompanying Notes to Condensed Consolidated Financial Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(in thousands)


	Nine Months Ended
	September 30,
	2007			2006

Operating activities
Income (Loss) from continuing operations	$	40		$	(108	)
Gain from discontinued operations		—			230

Net income		40			122

Adjustments to reconcile net income to cash provided by operating activities:
Gain from sale of discontinued operations		—			(230	)
Depreciation and amortization		837			944
Provisions for bad debts, returns and discounts		84			542
Gain on sale of fixed assets		—			(6	)
Amortization of software development costs		1,468			1,468
Non-cash stock compensation expense		1,548			1,381
Changes in operating assets and liabilities:
Accounts receivable		(233	)		3,281
Computer hardware held for resale, prepaid expenses and other		986			(3,235	)
Accounts payable and accrued expenses		1,237			(4,106	)
Deferred revenue including unearned discount		(398	)		1,295
Tax benefit from change in valuation allowance and other		—			443

Cash provided by operating activities		5,569			1,899


Investing activities
Purchases of property and equipment		(369	)		(603	)
Purchase of software		(2,300	)		—
Proceeds from sale of assets		—			6
Purchases of held-to-maturity securities		(72,820	)		(45,660	)
Maturities of held-to-maturity securities		67,300			14,439
Purchases of available-for-sale securities		(26,886	)		(37,503	)
Sales of available-for-sale securities		29,540			7,897

Cash used in investing activities		(5,535	)		(61,424	)


Financing activities
Repurchase of common stock		—			(14,158	)
Exercise of stock options and warrants		413			1,453

Cash provided by (used in) financing activities		413			(12,705	)


Increase (decrease) in cash and cash equivalents		447			(72,230	)
Cash and cash equivalents at beginning of period		7,331			82,214

Cash and cash equivalents at end of period	$	7,778		$	9,984


Supplemental disclosure of cash paid during the period for:
Income taxes, net of refunds	$	70		$	2,374
Non-Cash Investing:
Unrealized gain on available-for-sale securities		36			12

See Accompanying Notes to Condensed Consolidated Financial Statements.

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Notes to Condensed Consolidated Financial Statements

A. Business

AMICAS, Inc. (“we,” “us,” “our,” “AMICAS” or the “Company”) is a leader in radiology and medical image and information management solutions. The AMICAS Vision Series™ products provide a complete, end-to-end IT solution for imaging centers, ambulatory care facilities, radiology practices and billing services. Solutions include automation support for workflow, imaging, revenue cycle management and document management. Hospital customers are provided a best-of-breed picture archiving and communication system (“PACS”), featuring advanced enterprise workflow support and a scalable design that can fully integrate with any hospital information system (“HIS”), radiology information system (“RIS”), or electronic medical record (“EMR”). Complementing the Vision Series product family is AMICAS Insight Solutions^SM, a set of client-centered professional and consulting services that assist our customers with a well-planned transition to a digital enterprise. In addition, we provide our customers with ongoing software and hardware support, implementation, training, and electronic data interchange (“EDI”) services for patient billing and claims processing.

B. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to U.S. Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included in the accompanying unaudited financial statements. Operating results for the nine-month period ended September 30, 2007 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2007. These interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Amicas PACS, Corp. (“Amicas PACS”), formerly known as Amicas, Inc., which was acquired on November 25, 2003. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Revenue Recognition

We recognize revenue in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition”, as amended by SOP 98-9, “Modification of SOP 97-2 with Respect to Certain Transactions”, SOP 81-1, “Accounting for Performance of Construction Type and Certain Performance Type Contracts” (“SOP 81-1”), the Securities and Exchange Commission’s Staff Accounting Bulletin 104, “Revenue Recognition in Financial Statements” (“SAB 104”), and Emerging Issues Task Force 01-14, “Income Statement Characterization of Reimbursements for ‘Out-of-Pocket’ Expenses Incurred.” We recognize software license revenues and system

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(computer hardware) sales upon execution of the sales contract and delivery of the software (off-the-shelf application software) and/or hardware. In all cases, however, the fee must be fixed or determinable, collection of any related receivable must be considered probable, and no significant post-contract obligations of ours shall be remaining. Otherwise, we defer the sale until all of the requirements for revenue recognition have been satisfied. Maintenance fees for routine client support and unspecified product updates are recognized ratably over the term of the maintenance arrangement. Training, implementation and EDI services revenues are recognized as the services are performed. In instances that the Company believes that services are essential to the functionality of the product, the Company recognizes revenue under the provisions of SOP 81-1. Most of our sales and licensing contracts involve multiple elements, in which case, we allocate the total value of the customer arrangement to each element based on the vendor specific objective evidence, or VSOE, of its fair value. The residual method is used to determine revenue recognition with respect to a multiple-element arrangement when VSOE of fair value exists for all of the undelivered elements (e.g., implementation, training and maintenance services), but does not exist for one or more of the delivered elements of the contract (e.g., computer software). VSOE of fair value is determined based upon the price charged when the same element is sold separately. If VSOE of fair value cannot be established for the undelivered element(s) of an arrangement, the total value of the customer arrangement is deferred until the undelivered element(s) is delivered or until VSOE of its fair value is established. In our contracts and arrangements with our customers, we occasionally include acceptance provisions, which give the customer the right to accept or reject the product after we ship it. If an acceptance provision is included, revenue is recognized upon the customer’s acceptance of the product, which occurs upon the earlier receipt of a written customer acceptance or expiration of the acceptance period.

Recognition of revenues in conformity with US GAAP requires management to make judgments that affect the timing and amount of reported revenues.

Cash Equivalents and Marketable Securities

Cash equivalents consist primarily of money market funds and are carried at fair value, which approximates cost.

Marketable securities consist of high quality debt instruments, primarily U.S. government, municipal and corporate obligations. Investments in corporate obligations are classified as held-to-maturity, as AMICAS has the intent and ability to hold them to maturity. Held-to-maturity marketable securities are reported at amortized cost. Investments in municipal obligations are classified as available-for-sale and are reported at fair value with unrealized gains and losses reported as other comprehensive income. There have been no material realized gains or losses to date. Current marketable securities include held-to-maturity investments with remaining maturities of less than one year as of the balance sheet date and available-for-sale investments that may be sold in the current period or used in current operations.

As of September 30, 2007, marketable securities consisted of the following, in thousands:


	September 30, 2007
			Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value

Available-for-sale:
State and municipal obligations	$	29,433	$	4	$	(16	)	$	29,421
Federal agency obligations		8,256		44		—			8,300

Total	$	37,689	$	48	$	(16	)	$	37,721

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	September 30, 2007
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value

Held-to-maturity:
Commercial paper	$	17,716	$	19	$	(3	)	$	17,732
Certificates of deposit		11,900		2		(3	)		11,899

Total	$	29,616	$	21	$	(6	)	$	29,631

Available for sale securities are recorded at fair value of $37.7 million as of September 30, 2007, and held to maturity securities are recorded at amortized cost of $29.6 million, resulting in total marketable securities of $67.3 million.

The contractual maturities of our available-for-sale securities are as follows:


	September
	30, 2007

Due within one year	$	6,796
Due between one to five years		4,989
Due between five to ten years		2,236
Due after 10 years		23,700

Total	$	37,721

All of our held to maturity securities are expected to mature within one year and accordingly are classified as short term in the accompanying balance sheet.

Share-Based Payment

The Company adopted SFAS 123(R) “Share-Based Payment” (“SFAS 123R”) as of January 1, 2006. Under the fair value recognition provisions of SFAS 123R, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the requisite service period which is generally the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating expected dividends, the term of related options, share price volatility and the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, share-based compensation expense and our results of operations could be materially impacted.

The Company elected the modified prospective transition method for adopting SFAS 123R. Under this method, the provisions of SFAS 123R apply to all stock-based awards granted or other awards granted that are subsequently reclassified into equity. The unrecognized expense of awards not yet vested as of December 31, 2005, the date preceding adoption of SFAS 123R by the Company, is now being recognized as expense in the calculation of net income using the same valuation method (Black-Scholes) and assumptions disclosed prior to the adoption of SFAS 123R.

Under the provisions of SFAS 123R, the Company recorded $514,000 and $467,000 of stock-based compensation expense in its unaudited condensed consolidated statements of operations for the three months ended September 30, 2007 and September 30, 2006, respectively. During the nine months ended September 30, 2007 and September 30, 2006, the Company recorded stock-based compensation expense of $1,548,000 and $1,380,000, respectively.

The Company utilized the Black-Scholes valuation model for estimating the fair value of stock-based compensation after the adoption of SFAS 123R. For the three and nine months ended September 30, 2007 and September 30, 2006, the Company used the following assumptions:

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	Stock Option Plan
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006

Average risk-free interest rate		4.47	%		4.92	%		4.72	%		4.89	%
Expected dividend yield		—			—			—			—
Expected stock price volatility		44.4	%		41.7	%		45.0	%		41.7	%
Weighted average expected life (in years)		4.7			5.6			5.4			5.0
Weighted average fair value	$	1.35		$	1.41		$	1.42		$	1.70

In the quarter ended September 30, 2007, the offering period for the 2007 Employee Stock Purchase Plan commenced. During the three and nine months ended September 30, 2007 and September 30, 2006, respectively, the weighted average fair value of the shares subject to purchase under the Company’s employee stock purchase plan was $0.89, $0.89, $1.42, and $1.42, respectively using the following assumptions:


	September 30, 2007						September 30, 2006
	Three Months			Nine Months			Three Months			Nine Months
	Ended			Ended			Ended			Ended

Average risk-free interest rate		4.47	%		4.47	%		4.47	%		4.47	%
Expected dividend yield		—			—			—			—
Expected stock price volatility		44.4	%		44.4	%		41.7	%		41.7	%
Weighted average expected life (in years)		0.5			0.5			0.5			0.5

The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the historical volatility of the Company’s common stock over a four-year period which reflects the Company’s expectations of future volatility. The risk-free interest rate is derived from U.S. Treasury rates during the period, which approximate the rate in effect at the time of the grant. The expected life calculation is based on the observed and expected time to post-vesting exercise and forfeitures of options by the Company’s employees.

Based on historical experience of option pre-vesting cancellations, the Company has assumed an annualized forfeiture rate of 3.8% for its options. Under the true-up provisions of SFAS 123R, the Company will record additional expense if the actual forfeiture rate is lower than the Company estimated, and will record a recovery of prior expense if the actual forfeiture is higher than the Company estimated.

The unamortized fair value of stock options as of September 30, 2007 and September 30, 2006 was $3.6 million and $4.2 million, respectively, which is expected to be recognized over the weighted average remaining period of 2.4 years.

The following table summarizes activity under all stock option plans for the nine months ended September 30, 2007 (in thousands, except for per share and contractual term amounts):

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									Weighted
							Weighted		Average
							Average		Remaining
	Shares						Exercise		Contractual		Aggregate
	Available for			Number			Price per		Term		Intrinsic
	Grant			Outstanding			Share		(years)		Value (1)

Balance at December 31, 2006		7,745			6,681		$	3.32		5.97	$	2,427
Options granted		(1,098	)		1,098			3.00
Options exercised		0			(233	)		2.03
Shares allocated to ESPP		(750	)
Options cancelled		80			(136	)		3.58

Balance at September 30, 2007		5,977			7,410			3.31		5.78	$	2,234

Exercisable, September 30, 2007					4,833		$	3.28		4.41	$	2,180


(1)		The aggregate intrinsic value set forth in this table was calculated based on the positive difference between the closing market value of the Company’s common stock on September 30, 2007 and the exercise price of the underlying options.

Warrants

The following table summarizes information about the Company’s outstanding and exercisable warrants at September 30, 2007(shares in thousands):

Weighted

Average

Weighted

Remaining

Average

Range of

Number

Contractual

Exercise

Exercise Prices

Of Shares

Life

Price

(years)

$0.75–2.50

0.1

0.79

2.51 – 17.84

350

0.4

4.58

$0.75–17.84

352

0.4

4.55

There were no warrants issued during the nine months ended September 30, 2007.

Restricted Stock

As of September 30, 2007, an aggregate of 55,665 shares of restricted stock had been granted to the Company’s non-employee directors. The restrictions lapse after the service period which is the earlier of one year from the date of grant and the date the director completes a full term as a director. The fair value of restricted stock awards is based on the closing market price of the Company’s common stock on the date of award and is being amortized on a straight-line basis over the service period. Stock-based compensation expense recognized for the three months ended September 30, 2007 for restricted stock is based on the proportionate share of the service period. Approximately $58,000 is expected to be recognized over the remaining weighted-average amortization period of nine months when the restrictions lapse.

During the quarter ended September 30, 2007, the Company expensed $20,000 which is included in general and administrative expense in the accompanying consolidated statement of operations related to unvested restricted stock. The intrinsic value of the restricted stock outstanding at September 30, 2007 was $58,000.

A summary of the Company’s restricted stock activity and related information for the quarter ended September 30, 2007 is as follows:

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				Weighted
	Shares of			Average
	Restricted			Grant Date
	Stock			Fair Value

Restricted at December 31, 2006		29,680		$	2.83
Granted		25,985			3.20
Unrestricted		(29,680	)		2.83

Restricted at September 30, 2007		25,985		$	3.20

Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect, if any, of potential common shares, which consists of stock options and warrants. The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except for per share amounts):


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007		2006			2007		2006

Numerator —income (loss):
Continuing operations	$	374	$	(173	)	$	40	$	(108	)
Discontinued operations		—		478			—		230

		374		305			40		122


Denominator:
Basic EPS —weighted-average shares		44,762		45,114			44,627		47,087
Effect of dilutive securities		901		—			877		—

Diluted EPS —adjusted weighted-average shares and assumed conversions		45,663		45,114			45,504		47,087


Basic EPS:
Continuing operations	$	0.01	$	(0.00	)	$	0.00	$	(0.00	)
Discontinued operations		—		0.01			—	$	0.00

	$	0.01	$	0.01		$	0.00	$	0.00


Diluted EPS:
Continuing operations	$	0.01	$	(0.00	)	$	0.00	$	(0.00	)
Discontinued operations		—		0.01			—	$	0.00

	$	0.01	$	0.01		$	0.00	$	0.00

Stock options and warrants to purchase the Company’s common stock of 46,023 and 48,457 for the three and nine months ended September 30, 2006, respectively, were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive. However, these options could be dilutive in the future.

Comprehensive Income

Comprehensive income is a measure of all changes in equity of an enterprise that results from recognized transactions and other economic events of a period other than transactions with owners in their capacity as owners. Comprehensive income for the nine months ended September 30, 2007 and 2006 consists of net

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income and net unrealized gains on marketable securities. The components of comprehensive income are as follows (in thousands):


	Nine Months Ended
	September 30,
	2007		2006



Net income	$	40	$	122
Net unrealized gain on marketable securities		36		12

Total comprehensive income	$	76	$	134

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 157, ''Fair Value Measurements’’ (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in US GAAP and expands disclosures about fair value measurements. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of SFAS 157 will have on its financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows companies to elect to measure many financial assets and financial liabilities at fair value (the “fair value option”). The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, SFAS 159 specifies that all subsequent changes in fair value for that instrument must be reported in earnings. The Company is currently evaluating whether it will apply the voluntary fair value option to any of its financial assets or financial liabilities.

C. Gain from Discontinued Operations

For the nine months ended September 30, 2006, the Company recorded a $0.2 million gain from discontinued operations which represents a tax benefit related to the sale of its anesthesiology business (the “Medical Division”) to Cerner Corporation (“Cerner”).

D. Commitments and Contingencies

Commitments

The Company leases office and research facilities and other equipment under various agreements that expire in 2007, 2008 and 2013.

Future minimum lease payments under all operating leases with original non-cancelable terms in excess of one year are as follows:

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Year	Operating
	(in thousands)
2007	$	315
2008		1,118
2009		811
2010		839
2011		866
Thereafter		923

Total	$	4,872

The Company also leases space in Daytona, Florida with a base rent of $48,109 per month. The lease expires on July 31, 2008. The Company expects to find a suitable location prior to the expiration of the lease.

Agreements with Cerner

On January 3, 2005, the Company entered into a transition services agreement with Cerner in connection with the sale of the Medical Division. Pursuant to the transition services agreement, in exchange for specified fees, the Company provides services to Cerner including accounting, tax, information technology, customer support and use of facilities, and Cerner provides services to the Company such as EDI services including patient billing and claims processing, and use of facilities. Under the agreement, certain of the Company-provided services terminated on April 30, 2006 and certain Cerner-provided services were expected to be provided through March 31, 2009. On September 27, 2007, effective May 1, 2007, the Company and Cerner mutually agreed to terminate the transition services agreement.

In January 2005, the Company completed the sale of substantially all of the assets and liabilities of its medical division, together with certain other assets, liabilities, properties and rights of the Company relating to its anesthesiology business (the “Medical Division”) to Cerner and certain of Cerner’s wholly-owned subsidiaries (the “Asset Sale”). The Asset Sale was completed in accordance with the terms and conditions of the Asset Purchase Agreement between the Company and Cerner dated as of November 15, 2004 (the “Purchase Agreement”). In connection with the Purchase Agreement with Cerner, the Company assigned its agreement with a third-party provider of EDI services for patient claims processing to Cerner. For the months after April 2005, the annual processing services fee ranged from $0.2 million to $0.3 million based on the Company’s and Cerner’s combined volume usage in the last month of the preceding year. The Company also assigned its patient statement agreement with National Data Corp. (“NDC”) to Cerner. The agreement generally provided for the Company to send minimum quarterly volumes and to pay a minimum quarterly fee of $0.6 million to Cerner through March 2006. Thereafter, the minimum quarterly volume commitment was to be reduced by 1.25% per quarter until April 2009. On September 27, 2007, in connection with the termination of the transition services agreement the Company and Cerner mutually agreed the Company has no further obligation to pay any minimum quarterly fees, and Cerner has no obligation to provide services. As a result the Company recognized approximately $0.5 million of previously recorded unearned discount as a reduction of cost of maintenance and services during the quarter ended September 30, 2007.

Employee Savings Plan

In connection with the Company’s employee savings plans, the Company has committed, for the 2007 plan year, to contribute to the employee savings plans. The matching contribution for 2007 is estimated to be approximately $0.5 million and will be made in cash on a quarterly basis.

Contingencies

From time to time, in the normal course of business, various claims are made against the Company.

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There are no material proceedings to which the Company is a party, and management is unaware of any material contemplated actions against the Company.

As permitted under Delaware law, the Company has agreements under which it indemnifies its officers and directors for certain events or occurrences while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. Given the insurance coverage in effect, the Company believes the estimated fair value of these indemnification agreements is minimal. The Company has no liabilities recorded for these agreements as of September 30, 2007.

The Company generally includes intellectual property indemnification provisions in its software license agreements. Pursuant to these provisions, the Company holds harmless and agrees to defend the indemnified party, generally its business partners and customers, in connection with certain patent, copyright, trademark and trade secret infringement claims by third parties with respect to the Company’s products. The term of the indemnification provisions varies and may be perpetual. In the event an infringement claim against the Company or an indemnified party is made, generally the Company, in its sole discretion, will agree to do one of the following: (i) procure for the indemnified party the right to continue use of the software, (ii) provide a modification to the software so that its use becomes noninfringing; (iii) replace the software with software which is substantially similar in functionality and performance; or (iv) refund all or the residual value of the software license fees paid by the indemnified party for the infringing software. The Company believes the estimated fair value of these intellectual property indemnification agreements is minimal. The Company has no liabilities recorded for these agreements as of September 30, 2007.

E. Income Taxes

Provision

In the three and nine months ended September 30, 2007, the Company recorded an income tax provision from continuing operations of $97,000 and $185,000, respectively, as compared to an income tax provision from continuing operations of $63,000 for the nine months ended September 30, 2006 and an income tax benefit of $32,000 for the three months ended September 30, 2006. The income tax provision for the three and nine months ended September 30, 2007 is primarily due to state tax liabilities and federal alternative minimum tax.

Uncertain tax positions

In June, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”). This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely–than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements.

Effective January 1, 2007, the Company has adopted the provisions of FIN 48 and there was no material effect on the financial statements. As a result, there was no cumulative effect related to the adoption of FIN 48.

As of January 1, 2007, the Company has provided a liability of $1,112,500 for unrecognized tax benefits related to various federal and state income tax matters. If recognized, the entire amount would impact the Company’s effective tax rate. The reserve has not changed for the quarter ended September 30, 2007.

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The Company does not expect that the amounts of unrecognized tax benefits will change significantly within the next 12 months.

The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and state jurisdictions for the calendar years ended 2003, 2004, 2005 and 2006.

As of January 1, 2007, the Company had accrued $67,500 of interest and penalties related to uncertain tax positions. As of September 30, 2007, the total amount of accrued interest and penalties is $138,000. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes.

F. Acquired Developed Software

In the first quarter of 2007, the Company acquired certain ownership rights to IMAGINEradiology’s practice management software for $2.3 million. Costs incurred to develop and modify this software to release as the Company’s Vision Series Financial product will be amortized over its estimated life (expected to be seven years). The Company expects Vision Series Financials to be commercially available during the quarter ended December 31, 2007 at which point it will begin amortization of this capitalized cost.

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

Forward-Looking Statements

Our disclosure and analysis in this Quarterly Report on Form 10-Q contains forward-looking statements that set forth anticipated results based on management’s plans and assumptions. From time to time, we may also provide forward-looking statements in other materials that we release to the public as well as oral forward-looking statements. Forward-looking statements discuss our strategy, expected future financial position, results of operations, cash flows, financing plans, intellectual property, competitive position, and plans and objectives of management. We often use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will,” “should,” “might” and similar expressions to identify forward-looking statements. Additionally, forward-looking statements include those relating to future actions, prospective products, future performance, financing needs, liquidity, sales efforts, expenses, interest rates and the outcome of contingencies, such as legal proceedings, and financial results.

We cannot guarantee that any forward-looking statement will be realized. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected by our forward-looking statements. You should bear this in mind as you consider forward-looking statements.

We undertake no obligation to publicly update forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K. Also note that we provide a cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our businesses in Item 1A- Risk Factors of Part II. These are important factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. You should understand that it is not possible to predict or identify all such factors. Consequently, you should understand that the discussion in Item 1A does not include all potential risks or uncertainties.

Overview

AMICAS, Inc. (“we,” “us,” “our,” “AMICAS” or the “Company”), formerly known as VitalWorks Inc., is a leader in radiology and medical image and information management solutions. The AMICAS Vision Series™ products provide a complete, end-to-end IT solution for imaging centers, ambulatory care facilities, radiology practices and billing services. Solutions include automation support for workflow, imaging, revenue cycle management and document management. Hospital customers are provided a best-of-breed picture archiving and communication system (“PACS”), featuring advanced enterprise workflow support and a scalable design that can fully integrate with any hospital information system (“HIS”), radiology information system (“RIS”), or electronic medical record (“EMR”). Complementing the Vision Series product family is AMICAS Insight Solutions^SM, a set of client-centered professional and consulting services that assist our customers with a well-planned transition to a digital enterprise. In addition, we provide our customers with ongoing software and hardware support, implementation, training, and electronic data interchange (“EDI”) services for patient billing and claims processing.

We were incorporated in Delaware in November 1996 as InfoCure Corporation. On July 10, 1997, we completed our initial public offering. During the remainder of 1997 through 1999, we completed acquisitions of 16 medical and radiology software companies. In addition, during the period July 1997 through 2000, we acquired 19 companies that made up our former dental software business. We changed our name to VitalWorks Inc. in July 2001.

On March 5, 2001, we completed a spin-off of our dental software business through a pro rata distribution to our shareholders of all the outstanding common stock (the “Distribution”) of our previously wholly-owned subsidiary, PracticeWorks, Inc. (“PracticeWorks”). As a result of the Distribution, PracticeWorks became an

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independent public company consisting of our former dental business, which included the dental, orthodontic, and oral and maxillofacial surgery business lines. We relocated our executive offices to Connecticut, changed our name and began doing business as VitalWorks Inc. following the Distribution.

On November 25, 2003, we acquired 100% of the outstanding capital stock of Amicas PACS, Corp. (formerly known as Amicas, Inc.), a developer of Web-based diagnostic image management software solutions. The addition of Amicas PACS, Corp. (“Amicas PACS”) provided us with the ability to offer radiology groups and imaging center customers a comprehensive, integrated information and image management solution that incorporates the key components of a complete radiology data management system (i.e., image management, workflow management and financial management). The acquisition was completed to position us to achieve our goal of establishing a leadership position in the growing PACS market. PACS allows radiologists to access, archive and distribute diagnostic images for primary interpretation as well as to enable fundamental workflow changes that can result in improvements in operating efficiency. Vision Series PACS also supports radiologists and other groups to distribute images and digital information to their customers—the referring physicians.

On January 3, 2005, we completed the sale of substantially all of the assets and liabilities of our medical division, together with certain other assets, liabilities, properties and rights of the Company relating to our anesthesiology business (the “Medical Division”) to Cerner Corporation (“Cerner”) and certain of Cerner’s wholly-owned subsidiaries (the “Asset Sale”). The Medical Division provided IT-based, specialty-specific solutions for medical practices specializing in anesthesiology, ophthalmology, emergency medicine, plastic surgery, dermatology and internal medicine. The Asset Sale was completed in accordance with the terms and conditions of the Asset Purchase Agreement between the Company and Cerner dated as of November 15, 2004. The consolidated statements of operations have been prepared to present the results of the Medical Division as discontinued operations. We changed our name to AMICAS, Inc. on January 3, 2005.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based on our financial statements and accompanying notes, which we believe have been prepared in conformity with generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, assumptions and judgments, including those related to revenue recognition, allowances for future returns, discounts and bad debts, tangible and intangible assets, deferred costs, income taxes, restructurings, commitments, contingencies, claims and litigation. We base our judgments and estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, our actual results could differ from those estimates.

Management believes the following critical accounting policies, among others, involve the more significant judgments and estimates used in the preparation of its consolidated financial statements.

	•		Revenue Recognition.

	•		Accounts Receivable.

	•		Long-lived Assets.

	•		Goodwill Assets and Business Combinations.

	•		Income Taxes.

	•		Share-Based Payment.

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These policies are unchanged from those used to prepare the 2006 annual consolidated financial statements except for FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109(“FIN 48”), which the Company adopted effective January 1, 2007. We discuss our critical accounting policies in Item 7 under the heading “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2006. We discuss FIN 48 in Note E to the accompanying Condensed Consolidated Financial Statements.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 157, ''Fair Value Measurements’’ (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value pursuant to GAAP and expands disclosures about fair value measurements. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating the effect that the adoption of SFAS 157 will have on our financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).SFAS 159 allows companies to elect to measure many financial assets and financial liabilities at fair value (the “fair value option”). The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, SFAS 159 specifies that all subsequent changes in fair value for that instrument must be reported in earnings. We are currently evaluating whether we will apply the voluntary fair value option to any of our financial assets and financial liabilities.

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Results of Continuing Operations

Revenues


	Three Months Ended September 30,											Nine Months Ended September 30,
	(In thousands except percentage)											(In thousands except percentage)
						Change												Change
	2007			Change		(%)			2006			2007			Change			(%)			2006

Maintenance and services	$	9,739		$	639		7.0	%	$	9,100		$	28,530		$	1,263			4.6	%	$	27,267
Percentage of total revenues		73.2	%							77.1	%		74.6	%								71.8	%

Software licenses and system sales	$	3,562		$	860		31.8	%	$	2,702		$	9,706		$	(1,020	)		(9.5	)%	$	10,726
Percentage of total revenues		26.8	%							22.9	%		25.4	%								28.2	%

Total revenues	$	13,301		$	1,499		12.7	%	$	11,802		$	38,236		$	243			0.6	%	$	37,993

We recognize software license revenues and system (computer hardware) sales upon execution of a master license agreement and delivery of the software (off-the-shelf application software) and/or hardware. In all cases, however, the fee must be fixed or determinable, collection of any related receivable must be considered probable, and no significant post-contract obligations of ours shall be remaining. Otherwise, we defer the sale until all of the requirements for revenue recognition have been satisfied. Maintenance fees for routine client support and unspecified product updates are recognized ratably over the term of the maintenance arrangement. Training, implementation and EDI services revenues are recognized as the services are performed. In instances that the Company believes that services are essential to the functionality of the product, the Company recognizes revenue under the provisions of SOP 81-1.

Maintenance and services

Maintenance and services revenues increased from $9.1 million for the three months ended September 30, 2006 to $9.7 million for the three months ended September 30, 2007. The increase in maintenance and services revenues of approximately $0.6 million is primarily due to an increase of $0.2 million in EDI services revenues and of $0.4 million in maintenance revenues. The $0.4 million increase in maintenance revenues is primarily the result of the addition of new customers and associated maintenance revenues offset by customer attrition.

Maintenance and services revenues were $28.5 million for the nine months ended September 30, 2007, compared to $27.3 million for the nine months ended September 30, 2006. The increase in maintenance and services revenues of approximately $1.2 million was primarily due to an increase of $0.6 million in EDI services revenues offset by a decrease of implementation and training services revenues of $0.3 million, and an increase of $0.8 million in maintenance revenues. The $0.8 million increase in maintenance revenues is the result of an increase in the maintenance fee from new customers.

Software licenses and hardware sales

Software license and systems sales increased $0.9 million from $2.7 million in the third quarter of 2006 to $3.6 million for the three months ended September 30, 2007. This increase was the result of timing of recognizing software license and hardware revenues.

Software license and systems revenue was $9.7 million for the nine months ended September 30, 2007, compared to $10.7 million for the nine months ended September 30, 2006. The decrease of $1.0 million was the

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result of a lower volume of software license and system sales to new and existing customers, as well as increased discounting.

Quarterly and annual revenues and related operating results are highly dependent on the volume and timing of the signing of license agreements and product deliveries during each quarter, which are very difficult to forecast. Our current revenues include contracts which extend over a period of up to five years, and revenue recognition on these contracts generally extends over the life of the contract. We expect new contracts in the future to contain similar provisions. A significant portion of our quarterly sales of software product licenses and computer hardware is concluded in the last month of each quarter, generally with a concentration of our quarterly contracts concluded in the final ten business days of that month. Also, our projections for revenues and operating results include significant sales of new product and service offerings, including our image management systems, Vision Series PACS, Vision Series RIS, Vision Series Financials and document management software. Due to these and other factors, our revenues and operating results are very difficult to forecast.

Cost of revenues


	Three Months Ended September 30,												Nine Months Ended September 30,
	(In thousands except percentage)												(In thousands except percentage)
							Change												Change
	2007			Change			(%)			2006			2007			Change			(%)			2006

Maintenance and services	$	4,149		$	322			8.4	%	$	3,827		$	12,335		$	1,230			11.1	%	$	11,105
Percentage of maintenance and services revenues		42.6	%								42.1	%		43.2	%								40.7	%

Software licenses and hardware sales	$	1,971		$	(44	)		(2.2	%)	$	2,015		$	5,160		$	(1,060	)		(17.0	)%	$	6,220
Percentage of software licenses and hardware sales		55.3	%								74.6	%		53.2	%								58.0	%

Total cost of revenues	$	6,120		$	278			4.8	%	$	5,842		$	17,495		$	170			1.0	%	$	17,325

Cost of maintenance and services revenues

Cost of maintenance and services revenues primarily consists of the cost of EDI insurance claims processing, outsourced hardware maintenance, EDI billing and statement printing services, postage, third- party consultants and personnel salaries, benefits and other allocated indirect costs related to the delivery of services and support.

Cost of maintenance and services revenue increased approximately $0.3 million from $3.8 million for the three months ended September 30, 2006 to $4.1 million for the same period in 2007. The increase is the result of a $0.3 million increase in internal implementation costs and a $0.5 million increase in third party costs due to higher EDI revenues and additional third party maintenance fees. These increases were offset by a $0.5 million decrease due to previously recorded unearned discounts which were a reduction of cost of maintenance and services. This reduction was related to the termination of our transition services agreement with Cerner on September 27, 2007.

Cost of maintenance and services revenue increased from $11.1 million for the nine months ended September 30, 2006 to $12.3 million for the same period in 2007. The increase of approximately $1.2 million is primarily the result of a $1.0 million increase in third party costs and a $0.7 million increase in internal implementation costs. These increases were offset by a $0.5 million decrease due to previously recorded unearned discounts which were a reduction of cost of maintenance and services. This reduction was related to the termination of our transition services agreement with Cerner on September 27, 2007.

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Cost of software license and hardware revenues

Cost of software license and system revenues consists primarily of costs incurred to purchase computer hardware, third-party software and other items for resale in connection with sales of new systems and software, and amortization of software product costs.

Total cost of software licenses and hardware sales decreased from $2.02 million for the three months ended September 30, 2006 to $1.97 million for the same period in 2007. The decrease of $44,000 is primarily attributable to the decrease in third party hardware costs.

Total cost of software licenses and hardware decreased from $6.2 million to $5.2 million for the nine months ended September 30, 2006 and 2007, respectively. The decrease of $1.0 million is primarily the result of a decrease in the cost of sales related to hardware.

During the nine month period ended September 30, 2007, we acquired certain ownership rights to IMAGINEradiology’s practice management software for $2.3 million. Costs incurred to develop and modify this software to release as our Vision Series Financials product will be amortized over its estimated life (expected to be seven years). We expect Vision Series Financials to be commercially available by December 31, 2007 at which point it will begin amortization of this capitalized cost.

Operating expenses


	Three Months Ended September 30,												Nine Months Ended September 30,
	(In thousands except percentage)												(In thousands except percentage)
							Change												Change
	2007			Change			(%)			2006			2007			Change			(%)			2006

Selling, general and administrative	$	5,290		$	619			13.3	%	$	4,671		$	16,147		$	243			1.5	%	$	15,904
Percentage of total revenues		39.8	%								39.6	%		42.2	%								41.9	%

Research and development	$	2,112		$	(63	)		(2.9	%)	$	2,175		$	6,412		$	(218	)		(3.3	%)	$	6,630
Percentage of total revenues		15.9	%								18.4	%		16.8	%								17.5	%

Depreciation and amortization	$	300		$	3			1.0	%	$	297		$	836		$	(108	)		(11.4	%)	$	944
Percentage of total revenues		2.3	%								2.5	%		2.1	%								2.5	%

Selling, general and administrative

Selling, general and administrative expenses include fixed and variable compensation and benefits of all personnel (other than research and development and services personnel), facilities, travel, communications, bad debt, legal, marketing, insurance and other administrative expenses.

Selling, general and administrative expenses increased from $4.6 million for the three months ended September 30, 2006 to $5.3 million for the same period in 2007. This increase is the result of approximately $0.5 million in personnel costs and approximately $0.2 million in other administrative expenses.

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Selling, general and administrative expenses increased from $15.9 million in the nine months ended September 30, 2006 to $16.1 million in the nine months ended September 30, 2007. We incurred approximately $0.5 million in charges related to a previously disclosed services revenue inquiry during 2006, offset by increases of approximately $0.7 million in our selling, general and administrative costs due primarily to increased personnel costs in the nine months ended September 30, 2007.

Research and development

Research and development expense decreased from $2.2 million in the three months ended September 30, 2006 to $2.1 million for the three months ended September 30, 2007. For the nine months ended September 30, 2007, research and development decreased to $6.4 million from $6.6 million for the same period in 2006. This decrease is primarily due to a decrease in overhead costs related to internal development costs of approximately $0.2 million.

Depreciation and amortization

Depreciation and amortization increased approximately $3,000 from $297,000 in 2006 to $300,000 in 2007, and decreased $108,000 from $944,000 in the nine months ended September 30, 2006 to $836,000 in the nine months ended September 30, 2007. The decrease is primarily due to assets that were fully depreciated during 2007.

Interest Income


	Three Months Ended September 30,									Nine Months Ended September 30,
	(In thousands except percentage)									(In thousands except percentage)
					Change									Change
	2007		Change		(%)			2006		2007		Change		(%)			2006

Interest income	$	992	$	14		1.4	%	$	978	$	2,879	$	114		4.1	%	$	2,765

Interest income remained flat for the three months ended September 30, 2007 compared to the same period ended September 30, 2006. The increase of approximately $114,000 in interest income for the nine months ended September 30, 2006 as compared to nine months ended September 30, 2007 is primarily due to increases in our marketable securities balances.

Provision for income taxes

In the three and nine months ended September 30, 2007, we recorded an income tax provision from continuing operations of $97,000 and $185,000, respectively, as compared to an income tax benefit of $32,000 in the three months ended September 30, 2006 and a provision of $63,000 for the nine months ended September 30, 2006. Our effective income tax rate is 82.1 % for the nine months ended September 30, 2007. The income tax provision is primarily due to the effect of state tax liabilities.

Gain from Sale of Discontinued Operations

For the nine months ended September 30, 2006, the Company recorded a $230,000 gain from discontinued operations which represents a tax benefit related to the sale of the Medical Division.

Liquidity and Capital Resources

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To date, we have financed our business through cash flows from operations, proceeds from the issuance of common stock and long-term borrowings. Our cash, cash equivalents and marketable securities balance was $75.1 million as of September 30, 2007, compared to $71.7 million as of December 31, 2006. Cash provided by operating activities for the nine months ended September 30, 2007 was $5.6 million.

Cash used in investing activities through the third quarter of 2007 was $5.5 million, which consisted of $2.3 million to acquire certain ownership rights to IMAGINEradiology’s practice management software, $0.4 million for purchases of property and equipment and $2.8 million used to purchase marketable securities.

Cash provided by financing activities through the third quarter of 2007 was approximately $413,000, received in connection with the exercise of stock options by certain employees.

The following table summarizes, as of September 30, 2007, the general timing of future payments under our outstanding lease agreements that include noncancellable terms, and other long-term contractual obligations:


			October 1,
			2007 –
			December 31,
	Total		2007		2008		2009		2010		2011		Thereafter

	(dollars in thousands)
Operating Leases	$	4,872		315		1,118		811		839		866	$	923
Other Commitments		869		197		288		288		96		—		—

Total	$	5,741	$	512	$	1,406	$	1,099	$	935	$	866	$	923

The Company leases space for its corporate headquarters in Boston, Massachusetts. The current lease expires on January 11, 2008 with a base rent of $57,960 per month. On October 18, 2007 we renewed the lease to remain in our corporate headquarters in Boston, Massachusetts through January 2013. The monthly base rent of the lease is $65,446 beginning in 2008 and increases by $1.00 per square foot annually over the lease term. The Company also leases space in Daytona, Florida with a base rent of $48,109 per month. The lease expires on July 31, 2008. We expect to find a suitable location prior to the expiration of the lease.

On January 3, 2005, we entered into a transition services agreement with Cerner in connection with the sale of the Medical Division. Pursuant to the Transition Services Agreement, in exchange for specified fees, we provided to Cerner services including accounting, tax, information technology, customer support and use of facilities, and Cerner provided services to us such as EDI services including patient billing and claims processing, and use of facilities. Certain of the services we provided extended through April 30, 2006 and certain Cerner-provided services extend through March 31, 2009. On September 27, 2007, effective May 1, 2007, we mutually agreed to terminate the Transition Services Agreement. There are no further obligations related to this agreement.

In connection with the Purchase Agreement with Cerner, the Company assigned its agreement with a third-party provider of EDI services for patient claims processing to Cerner. The annual processing services fee that the Company pays Cerner ranges from $0.2 million to $0.3 million based on the Company’s and Cerner’s combined volume usage in the last month of the preceding year. The Company also assigned its patient statement agreement with National Data Corp. to Cerner. The Company committed to minimum quarterly volumes and paid a minimum quarterly fee of $0.6 million to Cerner through March 2006. Thereafter, the minimum quarterly volume commitments will be reduced by 1.25% per quarter until April 2009. On September 27, 2007, in connection with the termination of the transition services agreement the Company and Cerner mutually agreed the Company has no further obligation to pay any minimum quarterly fees, and Cerner has no obligation to provide services. As a result, the Company recognized approximately $0.5 million of previously recorded unearned discount as a reduction of cost of maintenance and services during the quarter ended September 30, 2007.

In connection with our employee savings plans, we are committed, for the 2007 plan year, to make

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matching contributions to the plans. The total matching contribution for 2007 is estimated to be approximately $0.5 million and is made in cash on a quarterly basis.

We anticipate capital expenditures during the fourth quarter of 2007 of approximately $0.4 million.

To date, the overall impact of inflation on us has not been material.

From time to time, in the normal course of business, various claims are made against us. There are no material proceedings to which we are a party, and management is unaware of any material contemplated actions against us.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We believe we are not subject to material foreign currency exchange rate fluctuations, as most of our sales and expenses are domestic and therefore are denominated in the U.S. dollar. We do not hold derivative securities and have not entered into contracts embedded with derivative instruments, such as foreign currency and interest rate swaps, options, forwards, futures, collars, and warrants, either to hedge existing risks or for speculative purposes.

As of September 30, 2007, we held approximately $7.8 million in cash and cash equivalents and $67.3 million in marketable securities. Cash equivalents are carried at fair value, which approximates cost. Held-to-maturity securities are reported at amortized cost. Available-for-sale securities are reported at fair value with unrealized gains and losses reported as other comprehensive income.

We are exposed to market risk, including changes in interest rates affecting the return on our investments. We have established procedures to manage our exposure to fluctuations in interest rates.

Exposure to market rate risk for changes in interest rates relates to our investment in marketable securities of $67.3 million at September 30, 2007. We have not used derivative financial instruments in our investment portfolio. We place our investments with high-quality issuers and have policies limiting, among other things, the amount of credit exposure to any one issuer. We seek to limit default risk by purchasing only investment-grade securities. We manage potential losses in fair value by investing in relatively short term investments thereby allowing us to hold our investments to maturity. Our investments have an average remaining maturity of approximately six months and are primarily fixed-rate debt instruments. Based on a hypothetical 10% adverse movement in interest rates, the potential losses in future earnings and cash flows are estimated to be $239,000.

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Item 4. Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2007. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2007, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Management’s report on internal controls over financial reporting as of December 31, 2006, was included in our Annual Report on Form 10-K for the year-end December 31, 2006. In the report, management concluded that, as of December 31, 2006, our internal control over financial reporting was effective.

There has been no change in our internal control over financial reporting during the fiscal quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

From time to time, in the normal course of business, the Company is involved with disputes and there are various claims made against the Company. There are no material proceedings to which the Company is a party, and management is unaware of any material contemplated actions against the Company.

Item 1A. Risk Factors

Risk Factors

Our operating results will vary from period to period. In addition, we have experienced losses in the past and may never achieve consistent profitability.

Our operating results will vary significantly from quarter to quarter and from year to year. We had a net loss of $1.0 million for the year ended December 31, 2006 and net income of $44.2 million (which included a $46.3 million net gain from the sale of the Medical Division) for the year ended December 31, 2005. We also had a net loss of $12.5 million for the year end December 31, 2004. Although we had net income of $8.0 million and $24.2 million for the years ended December 31, 2003 and 2002, respectively, we had consistently experienced net losses prior to December 31, 2002. On a continuing operations basis, we had losses of $1.3 million, $2.0 million, $26.5 million and $10.7 million, respectively, for the years ended December 31, 2006, 2005, 2004 and 2003, and income of $4.0 million for the year ended December 31, 2002.

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Our operating results have been and/or may be influenced significantly by factors such as:

	•		release of new products, product upgrades and services, and the rate of adoption of these products and services by new and existing customers;

	•		timing, cost and success or failure of our new product and service introductions and upgrade releases;

	•		length of sales and delivery cycles;

	•		size and timing of orders for our products and services;

	•		changes in the mix of products and/or services sold;

	•		availability of specified computer hardware for resale;

	•		deferral and/or realization of deferred software license and system revenues according to contract terms;

	•		interpretations of accounting regulations, principles or concepts that are or may be considered relevant to our business arrangements and practices;

	•		changes in customer purchasing patterns;

	•		changing economic, political and regulatory conditions, particularly with respect to the information technology-spending environment;

	•		competition, including alternative product and service offerings, and price pressure;

	•		rates and timing of customer attrition;

	•		timing of, and charges or costs associated with, mergers, acquisitions or other strategic events or transactions, completed or not completed;

	•		timing, cost and level of advertising and promotional programs;

	•		changes of accounting estimates and assumptions used to prepare the prior periods’ financial statements and accompanying notes, and management’s discussion and analysis of financial condition and results of operations (e.g., our valuation of assets and estimation of liabilities); and

	•		uncertainties concerning threatened, pending and new litigation against us, including related professional services fees.

Quarterly and annual revenues and operating results are highly dependent on the volume and timing of the signing of license agreements and product deliveries during each quarter, which are very difficult to forecast. A significant portion of our quarterly sales of software product licenses and computer hardware is concluded in the last month of the fiscal quarter, generally with a concentration of our quarterly revenues earned in the final ten business days of that month. Also, our projections for revenues and operating results include significant sales of new product and service offerings, including our new image management systems,Vision Series PACS, our radiology information system, Vision Series RIS, and our combination offering AMICAS Office Solutions, which may not be realized. Due to these and other factors, our revenues and operating results are very difficult to forecast. A major portion of our costs and expenses, such as personnel and facilities, is of a fixed nature and, accordingly, a shortfall or decline in quarterly and/or annual revenues typically results in lower profitability or losses. As a result, comparison of our period-to-period financial performance is not necessarily meaningful and should not be relied upon as an indicator of future performance. Due to the many variables in forecasting our revenues and operating results, it is likely that our results for any particular reporting period will not meet our expectations or the expectations of public market analysts or investors. Failure to attain these expectations would likely cause the price of our common stock to decline.

If our new and existing products, including product upgrades, and services do not achieve and maintain sufficient market acceptance, our business, financial condition, cash flows, revenues, and operating results will suffer.

The success of our business depends and will continue to depend in large part on the market acceptance of:

•

existing products and services, such as our Vision Series suite of products, and related product and service offerings;

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	•		new products and services including AMICAS Office Solutions, Insight Dashboards, Vision Reach, Vision Series Financials and Rad Stream; and

	•		enhancements to our existing products, support and services including Vision Series RIS and Vision Series PACS.

There can be no assurance that our customers will accept any of these products, product upgrades, support or services. In addition, even if our customers accept our products and services initially, we cannot assure you that they will continue to purchase our products and services at levels that are consistent with, or higher than, past quarters. Customers may significantly reduce their relationships with us or choose not to expand their relationship with us. In addition, any pricing strategy that we implement for any of our products, product upgrades, or services may not be economically viable or acceptable to our target markets. Failure to achieve or to sustain significant penetration in our target markets with respect to any of our products, product upgrades, or services could have a material adverse effect on our business.

Achieving and sustaining market acceptance for our products, product upgrades and services is likely to require substantial marketing and service efforts and the expenditure of significant funds to create awareness and demand by participants in the healthcare industry. In addition, deployment of new or newly integrated products or product upgrades may require the use of additional resources for training our existing sales force and customer service personnel and for hiring and training additional sales and customer service personnel. There can be no assurance that the revenue opportunities for our new products, product upgrades and services will justify the amounts that we spend for their development, marketing and rollout.

If we are unable to sell our new and next-generation software products to healthcare providers that are in the market for healthcare information and/or image management systems, such inability will likely have a material adverse effect on our business, revenues, operating results, cash flows and financial condition. If anticipated software sales and services do not materialize, or if we lose customers or experience significant declines in orders from our customers, our revenues would decrease over time due to the combined effects of attrition of existing customers and a shortfall in new client additions.

National and regional competitors could cause us to lower our prices or to lose customers.

Our principal competitors include both national and regional practice management and clinical systems vendors. Until recently, larger, national vendors have targeted primarily large healthcare providers. We believe that the larger, national vendors may broaden their markets to include both small and large healthcare providers. In addition, we compete with national and regional providers of computerized billing, insurance processing and record management services to healthcare practices. As the market for our products and services expands, additional competitors are likely to enter this market. We believe that the primary competitive factors in our markets are:

	•		product features and functionality;

	•		customer service, support and satisfaction;

	•		price;

	•		ongoing product enhancements; and

	•		vendor reputation and stability.

We have experienced, and we expect to continue to experience, increased competition from current and potential competitors, many of which have significantly greater financial, technical, marketing and other resources than us. Such competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than we can. Also, certain current and potential competitors have greater name recognition or more extensive customer bases that could be leveraged, which could cause us to lose customers. We expect additional competition as other

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established and emerging companies enter into the practice management and clinical software markets and as new products and technologies are introduced. Increased competition could result in price reductions, fewer customer orders, or losses in customers reduced gross margins and loss of market share, any of which could materially adversely affect our business, operating results, cash flows and financial condition.

Current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing their abilities to address the needs of our existing and prospective customers. Further competitive pressures, such as those resulting from competitors’ discounting of their products, may require us to reduce the price of our software and complementary products, which would materially adversely affect our business, operating results, cash flows and financial condition. There can be no assurance that we will be able to compete successfully against current and future competitors, and our failure to do so would have a material adverse effect upon our business, operating results, cash flows and financial condition.

We rely on some of our existing customers to serve as reference sites for us in developing and expanding relationships with other customers and potential customers, and if the customers who serve as reference sites become unwilling to do so, our ability to obtain new customers or to expand customer relationships could be materially harmed.

As an integral part of the process of establishing new client relationships and expanding existing relationships, we rely on current clients who agree to serve as reference sites for potential customers of our products and services. The reference sites allow potential customers to observe the operation of our products and services in a true-to-life environment and to ask questions of actual customers concerning the functionality, features and benefits of our product and service offerings. We cannot assure you that the sites that we currently have will continue to be willing to serve as reference sites, nor that the availability of the reference sites will be successful in establishing or expanding relationships with existing or new customers. If we lose reference sites and are unable to establish new ones in a timely manner, this could have a material adverse effect on our business and results of operations.

Changes in the regulatory and economic environment in the healthcare industry could cause us to lose revenue and incur substantial costs to comply with new regulations.

The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. These factors affect the purchasing practices and operations of healthcare organizations. Changes in current healthcare financing and reimbursement systems could require us to make unplanned enhancements of applications or services, or result in delays or cancellations of orders or in the revocation of endorsement of our services by our strategic partners and others. Changes in the federal reimbursement regulations have been made, and federal and state legislatures have periodically considered programs to further reform or amend the U.S. healthcare system. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may respond by reducing their investments or postponing investment decisions, including investments in our applications and services.

As the cost of healthcare continues to rise, the government and other payers may make adjustments to their reimbursement policies for certain healthcare services and/or may make certain requirements of certain healthcare service provider organizations and businesses such that monies available for investment in image and information management products and services may decrease. While we believe that the pressure on such healthcare organizations to operate as efficiently and effectively as possible should drive the need for AMICAS products and services, certain changes in existing reimbursement policies may have the opposite effect. Any significant reduction in reimbursement amounts puts at risk our customers and prospects ability and inclination to pay for our products and services. Regulations that require our customers and prospects to invest and spend their monies in other areas puts at risk their ability and inclination to pay for our products and services as well. The Deficit Reduction Act of 2005, signed into law on February 8, 2006, is an example of a change to reimbursement

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policies that may have a negative impact on our target market’s ability and/or inclination to acquire our products and services.

If the marketplace demands subscription pricing and/or application service provider, or ASP, delivered offerings, our revenues may be adversely impacted.

We currently derive a substantial portion of our revenues from traditional software license, maintenance and service fees, as well as from the resale of computer hardware. Today, most customers pay an initial license fee for the use of our products, in addition to a periodic maintenance fee. If the marketplace demands subscription pricing or application service provider offerings, we may need to adjust our strategy accordingly, by offering a higher percentage of our products and services through these means. Shifting to subscription pricing and/or application service provider offerings could materially adversely impact our financial condition, cash flows and quarterly and annual revenues and results of operations, as our revenues would initially decrease substantially. We cannot assure you that the marketplace will not embrace subscription pricing and/or application service provider offerings.

Our business could suffer if our products and services contain errors, experience failures, result in loss of our customers’ data or do not meet customer expectations.

The products and services that we offer are inherently complex. Despite testing and quality control, we cannot be certain that errors will not be found in prior, current or future versions, or enhancements of our products and services. We also cannot assure you that our products and services will not experience partial or complete failure, especially with respect to our new product or service offerings. It is also possible that as a result of any of these errors and/or failures, our customers may suffer loss of data. The loss of business, medical, diagnostic, or patient data or the loss of the ability to process data for any length of time may be a significant problem for some of our customers who have time-sensitive or mission-critical practices. We could face breach of warranty or other claims or additional development costs if our software contains errors, if our customers suffer loss of data or are unable to process their data, if our products and/or services experience failures, do not perform in accordance with their documentation, or do not meet the expectations that our customers have for them. Even if these claims do not result in our having any liability, investigating and defending against them could be expensive and time-consuming and could divert management’s attention away from our operations. In addition, negative publicity caused by these events may delay or reduce market acceptance of our products and services, including unrelated products and services. Such errors, failures or claims could also cause us to lose customers or to experience significant decreases in orders from existing customers, and could materially adversely affect our business, revenues, operating results, cash flows and financial condition.

Our competitive position could be significantly harmed if we fail to protect our intellectual property rights from third-party challenges.

Our ability to compete depends in part on our ability to protect our intellectual property rights. We rely on a combination of copyright, patent, trademark, and trade secret laws and restrictions on disclosure to protect the intellectual property rights related to our software applications. Most of our software technology is not patented and existing copyright laws offer only limited practical protection. Our practice is to require all new employees to sign a confidentiality agreement and most of our employees have done so. However, not all existing employees have signed confidentiality agreements. In addition, third parties with whom we share confidential information are required to sign confidentiality agreements. We cannot assure you that the legal protections that we rely on will be adequate to prevent misappropriation of our technology.

Further, we may need to bring lawsuits or pursue other legal or administrative proceedings to enforce our intellectual property rights. Generally, lawsuits and proceedings of this type, even if successful, are costly, time consuming and could divert our personnel and other resources away from our business, which could harm our business.

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Moreover, these protections do not prevent independent third-party development of competitive technology or services. Unauthorized parties may attempt to copy or otherwise obtain and use our technology. Monitoring use of our technology is difficult, and we cannot assure you that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.

Intellectual property infringement claims against us could be costly to defend and could divert our management’s attention away from our business.

As the number of software products and services in our target markets increases and as the functionality of these products and services overlaps, we are increasingly subject to the threat of intellectual property infringement claims. Any infringement claims alleged against us, regardless of their merit, will be time-consuming and expensive to defend. Infringement claims will also divert our management’s attention and resources and could also cause delays in the delivery of our products and services to our customers. Settlement of any infringement claims could require us to enter into royalty or licensing agreements on terms that are costly or cost-prohibitive. If a claim of infringement against us was successful and if we were unable to license the infringing or similar technology or redesign our products and services to avoid infringement, our business, financial condition, cash flows, and results of operations will be harmed.

We may undertake additional acquisitions, which may involve significant uncertainties and may increase costs and divert management resources from our core business activities, or we may fail to realize anticipated benefits of such acquisitions.

We may undertake additional acquisitions if we identify companies with desirable applications, products, services, businesses or technologies. We may not achieve any of the anticipated synergies and other benefits that we expected to realize from these acquisitions. In addition, software companies depend heavily on their employees to maintain the quality of their software offerings and related customer services. If we are unable to retain the acquired companies’ personnel or integrate them into our operations, the value of the acquired applications, products, services, distribution capabilities, business, technology, and/or customer base could be compromised. The amount and timing of the expected benefits of any acquisition are also subject to other significant risks and uncertainties. These risks and uncertainties include:

	•		our ability to cross-sell products and services to customers with whom we have established relationships and those with whom the acquired business had established relationships;

	•		diversion of our management’s attention from our existing business;

	•		potential conflicts in customer and supplier relationships;

	•		our ability to coordinate organizations that are geographically diverse and may have different business cultures;

	•		dilution to existing stockholders if we issue equity securities in connection with acquisitions;

	•		assumption of liabilities or other obligations in connection with the acquisition; and

	•		compliance with regulatory requirements.

Further, our profitability may also suffer because of acquisition-related costs and/or amortization or impairment of intangible assets.

Technology solutions may change faster than we are able to update our technologies, which could cause a loss of customers and have a negative impact on our revenues.

The information management technology market in which we compete is characterized by rapidly changing technology, evolving industry standards, emerging competition and the frequent introduction of new services, software and other products. Our success depends partly on our ability to:

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	•		develop new or enhance existing products and services to meet the changing needs of our customers and the marketplace in a timely and cost-effective way; and

	•		respond effectively to technological changes, new product offerings, product enhancements and new services of our competitors.

We cannot be sure that we will be able to accomplish these goals. Our development of new and enhanced products and services may take longer than originally expected, require more testing than originally anticipated and require the acquisition of additional personnel and other resources. In addition, there can be no assurance that the products and/or services we develop or license will be able to compete with the alternatives available to our customers. Our competitors may develop products or technologies that are better or more attractive than our products or technologies, or that may render our products or technologies obsolete. If we do not succeed in adapting our products, technology and services or developing new products, technologies and services, our business could be harmed.

Our inability to renew, or make material modifications to, agreements with our third-party product and service providers could lead to a loss of customers and have a negative impact on our revenues.

Some of our customers demand the ability to acquire a variety of products from one provider. Some of these products are not owned or developed by us. Through agreements with third parties, we currently resell the desired hardware, software and services to these customers. However, in the event these agreements are not renewed or are renewed on less favorable terms, we could lose sales to competitors who market the desired products to these customers or recognize less revenue. If we do not succeed in maintaining our relationships with our third-party providers, our business could be harmed.

The nature of our products and services exposes us to product liability claims that may not be adequately covered by insurance or contractual indemnification.

As a product and service provider in the healthcare industry, we operate under the continual threat of product liability claims being brought against us. Errors or malfunctions with respect to our products or services could result in product liability claims. In addition, certain agreements require us to indemnify and hold others harmless against certain matters. Although we believe that we carry adequate insurance coverage against product liability claims, we cannot assure you that claims in excess of our insurance coverage will not arise. In addition, our insurance policies must be renewed annually. Although we have been able to obtain what we believe to be adequate insurance coverage at an acceptable cost in the past, we cannot assure you that we will continue to be able to obtain adequate insurance coverage at an acceptable cost.

In many instances, agreements which we enter into contain provisions requiring the other party to the agreement to indemnify us against certain liabilities. However, any indemnification of this type is limited, as a practical matter, to the creditworthiness of the indemnifying party. If the contractual indemnification rights available under such agreements are not adequate, or inapplicable to the product liability claims that may be brought against us, then, to the extent not covered by our insurance, our business, operating results, cash flows and financial condition could be materially adversely affected.

We may be subject to claims resulting from the activities of our strategic partners.

We rely on third parties to provide certain services and products critical to our business. For example, we use national clearinghouses in the processing of insurance claims and we outsource some of our hardware maintenance services and the printing and delivery of patient billings for our customers. We also sell third-party products, several of which manipulate clinical data and information. We also have relationships with certain third parties where these third parties serve as sales channels through which we generate a portion of our revenues. Due to these third-party relationships, we could be subject to claims as a result of the activities, products, or services of these third-party service providers even though we were not directly involved in the circumstances leading to

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those claims. Even if these claims do not result in liability to us, defending against and investigating these claims could be expensive and time-consuming, divert personnel and other resources from our business and result in adverse publicity that could harm our business.

We are subject to government regulation and legal uncertainties, compliance with which could have a material adverse effect on our business.

HIPAA

Federal regulations impact the manner in which we conduct our business. We have been, and may continue to be, required to expend additional resources to comply with regulations under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). The total extent and amount of resources to be expended is not yet known. Because some of these regulations are relatively new, there is uncertainty as to how they will be interpreted and enforced.

Although we have made, and will continue to make, a good faith effort to ensure that we comply with, and that our future products enable compliance with, applicable HIPAA requirements, we may not be able to conform all of our operations and products to such requirements in a timely manner, or at all. The failure to do so could subject us and our customers to penalties and damages, as well as civil liability and criminal sanctions to the extent we are a business associate of a covered entity or regulated directly as a covered entity. In addition, any delay in developing or failure to develop products and/or deliver services that would enable HIPAA compliance for our current and prospective customers could put us at a significant disadvantage in the marketplace. Accordingly, our business, and the sale of our products and services, could be materially harmed by failures with respect to our implementation of HIPAA regulations.

Other E-Commerce Regulations

We may be subject to additional federal and state statutes and regulations in connection with offering services and products via the Internet. On an increasingly frequent basis, federal and state legislators are proposing laws and regulations that apply to Internet commerce and communications. Areas being affected by these regulations include user privacy, pricing, content, taxation, copyright protection, distribution, and quality of products and services. To the extent that our products and services are subject to these laws and regulations, the sale of our products and services could be harmed.

FDA

The United States Food and Drug Administration, or FDA, is responsible for ensuring the safety and effectiveness of medical devices under the 1976 Medical Device Amendments to the Food, Drug and Cosmetic Act, as well as the 1990 Safe Medical Devices Act, and the Food and Drug Administration Modernization Act of 1997. Certain computer applications and software are generally subject to regulation as medical devices, requiring registration with the FDA, application of detailed record-keeping and manufacturing standards, and FDA approval or clearance prior to marketing when such products are intended to be used in the diagnosis, cure, mitigation, treatment, or prevention of disease. Our PACS product is subject to FDA regulation. If the FDA were to decide that any of our other products and services should be subject to FDA regulation or, if in the future we were to expand our application and service offerings into areas that may subject us to further FDA regulation, the costs of complying with FDA requirements would most likely be substantial. Satisfaction of the approval or clearance requirements would create delays in marketing, and the FDA could require supplemental filings or deny certain of these products. In addition, we are subject to periodic FDA inspections and there can be no assurances that we will not be required to undertake specific actions to further comply with the Federal Food, Drug and Cosmetic Act, its amendments and any other applicable regulatory requirements. The FDA has available several enforcement tools, including product recalls, seizures, injunctions, civil fines and/or criminal prosecutions. FDA compliance efforts with regard to our PACS product are time consuming and very significant and any failure to

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comply could have a material adverse effect on our business, revenues, operating results, cash flows and financial condition.

We and our customers must comply with various federal and state anti-kickback, self-referral, false claims and similar laws, the breach of which could cause a material adverse effect on our business, financial condition and results of operations.

Our relationships with our customers are subject to scrutiny under various federal anti-kickback, self-referral, false claims and similar laws, often referred to collectively as healthcare fraud and abuse laws. The scope and enforcement of all of these laws is uncertain and subject to rapid change, especially in light of the lack of applicable precedent and regulations. There can be no assurance that federal or state regulatory or enforcement authorities will not investigate or challenge our current or future activities under these laws. Any such investigation or challenge could have a material adverse effect on our business, financial condition and results of operations. Any state or federal regulatory or enforcement review of us, regardless of the outcome, would be costly and time consuming. Additionally, we cannot predict the impact of any changes in these laws, whether or not retroactive.

State and federal laws relating to confidentiality of patient medical records could limit our customers’ ability to use our services and expose us to liability.

The confidentiality of patient records and the circumstances under which records may be released are already subject to substantial governmental regulation. Although compliance with these laws and regulations is principally the responsibility of the healthcare provider, under these current laws and regulations patient confidentiality rights are evolving rapidly. A breach of any privacy rights of a customer and/or patient of a customer by one of our employees could subject us to significant liability. In addition to the obligations being imposed at the state level, there is also legislation governing the dissemination of medical information at the federal level. The federal regulations may require holders of this information to implement security measures, which could entail substantial expenditures on our part. Adoption of these types of legislation or other changes to state or federal laws could materially affect or restrict the ability of healthcare providers to submit information from patient records using our products and services. These kinds of restrictions would likely decrease the value of our applications to our customers, which could materially harm our business.

We depend on partners/suppliers for delivery of electronic data interchange (e.g., insurance claims processing and invoice printing services), commonly referred to as EDI, hardware maintenance services, third-party software or software or hardware components of our offerings, and sales lead generation. Any failure, inability or unwillingness of these suppliers to perform these services or provide their products could negatively impact our customers satisfaction and our revenues.

We use various third-party suppliers to provide our customers with EDI transactions and on-site hardware maintenance. EDI revenues would be particularly vulnerable to a supplier failure because EDI revenues are earned on a daily basis. We rely on numerous third-party products that are made part of our software offerings and/or that we resell. Although other vendors are available in the marketplace to provide these products and services, it would take time to switch suppliers. If these suppliers were unable or unwilling to perform such services, provide their products or if the quality of these services or products declined, it could have a negative impact on our customers satisfaction and result in a decrease in our revenues, cash flows and operating results.

Our systems may be vulnerable to security breaches and viruses.

The success of our strategy to offer our EDI services and Internet solutions depends on the confidence of our customers in our ability to securely transmit confidential information. Our EDI services and Internet solutions rely on encryption, authentication and other security technology licensed from third parties to achieve secure transmission of confidential information. We may not be able to stop unauthorized attempts to gain access to or disrupt the transmission of communications by our customers. Some of our customers have had their use of our software significantly impacted by computer viruses. Anyone who is able to circumvent our security measures

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could misappropriate confidential user information or interrupt our operations and those of our customers. In addition, our EDI and internet solutions may be vulnerable to viruses, physical or electronic break-ins, and similar disruptions. Any failure to provide secure electronic communication services could result in a lack of trust by our customers, causing them to seek out other vendors, and/or damage our reputation in the market, making it difficult to obtain new customers. Moreover, any such failure could cause us to be sued. Even if these law suits do not result in any liability to us, defending against and investigating these law suits could be expensive and time-consuming, and could divert personnel and other resources from our business.

Our growth could be limited if we are unable to attract and retain qualified personnel.

We believe that our success depends largely on our ability to attract and retain highly skilled technical, managerial and sales personnel to develop, sell and implement our products and services. Individuals with the information technology, managerial and selling skills we need to further develop, sell and implement our products and services are in short supply and competition for qualified personnel is particularly intense. We may not be able to hire the necessary personnel to implement our business strategy, or we may need to pay higher compensation for employees than we currently expect. We cannot assure you that we will succeed in attracting and retaining the personnel we need to continue to grow and to implement our business strategy. In addition, we depend on the performance of our executive officers and other key employees. The loss of any member of our senior management team could negatively impact our ability to execute our business strategy

We may be exposed to credit risks of our customers.

We recorded revenues of $38.2 million for the nine months ended September 30, 2007 and $49.4 million in fiscal year 2006 and we bill substantial amounts to many of our customers. A deterioration of the credit worthiness of any of our customers could impact our ability to collect receivables or provide future services, which could negatively impact the results of our operations. At September 30, 2007, no one customer represented more than 10% of our accounts receivable. If any of our significant customers were unable to pay us in a timely fashion, or if we were to experience significant credit losses in excess of our reserves, our results of operations, cash flows and financial condition would be seriously harmed.

Our future success depends on our ability to successfully develop new products and adapt to new technological change.

To remain competitive, we will need to develop new products, evolve existing products, and adapt to technological change. Technical developments, customer requirements, computer programming languages and industry standards change frequently in our markets. As a result, success in current markets and new markets will depend upon our ability to enhance current products, develop and introduce new products that meet customer needs, keep pace with changes in technology, respond to competitive products, and achieve market acceptance. Product development requires substantial investments for research, refinement and testing. There can be no assurance that we will have sufficient resources to make necessary product development investments. We may experience difficulties that will delay or prevent the successful development, introduction or implementation of new or enhanced products. Our inability to introduce or implement new or enhanced products in a timely manner would adversely affect our future financial performance. Our products are complex and may contain errors. Computer programming errors in products will require us to ship corrected products to customers. Errors in products could cause the loss of or delay in market acceptance or sales and revenue, the diversion of development resources, injury to our reputation, and increased service, indemnification and warranty costs which would have an adverse effect on our financial performance.

We are exposed to potential risks and we will continue to incur increased costs as a result of the internal control testing and evaluation process mandated by Section 404 of the Sarbanes-Oxley Act of 2002.

We assessed the effectiveness of our internal control over financial reporting as of December 31, 2006 and assessed all deficiencies on both an individual basis and in combination to determine if, when aggregated, they constitute a material weakness. As a result of this evaluation, no material weaknesses were identified.

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Although we have completed the documentation and testing of the effectiveness of our internal control over financial reporting for the fiscal year ended December 31, 2006, as required by Section 404 of the Sarbanes-Oxley Act of 2002, we expect to continue to incur costs, including increased accounting fees and increased staffing levels, in order to maintain compliance with that section of the Sarbanes-Oxley Act. We continue to monitor controls for any weaknesses or deficiencies. No evaluation can provide complete assurance that our internal controls will detect or uncover all failures of persons within the company to disclose material information otherwise required to be reported. The effectiveness of our controls and procedures could also be limited by simple errors or faulty judgments.

In the future, if we fail to complete the Sarbanes-Oxley 404 evaluation in a timely manner, or if our independent registered public accounting firm cannot attest to our evaluation in a timely manner, we could be subject to regulatory scrutiny and a loss of public confidence in our internal controls. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.

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Item 5. Other Information.

Pursuant to the terms of Mr. McClennen’s employment agreement with us, dated March 28, 2005, in connection with the previously announced non-renewal by us of that agreement, we and Mr. McClennen have entered into a general release and separation agreement, dated as of October 25, 2007, under which Mr. McClennen is entitled to receive one year’s salary as a severance payment.

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Item 6. Exhibits

(a) Exhibits


Exhibit No.		Description

10.1		Separation agreement, dated October 25, 2007 by and between AMICAS, Inc. and Peter McClennen.

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 9^th day of November, 2007.


	AMICAS, Inc.
	By:	/s/ Joseph D. Hill
		Joseph D. Hill
		Senior Vice President and Chief Financial Officer



	By:	/s/ Stephen N. Kahane M.D., M.S.
		Stephen N. Kahane M.D., M.S.
		Chief Executive Officer

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Positive
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Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

Amicas (AMCS) Inactive 10-Q2007 Q3 Quarterly report

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