Amicas (AMCS) 10-Q 2008 Q2 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 June 30, 2008

OR

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	Smaller reporting companyo
		(Do not check if a smaller reporting company)

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

As of August 1, 2008 there were 35,772,106 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 — June 30, 2008 and December 31, 2007		3
Condensed Consolidated Statements of Operations — Three and Six Months Ended June 30, 2008 and 2007		4
Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2008 and 2007		5
Notes to Condensed Consolidated Financial Statements — June 30, 2008.		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3. Quantitative and Qualitative Disclosures about Market Risk		24
Item 4. Controls and Procedures		26
Part II. Other Information
Item 1. Legal Proceedings		26
Item 1A. Risk Factors		26
Item 2. Unregistered Sales of Equity Securities and use of proceeds		27
Item 4. Submission of Matters to a Vote of Security Holders		28
Item 6. Exhibits		29
Signatures		30
EX-10.1 Employment Agreement, dated April 7, 2008
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO & CFO

For further information, refer to the AMICAS, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the Securities and Exchange Commission on March 17, 2008.

AMICAS, Vision Series, Radstream, 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.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)

	June 30,			December 31,
	2008			2007
Assets
Current assets:
Cash and cash equivalents	$	6,353		$	8,536
Marketable securities		47,527			67,071
Accounts receivable, net of allowances of $290 and $231, respectively		11,980			10,483
Prepaid expenses and other current assets		2,700			3,600
Total current assets		68,560			89,690
Property and equipment, less accumulated depreciation and amortization of $7,178 and $6,848, respectively		1,334			1,186
Goodwill		27,313			27,313
Acquired/developed software, less accumulated amortization of $9,052 and $7,992, respectively		6,948			8,008
Other intangible assets, less accumulated amortization of $1,956 and $1,742, respectively		1,444			1,658
Other assets		1,583			586
Total Assets	$	107,182		$	128,441
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses	$	6,256		$	7,094
Accrued employee compensation and benefits		1,658			1,451
Deferred revenue		11,153			10,375
Total current liabilities		19,067			18,920
Unrecognized tax benefits		1,326			1,275
Commitments and contingencies
Stockholders’ equity:
Preferred stock $.001 par value; 2,000,000 shares authorized; none issued		—			—
Common stock $.001 par value, 200,000,000 shares authorized, 51,405,762 and 51,296,823 issued, respectively		51			51
Additional paid-in capital		229,855			229,056
Accumulated other comprehensive income		71			60
Accumulated deficit		(99,042	)		(98,478	)
Treasury stock, at cost, 15,207,435 and 6,824,192 shares, respectively		(44,146	)		(22,443	)
Total stockholders’ equity		86,789			108,246
Total Liabilities and Stockholders’ Equity	$	107,182		$	128,441

See Accompanying Notes to Condensed Consolidated Financial Statements.

3

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Revenues
Maintenance and services	$	10,552		$	9,583		$	20,305		$	18,791
Software licenses and system sales		3,023			2,919			6,058			6,144
Total revenues		13,575			12,502			26,363			24,935
Costs and expenses
Cost of revenues:
Maintenance and services (a)		4,692			4,194			8,961			8,186
Software licenses and system sales, including amortization of software costs of $571, $476, $1,060 and $979, respectively		1,731			1,670			3,942			3,189
Selling, general and administrative (b)		5,282			5,480			10,284			10,857
Research and development (c)		2,195			2,278			4,390			4,300
Depreciation and amortization		277			264			552			536
		14,177			13,886			28,129			27,068
Operating loss		(602	)		(1,384	)		(1,766	)		(2,133	)
Interest income		572			930			1,361			1,887
Loss on sale of investments		—			—			(31	)		—
Loss before provision for income taxes		(30	)		(454	)		(436	)		(246	)
Provision for income taxes		67			26			128			88
Net loss	$	(97	)	$	(480	)	$	(564	)	$	(334	)
Loss per share
Basic:	$	(0.00	)	$	(0.01	)	$	(0.01	)	$	(0.01	)
Diluted:	$	(0.00	)	$	(0.01	)	$	(0.01	)	$	(0.01	)
Weighted average number of shares outstanding
Basic		40,740			44,568			42,188			44,559
Diluted		40,740			44,568			42,188			44,559

(a)	– includes $35,000, $27,000, $70,000 and $48,000 in stock-based compensation expense for the three and six months ended June 30, 2008 and June 30, 2007, respectively.
(b)	– includes $50,000, $0.4 million, $0.3 million and $0.9 million in stock-based compensation expense for the three and six months ended June 30, 2008 and June 30, 2007, respectively.
(c)	– includes $100,000, $71,000 and $213,000 and $133,000 in stock-based compensation expense for the three and six months ended June 30, 2008 and June 30, 2007 respectively.

See Accompanying Notes to Condensed Consolidated Financial Statements.

4

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

	Six Months Ended
	June 30,
	2008			2007
Operating activities
Net loss	$	(564	)	$	(334	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization		552			538
Provisions for (recoveries from) bad debts		110			(341	)
Loss on disposal of fixed assets		6			—
Amortization of software development costs		1,060			979
Non-cash stock compensation expense		618			1,034
Changes in operating assets and liabilities:
Accounts receivable		(1,607	)		(52	)
Computer hardware held for resale, prepaid expenses and other		904			854
Accounts payable and accrued expenses		(630	)		922
Deferred revenue including unearned discount		778			993
Unrecognized tax benefits		50			46
Cash provided by operating activities		1,277			4,639
Investing activities
Purchases of property and equipment		(492	)		(264	)
Purchase of software		—			(2,300	)
Purchases of held-to-maturity securities		(189,410	)		(44,592	)
Maturities of held-to-maturity securities		175,642			44,174
Purchases of available-for-sale securities		(5,597	)		(13,587	)
Sales of available-for-sale securities		37,919			15,240
Cash provided by (used in) investing activities		18,062			(1,329	)
Financing activities
Repurchases of common stock		(21,703	)		—
Exercise of stock options		181			182
Cash (used in) provided by financing activities		(21,522	)		182
(Decrease) increase in cash and cash equivalents		(2,183	)		3,492
Cash and cash equivalents at beginning of period		8,536			7,331
Cash and cash equivalents at end of period	$	6,353		$	10,823
Supplemental disclosure of cash paid during the period for:
Income taxes, net of refunds	$	115		$	60
Non-cash investing activities:
Unrealized gain (loss) on available-for-sale securities	$	11		$	(29	)

See Accompanying Notes to Condensed Consolidated Financial Statements.

5

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 three and six-month periods ended June 30, 2008 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2008. 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, 2007.

Principles of Consolidation

          The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Amicas PACS, Corp. (“Amicas PACS”). 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 (computer hardware) sales upon execution of the sales contract and delivery of the software (off-the-shelf

- 6 -

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, hardware, maintenance and 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. 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. In June 2008, the Company reclassified an auction rate security of approximately $1.0 million to long-term assets as a result of the current conditions in the global credit markets which have adversely impacted the liquidity of this security; however, the investment is AAA rated, and the Company is not relying on this security for short-term cash needs. This security is held at cost which approximates market value.

     As of June 30, 2008, marketable securities consisted of the following, in thousands:

	June 30, 2008
			Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
Available-for-sale:
State and municipal obligations	$	7,984	$	12	$	(15	)	$	7,981
Federal agency		8,853		78		(3	)		8,928
Total	$	16,837	$	90	$	(18	)	$	16,909

- 7 -

	June 30, 2008
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
Held-to-maturity:
Commercial paper	$	11,502	$	3	$	(2	)	$	11,503
Certificates of deposit		19,116		14		(22	)		19,108
Total	$	30,618	$	17	$	(24	)	$	30,611

     Available for sale securities are recorded at fair value of $16.9 million as of June 30, 2008 and held to maturity securities are recorded at amortized cost of $30.6 million, resulting in total marketable securities of $47.5 million.

The contractual maturities of our available-for-sale state and municipal obligations are as follows:

Contractual maturities of available-for-sale securities

	June 30,
	2008
Due within one year	$	11,216
Due between one to five years		5,693
Due between five to ten years		—
Due after 10 years		—
Total	$	16,909

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

Share-Based Payments

          The Company follows the provisions of SFAS 123(R), “Share-Based Payment” (“SFAS 123R”). The Company utilizes the Black-Scholes valuation model for estimating the fair value of stock-based compensation. Under the provisions of SFAS 123R, the Company recorded $185,000 and $510,000 of stock-based compensation expense in its unaudited condensed consolidated statements of operations for the three months ended June 30, 2008 and June 30, 2007, respectively. During the six months ended June 30, 2008 and June 30, 2007, the Company recorded stock-based compensation expense of $618,000 and $1,034,000, respectively.

          For the three and six months ended June 30, 2008 and June 30, 2007, the Company used the following assumptions:

	Stock Option Plans						Stock Option Plans
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Average risk-free interest rate		2.92	%		4.61	%		2.84	%		4.76	%
Expected dividend yield		—			—			—			—
Expected stock price volatility		45.4% - 46.3	%		45.0	%		43.6% - 46.3	%		45.04	%
Weighted average expected life (in years)		5.1			4.8			5.8			5.5
Weighted average fair value	$	0.95		$	1.34		$	1.15		$	1.43

- 8 -

          During the three and six months ended June 30, 2008, the weighted average fair value of the shares subject to purchase under the employee stock purchase plan was $0.96 per share, using the following assumptions:

	Stock Purchase Plan
	Period ended June 30, 2008
	Three Months			Six Months
	Ended			Ended
Average risk-free interest rate		4.47	%		4.47	%
Expected dividend yield		—			—
Expected stock price volatility		43.6	%		43.6	%
Weighted average expected life (in years)		0.5			0.5

          During the three and six months ended June 30, 2007, no shares were issued under the employee stock purchase plan.

          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 for option plans 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. Expected volatility for the stock purchase plan is based on six months which reflects the offering period of the plan. 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 6.3% 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 June 30, 2008 and June 30, 2007 was $2.8 million and $4.0 million, respectively, which is expected to be recognized over the weighted average remaining period of 2.5 years.

     The following table summarizes activity under all of the Company’s stock option plans for the six months ended June 30, 2008 (in thousands, except for per share and contractual term amounts):

									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, 2007		6,058			7,047		$	3.28		5.03	$	1,977
Options granted		(1,269	)		1,237			2.54
Options exercised		2			(2	)		2.48
Option plan expired		(237	)		—
Options cancelled/forfeited		185			(828	)		3.74
Balance at June 30, 2008		4,739			7,455			3.10		5.4	$	2,348
Exercisable, June 30, 2008					4,975		$	3.21		3.8	$	1,961

- 9 -

(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 June 30, 2008 and the exercise price of the underlying options.

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						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Numerator — (loss) income:
Net loss	$	(97	)	$	(480	)	$	(564	)	$	(334	)
Denominator:
Basic weighted average shares outstanding		40,740			44,568			42,188			44,559
Effect of dilutive securities		—			—			—			—
Diluted weighted average shares outstanding		40,740			44,568			42,188			44,559
Basic EPS:	$	(0.00	)	$	(0.01	)	$	(0.01	)	$	(0.01	)
Diluted EPS:	$	(0.00	)	$	(0.01	)	$	(0.01	)	$	(0.01	)

          Stock options to purchase approximately 4.6 million shares and 4.5 million shares of the Company’s common stock were excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2008, respectively, because their effect would have been anti-dilutive. However, these options could be dilutive in the future.

Comprehensive Income (Loss)

          Comprehensive income (loss) 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 (loss) for the six months ended June 30, 2008 and 2007 consists of net income (loss) and net unrealized gains (losses) on marketable securities. The components of comprehensive income (loss) are as follows (in thousands):

- 10 -

	Six Months Ended
	June 30,
	2008			2007
Net loss	$	(564	)	$	(334	)
Net unrealized gain (loss) on marketable securities		11			(29	)
Total comprehensive loss	$	(553	)	$	(363	)

C. Equity Transactions

Restricted Stock

          As of June 30, 2008, an aggregate of 88,446 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 or 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. Approximately $86,000 is expected to be recognized over the remaining weighted-average amortization period of eleven months when the restrictions lapse.

          During the quarter ended June 30, 2008, the Company recognized $23,000 in stock-based compensation expense 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 June 30, 2008 was $100,000.

          A summary of the Company’s restricted stock activity and related information for the quarter ended June 30, 2008 is as follows:

				Weighted
	Shares of			Average
	Restricted			Grant Date
	Stock			Fair Value
Restricted at December 31, 2007		25,985		$	3.23
Granted		32,781			2.82
Unrestricted		(23,435	)		3.20
Restricted at June 30, 2008		35,331		$	2.87

Repurchase of Common Stock

          On December 13, 2007, the Board of Directors approved a repurchase of shares of the Company’s common stock having an aggregate value of up to $25 million. During the quarter ended June 30, 2008, the Company repurchased 6,586,418 shares of stock under a Rule 10b5-1 trading plan for a total of approximately $16.9 million. To date, the Company has repurchased 8,568,346 shares for approximately $22.5 million under this program.

D. Commitments and Contingencies

Commitments

          The Company leases office and research facilities and other equipment under various agreements that expire in 2008, 2009 and 2013.

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

- 11 -

	Operating
Year	lease payments
	(in thousands)
2008	$	625
2009		991
2010		874
2011		866
2012		893
Thereafter		29
Total	$	4,278

          The Company leases space for its corporate headquarters in Boston, Massachusetts. The Company renewed the lease effective January 11, 2008 with a base rent of $65,446 per month which increases by $1.00 per square foot annually over the lease term of five years.

          The Company also leases space in Daytona, Florida. In May 2008, the Company extended the lease with a base rent of $35,665 per month. The extended lease expires on April 30, 2009. The Company expects to find a suitable location prior to the expiration of the lease.

Employee Savings Plan

          In connection with the Company’s employee savings plans, the Company has committed, for the 2008 plan year, to contribute to such plans. The matching contribution for 2008 is estimated to be approximately $0.6 million and will be made in cash.

Contingencies

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

          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 June 30, 2008.

          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 June 30, 2008.

- 12 -

E. Income Tax

     Provision

          In the three and six months ended June 30, 2008, the Company recorded an income tax provision of $67,000 and $128,000, respectively as compared to an income tax provision of $26,000 and $88,000, respectively, in the three and six months ended June 30, 2007. The income tax provisions for the three and six months ended June 30, 2008 and June 30, 2007 is primarily due to the effect of state tax liabilities and interest on liabilities recorded in accordance with Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109”.

     Uncertain tax positions

          As of January 1, 2008, 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 June 30, 2008.

          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 December 31, 2004, 2005, 2006 and 2007.

          As of January 1, 2008, the Company has accrued $162,500 of interest and penalties related to uncertain tax positions. As of June 30, 2008, the total amount of accrued interest and penalties are $213,000. 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 paid $2.3 million to acquire certain ownership rights to a practice management software application that the Company now markets as Vision Series Financials. Vision Series Financials became commercially available in April 2008, at which point the Company began amortization of this capitalized cost over the estimated life of approximately seven years. The Company did not capitalize any internal costs through June 30, 2008 as such amounts were immaterial.

G. Fair Value Measurements

               Effective January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting Standards No. 157 (SFAS 157) “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. SFAS 157 also requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model. The adoption of SFAS 157 on our assets and liabilities did not have a significant impact on our financial statements.

          SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for

- 13 -

identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under SFAS No. 157 are described below:

Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.

Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

          A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

          The financial assets of the Company measured at fair value on a recurring basis are cash equivalents and short term investments. The Company’s cash equivalents and short term investments are generally classified within level 1 or level 2 of the fair value hierarchy provided for under SFAS No. 157 because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

          The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities and most money market securities. Such instruments are generally classified within level 1 of the fair value hierarchy.

          The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most investment-grade corporate bonds, and state and municipal obligations. Such instruments are generally classified within level 2 of the fair value hierarchy.

          The following table sets forth the Company’s cash and cash equivalents and marketable securities which are measured at fair value on a recurring basis by level within the fair value hierarchy. As required by SFAS No. 157, these are classified based on the lowest level of input that is significant to the fair value measurement.

	Fair value measurements using						Assets at
	Level 1		Level 2		Level 3		Fair Value
Cash and cash equivalents and marketable securities	$	15,280	$	7,981	$	—	$	23,261
Total	$	15,280	$	7,981	$	—	$	23,261

          In February 2008, the Financial Accounting Standards Board (FASB) issued Staff Position No. 157-2 (FSP 157-2) that delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The delay is intended to allow the FASB and constituents additional time to consider the effect of various implementation issues that have arisen, or that may arise, from the application of SFAS 157.

H. Recent Accounting Pronouncements

          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

- 14 -

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.

          In December 2007, the FASB issued SFAS No. 141-R, “Business Combinations” (‘SFAS 141-R”).This statement replaces SFAS No. 141, but retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting be used for all business combinations. This statement requires an acquirer to recognize and measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their fair values as of the acquisition date. The statement requires acquisition costs and any restructuring costs associated with the business combination to be recognized separately from the fair value of the business combination. SFAS No. 141-R establishes requirements for recognizing and measuring goodwill acquired in the business combination or a gain from a bargain purchase as well as disclosure requirements designed to enable users to better interpret the results of the business combination. SFAS No. 141-R is effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the effect that the adoption of SFAS 141-R will have on its financial position and results of operations. Early adoption of this statement is not permitted.

- 15 -

     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

- 16 -

subsidiary, PracticeWorks, Inc. (“PracticeWorks”). As a result of the Distribution, PracticeWorks became an independent public company consisting of our former dental business, which included the dental, orthodontic, and oral and maxillofacial surgery business lines. We 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. 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.

- 17 -

     These policies are unchanged from those used to prepare the 2007 annual consolidated financial statements except for Statement of Financial Accounting Standards No. 157, ''Fair Value Measurements’’ (“SFAS 157”). 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, 2007. We discuss SFAS 157 in Note G to our Condensed Consolidated Financial Statements.

Recent Accounting Pronouncements

     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 or financial liabilities.

     In December 2007, the FASB issued SFAS No. 141-R, “Business Combinations” (”SFAS 141-R”).This statement replaces SFAS No. 141, but retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting be used for all business combinations. This statement requires an acquirer to recognize and measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their fair values as of the acquisition date. The statement requires acquisition costs and any restructuring costs associated with the business combination to be recognized separately from the fair value of the business combination. SFAS No. 141-R establishes requirements for recognizing and measuring goodwill acquired in the business combination or a gain from a bargain purchase as well as disclosure requirements designed to enable users to better interpret the results of the business combination. SFAS No. 141-R is effective for fiscal years beginning on or after December 15, 2008. We are currently evaluating the effect that the adoption of SFAS 141-R will have on our financial position and results of operations. Early adoption of this statement is not permitted.

- 18 -

Results of Continuing Operations

Revenues

	Three Months Ended June 30,											Six Months Ended June 30,
	(In thousands except percentage)											(In thousands except percentage)
						Change												Change
	2008			Change		(%)			2007			2008			Change			(%)			2007
Maintenance and services	$	10,552		$	969		10.1	%	$	9,583		$	20,305		$	1,514			8.1	%	$	18,791
Percentage of total revenues		77.7	%							76.7	%		77.0	%								75.4	%
Software licenses and system sales	$	3,023		$	104		3.6	%	$	2,919		$	6,058		$	(86	)		(1.4	)%	$	6,144
Percentage of total revenues		22.3	%							23.3	%		23.0	%								24.6	%
Total revenues	$	13,575		$	1,073		8.6	%	$	12,502		$	26,363		$	1,428			5.7	%	$	24,935

     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 $9.6 million for the three months ended June 30, 2007 to $10.6 million for the three months ended June 30, 2008. The increase in maintenance and services revenues of approximately $0.9 million is primarily due to an increase of $0.6 million of maintenance revenues an increase of $0.1 million in EDI services revenues and a $0.2 million increase in implementation and training services revenues. The $0.6 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 $20.3 million for the six months ended June 30, 2008, compared to $18.8 million for the six months ended June 30, 2007. The increase in maintenance and services revenues of approximately $1.5 million was primarily due to an increase of $1.2 million in maintenance revenues and an increase of implementation and training services revenues of $0.3 million. The $1.2 million increase in maintenance revenues is the result of an increase in the installed base of our customers offset by customer attrition.

Software licenses and hardware sales

     Software license and systems revenue increased $104,000 from $2.9 million in the three months ended June 30, 2007 to $3.0 million for the three months ended June 30, 2008. This increase was the result of a $0.5 million increase in software license and system sales offset by a decrease of $0.4 million in hardware sales. The increase of software license and system sales is the result of software license sales to new and existing customers and the timing of recognizing systems orders previously deferred due to revenue recognition policies under U.S. GAAP.

- 19 -

     Software license and systems revenue was $6.1 million for the six months ended June 30, 2008, compared to $6.1 million for the six months ended June 30, 2007. Revenues for software license sales decreased slightly by $0.3 million offset by an increase of hardware sales of $0.3 million.

     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. 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 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 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 June 30,											Six Months Ended June 30,
	(In thousands except percentage)											(In thousands except percentage)
						Change											Change
	2008			Change		(%)			2007			2008			Change		(%)			2007
Maintenance and services	$	4,692		$	498		11.9	%	$	4,194		$	8,961		$	775		9.5	%	$	8,186
Percentage of maintenance and services revenues		44.5	%							43.8	%		44.1	%							43.6	%
Software licenses and hardware sales	$	1,731		$	61		3.7	%	$	1,670		$	3,942		$	753		23.6	%	$	3,189
Percentage of software licenses and hardware sales		57.3	%							57.2	%		65.1	%							51.9	%
Total cost of revenues	$	6,423		$	559		9.5	%	$	5,864		$	12,903		$	1,528		13.4	%	$	11,375

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 and 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 from $4.2 million for the three months ended June 30, 2007 to $4.7 million for the same period in 2008. The increase of approximately $0.5 million is primarily the result of increased internal personnel costs of approximately $0.2 million and increased third party costs of approximately $0.3 million.

     Cost of maintenance and services revenue increased from $8.2 million for the six months ended June 30, 2007 to $9.0 million for the same period in 2008. The increase of approximately $0.8 million is primarily the result of a $0.3 million increase in third party costs including $0.2 million in EDI related transaction costs, and an $0.2 million increase in maintenance costs offset by a $0.1 million increase in third party implementation costs as well as a $0.5 million increase in internal implementation costs.

Cost of software license and hardware revenues

- 20 -

     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 remained substantially unchanged at approximately $1.7 million for the three months ended June 30, 2008 and June 30, 2007. Amortization of capitalized software increased by approximately $0.1 million offset by a decrease in third party costs of $0.1 million.

     Total cost of software licenses and hardware increased from $3.2 million to $3.9 million for the six months ended June 30, 2007 and 2008, respectively. The increase of $0.8 million is primarily the result of an increase in the cost of sales related to hardware from the first quarter of 2008.

     During the period ended March 31, 2007, we acquired certain ownership rights to a practice management software application for $2.3 million. This product became commercially available in April 2008, at which point we began amortization of the product over the estimated life of approximately seven years. We did not capitalize any internal costs prior to commercial availability as such amounts were immaterial.

Operating expenses

	Three Months Ended June 30,												Six Months Ended June 30,
	(In thousands except percentage)												(In thousands except percentage)
							Change												Change
	2008			Change			(%)			2007			2008			Change			(%)			2007
Selling, general and administrative	$	5,282		$	(198	)		(3.6	%)	$	5,480		$	10,284		$	(573	)		(5.3	%)	$	10,857
Percentage of total revenues		38.9	%								43.8	%		39.0	%								43.5	%
Research and development	$	2,195		$	(83	)		(3.6	%)	$	2,278		$	4,390		$	90			2.1	%	$	4,300
Percentage of total revenues		16.2	%								18.2	%		16.7	%								17.2	%
Depreciation and amortization	$	277		$	13			4.9	%	$	264		$	552		$	16			3.0	%	$	536
Percentage of total revenues		2.0	%								2.1	%		2.1	%								2.1	%

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 decreased from $5.5 million for the three months ended June 30, 2007 to $5.3 million for the same period in 2008. This reduction is primarily the result of a decrease in other administrative expenses, primarily stock-based compensation expense.

     Selling, general and administrative expenses decreased from $10.9 million in the six months ended June 30, 2007 to $10.3 million in the six months ended June 30, 2008. This reduction is primarily the result of a decrease in other administrative and overhead expenses, including stock-based compensation expense.

Research and development

- 21 - 

     Research and development expense of $2.2 million in the three months ended June 30, 2008 represents a decrease of approximately $0.1 million from $2.3 million for the same period in 2007. This decrease is primarily due to a decrease in overhead costs. For the six months ended June 30, 2008, research and development expense increased to $4.4 million from $4.3 million for the same period in 2007. This increase is primarily due to an increase in personnel costs partially offset by a decrease in overhead costs.

Depreciation and amortization

     Depreciation and amortization increased slightly from $264,000 in the three months ended June 30, 2007 to $277,000 in the three months ended June 30, 2008 and $16,000 from $536,000 in the six months ended June 30, 2007 to $552,000 in the six months ended June 30, 2008. The increase is primarily due to increases in fixed assets purchased during 2008.

Interest Income

	Three Months Ended June 30,										Six Months Ended June 30,
	(In thousands except percentage)										(In thousands except percentage)
						Change										Change
	2008		Change			(%)			2007		2008		Change			(%)			2007
Interest income	$	572	$	(358	)		(38.5	%)	$	930	$	1,361	$	(526	)		(27.9	%)	$	1,887
Loss on sale of investment		—		—			—			—		31		31			100	%		—

     The decrease of approximately $358,000 and $526,000 in interest income for the three and six months ended June 30, 2008, respectively, is due to both lower yields and lower investment balances in our investment portfolio as compared to the same periods in 2007.

     We sold an investment during the first quarter of 2008 that resulted in a loss of approximately $31,000. We do not anticipate significant realized investment losses in our portfolio in the future.

Provision for income taxes

     In the three and six months ended June 30, 2008, we recorded an income tax provision of $67,000 and $128,000 as compared to an income tax provision of $26,000 and $88,000, respectively, in the three and six months ended June 30, 2007. The income tax provision in the three and six months ended June 30, 2008 and 2007 is primarily due to the effect of state tax liabilities and interest on FIN48 liabilities.

Liquidity and Capital Resources

     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 and cash equivalent and marketable securities balance was $53.9 million as of June 30, 2008, as compared to $75.6 million as of December 31, 2007. Cash provided by operating activities for the six months ended June 30, 2008 was $1.3 million as compared to $4.6 million in the same period in 2007. This decrease is due to fluctuations in operating assets and liabilities, primarily on increase in accounts receivable and a decrease in accounts payable.

     Cash provided by investing activities for the six months ended June 30, 2008 was $18.0 million, which consisted of $0.5 million for purchases of property and equipment and a $17.5 million net decrease in marketable securities as compared to $1.3 million of cash used in the same period in 2007.

- 22 - 

     Cash used in financing activities for the six months ended June 30, 2008 was approximately $21.5 million, consisting of $0.2 million provided in connection with the exercise of stock options by certain employees, and $21.7 million used to repurchase common stock as compared to $0.2 million of cash provided in the same period in 2007 which represented proceeds from the exercise of stock options.

- 23 - 

     The following table summarizes, as of June 30, 2008, the general timing of future payments under our lease agreements that include noncancellable terms, and other long-term contractual obligations:

			July 1, 2008 to
			December 31,
	Total		2008		2009		2010		2011		2012		Thereafter
	(dollars in thousands)
Operating Leases	$	4,278	$	625	$	991	$	874	$	866	$	893	$	29
Other Commitments		1,128		744		288		96		—		—		—
Total	$	5,406	$	1,369	$	1,279	$	970	$	866	$	893	$	29

     We lease space for our corporate headquarters in Boston, Massachusetts. The current lease renewed on January 11, 2008 with a base rent of $65,446 per month. The monthly base increases by $1.00 per square foot annually over the lease term.

     We also lease space in Daytona, Florida. In May 2008, we extended our lease for an additional 10 months at a new base rent of $35,665 per month. The extended lease expires on April 30, 2009. We expect to find a suitable location prior to the expiration of the lease.

     In connection with our employee savings plans, we are committed, for the 2008 plan year, to contribute to the plans. The matching contribution for 2008 is estimated to be approximately $0.6 million and will be made in cash.

We anticipate capital expenditures of approximately $0.8 million for 2008.

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 June 30, 2008, we held approximately $6.4 million in cash and cash equivalents and $47.5 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.

- 24 - 

     Exposure to market rate risk for changes in interest rates relates to our investment in marketable securities of $47.5 million at June 30, 2008. 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. We invest in marketable securities, including auction rate securities of approximately $1.0 million at June 30, 2008. The current conditions in the global credit markets have adversely impacted the liquidity of this security and we have classified it at cost as a long-term asset; however, the investment is AAA rated, and we are not relying on this security for short-term cash needs. 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 $122,000.

- 25 -

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 June 30, 2008. 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 June 30, 2008, 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, 2007, was included in our Annual Report on Form 10-K for the year-end December 31, 2007. In the report, management concluded that, as of December 31, 2007, 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 June 30, 2008 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, we are involved with disputes and there are various claims 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 1A. Risk Factors

Risk Factors

     Our risk factors are described in Part I, Item 1A of our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2007. There have been no material changes in the risks affecting AMICAS since the filing of our Form 10-K.

- 26 -

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) Issuer Repurchases of Equity Securities

					(c)
					Total Number of		(d)
		(a)			Shares		Maximum
	Total				Purchased as		Approximate Dollar
	Number of				Part of Publicly		Value of Shares that
	Shares		(b)		Announced		May Yet Be
	Purchased		Average Price		Plans or		Purchased Under the
Period	(1)		Paid per Share		Programs (2)		Plans or Programs
April 1, 2008 through April 30, 2008		489,912		2.268		2,471,840	$	18,567,185
May 1, 2008 through May 31, 2008		3,258,598		2.574		5,730,438		10,278,263
June 1, 2008 through June 30, 2008		2,837,908		2.682		8,568,346		2,751,264
Total:		6,586,418	$	2.598

(1)	We have repurchased an aggregate of 6,523,292 shares of our common stock pursuant to our previously announced stock repurchase program (the “Program”).
(2)	On December 13, 2007, our Board of Directors approved our repurchase of shares of our common stock having an aggregate value of up to $25 million. As of June 30, 2008, we have repurchased 8,568,346 shares of stock under a Rule 10b5-1 trading plan.

- 27 - 

ITEM 4. Submission Of Matters To A Vote Of Security Holders

     We held our Annual Meeting of Stockholders on June 3, 2008. The following is a brief description of each matter voted upon at the meeting and the number of votes cast for, withheld, or against, the number of abstentions and the number of broker non-votes with respect to each matter, if applicable.

1. To elect seven members of the Board of Directors to serve until the 2009 Annual Meeting of Stockholders.

	Shares		Shares		Shares
	Voted For		Voted Against		Abstaining
Phillip M. Berman, M.D.		33,879,555		—		3,706,065
Stephen J. DeNelsky		33,839,409		—		3,746,211
Joseph D. Hill		33,892,509		—		3,693,111
Stephen N. Kahane, M.D., M.S.		33,849,374		—		3,736,246
Stephen J. Lifshatz		33,866,935		—		3,718,685
David B. Shepherd		33,840,392		—		3,745,228
John J. Sviokla		33,867,638		—		3,717,982

2. To ratify the appointment of BDO Seidman, LLP as our independent registered public accounting firm for the year ending December 31, 2007.

	Number of Shares
For	Against		Abstaining
36,361,261		1,196,364		27,995
Broker Non Votes: 0

- 28 -

Item 6. Exhibits

(a) Exhibits

Exhibit No.	Description
10.1	Employment Agreement, dated April 7, 2008, by and between AMICAS, Inc and Kevin C. Burns.
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.

- 29 -

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 6th day of August, 2008.

 AMICAS, Inc.

By:	/s/ Kevin C. Burns
	Kevin C. Burns
	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

- 30 -