Trizetto (TZIX) 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x 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

¨ 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 000-27501

The TriZetto Group, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	33-0761159
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

567 San Nicolas Drive, Suite 360 Newport Beach, California	92660
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (949) 719-2200

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

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.

Large accelerated filer   x             Accelerated filer   ¨             Non-accelerated filer   ¨

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

As of August 1, 2008 43,198,047 shares, $0.001 par value per share, of the registrant’s common stock were outstanding.

THE TRIZETTO GROUP, INC.

QUARTERLY REPORT ON

FORM 10-Q

For the Quarterly Period Ended June 30, 2008

TABLE OF CONTENTS

		PAGE
PART I—FINANCIAL INFORMATION
Item 1	Financial Statements:
	Condensed Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007	1
	Unaudited Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2008 and 2007	2
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007	3
	Notes to Unaudited Condensed Consolidated Financial Statements	4
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4	Controls and Procedures	26
PART II—OTHER INFORMATION
Item 1	Legal Proceedings	27
Item 1A	Risk Factors	28
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 4	Submission of Matters to a Vote of Security Holders	37
Item 6	Exhibits	37
SIGNATURES		38

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

The TriZetto Group, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	June 30, 2008			December 31, 2007
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	148,596		$	208,507
Accounts receivable, less allowances of $1,785 and $3,528 at June 30, 2008 and December 31, 2007, respectively		107,197			92,118
Prepaid expenses and other current assets		24,857			17,458
Deferred tax assets		10,273			10,273
Total current assets		290,923			328,356
Property and equipment, net		31,845			32,889
Capitalized software development costs, net		23,800			25,903
Long-term investments		67,715			—
Goodwill		213,549			200,219
Other intangible assets, net		69,759			74,545
Other assets		15,104			16,070
Total assets	$	712,695		$	677,982
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of notes payable	$	601		$	53
Current portion of term loan		10,714			10,714
Current portion of capital lease obligations		776			1,108
Accounts payable		12,946			16,142
Accrued liabilities		52,001			53,079
Deferred revenue		71,772			41,356
Total current liabilities		148,810			122,452
Long-term convertible debt		330,000			330,000
Long-term revolving line of credit and term loan		53,571			60,250
Other long-term liabilities		7,155			6,370
Capital lease obligations		899			1,172
Deferred tax liabilities		2,817			2,817
Deferred revenue, non-current		4,593			7,265
Total liabilities		547,845			530,326
Commitments and contingencies
Stockholders’ equity:
Common stock		44			44
Accumulated other comprehensive income		(4,585	)		—
Additional paid-in capital		375,202			362,151
Accumulated deficit		(205,811	)		(214,539	)
Total stockholders’ equity		164,850			147,656
Total liabilities and stockholders’ equity	$	712,695		$	677,982

See accompanying notes.

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The TriZetto Group, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Revenue:
Services and other	$	101,441		$	91,432		$	191,488		$	181,207
Products		15,576			23,403			32,349			47,131
Total revenue		117,017			114,835			223,837			228,338
Operating costs and expenses:
Cost of revenue—services and other		50,860			50,353			98,734			99,952
Cost of revenue—products (excludes amortization of acquired technology)		4,320			4,775			8,938			9,978
Research and development		16,452			16,444			31,547			32,179
Selling, general and administrative		32,429			29,337			61,219			57,145
Amortization of acquired technology		1,421			1,237			2,842			2,947
Amortization of acquired other intangible assets		1,411			1,360			2,794			2,661
Total operating costs and expenses		106,893			103,506			206,074			204,862
Income from operations		10,124			11,329			17,763			23,476
Interest income		1,541			2,803			3,706			3,556
Interest expense		(3,057	)		(3,483	)		(6,325	)		(6,124	)
Change in fair value of derivative liabilities		—			(2,483	)		—			(2,483	)
Income before provision for income taxes		8,608			8,166			15,144			18,425
Provision for income taxes		(3,802	)		(4,523	)		(6,416	)		(8,886	)
Net income	$	4,806		$	3,643		$	8,728		$	9,539
Net income for diluted EPS calculation	$	5,551		$	4,184		$	10,266		$	10,858
Net income per share:
Basic	$	0.11		$	0.08		$	0.21		$	0.22
Diluted	$	0.09		$	0.07		$	0.17		$	0.18
Shares used in computing net income per share:
Basic		42,625			44,522			42,473			44,192
Diluted		60,768			61,876			60,531			61,777

See accompanying notes.

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The TriZetto Group, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended June 30,
	2008			2007
Cash flows from operating activities:
Net income	$	8,728		$	9,539
Adjustments to reconcile net income to net cash provided by operating activities:
Net reduction in doubtful accounts and sales allowance		(705	)		(1,628	)
Stock-based compensation		4,973			5,533
Depreciation and amortization		11,555			12,332
Amortization of acquired technology		2,842			2,947
Amortization of acquired other intangible assets		2,794			2,661
Change in fair value of derivative liabilities		—			2,483
Excess tax benefits from stock-based compensation		(4,636	)		—
Loss on disposal of assets		223			—
Increase in cash surrender value of life insurance policies		(474	)		(565	)
Changes in assets and liabilities, net of acquisitions:
Restricted cash		—			(819	)
Accounts receivable		(14,374	)		(11,406	)
Prepaid expenses and other current assets		(1,673	)		(2,285	)
Other assets		350			1,954
Accounts payable		(3,196	)		(5,456	)
Accrued liabilities		(4,001	)		(7,715	)
Deferred revenue		27,744			19,557
Net cash provided by operating activities		30,150			27,132
Cash flows from investing activities:
Purchase of investments		(77,200	)		(195,640	)
Sale of investments		4,900			142,575
Purchase of property and equipment and software licenses		(5,946	)		(9,333	)
Capitalization of software development costs		(2,685	)		(3,829	)
Purchase of intangible assets		(850	)		—
Acquisitions, net of cash acquired		(9,622	)		(143,196	)
Net cash used in investing activities		(91,403	)		(209,423	)
Cash flows from financing activities:
Proceeds from revolving line of credit		—			104,200
Proceeds from term note		—			75,000
Proceeds from notes payable		571			—
Proceeds from convertible debt		—			223,100
Proceeds from warrant		—			25,714
Proceeds from debt financing		495			717
Payments on revolving line of credit		(4,000	)		(99,200	)
Payment for convertible note hedge (call options)		—			(58,972	)
Payments on term loan		(2,679	)		—
Payments on notes payable		(518	)		(1,076	)
Payments on capital leases		(605	)		(915	)
Excess tax benefits from stock-based compensation		4,636			—
Employee exercises of stock options		5,126			8,728
Repurchase of common stock to treasury		(1,684	)		—
Net cash provided by financing activities		1,342			277,296
Net (decrease) increase in cash and cash equivalents		(59,911	)		95,005
Cash and cash equivalents at beginning of period		208,507			107,057
Cash and cash equivalents at end of period	$	148,596		$	202,062

See accompanying notes.

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The TriZetto Group, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Preparation

The accompanying unaudited condensed consolidated financial statements have been prepared by The TriZetto Group, Inc. (the “Company”) in accordance with generally accepted accounting principles for interim financial information that are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, and pursuant to the instructions to Form 10-Q and Article 10 promulgated by Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes to financial statements required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008, or for any future period. The financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K as filed with the SEC on February 15, 2008.

2. Computation of Earnings per Share

The computation of basic earnings per share (“EPS”) is based on the weighted average number of common shares outstanding during each period. The computation of diluted EPS is based on the weighted average number of common shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to stock options, warrants and shares issuable upon vesting of restricted stock awards, calculated using the treasury stock method, and shares to be issued upon conversion of convertible debt.

Emerging Issues Task Force No. 04-08, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share,” requires companies to account for contingently convertible debt using the “if converted” method set forth in Statement of Financial Accounting Standards No. 128, “Earnings per Share,” for calculating diluted EPS. Under the “if converted” method, the after-tax effect of interest expense related to the convertible securities is added back to net income and convertible debt is assumed to have been converted to equity at the beginning of the period, or at such time when the convertible debt became outstanding if issued during the period, and is added to outstanding common shares, unless the inclusion of such shares is anti-dilutive.

For the three and six months ended June 30, 2008, approximately 2.0 million and 2.2 million options, respectively, were anti-dilutive and excluded from the table below, compared to 2.0 million and 1.8 million options for the same period in 2007. For the three and six months ended June 30, 2008, approximately 10.4 million warrants relating to the convertible debt offering that occurred on April 11, 2007 were anti-dilutive and excluded from the table below. The following is a reconciliation of the computations of basic and diluted EPS information for the periods presented (in thousands, except per share data):

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Numerator:
Net income, as reported	$	4,806	$	3,643	$	8,728	$	9,539
After-tax interest expense on 2.75% convertible debt		384		307		792		712
After-tax interest expense on 1.125% convertible debt		361		234		746		607
Net income for diluted EPS calculation	$	5,551	$	4,184	$	10,266	$	10,858
Denominator:
Weighted average shares outstanding – basic		42,625		44,522		42,473		44,192
2.75% convertible debt converted to common shares		5,305		5,305		5,305		5,305
1.125% convertible debt converted to common shares		10,467		8,512		10,467		8,512
Unvested common shares outstanding		228		767		214		744
Stock options		2,143		2,770		2,072		3,024
Adjusted weighted average shares for diluted EPS		60,768		61,876		60,531		61,777
Basic earnings per share	$	0.11	$	0.08	$	0.21	$	0.22
Diluted earnings per share	$	0.09	$	0.07	$	0.17	$	0.18

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3. Comprehensive Income

FASB Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” (“SFAS 130”), establishes standards for reporting and displaying comprehensive income and its components for general-purpose financial statements. Comprehensive income is defined in SFAS 130 as net income plus all revenues, expenses, gains and losses from non-owner sources that are excluded from net income in accordance with U.S. generally accepted accounting principles.

The components of comprehensive income are as follows (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
Net income	$	4,806		$	3,643	$	8,728		$	9,539
Unrealized loss on non-current auction rate securities		(1,210	)		—		(4,585	)		—
Total comprehensive income	$	3,596		$	3,643	$	4,143		$	9,539

4. Share-Based Awards

The Company recognizes compensation expense for all share-based awards made to its employees and directors. The fair value of stock options is estimated at the grant date using the Black-Scholes option-pricing model. The fair value of restricted stock awards is based on the closing market price of the Company’s common stock on the date of grant. Stock-based compensation expense for time vested options and awards ultimately expected to vest is recognized as compensation cost over the requisite service period using the straight-line single option method. The Company recognizes compensation cost for performance based restricted stock in the period when it is probable that the performance measures will be achieved. The following table is a summary of the amount of stock-based compensation expense recognized in the consolidated statement of operations (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Cost of revenue—services and other	$	335	$	120	$	571	$	774
Cost of revenue—products		106		85		155		130
Research and development		356		424		658		800
Selling, general and administrative		1,587		1,992		3,589		3,829
Total stock based compensation expense before tax	$	2,384	$	2,621	$	4,973	$	5,533

The determination of fair value using the Black-Scholes option-pricing model is affected by various assumptions including the Company’s stock price, expected stock price volatility, risk-free interest rate, expected dividends and projected employee stock option exercise behavior, or expected term. The Company evaluates the assumptions used to value stock awards on a quarterly basis. The following weighted average assumptions were used for the periods presented:

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Expected volatility		39	%		45	%		39	%		45	%
Risk-free interest rate		2.42	%		4.82	%		2.42	%		4.82	%
Expected life		3.94 years			6.25 years			3.94 years			6.25 years
Forfeiture rate		6	%		6	%		6	%		6	%
Expected dividends		—			—			—			—
Weighted average fair value	$	—		$	10.08		$	6.42		$	10.11

Expected volatility is based on a combination of implied volatility from traded options on the Company’s stock and historical volatility of the Company’s stock. The risk-free interest rate is the U.S. Treasury rate on the date of grant having a term equal to the expected life of the option. The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. In the first quarter of 2008, the Company changed the contractual life of new options granted from 10 to five years. As a result, the Company has determined that comparable historical data does not exist and thus, has continued to apply the “simplified method” outlined in Staff Accounting Bulletin No. 107 to calculate expected term. The forfeiture rate is the estimated

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percentage of options granted that are expected to be forfeited or cancelled before becoming fully vested and is based on historical experience. These estimates will be revised, if necessary, in future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs. The weighted average fair value was $0.00 for the three months ended June 30, 2008 since no stock options were granted during this period.

The following is a summary of stock option activity for the six months ended June 30, 2008 (in thousands, except weighted average data):

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Options Outstanding at December 31, 2007	6,953		$	11.55
Granted	1,082			19.19
Exercised	(546	)		9.19
Cancelled	(210	)		18.57
Options Outstanding at June 30, 2008	7,279		$	12.66	5.08	$	65,939
Exercisable at June 30, 2008	4,855		$	10.79	4.56	$	53,912

The total intrinsic value of options exercised during the six months ended June 30, 2008 was $6.0 million. As of June 30, 2008, $12.6 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted average period of 2.31 years.

The following table summarizes nonvested restricted stock awards as of June 30, 2008 and changes during the six months ended June 30, 2008 (in thousands, except weighted average data):

	Number of Shares		Weighted- Average Grant-Date Fair Value
Nonvested at December 31, 2007	636		$	17.29
Granted	—			—
Vested	(76	)		17.58
Forfeited	(86	)		16.67
Nonvested at June 30, 2008	474		$	17.36

As of June 30, 2008, there was $4.6 million of total unrecognized compensation cost related to nonvested restricted stock awards, which will be amortized over the weighted-average remaining service period of 1.32 years.

5. Supplemental Cash Flow Disclosures

The following table is a summary of supplemental cash flow disclosures as follows (in thousands):

	Six Months Ended June 30,
	2008		2007
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION
Cash paid for interest	$	6,353	$	4,490
Cash paid for income taxes		5,079		6,522
NON-CASH INVESTING AND FINANCING ACTIVITIES
Assets acquired through capital lease		—		349
Common stock issued in connection with PDM acquisition		—		8,911

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6. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	June 30, 2008		December 31, 2007
Accrued payroll and benefits	$	26,551	$	34,181
Accrued professional and litigation fees and settlements		985		1,342
Accrued contingent considerations related to acquisitions		13,330		9,772
Accrued employee relations		609		388
Accrued income and other taxes		3,720		1,964
Accrued interest		1,297		1,335
Other		5,509		4,097
	$	52,001	$	53,079

During the three months ended June 30, 2008, CareKey and PDM stockholders and optionholders earned contingent consideration payments of $8.3 million and $5.0 million, respectively, upon the achievement of certain revenue milestones. Payment is expected to be paid to PDM stockholders and optionholders in the third quarter of 2008 and to CareKey stockholders and optionholders in the first quarter of 2009. The accrual of this contingent consideration increased goodwill by $13.3 million during the three months ended June 30, 2008.

7. Debt

Debt consists of the following for the periods presented (in thousands):

	Notes Payable						Line of Credit and Term Loan
	June 30, 2008			December 31, 2007			June 30, 2008			December 31, 2007
Long-term convertible debt, due in 2025, interest at 2.75% fixed rate, payable semi-annually in arrears	$	100,000		$	100,000		$	—		$	—
Long-term convertible debt, due in 2012, interest at 1.125% fixed rate, payable semi-annually in arrears		230,000			230,000			—			—
Term loan of $150.0 million, interest at the lending institution’s prime rate plus adjustable applicable margin between 0.00% and 2.00% (prime rate 5.00% at June 30, 2008), payable monthly in arrears; or LIBOR rate plus an adjustable applicable margin of between 1.75% and 3.50%, payable upon maturity date		—			—			64,285			66,964
Revolving credit facility of $100.0 million, interest at the lending institution’s prime rate plus adjustable applicable margin between 0.00% and 2.00% (prime rate 5.00% at June 30, 2008), payable monthly in arrears; or LIBOR rate plus an adjustable applicable margin of between 1.75% and 3.50%, payable upon maturity date		—			—			—			4,000
Other		601			53			—			—
Total debt	$	330,601		$	330,053		$	64,285		$	70,964
Less: Current portion		(601	)		(53	)		(10,714	)		(10,714	)
	$	330,000		$	330,000		$	53,571		$	60,250

2.75% Convertible Senior Notes

In October 2005, the Company issued $100.0 million aggregate principal amount of 2.75% Convertible Senior Notes due 2025 (the “2025 Notes”). The 2025 Notes bear interest at a rate of 2.75%, which is payable in cash semi-annually in arrears on April 1 and October 1 of each year, and commenced on April 1, 2006, to the holders of record on the preceding March 15 and September 15, respectively.

The 2025 Notes are convertible into shares of the Company’s common stock at an initial conversion price of $18.85 per share, or 53.0504 shares for each $1,000 principal amount of 2025 Notes, subject to certain adjustments pursuant to an indenture with Wells Fargo Bank, National Association, as trustee (the “2025 Indenture”). The maximum conversion rate is 68.9655 shares for each $1,000 principal amount of 2025 Notes. Upon conversion of the 2025 Notes, the Company will have the right to deliver shares of its

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common stock, cash or any combination of cash and shares of its common stock. The 2025 Notes are convertible (i) prior to October 1, 2020, during any fiscal quarter after the fiscal quarter ending December 31, 2005, if the closing sale price of the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds 120% of the conversion price in effect on the last trading day of the immediately preceding fiscal quarter, (ii) prior to October 1, 2020, during the five business day period after any five consecutive trading day period (the “Note Measurement Period”) in which the average trading price per $1,000 principal amount of 2025 Notes was equal to or less than 97% of the average conversion value of the 2025 Notes during the Note Measurement Period, (iii) upon the occurrence of specified corporate transactions, as described in the 2025 Indenture, (iv) if the Company calls the 2025 Notes for redemption, or (v) any time on or after October 1, 2020.

The 2025 Notes mature on October 1, 2025. However, on or after October 5, 2010, the Company may from time to time at its option redeem the 2025 Notes, in whole or in part, for cash, at a redemption price equal to 100% of the principal amount of the 2025 Notes the Company redeems, plus any accrued and unpaid interest to, but excluding, the redemption date. On each of October 1, 2010, October 1, 2015 and October 1, 2020, holders may require the Company to purchase all or a portion of their 2025 Notes at a purchase price in cash equal to 100% of the principal amount of the 2025 Notes to be purchased, plus any accrued and unpaid interest to, but excluding, the purchase date. In addition, holders may require the Company to repurchase all or a portion of their 2025 Notes upon a fundamental change, as described in the 2025 Indenture, at a repurchase price in cash equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. Additionally, the 2025 Notes may become immediately due and payable upon an Event of Default, as defined in the 2025 Indenture. Pursuant to a Registration Rights Agreement dated October 5, 2005, the Company filed with the Securities and Exchange Commission, a registration statement under the Securities Act for the purpose of registering for resale, the 2025 Notes and all of the shares of its common stock issuable upon conversion of the 2025 Notes.

1.125% Convertible Senior Notes

On April 11, 2007, the Company entered into a Purchase Agreement with Deutsche Bank Securities Inc., Goldman, Sachs & Co. and UBS Investment Bank (the “Initial Purchasers”), to sell $230.0 million aggregate principal amount of its 1.125% Convertible Senior Notes due 2012 which included $30 million to cover over-allotments (the “2012 Notes”) in a private placement in reliance on Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). The 2012 Notes have been resold by the Initial Purchasers to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The sale of the 2012 Notes to the Initial Purchasers was consummated on April 17, 2007.

The aggregate net proceeds received by the Company from the sale of the 2012 Notes was approximately $223 million, after deducting the Initial Purchasers’ discount and offering expenses. The 2012 Notes are the Company’s senior unsecured obligations and rank equal in right of payment with all of the Company’s other senior unsecured debt and senior to all of the Company’s future subordinated debt.

The 2012 Notes were issued pursuant to an indenture, dated April 17, 2007, by and between the Company and Wells Fargo Bank, National Association, as trustee (the “2012 Indenture”). The 2012 Notes bear interest at a rate of 1.125%, which is payable in cash semi-annually in arrears on April 15 and October 15 of each year, and commenced on October 15, 2007, to the holders of record on the preceding April 1 and October 1, respectively.

The 2012 Notes are convertible into shares of the Company’s Common stock at an initial conversion price of $21.97 per share, or 45.5114 shares for each $1,000 principal amount of 2012 Notes, subject to certain adjustments set forth in the 2012 Indenture. The maximum conversion rate is 53.4759 shares for each $1,000 principal amount of 2012 Notes. Upon conversion of the 2012 Notes, the Company will have the right to deliver shares of its common stock, cash or any combination of cash and shares of its common stock. The 2012 Notes are convertible (i) prior to January 15, 2012, during any calendar quarter after the calendar quarter ending June 30, 2007, if the closing sale price of the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds 130% of the conversion price in effect on the last trading day of the immediately preceding fiscal quarter, (ii) prior to January 15, 2012, during the five business day period after any five consecutive trading day period (the “Note Measurement Period”) in which the average trading price per $1,000 principal amount of 2012 Notes was equal to or less than 97% of the average conversion value of the 2012 Notes during the Note Measurement Period, (iii) upon the occurrence of specified corporate transactions, as described in the 2012 Indenture, or (iv) any time on or after January 15, 2012.

The Company used $59.0 million of the aggregate net proceeds from the 2012 Notes to pay the net cost of a call option transaction entered into in connection with the offering. The call option covers approximately 10.4 million shares of the Company’s common stock and is intended to reduce the dilution to the Company’s common stock upon potential future conversion of the 2012 Notes. The call option has an exercise price equal to the conversion price of the 2012 Notes and will terminate on the earlier of

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(i) the last day any of the 2012 Notes remain outstanding or (ii) April 15, 2012. The Company also entered into a warrant transaction in connection with the offering. The Company sold warrants to acquire approximately 10.4 million shares of the Company’s common stock to affiliates of one or more of the initial purchases for $25.7 million. The warrants have an exercise price of $31.79 per share and may be settled at various dates from July 2012 through December 2012.

Wells Fargo Foothill Amended and Restated Credit Agreement

On January 10, 2007, the Company (together with certain specified subsidiaries, the “Borrowers”) entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with Wells Fargo Foothill, Inc., as the administrative agent and lender (the “Lender”). The Credit Agreement amended and restated the Company’s $100.0 million revolving credit facility with the Lender and provided that the Lender will make available to the Company up to $150.0 million of term debt (the “Term Loan”). The Credit Agreement expires by its terms on January 5, 2011. All borrowings under the Credit Agreement bear interest at a per annum rate equal to either (i) the LIBOR rate plus an adjustable applicable margin of between 1.75% and 3.50% or (ii) Wells Fargo’s prime rate plus an adjustable applicable margin of between 0.0% and 2.0%, at the election of the Company, subject to specified restrictions.

The Company initially drew down $75.0 million from the Term Loan to partially fund its acquisition of Quality Care Solutions, Inc. (“QCSI”) in January 2007. All borrowings under the Term Loan must be repaid in quarterly installments commencing on June 30, 2007 and continuing on the first day of each calendar quarter thereafter through January 5, 2011, in amounts equal to the amount outstanding under the Term Loan on June 30, 2007 with a final balloon payment due January 5, 2011.

On March 31, 2008, the Company entered into Amendments Number Three and Four to the Amended and Restated Credit Agreement dated January 10, 2007, with Wells Fargo Foothill, Inc. Amendment Three sets forth the quarterly trailing twelve month recurring revenue requirements through December 31, 2008. Amendment Four allows the Borrowers to request additional term loan draws through March 31, 2009 and further extends the application of an unused term loan commitment fee through April 1, 2009. In addition, Amendment Four extends the deadline for the Company to repurchase shares of its common stock to March 31, 2009. The guidelines for repurchase still remain in place allowing the Company to repurchase up to $100.0 million of its common stock provided that the Company has liquidity (defined as the sum of unrestricted cash and cash equivalents plus availability of borrowings on its revolving line of credit) in excess of $80.0 million both before and immediately after giving effect to such transaction.

As of June 30, 2008, no additional draws have been made. In the event Borrowers terminate the Credit Agreement prior to its expiration or make certain prepayments, the Borrowers will be required to pay the Lender a termination or prepayment fee equal to 1% of the maximum credit amount in the event of termination or 1% of the prepayment amount in the event of prepayments, subject to specified exceptions. Under the Credit Agreement, the Borrowers have granted the Lender a security interest in all of the assets of the Borrowers.

The Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations on the Borrowers with respect to indebtedness, liens, investments, distributions, mergers and acquisitions, dispositions of assets and transactions with affiliates of the Borrowers. The Credit Agreement also includes financial covenants including minimum EBITDA, minimum liquidity, minimum recurring revenue (which includes outsourced business services and software maintenance revenue) and maximum capital expenditures.

As of June 30, 2008, the Company had no outstanding borrowings on the revolving line of credit and $64.3 million outstanding under the Term Loan, and was in compliance with all applicable covenants and other restrictions under the Credit Agreement. As of June 30, 2008, the Company also had $100.0 million available under its revolving line of credit.

8. Legal Proceedings

On April 15, 2008, Plaintiff David P. Simonetti Rollover IRA filed a Verified Class Action Complaint in the Delaware Court of Chancery, entitledDavid P. Simonetti Rollover IRA, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. Jeffrey H. Margolis, Donald J. Lothrop, Thomas B. Johnson, Paul F. Lefort, Jerry P. Widman, Nancy H. Handel, L. William Krause, Apax Partners, L.P., TZ Holdings, L.P., TZ Merger Sub, Inc., and The TriZetto Group Inc., Defendants, C.A. No. 3694-VCN (the “Simonetti Litigation”). The complaint sought, among other relief, certification of a class of all common stockholders of TriZetto who allegedly were harmed by the defendants’ actions challenged in the complaint, a declaration that the defendants had breached their fiduciary and other duties, entry of an order requiring defendants to take certain steps in connection with the proposed transaction, compensatory damages, costs and disbursements, including plaintiff’s counsel’s fees and experts’ fees. On May 20, 2008, the plaintiff in the Simonetti Litigation filed a First Amended Complaint, which added allegations that the defendants allegedly failed to disclose material facts regarding the Merger.

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In addition to the Simonetti Litigation, two putative class action complaints were filed in the Superior Court of the State of California, County of Orange, alleging substantially similar claims as those alleged in the Simonetti Litigation. On May 28, 2008, the two California putative class actions were consolidated (the “Consolidated California Action”), and on June 5, 2008, the Consolidated California Action was stayed in favor of the Simonetti Litigation. On June 10, 2008, the plaintiffs in the Consolidated California Action filed a putative class action complaint in the Delaware Court of Chancery entitledCity Of Fort Lauderdale Police And Firefighters’ Retirement System And Police And Fire Retirement System Of The City Of Detroit, Individually and On Behalf of All Others Similarly Situated, v. Jeffrey H. Margolis, et al., C.A. No. 3817-VCN (together with the Simonetti Litigation, the “Delaware Litigation” and collectively with the Consolidated California Action, the “Merger Litigation”). In addition, counsel for plaintiffs’ in the Consolidated California Action appeared as counsel in the Simonetti Litigation and joined in the discovery and briefing in the Simonetti Litigation in connection with the motion to preliminarily enjoin the Merger.

On June 27, 2008, the Delaware Court of Chancery issued a memorandum opinion and order (the “Order”) in the Simonetti Litigation, granting in part and denying in part the plaintiff’s motion for a preliminary injunction enjoining the proposed Merger. The Court preliminarily enjoined TriZetto from conducting or allowing any vote by its stockholders to approve the proposed Merger until TriZetto made curative supplemental disclosures relating to certain potential financial benefits of the Merger to TriZetto’s financial advisor, UBS Securities LLC (“UBS”), and its affiliates, upon consummation of the transactions contemplated by the Merger Agreement, based on its interest in certain convertible notes issued by TriZetto and related bond hedge and warrant transactions entered into with TriZetto in 2007 (the “Financial Advisor Disclosure”). The Court’s Order provided that, upon application, the Order could be vacated upon demonstration that TriZetto had provided appropriate curative disclosure.

Following the Court’s Order, counsel for the parties negotiated the contents of the Financial Advisor Disclosure. The parties thereafter entered into a stipulation agreeing upon the substance of the Financial Advisor Disclosure and submitted the Financial Advisor Disclosure to the Court for its approval. The Parties jointly requested that the Court vacate its Order preliminarily enjoining the Merger.

On July 2, 2008, the Court issued an order approving the parties’ stipulation and vacating the preliminary injunction Order dependent on TriZetto providing the Financial Advisor Disclosure forthwith. TriZetto provided the Financial Advisor Disclosure in the Definitive Additional Material, which was filed with the SEC on July 2, 2008 and mailed to TriZetto’s stockholders on or about July 3, 2008.

On July 8, 2008, the parties entered into a memorandum of understanding (“MOU”) to settle the Merger Litigation. Under the terms of the MOU, the parties agreed in good faith to attempt to agree upon and execute an appropriate Stipulation of Settlement and such other documentation as may be required to secure certification of the Settlement Class (as defined to include all record holders and beneficial owners of TriZetto common stock (excluding defendants, their immediate families, and affiliates) on any day during the period from April 11, 2008 (the date that the proposed Merger was publicly announced) to and including the effective date of consummation of the Merger, including the legal representatives, heirs, successors and successors in interest, transferees and assigns of all such foregoing holders and/or owners, immediate and remote, and any person or entity acting for or on behalf of, or claiming under, any of them and each of them) and obtain pursuant to Delaware Court of Chancery Rules 23(b)(1) and 23(b)(2) final Court approval of the settlement, and the dismissal of the Delaware Litigation and the Consolidated California Action. In addition to other customary provisions, the settlement will provide releases to all defendants of any claims arising from the process leading to the proposed Merger, any of the transactions contemplated by the Merger Agreement, and any disclosures made in connection with the Proxy Disclosure. In return, TriZetto agreed to provide additional explanation to TriZetto’s stockholders regarding certain matters disclosed in the Proxy Disclosure. This additional explanation was made in a Form 8-K filed on July 9, 2008. In accordance with the agreement to settle the Merger Litigation, the shares of common stock of TriZetto held by TriZetto’s executive officers were voted in the aggregate in the same proportion as the vote cast by the other stockholders voting on the Merger at the Special Meeting. The parties to the litigation are in the process of finalizing the Stipulation of Settlement to be submitted to the Court.

In addition to the matters described above, the Company is involved in litigation from time to time relating to claims arising out of its operations in the normal course of business. Except as discussed above, as of the filing date of this quarterly report on Form 10-Q, the Company was not a party to any other legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on its results of operations, financial position and/or cash flows.

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9. Reclassifications

Certain reclassifications have been made to prior year amounts to conform to current year presentation.

10. Fair Value Measurements

In the first quarter of 2008, the Company adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (“SFAS No. 157”) for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements in the financial statements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.

SFAS No. 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

• Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

• Level 2: Inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

• Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

Our population of financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows (in thousands):

	Fair Value As of June 30, 2008		Fair Value Measurement at June 30, 2008 (Using Fair Value Hierarchy)
			Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	148,596	$	148,596	$	—	$	—
Long-term investments		67,715		—		—		67,715
Sub-total		216,311		148,596		—		67,715
Long-term debt		379,347		—		379,347		—
Total	$	595,658	$	148,596	$	379,347	$	67,715

The long-term debt values are based on actual transactions in the Company’s convertible debt instruments. However, given the relatively low number of transactions, the Company used Level 2 measurements to determine the fair value of the Company’s convertible debt instruments as of June 30, 2008 for disclosure purposes. The convertible debt continues to be recorded at carrying value on the Company’s balance sheet.

The long-term investments represent taxable note investments with an auction reset function (“auction rate securities”) collateralized by student loans which are substantially backed by the federal government and state agencies. These instruments were purchased by the Company in January 2008 and classified as available-for-sale. Beginning in February 2008, auctions for the Company’s auction rate securities failed due to conditions in the market. A failed auction results in a lack of liquidity in the securities but does not signify a default by the issuer. Upon an auction failure, the interest rates do not reset at a market rate but instead reset based on a formula contained in the security. As of June 30, 2008, all of the Company’s auction rate securities continue to be rated AAA by Standard & Poor’s or Aaa by Moody’s despite the auction failures.

The Company determined the fair value of the auction rate securities no longer approximated their par value based on a discounted cash flow valuation model that was based on the collateralization of the underlying securities, the credit rating of the investment, the timing of expected future cash flows, and the expected duration until the securities trade again. As a result, the Company concluded that the auction rate securities were temporarily impaired. As of June 30, 2008, the Company had recorded an unrealized loss of approximately $4.6 million to Accumulated Other Comprehensive Income to reflect the revised fair value of the auction rate securities at $67.7 million. Given the uncertainty as to when the securities may be actively traded, the Company has classified the auction rate securities as long-term investments.

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The Company reviewed the classification of the impairment charges in accordance with Emerging Issues Task Force No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” Staff Accounting Bulletin Topic 5M, “Other-Than-Temporary Impairment of Certain Investments in Debt and Equity Securities,” and FASB Staff Position Nos. 115-1 and 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” A temporary impairment charge results in an unrealized loss being recorded in the accumulated other comprehensive income component of stockholders’ equity. The Company believes this treatment is appropriate because the Company has concluded the loss in value attributable to its auction rate securities is temporary in nature and the Company has both the ability and intent to hold the auction rate securities until a recovery in market value takes place. The Company will continue to monitor and analyze its auction rate securities investments to determine whether the impairment continues to exist, and if so, how the impairment should be classified.

The following table provides a summary of changes the fair value of the Company’s auction rate securities as of June 30, 2008 (in thousands):

	Auction Rate Securities
Balance at December 31, 2007	$	—
Purchases, transfers and settlements		72,300
Unrealized loss included in other comprehensive income		(4,585	)
Balance at June 30, 2008	$	67,715

11. Agreement and Plan of Merger

On April 11, 2008, the Company entered into an Agreement and Plan of Merger, as amended, (the “Merger Agreement”) with TZ Holdings, L.P., a Delaware limited partnership (“Parent”) and TZ Merger Sub, Inc., a Delaware corporation and indirectly-owned subsidiary of Parent (“Merger Sub”). Parent is controlled by Apax Partners, L.P. (“Apax”). BlueCross BlueShield of Tennessee, Inc. (“BCBST”) and Regence BlueCross BlueShield of Oregon, Regence BlueCross BlueShield of Utah and Regence BlueShield (collectively, the “Regence Group”) are providing a portion of the funding for the transaction and will be equity investors in the surviving corporation.

The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”) with the Company continuing as the surviving corporation and a wholly-owned subsidiary of Parent. As of the effective date of the Merger, each issued and outstanding share of common stock of the Company will be cancelled and converted into the right to receive $22.00 in cash (the “Merger Consideration”). The transaction is valued at approximately $1.4 billion, including consideration for stock options and shares underlying the Company’s convertible notes. Parent and Merger Sub have obtained equity and debt financing commitments for the transactions contemplated by the Merger Agreement, the aggregate proceeds of which will be sufficient for Parent to pay the aggregate Merger Consideration and all related fees and expenses. Consummation of the Merger is subject to various conditions, including adoption of the Merger Agreement by the Company’s stockholders and other customary closing conditions. The transaction closed on August 4, 2008 (see Note 13, Subsequent Events, below).

The Merger Agreement contains certain termination rights for both the Company and Parent. The Merger Agreement provides that, upon termination under specified circumstances, the Company would be required to pay Parent a termination fee of $50.0 million. The Merger Agreement further provides that, upon termination under specified circumstances, Parent would be required to pay the Company a reverse termination fee of $65.0 million. The reverse termination fee potentially payable by Parent is guaranteed by BCBST, the Regence Group and certain affiliates of Apax, in separate limited guarantees.

12. Recent Accounting Pronouncements

In December 2007, the FASB issued “Business Combinations,” (“FAS 141R”). FAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination, recognizing assets acquired and liabilities assumed arising from contingencies, and determining what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. FAS 141R is effective for fiscal years beginning after December 15, 2008. The Company expects FAS 141R will have an impact on its consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions it consummates after the effective date.

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In December 2007, the FASB issued “Noncontrolling Interests in Consolidated Financial Statement,” (“FAS 160”). FAS 160 amends ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. Consolidated net income should include the net income for both the parent and the noncontrolling interest with disclosure of both amounts on the consolidated statement income. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. FAS 160 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating what impact, if any, FAS 160 will have on its consolidated financial statements.

13. Subsequent Events

Pursuant to the Merger Agreement, on August 4, 2008, Merger Sub merged with and into TriZetto, with TriZetto as the surviving corporation as a result of the Merger and continuing as an indirectly-owned subsidiary of Parent. Pursuant to the terms of the Merger Agreement and as a result of the Merger, each outstanding share of the common stock (the “Common Stock”) of the Company was converted into the right to receive $22.00 cash per share.

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

We offer a broad portfolio of proprietary software and services targeted to the payer industry, which is comprised of health insurance plans and third party benefits administrators. TriZetto’s predominant software products comprise six enterprise-class applications for automating all of a payer’s core administrative functions, and for automating care management activities, which improve the cost and quality of care consumers receive. Key enterprise software product brands include Facets^®, QicLink^™, QNXT^™, CareAdvance^™ and NetworX. The Company also offers a number of component software products, web-based applications and add-ons to the enterprise software solutions, which provide supplemental functionality or further enhance the efficiency and throughput of the enterprise applications.

To support these software products, the Company provides software hosting, business process outsourcing, and revenue enhancement services, which give customers additional efficiency, revenue and capital cost reduction opportunities. The company also provides professional consulting services, which are predominantly focused on the installation and optimization of the company’s software products.

As of June 30, 2008, we served 354 unique customers in the health plan and benefits administrator markets, which we collectively refer to as payers. In the second quarter of 2008, these markets represented 93% and 7% of our total revenue, respectively.

We measure financial performance by monitoring revenue, bookings and backlog, and net income. Total revenue in the second quarter of 2008 was $117.0 million compared to $114.8 million for the same period in 2007. Services and other revenue in the second quarter of 2008 was $101.4 million compared to $91.4 million for the same period in 2007. Products revenue in the second quarter of 2008 was $15.6 million compared to $23.4 million for the same period in 2007. Bookings in the second quarter of 2008 were $61.7 million compared to $93.8 million for the same period in 2007. Backlog at June 30, 2008 was $1.1 billion compared to $944.4 million at June 30, 2007. Net income in the second quarter of 2008 was $4.8 million compared to $3.6 million for the same period in 2007. These financial comparisons are further explained in the section below, “Results of Operations.”

We generate services revenue from several sources, including the provision of outsourcing services, such as software hosting and business process outsourcing services, the sale of maintenance and support for our proprietary and certain of our non-proprietary software products, and from consulting fees for implementation, installation, configuration, business process engineering, data conversion, testing and training related to the use of our proprietary, and third-party licensed products. We generate products revenue from the licensing of our software. Cost of revenue includes costs related to the products and services we provide to our customers and costs associated with the operation and maintenance of our customer connectivity centers. These costs include salaries and related expenses for consulting personnel, customer connectivity centers’ personnel, customer support personnel, application software license fees, amortization of capitalized software development costs, telecommunications costs, facility costs, and maintenance costs. Research and development (“R&D”) expenses are salaries and related expenses associated with the development of software applications prior to establishing technological feasibility. Such expenses include compensation paid to software engineering personnel and other administrative, infrastructure and facility expenses and fees to outside contractors and consultants. Selling, general and administrative expenses consist primarily of salaries and related expenses for sales, sales commissions, account management, marketing, administrative, finance, legal, human resources and executive personnel, and fees for certain professional services.

As part of our growth strategy, we intend to increase revenue per customer by continuing to introduce new complementary products and services, including new cost and quality of care products and services, to our established enterprise software and hosting and business process outsourcing services. Some of these service offerings, including hosting, business process outsourcing, and consulting have a higher cost of revenue, resulting in lower gross profit margins. Therefore, to the extent that our revenue increases through the sale of these lower margin product and service offerings, our total gross profit margin would likely decrease.

We are continuing to target larger health plan customers. This has given us the opportunity to sell additional services such as software hosting, business intelligence, and business process outsourcing services. As the technology requirements of our customers become more sophisticated, our service offerings have become more complex. This has lengthened our sales cycles and made it more difficult for us to predict the quarterly timing of our software and services sales.

In May 2007, we made a decision to sunset our FACTS™ proprietary software product. A formal plan of restructuring was developed and includes four milestones to complete the final coding and release of FACTS™ 7.0. The final milestone to end sales and support of the FACTS™ software product is approximately March 31, 2009. However, we intend to convert as many of our existing FACTS™ customers as possible to our Facets^®, QNXT^™or QicLink™ software platforms. The plan of restructuring includes the elimination of positions within the research and development group, which was formally communicated to all affected employees late in the second quarter of 2007. To retain key employees and to ensure that the final product milestones are achieved, benefit packages were provided and are contingent upon completion of these milestones. We currently estimate that the total amount of severance expense and retention bonuses to be accrued through the final milestone date on March 31, 2009 is approximately $1.0 million. As of June 30, 2008, we have accrued $736,000 related to severance expense and retention bonuses, which are reflected in cost of revenue – services and other and research and development in the consolidated statement of income. To date, $129,000 of these costs have been paid or otherwise settled.

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Effective August 2007, we agreed to sell and transfer full ownership rights of the InAlysis Personal Analyst Suite of business intelligence software (referred to as the “Decipher” product), which we acquired in early 2003. The Decipher software was sold for approximately $1.0 million with payment terms of four equal installments through December 31, 2010. The first installment payment was received and recognized as income in the consolidated statement of income in the first quarter of 2008. The remaining $750,000 will be recorded as income in the periods cash payments are received.

In December 2007, our management and administrative services agreement with QualChoice of Arkansas, Inc. and QCA Health Plan (“QCA”) expired. In January 2008, we entered into a new seven-year hosting services agreement with QCA.

In February 2008, we granted cash-based performance units in lieu of restricted stock awards. These performance units are aligned with our multi-year strategic revenue targets. The expense for the performance units may be adjusted each period based on the current quarter contribution towards those multi-year revenue targets and the overall likelihood of payment, and therefore, may fluctuate dramatically from period to period. In the first six months of 2008, approximately $595,000 of expense related to performance units was recognized in the consolidated statement of income.

In June 2008, we determined that our Santa Ana facility was not occupied at its maximum capacity, and therefore, transferred the remaining employees to our corporate office in Newport Beach, California. The Santa Ana site was subsequently subleased to a third-party for a portion of the remaining lease term. As a result, we recorded a loss accrual of $103,000 for future obligations related to the facility, which is reflected in selling, general and administrative in the consolidated statement of income.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Those estimates are based on our experience, terms of existing contracts, observance of trends in the industry, information provided by our customers and information available from other outside sources, which are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

The following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements, and may potentially result in materially different results under different assumptions and conditions. We have identified the following as critical accounting policies to our company:

• Revenue recognition;

• Up-front payments to customers;

• Sales returns and allowance for doubtful accounts;

• Capitalization of software development costs;

• Goodwill and other intangible assets;

• Litigation accruals;

• Self-insurance;

• Bonus accrual;

• Income taxes; and

• Share-based awards.

This listing is not a comprehensive list of all of our accounting policies. For a detailed discussion on the application of these and other accounting policies, see Note 2 of Notes to Consolidated Financial Statements in our annual Form 10-K filed with the Securities and Exchange Commission on February 15, 2008.

Revenue Recognition.We recognize revenue when persuasive evidence of an arrangement exists, the product or service has been delivered, fees are fixed or determinable, collection is reasonably assured and all other significant obligations have been fulfilled. Our revenue is classified into two categories: services and other, and products. For the quarter ended June 30, 2008, approximately 87% of our total revenue was generated from services and other revenue and 13% was from products revenue.

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We follow the provisions of the Securities and Exchange Commission Staff Accounting Bulletin No. 104,“Revenue Recognition,” AICPA Statement of Position 97-2,“Software Revenue Recognition,” as amended (“SOP 97-2”), Emerging Issues Task Force No. 00-3,“Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware,” (“EITF 00-3”), and Emerging Issues Task Force No. 00-21,“Revenue Arrangements with Multiple Deliverable” (“EITF 00-21”).

We generate services and other revenue from several sources, including the provision of outsourcing services, such as software hosting and other business services, and the sale of maintenance and support for our proprietary software products. We apply EITF 00-3 to hosting arrangements that include the licensing of software. A software element covered by SOP 97-2 is present in a hosting arrangement if the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty and it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. Outsourcing services revenue is typically billed and recognized monthly over the contract term, generally three to seven years. Many of our outsourcing agreements require us to maintain a certain level of operating performance. We record revenue net of estimated penalties resulting from any failure to maintain this level of operating performance. These penalties have not been significant in the past. Software maintenance and support revenues are typically based on one-year renewable contracts and are recognized ratably over the contract period. Software maintenance in which we receive payment in advance is recorded on the balance sheet as deferred revenue.

We also generate services and other revenue from consulting fees for implementation, installation, configuration, business process engineering, data conversion, testing and training related to the use of our proprietary and third party licensed products. In certain instances, we also generate services revenue from customization services of our proprietary licensed products. We recognize revenue for these services as they are performed. We also generate services revenues associated with preparing our customer connectivity center or a customer’s data center in order to ready a specific customer for software hosting services. These fees are usually separate and distinct from the hosting fees, and performance of the set-up services represents the culmination of the earnings process. We recognize revenue for these services as they are performed. We generate other revenue from certain one-time charges, including certain contractual fees such as termination fees and change of control fees, and we recognize the revenue for these fees once the termination or change of control is guaranteed, there are no remaining substantive performance obligations and collection is reasonably assured. Other revenue is also generated from fees related to our product-related customer conferences, which is recognized as our obligations are performed.

For multiple element arrangements, such as software license, consulting services, outsourcing services and maintenance, and where vendor-specific objective evidence (“VSOE”) of fair value exists for all undelivered elements, we account for the delivered elements in accordance with the “residual method” of SOP 97-2 or EITF 00-21, as applicable. VSOE of fair value is determined for each undelivered element based on how it is sold separately, or in the case of maintenance, the renewal rate. For arrangements in which VSOE of fair value does not exist for each undelivered element, including specified product and upgrade rights, revenue for the delivered element is deferred and not recognized until VSOE of fair value is available for the undelivered element or delivery of each element has occurred, unless the only undelivered element is a service in which revenue from the delivered element is recognized over the service period. In determining VSOE of fair value for the undelivered elements, no portion of the discount is allocated to specified or unspecified product or upgrade rights.

Under the residual method, the arrangement fee is recognized as follows: (1) the total fair value of the undelivered elements, as indicated by VSOE of fair value, is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2 and (2) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements.

We generate products revenue from the licensing of our software. Under SOP 97-2, software license revenue is recognized upon the execution of a license agreement, upon delivery of the software, when fees are fixed or determinable, when collectibility is probable and when all other significant obligations have been fulfilled. For software license agreements in which customer acceptance is a significant condition of earning the license fees, revenue is not recognized until acceptance occurs. For software license agreements that require significant customization or modification of the software, revenue for the software is recognized on a percentage-of-completion basis as the customization services are performed. Progress to completion under the percentage-of-completion method is generally determined based upon direct labor costs. For software license arrangements that include a right to use the product for a defined period of time or for content subscriptions, revenue is generally recognized ratably over the term of the license.

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Up-front Payments to Customers.We may pay certain up-front amounts to our customers in connection with the establishment of our hosting and outsourcing services contracts. Under Emerging Issues Task Force No. 01-9,“Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products),” these payments are capitalized and amortized over the life of the contract as a reduction to revenue, provided that such amounts are recoverable from future revenue under the contract. If an up-front payment is not recoverable from future revenue or contract cancellation penalties paid by the customer, the amount will be expensed in the period it is deemed unrecoverable. Unamortized up-front fees were $4.1 million and $5.5 million as of June 30, 2008 and 2007, respectively.

Sales Returns and Allowance for Doubtful Accounts.We maintain a reserve for estimated discounts, pricing adjustments, and other sales allowances. The reserve is charged to revenue in amounts sufficient to maintain the allowance at a level we believe is adequate based on historical experience and current trends. We also maintain an allowance for doubtful accounts to reflect estimated losses resulting from the inability of customers to make required payments. We base this allowance on estimates after consideration of factors such as the composition of the accounts receivable aging and bad debt history and our evaluation of the financial condition of the customers. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional bad debt expense may be required. We typically do not require collateral. Historically, our estimates for sales allowances and doubtful account reserves have been adequate to cover accounts receivable exposures. We continually monitor these reserves and make adjustments to these provisions when we believe actual credits or other allowances may differ from established reserves.

Capitalization of Software Development Costs.The capitalization of software costs includes developed technology acquired in acquisitions and costs incurred by us in developing our products that qualify for capitalization. We account for our software development costs, other than costs for internal-use software, in accordance with Statement of Financial Accounting Standards, “Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed.” We capitalize costs associated with product development, coding and testing subsequent to establishing technological feasibility of the product. Technological feasibility is established after completion of a detailed program design or, in its absence, a working model. Capitalization of computer software costs ceases upon a product’s general availability release. Amounts capitalized as software development costs are amortized using the greater of revenues during the period compared to the total estimated revenues to be earned or on a straight-line basis over estimated lives, which is generally deemed to be five years. In some instances, the period between achieving technological feasibility and the general availability of such software is short and software development costs qualifying for capitalization is insignificant. As a result, no costs are capitalized and such costs are expensed in the period incurred.

On a quarterly basis, we monitor the expected net realizable value of the capitalized software for factors that would indicate impairment, such as a decline in the demand, the introduction of new technology, or the loss of a significant customer. As of June 30, 2008, our evaluation determined that the carrying amount of these assets was not impaired.

Goodwill and Other Intangible Assets. Acquisitions are accounted for using the purchase method of accounting. The purchase price is allocated to the tangible and intangible assets acquired and the liabilities assumed on the basis of their estimated fair market values on the acquisition date. The excess of the purchase price over the estimated fair market value of the assets purchased and liabilities assumed is allocated to goodwill and other intangible assets.

Under Statement of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets,” goodwill and intangible assets deemed to have indefinite lives are subject to annual (or more often if indicators of impairment exist) impairment tests using a two-step process. The first step looks for indicators of impairment. If indicators of impairment are revealed in the first step, then the second step is conducted to measure the amount of the impairment, if any. We performed our annual impairment test on March 31, 2008, and this test did not reveal indications of impairment.

Litigation Accruals. Pending unsettled lawsuits involve complex questions of fact and law and may require expenditure of significant funds. From time to time, we may enter into confidential discussions regarding the potential settlement of such lawsuits; however, there can be no assurance that any such discussions will occur or will result in a settlement. Moreover, the settlement of any pending litigation could require us to incur settlement payments and costs. In the period in which a new legal case arises, an expense will be accrued if our liability to the other party is probable and can be reasonably estimated. On a quarterly basis, we review and analyze the adequacy of our accruals for each individual case for all pending litigations. Adjustments are recorded as needed to ensure appropriate levels of reserve. Our attorney fees and other defense costs related to litigation are expensed as incurred.

Self-Insurance.Effective January 1, 2006, we became self-insured for certain losses related to employee health and dental benefits. We record a liability based on an estimate of claims incurred but not recorded determined based on actuarial analysis of historical claims experience and historical industry data. We maintain individual and aggregate stop-loss coverage with a third party insurer to limit our total exposure for these programs. Our self-insurance liability contains uncertainties because the calculation requires management to make assumptions and apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date. We do not believe that there is a reasonable likelihood that there will be a material change in the future assumptions or estimates we use to calculate our self-insurance liability. However, if actual results are not consistent with our assumptions and estimates, we may be exposed to losses or gains that could be material.

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Bonus Accrual.Our bonus model is designed to project the level of funding required under the bonus program as approved by the Compensation Committee of the Board of Directors. A significant portion of the bonus program is based on the Company meeting certain financial objectives, such as revenue, free cash flow, and pro-forma earnings (adjusted EBITDA). The expense related to the bonus program is accrued in the year of performance and paid in the first quarter following the fiscal year end. The bonus model is analyzed and adjusted on a quarterly basis as necessary based on achievement of targets.

Income Taxes.We account for income taxes under Statement of Accounting Financial Standards No. 109,“Accounting for Income Taxes” (“SFAS No. 109”). This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in our financial statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and the tax bases of our assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such an asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or the entire deferred tax asset will not be realized. We review the need for a valuation allowance on a quarterly basis and believe that there is sufficient certainty regarding the realizability of substantially all of our deferred tax assets.

On January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes,” and defines the confidence level that a tax position must meet in order to be recognized in the financial statements. This interpretation requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained by the taxing authority as of the reporting date. We recognize interest and/or penalties associated with uncertain tax positions in income tax expense.

Share-Based Awards. Under the fair value recognition provisions of FASB Statement No. 123R, “Share-Based Payment,” (“SFAS 123R”), stock-based compensation cost is estimated at the grant date based on the award’s fair-value and is recognized as expense ratably over the requisite service period. We use the Black-Scholes option-pricing model to calculate fair value which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation could be materially different in the future. In addition, if our actual forfeiture rate is materially different from our estimate, stock-based compensation expense could be significantly different from what we have recorded in the current period. We recognize share-based compensation cost over the requisite service period using the straight-line single option method.

Recent Accounting Pronouncements

In December 2007, the FASB issued “Business Combinations,” (“FAS 141R”). FAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination, recognizing assets acquired and liabilities assumed arising from contingencies, and determining what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. FAS 141R is effective for fiscal years beginning after December 15, 2008. We expect FAS 141R will have an impact on our consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions we consummate after the effective date.

In December 2007, the FASB issued “Noncontrolling Interests in Consolidated Financial Statement” (“FAS 160”). FAS 160 amends ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. Consolidated net income should include the net income for both the parent and the noncontrolling interest with disclosure of both amounts on the consolidated statement income. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. FAS 160 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact, if any, FAS 160 will have on our consolidated financial statements.

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Revenue Information

Revenue by customer type and revenue mix for the three and six months ended June 30, 2008, and 2007, respectively, is as follows (amounts in thousands):

	Three Months Ended June 30,								Six Months Ended June 30,
	2008				2007				2008				2007
Revenue by customer type:
Health plans	$	109,389	93	%	$	104,740	91	%	$	208,415	93	%	$	209,031	92	%
Benefits administration		7,628	7	%		10,095	9	%		15,422	7	%		19,307	8	%
Total revenue	$	117,017	100	%	$	114,835	100	%	$	223,837	100	%	$	228,338	100	%
Revenue mix:
Services and other revenue
Outsourced business services	$	24,255	21	%	$	23,273	20	%	$	48,277	22	%	$	47,441	21	%
Software maintenance		34,281	29	%		30,755	27	%		67,516	30	%		60,568	26	%
Consulting services and other		42,905	37	%		37,404	33	%		75,695	34	%		73,198	32	%
Services and other revenue total		101,441				91,432				191,488				181,207
Products revenue
Perpetual license fees		10,650	9	%		19,775	17	%		22,758	10	%		40,260	18	%
Term license fees		4,926	4	%		3,628	3	%		9,591	4	%		6,871	3	%
Products revenue total		15,576				23,403				32,349				47,131
Total revenue	$	117,017	100	%	$	114,835	100	%	$	223,837	100	%	$	228,338	100	%

Our total backlog is defined as the revenue we expect to generate in future periods from existing customer contracts. Our 12-month backlog is defined as the revenue we expect to generate from existing customer contracts over the next 12 months. Most of the revenue in our backlog is derived from multi-year service revenue contracts (including software hosting, business process outsourcing, IT outsourcing, and software maintenance with periods up to seven years), term software license fees, and consulting contracts. Consulting revenue is included in the backlog when the revenue from such consulting contract is expected to be recognized over a period exceeding 12 months.

Backlog can change due to a number of factors, including unforeseen changes in implementation schedules, contract cancellations (subject to penalties paid by the customer), or customer financial difficulties. In such event, unless we enter into new customer agreements that generate enough revenue to replace or exceed the revenue we expect to generate from our backlog in any given quarter, our backlog will decline. Our backlog at any date may not indicate demand for our products and services and may not reflect actual revenue for any period in the future. Our 12-month and total backlog data are as follows (in thousands):

	6/30/08		3/31/08		12/31/07		9/30/07		6/30/07
12-month backlog	$	313,000	$	310,600	$	238,400	$	225,500	$	229,000
Total backlog	$	1,117,600	$	1,144,800	$	982,600	$	941,100	$	944,400

Total quarterly bookings equal the estimated total dollar value of the contracts signed in the quarter. Bookings can vary substantially from quarter to quarter, based on a number of factors, including the number and type of prospects in our pipeline, the length of time it takes a prospect to reach a decision and sign the contract, and the effectiveness of our sales force. Included in quarterly bookings are up to seven years of maintenance revenue and hosting and other services revenue. Bookings for each of the quarters are as follows (in thousands):

	6/30/08		3/31/08		12/31/07		9/30/07		6/30/07
Quarterly bookings	$	61,700	$	236,400	$	163,200	$	74,500	$	93,800

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RESULTS OF OPERATIONS

Quarter Ended June 30, 2008 Compared to the Quarter Ended June 30, 2007.

Revenue. Total revenue increased $2.2 million, or 2%, to $117.0 million in the second quarter of 2008 from $114.8 million for the same period in 2007. This increase was primarily related to an increase of $10.0 million in services and other revenue offset by a decrease in products revenue of $7.8 million.

Services and Other Revenue.Services and other revenue includes outsourced business services (primarily software hosting and business process outsourcing), maintenance fees related to our software license contracts, consulting services and other revenue. Services and other revenue increased $10.0 million, or 11%, to $101.4 million in the second quarter of 2008 from $91.4 million for the same period in 2007. The net increase consisted of $5.5 million in consulting and other services revenue, $3.5 million in software maintenance revenue, and $1.0 million in outsourced business services revenue. Consulting and other services revenue related primarily to new implementation contracts signed in late 2007 and early 2008. Higher software maintenance revenue was triggered by large software license sales in late 2007 and early 2008, as well as annual pricing improvements in maintenance tied to increases in the consumer price index. The increase in outsourced business services revenue is partially attributable to new hosting agreements and increased membership for new and existing customers offset by termination agreements, including the QCA services agreement.

Products Revenue.Products revenue, which includes software license sales, decreased $7.8 million, or 33%, from $23.4 million in the second quarter of 2007 to $15.6 million for the same period in 2008. The decrease was due primarily to a decrease in perpetual license fees of $9.1 million offset by an increase in term license fees of $1.3 million.

Cost of Revenue – Services and Other. Cost of revenue for services and other includes costs for outsourced business services, consulting services and maintenance revenue. Cost of revenue for services and other increased $500,000, or 1%, to $50.9 million in the second quarter of 2008 from $50.4 million for the same period in 2007. This increase primarily related to higher compensation and related costs of $2.8 million from increased headcount, scheduled salary increases, and an allocation of labor costs from research and development for developers’ time spent on support and maintenance projects. In addition, higher telecommunication costs and an increase in infrastructure and technology investment of $1.0 million contributed to the overall increase. These increases were partially offset by $1.1 million from lower utilization of outsourced contractors on implementation projects and a $2.1 million reduction in overall costs from the termination of the QCA services agreement. As a percentage of total revenue, cost of revenue for services and other approximated 43% in the second quarter of 2008 compared to 44% for the same period in 2007.

Cost of Revenue – Products. Cost of revenue for products, excluding the amortization of acquired technology, decreased $500,000, or 10%, from $4.8 million in the second quarter of 2007 compared to $4.3 million for the same period in 2008. The decrease was primarily the result of lower amortization expense of $550,000 for capitalized R&D and $200,000 in lower investment in infrastructure and technology, offset by higher compensation and related costs of $300,000 from increased headcount and scheduled salary increases. As a percentage of total revenue, cost of revenue for products approximated 4% in the second quarter of both 2008 and 2007.

Gross Margin.Gross margin, excluding the amortization of acquired technology, increased slightly to 53% in the second quarter of 2008 compared to 52% for the same period in 2007. Gross margin was favorably impacted by a higher-margin mix of services and other revenue, operating efficiencies and pricing improvements offset by a lower volume of products revenue.

Research and Development (R&D) Expenses. R&D expenses remained relatively flat from $16.4 million in the second quarter of 2007 to $16.5 million for the same period for 2008. Lower compensation and related costs of $1.4 million were impacted by an allocation of costs to services and other due to developers’ time spent on support and maintenance projects. This decrease was largely offset by a $1.2 million increase due to increased expense of software development costs and an increase in other costs of $350,000 related primarily to higher utilization of outsourced contractors and facility-related costs. As a percentage of total revenue, R&D expenses approximated 14% for both the second quarter of 2008 and 2007. R&D expenses, as a percentage of total R&D expenditures (which includes capitalized R&D expenses of $900,000 in the second quarter of 2008 and $2.1 million for the same period in 2007), was 95% in the second quarter of 2008 compared with 89% for the same period in 2007.

Selling, General and Administrative (SG&A) Expenses. SG&A expenses increased $3.1 million, or 11%, to $32.4 million in the second quarter of 2008 from $29.3 million for the same period in 2007. The increase was driven primarily by transaction costs of $2.1 million associated with the definitive merger agreement to sell the company to Apax Partners, $1.2 million in higher compensation and related costs impacted by increased headcount and scheduled salary increases, and a $700,000 increase due to executive severance expense. These increases were offset by a $900,000 decrease in the utilization of outsourced contractors, primarily for corporate strategy projects. As a percentage of total revenue, selling, general, and administrative expenses approximated 28% in the second quarter of 2008 compared to 26% for the same period in 2007.

Amortization of Intangible Assets.Amortization of intangible assets is comprised of acquired technology and acquired other intangible assets. In total, amortization of intangible assets increased $200,000, or 9%, to $2.8 million in the second quarter of 2008 from $2.6 million for the same period in 2007 due to adjustments for the final valuation of intangible assets from the PDM and QCSI acquisitions.

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Interest Income.Interest income decreased $1.3 million, or 45%, from $2.8 million in the second quarter of 2007 to $1.5 million for the same period in 2008. The decrease was driven by lower balances in our operating cash and investment accounts.

Interest Expense.Interest expense decreased $400,000, or 12%, from $3.5 million in the second quarter of 2007 to $3.1 million for the same period in 2008. The decrease in expense was driven by lower borrowings on our credit facility, lower principal balance and interest rates on the term loan, and the payoff of certain capital lease obligations. These decreases were partially offset by an increase in interest related to our convertible debt notes.

Change in Fair Value of Derivative Liabilities. In the second quarter of 2007, it was determined that upon execution of the 2012 Notes, we did not have sufficient authorized and unissued shares available to settle all of our commitments that would require the issuance of stock during the maximum period those commitments could remain outstanding. As a result, warrants to purchase approximately 3.0 million shares of the Company’s common stock did not meet the definition of an equity instrument and were recorded as a derivative financial instrument liability. A charge to earnings of $2.5 million was also recorded to reflect the increase in the fair value of the warrant liability. The situation was resolved in the third quarter of 2007. As of June 30, 2008, the Company had sufficient authorized shares to settle all of its commitments.

Provision for Income Taxes. Provision for income taxes was $3.8 million for the second quarter of 2008 compared to $4.5 million for the same period in 2007. The effective tax rate was 44.2% for the second quarter of 2008 compared to 55.4% for the same period in 2007. The decrease to the effective tax rate was primarily due to claiming the Federal section 199 manufacturing deduction, various state R&D tax credits and changes to state income taxes in 2008, as well as no tax benefit for the charge to earnings from the change in fair value of the warrant liability in 2007.

Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007.

Revenue. Total revenue decreased $4.5 million, or 2%, from $228.3 million for the first six months of 2007 to $223.8 million for the same period in 2008. This decrease consisted of a $14.8 million decrease related to products revenue offset by an increase in services and other revenue of $10.3 million.

Services and Other Revenue.Services and other revenue includes outsourced business services (primarily software hosting and business process outsourcing), maintenance fees related to our software license contracts, consulting services and other revenue. Services and other revenue increased $10.3 million, or 6%, to $191.5 million in the first six months of 2008 from $181.2 million during the same period in 2007. The net increase consisted of a $7.0 million increase in software maintenance revenue, $2.5 million in consulting and other services revenue, and $800,000 in outsourced business services revenue. Higher software maintenance revenue was triggered by large software license sales in late 2007 and early 2008, as well as annual pricing improvements in maintenance tied to increases in the consumer price index. The increases in consulting and other services revenue related primarily to new implementation contracts signed in late 2007 and in the first quarter of 2008. The increase in outsourced business services revenue is partially attributable to new hosting agreements and increased membership for new and existing customers offset by termination agreements, including the QCA services agreement.

Products Revenue.Products revenue, which includes software license sales, decreased $14.8 million, or 31%, from $47.1 million in the first six months of 2007 to $32.3 million for the same period in 2008. The decrease was due primarily to a decrease in perpetual license fees of $17.5 million offset by an increase in term license fees of $2.7 million.

Cost of Revenue – Services and Other. Cost of revenue for services and other includes costs for outsourced business services, consulting services and maintenance revenue. Cost of revenue for services and other decreased $1.3 million, or 1%, from $100.0 million in the first six months of 2007 to $98.7 million for the same period in 2008. This decrease primarily related to $4.2 million of lower overall costs from the termination of the QCA services agreement, $2.6 million from lower utilization of outsourced contractors, and a decrease in overall travel of $900,000. These decreases were partially offset by higher compensation and related costs of $5.2 million from increased headcount, scheduled salary increases, and an allocation of labor costs from research and development for developers’ time spent on support and maintenance projects. In addition, telecommunication costs, infrastructure and technology investment, and professional fees increased a total of $1.3 million. As a percentage of total revenue, cost of revenue for services and other approximated 44% in the first six months of both 2008 and 2007.

Cost of Revenue – Products. Cost of revenue for products, excluding the amortization of acquired technology, decreased $1.1 million, or 10%, from $10.0 million in the first six months of 2007 compared to $8.9 million for the same period in 2008. The overall decrease was the result of lower amortization expense of $700,000 for capitalized R&D, $200,000 in lower compensation and related costs, and $200,000 in decreased investment in infrastructure and technology. As a percentage of total revenue, cost of revenue for products approximated 4% for the first six months of both 2008 and 2007.

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Gross Margin.Gross margin, excluding the amortization of acquired technology, remained flat at 52% in the first six months of 2008 compared to the same period in 2007. Gross margin was favorably impacted by a higher-margin mix of services and other revenue, operating efficiencies and pricing improvements which were offset by a lower volume of products revenue.

Research and Development (R&D) Expenses. R&D expenses decreased $700,000, or 2%, from $32.2 million in the first six months of 2007 to $31.5 million for the same period for 2008. Lower compensation and related costs of $2.2 million were impacted by an allocation of costs to services and other due to developers’ time spent on support and maintenance projects. This decrease was largely offset by a $1.1 million increase due to increased expense of software development costs and an increase of $400,000 in facility-related costs. As a percentage of total revenue, R&D expenses approximated 14% for both the first six months of 2008 and 2007. R&D expenses, as a percentage of total R&D expenditures (which includes capitalized R&D expenses of $2.7 million in the first six months of 2008 and $3.8 million for the same period in 2007), was 92% in the first six months of 2008 compared with 89% for the same period in 2007.

Selling, General and Administrative (SG&A) Expenses. SG&A expenses increased $4.1 million, or 7%, to $61.2 million in the first six months of 2008 from $57.1 million for the same period in 2007. The increase was driven primarily by transaction costs of $2.9 million associated with the definitive merger agreement to sell the company to Apax Partners, $3.8 million in higher compensation and related costs impacted by increased headcount and scheduled salary increases, an increase in sales and marketing expenses of $900,000 resulting from the annual Payer conference and an overall increase in trade show activity, and a $700,000 increase due to executive severance expense. These increases were offset by a $2.1 million decrease in the utilization of outsourced contractors primarily for corporate strategy projects, $1.3 million in decreased investment in infrastructure and technology, and a reduction in recruiting and relocation fees of $600,000 attributed to the accounting department transition to Colorado last year. As a percentage of total revenue, selling, general, and administrative expenses approximated 27% in the first six months of 2008 compared to 25% for the same period in 2007.

Amortization of Intangible Assets.Amortization of intangible assets is comprised of acquired technology and acquired other intangible assets. In total, amortization of intangible assets remained flat at $5.6 million in the first six months of 2008 and 2007.

Interest Income.Interest income increased $100,000, or 4%, to $3.7 million in the first six months of 2008 from $3.6 million for the same period in 2007. The net increase was driven by higher balances in our operating cash account and offset by lower balances in our investment accounts.

Interest Expense.Interest expense increased $200,000, or 3%, to $6.3 million in the first six months of 2008 from $6.1 million for the same period in 2007. The decrease in expense was driven by lower borrowings on our credit facility, lower principal balance and interest rates on the term loan, and the payoff of certain capital lease obligations. These decreases were partially offset by an increase in interest related to our convertible debt notes.

Change in Fair Value of Derivative Liabilities. In the second quarter of 2007, it was determined that upon execution of the 2012 Notes, we did not have sufficient authorized and unissued shares available to settle all of our commitments that would require the issuance of stock during the maximum period those commitments could remain outstanding. As a result, warrants to purchase approximately 3.0 million shares of the Company’s common stock did not meet the definition of an equity instrument and were recorded as a derivative financial instrument liability. A charge to earnings of $2.5 million was recorded to reflect the increase in the fair value of the warrant liability. The situation was resolved in the third quarter of 2007. As of June 30, 2008, the Company had sufficient authorized shares to settle all of its commitments.

Provision for Income Taxes. Provision for income taxes was $6.4 million for the first six months of 2008 compared to $9.0 million for the same period in 2007. The effective tax rate was 42.4% for the first six months of 2008 compared to 48.3% for the same period in 2007. The decrease to the effective tax rate was primarily due to claiming the Federal section 199 manufacturing deduction, various state R&D tax credits and changes to state income taxes in 2008, as well as no tax benefit for the charge to earnings from the change in fair value of the warrant liability in 2007.

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LIQUIDITY AND CAPITAL RESOURCES

Capital Resources

As of June 30, 2008, cash available to fund our operations included cash and cash equivalents totaling $148.6 million. Our principal sources of liquidity include cash from operations, borrowings under our debt facility, proceeds from the issuance of convertible debt, cash obtained from our acquisitions, employee exercises of stock options and private financings, described as follows:

• In October 2005, we issued $100.0 million aggregate principal amount of 2.75% Convertible Senior Notes due 2025 (the “2025 Notes”). The 2025 Notes are convertible, at the holder’s option in certain circumstances, into shares of our common stock at an initial conversion price of $18.85 per share, or 53.0504 shares for each $1,000 principal amount of 2025 Notes, subject to certain adjustments. The maximum conversion rate is 68.9655 shares for each $1,000 principal amount of 2025 Notes. The 2025 Notes bear interest at a rate of 2.75%, which is payable in cash semi-annually.

• In January 2007, we amended and restated our Credit Agreement, initially established December 21, 2004, to add a term loan of up to $150.0 million and to extend the expiration date of the Credit Agreement, including our $100.0 million revolving credit facility, to January 5, 2011. As of June 30, 2008, we no had outstanding borrowings on the revolving line of credit and were in compliance with all applicable covenants and other restrictions under the Credit Agreement. In January 2007, we borrowed $75.0 million under the term loan to help fund our acquisition of QCSI, of which $64.3 million was outstanding as of June 30, 2008. We can borrow up to an additional $75.0 million under the term loan through and including March 31, 2009, at which time no additional funds can be borrowed under the term loan.

• In April 2007, we issued $230.0 million aggregate principal amount of 1.125% Convertible Senior Notes due 2012 (the “2012 Notes”). The 2012 Notes are convertible, at the holder’s option in certain circumstances, into shares of our common stock at an initial conversion price of $21.97 per share, or 45.5114 shares for each $1,000 principal amount of 2012 Notes, subject to certain adjustments. The maximum conversion rate is 53.4759 shares for each $1,000 principal amount of 2012 Notes. The 2012 Notes bear interest at an annual rate of 1.125%, which is payable in cash semi-annually.

In January 2008, we invested $72.3 million in taxable note investments with an auction reset function (“auction rate securities”) collateralized by student loans which are substantially backed by the federal government and state agencies. Beginning in February 2008, auctions for our auction rate securities failed due to conditions in the market. A failed auction results in a lack of liquidity in the securities but does not signify a default by the issuer. Upon an auction failure, the interest rates do not reset at a market rate but instead reset based on a formula contained in the security. As of June 30, 2008, all of our auction rate securities continue to be rated AAA by Standard & Poor’s or Aaa by Moody’s despite the auction failures.

As of June 30, 2008, we determined the fair value of the auction rate securities no longer approximated their par value based on a discounted cash flow valuation model that was based on the collateralization of the underlying securities, the credit rating of the investment, the timing of expected future cash flows, and the expected duration until the securities trade again. As a result, we concluded that the auction rate securities were temporarily impaired and recorded an unrealized loss of approximately $4.6 million to reflect the revised fair value of the auction rate securities at $67.7 million. Given the uncertainty as to when the securities may be actively traded we have classified the auction rate securities as long-term investments.

We reviewed the classification of the impairment charges in accordance with the appropriate accounting literature, and concluded the impairment is temporary as of June 30, 2008. A temporary impairment charge results in an unrealized loss being recorded in the accumulated other comprehensive income component of stockholders’ equity. We believe this treatment is appropriate because the loss in value attributable to our auction rate securities is temporary in nature and we have the ability and intent to hold the auction rate securities until a recovery in market value takes place. We will continue to monitor and analyze our auction rate securities investments to determine whether the impairment continues to exist, and if so, how the impairment should be classified.

Based on our current operating plan, we believe that existing cash and cash equivalents balances, cash forecasted by management to be generated by operations and borrowings from existing credit facilities will be sufficient to meet our working capital and capital requirements for at least the next 12 months. However, if events or circumstances occur such that we do not meet our operating plan as expected, we may be required to seek additional capital and/or reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. We may seek additional financing, which may include debt and/or equity financing or funding through third party agreements. There can be no assurance that any additional financing will be available on acceptable terms, if at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.

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Summary of Cash Activities

As of June 30, 2008, we had cash and cash equivalents totaling $148.6 million. Significant cash flow activities for the six months ended June 30, 2008 and 2007 are as follows (in thousands):

	Six Months Ended June 30,
	2008			2007
Cash provided by operating activities	$	30,150		$	27,132
Purchase of investments		(77,200	)		(195,640	)
Sale of investments		4,900			142,575
Purchase of property and equipment and software licenses		(5,946	)		(9,333	)
Capitalization of software development costs		(2,685	)		(3,829	)
Purchase of intangible assets		(850	)		—
Acquisitions, net of cash acquired		(9,622	)		(143,196	)
Proceeds from revolving line of credit, debt financings, notes payable and capital leases		1,066			428,731
Payments on revolving line of credit, notes payable and capital leases		(7,802	)		(160,163	)
Employee exercises of stock options and purchase of common stock		5,126			8,728
Excess tax benefits from stock-based compensation		4,636			—
Repurchase of common stock to treasury		(1,684	)		—

Cash and cash equivalents decreased $59.9 million in the first six months of 2008 from $208.5 million at December 31, 2007 to $148.6 million at June 30, 2008. This decrease was primarily due to the purchase of investments of $77.2 million, a cash payment of $9.6 million to former QCSI stockholders, warrantholders, and optionholders (which included a $2.6 million Holdback payment along with a $7.0 million contingent consideration earned as of December 31, 2007), $8.6 million for capital spending, payments on our debt (including our revolving line of credit) of $7.8 million, a $1.7 million payment for the repurchase of common stock, and a $1.0 million purchase of intangible assets. These cash outflows were offset by cash provided by operating activities of $30.2 million, $5.1 million in proceeds from employee option exercises, sale of investments of $4.9 million, $4.6 million of tax benefits related to stock-based compensation, and net proceeds from debt financing of $1.0 million.

Commitments and Contingencies

The following tables summarize our estimated contractual obligations and other commercial commitments as of June 30, 2008 (in thousands):

	Payments (including interest) Due by Period
Contractual obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Short-term debt	$	601	$	601	$	—	$	—	$	—
Capital lease obligations		1,675		776		899		—		—
Operating leases		70,180		17,876		23,798		9,377		19,129
Convertible debt		388,506		5,338		10,675		238,087		134,406
Total contractual obligations	$	460,962	$	24,591	$	35,372	$	247,464	$	153,535
	Amount of Commitment Expiration per Period
Other commercial commitments	Total Amounts Committed		Less Than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Term loan	$	71,408	$	13,770	$	57,638	$	—	$	—
Standby letters of credit		1,990		1,000		308		—		682
Total other commercial commitments	$	73,398	$	14,770	$	57,946	$	—	$	682

Convertible debt represents scheduled principal and interest payments for our 2025 Notes and 2012 Notes, which includes $100.0 million and $230.0 million aggregate principal amounts, respectively. The 2025 Notes bear interest at a rate of 2.75%, which is payable in cash semi-annually in arrears on April 1 and October 1 of each year, and commenced on April 1, 2006, to the holders of record on the preceding March 15 and September 15, respectively. The 2025 Notes mature on October 1, 2025. However, on or after October 5, 2010, we may from time to time at our option redeem the 2025 Notes, in whole or in part, for cash, at the applicable

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redemption date. Additionally, holders of the 2025 Notes may require us to purchase all or a portion of their 2025 Notes in cash on each of October 1, 2010, October 1, 2015 and October 1, 2020. The 2012 Notes bear interest at a rate of 1.125%, which is payable in cash semi-annually in arrears on April 15 and October 15 of each year, and commenced on October 15, 2007, to the holders of record on the preceding April 1 and October 1, respectively. The 2012 Notes mature on April 15, 2012.

As of June 30, 2008, we had five unused standby letters of credit outstanding in the aggregate amount of $2.0 million, which serve as security deposits for certain operating leases.

Excluded from the tables above are certain potential payments to CareKey stockholders and optionholders as these payments are contingent upon the achievement of financial milestones and are payable in either cash or stock at our election. CareKey stockholders and optionholders are entitled to receive additional contingent consideration payments upon the achievement of certain revenue milestones during the period beginning upon acquisition and ending December 31, 2008. In addition, further consideration payable in cash or stock at our election, may be paid to former CareKey stockholders and optionholders if, prior to December 31, 2008, the acquired CareKey products generate revenues in excess of certain revenue milestones and/or if a negotiated multiple of software maintenance revenues of acquired CareKey products during the fiscal year ended December 31, 2009 exceed total purchase consideration made to those former CareKey stockholders and optionholders. As of June 30, 2008, $8.3 million of contingent considerations had been earned. This amount is payable as of March 31, 2009.

Also excluded from the tables above are certain potential payments to former PDM stockholders and optionholders. PDM security holders may be entitled to receive additional contingent consideration of $8.0 million on or before December 31, 2009 subject to reduction if certain revenue thresholds are not satisfied during the applicable measurement period or to the extent TriZetto is entitled to claims for indemnification as specified in the Merger Agreement. Additional contingent consideration of $5.0 million may be paid on June 30, 2009 if certain specified revenue thresholds are satisfied, provided that in no event will the aggregate consideration of all payments exceed $42.0 million. The contingent consideration is payable in a combination of cash and common stock.

Due to the uncertainty with respect to the timing of future cash flows associated with the Company’s cumulative unrecognized tax benefits recorded in accordance with FIN 48 at June 30, 2008, the Company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities as it relates to the $11.0 million of unrecognized tax benefits.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not currently have any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet or other contractually narrow or limited purposes.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk associated with adverse changes in financial and commodity market prices and rates could impact our financial position, operating results or cash flows. We are exposed to market risk due to changes in interest rates such as the prime rate and LIBOR. This exposure is directly related to our normal operating and funding activities.

The interest rate on our $100.0 million revolving credit facility and $150.0 million term loan is a per annum rate equal to either (i) the LIBOR rate plus an adjustable applicable margin of between 1.75% and 3.50% or (ii) the lending institution’s prime rate plus an adjustable applicable margin of between 0.0% and 2.0%, at our election, subject to specified restrictions, and is payable monthly in arrears or upon maturity date. The revolving credit facility and term loan expire in January 2011. As of June 30, 2008, we had outstanding no borrowings on the revolving line of credit and $64.3 million outstanding borrowings on the term loan.

In October 2005, we issued $100.0 million aggregate principal amount of 2.75% Convertible Senior Notes due 2025 (the “2025 Notes”). The 2025 Notes are convertible into shares of our common stock at an initial conversion price of $18.85 per share, or 53.0504 shares for each $1,000 principal amount of 2025 Notes, subject to certain adjustments. The maximum conversion rate is 68.9655 shares for each $1,000 principal amount of 2025 Notes. The 2025 Notes were issued pursuant to an Indenture, dated October 5, 2005, by and between us and Wells Fargo Bank, National Association, as trustee. The 2025 Notes bear interest at a rate of 2.75%, which is payable in cash semi-annually in arrears on April 1 and October 1 of each year, and commenced on April 1, 2006, to the holders of record on the preceding March 15 and September 15, respectively.

In April 2007, we issued $230.0 million aggregate principal amount of 1.125% Convertible Senior Notes due 2012 (the “2012 Notes”). The 2012 Notes are convertible into shares of our common stock at an initial conversion price of $21.97 per share, or 45.5114 shares for each $1,000 principal amount of 2012 Notes, subject to certain adjustments. The maximum conversion rate is 53.4759 shares for each $1,000 principal amount of 2012 Notes. The 2012 Notes were issued pursuant to an Indenture, dated April 17, 2007, by and between us and Wells Fargo Bank, National Association, as trustee. The 2012 Notes bear interest at a rate of 1.125%, which is payable in cash semi-annually in arrears on April 15 and October 15 of each year, and commenced on October 15, 2007, to the holders of record on the preceding April 1 and October 1, respectively.

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We manage interest rate risk by investing excess funds in cash equivalents and short-term investments bearing variable interest rates, which are tied to various market indices. We also manage interest rate risk by closely managing our borrowings on our credit facility based on our operating needs in order to minimize the interest expense incurred. As a result, we do not believe that near-term changes in interest rates will result in a material effect on our future earnings, fair values or cash flows.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal accounting officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal accounting officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Additionally, there were no changes in our internal controls over financial reporting during the quarter ended June 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

On April 15, 2008, Plaintiff David P. Simonetti Rollover IRA filed a Verified Class Action Complaint in the Delaware Court of Chancery, entitledDavid P. Simonetti Rollover IRA, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. Jeffrey H. Margolis, Donald J. Lothrop, Thomas B. Johnson, Paul F. Lefort, Jerry P. Widman, Nancy H. Handel, L. William Krause, Apax Partners, L.P., TZ Holdings, L.P., TZ Merger Sub, Inc., and The TriZetto Group Inc., Defendants, C.A. No. 3694-VCN (the “Simonetti Litigation”). The complaint sought, among other relief, certification of a class of all common stockholders of TriZetto who allegedly were harmed by the defendants’ actions challenged in the complaint, a declaration that the defendants had breached their fiduciary and other duties, entry of an order requiring defendants to take certain steps in connection with the proposed transaction, compensatory damages, costs and disbursements, including plaintiff’s counsel’s fees and experts’ fees. On May 20, 2008, the plaintiff in the Simonetti Litigation filed a First Amended Complaint, which added allegations that the defendants allegedly failed to disclose material facts regarding the Merger.

In addition to the Simonetti Litigation, two putative class action complaints were filed in the Superior Court of the State of California, County of Orange, alleging substantially similar claims as those alleged in the Simonetti Litigation. On May 28, 2008, the two California putative class actions were consolidated (the “Consolidated California Action”), and on June 5, 2008, the Consolidated California Action was stayed in favor of the Simonetti Litigation. On June 10, 2008, the plaintiffs in the Consolidated California Action filed a putative class action complaint in the Delaware Court of Chancery entitledCity Of Fort Lauderdale Police And Firefighters’ Retirement System And Police And Fire Retirement System Of The City Of Detroit, Individually and On Behalf of All Others Similarly Situated, v. Jeffrey H. Margolis, et al., C.A. No. 3817-VCN (together with the Simonetti Litigation, the “Delaware Litigation” and collectively with the Consolidated California Action, the “Merger Litigation”). In addition, counsel for plaintiffs’ in the Consolidated California Action appeared as counsel in the Simonetti Litigation and joined in the discovery and briefing in the Simonetti Litigation in connection with the motion to preliminarily enjoin the Merger.

On June 27, 2008, the Delaware Court of Chancery issued a memorandum opinion and order (the “Order”) in the Simonetti Litigation, granting in part and denying in part the plaintiff’s motion for a preliminary injunction enjoining the proposed Merger. The Court preliminarily enjoined TriZetto from conducting or allowing any vote by its stockholders to approve the proposed Merger until TriZetto made curative supplemental disclosures relating to certain potential financial benefits of the Merger to TriZetto’s financial advisor, UBS Securities LLC (“UBS”), and its affiliates, upon consummation of the transactions contemplated by the Merger Agreement, based on its interest in certain convertible notes issued by TriZetto and related bond hedge and warrant transactions entered into with TriZetto in 2007 (the “Financial Advisor Disclosure”). The Court’s Order provided that, upon application, the Order could be vacated upon demonstration that TriZetto had provided appropriate curative disclosure.

Following the Court’s Order, counsel for the parties negotiated the contents of the Financial Advisor Disclosure. The parties thereafter entered into a stipulation agreeing upon the substance of the Financial Advisor Disclosure and submitted the Financial Advisor Disclosure to the Court for its approval. The Parties jointly requested that the Court vacate its Order preliminarily enjoining the Merger.

On July 2, 2008, the Court issued an order approving the parties’ stipulation and vacating the preliminary injunction Order dependent on TriZetto providing the Financial Advisor Disclosure forthwith. TriZetto provided the Financial Advisor Disclosure in the Definitive Additional Material, which was filed with the SEC on July 2, 2008 and mailed to TriZetto’s stockholders on or about July 3, 2008.

On July 8, 2008, the parties entered into a memorandum of understanding (“MOU”) to settle the Merger Litigation. Under the terms of the MOU, the parties agreed in good faith to attempt to agree upon and execute an appropriate Stipulation of Settlement and such other documentation as may be required to secure certification of the Settlement Class (as defined to include all record holders and beneficial owners of TriZetto common stock (excluding defendants, their immediate families, and affiliates) on any day during the period from April 11, 2008 (the date that the proposed Merger was publicly announced) to and including the effective date of consummation of the Merger, including the legal representatives, heirs, successors and successors in interest, transferees and assigns of all such foregoing holders and/or owners, immediate and remote, and any person or entity acting for or on behalf of, or claiming under, any of them and each of them) and obtain pursuant to Delaware Court of Chancery Rules 23(b)(1) and 23(b)(2) final Court approval of the settlement, and the dismissal of the Delaware Litigation and the Consolidated California Action. In addition to other customary provisions, the settlement will provide releases to all defendants of any claims arising from the process leading to the proposed Merger, any of the transactions contemplated by the Merger Agreement, and any disclosures made in connection with the Proxy Disclosure. In return, TriZetto agreed to provide additional explanation to TriZetto’s stockholders regarding certain matters

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disclosed in the Proxy Disclosure. This additional explanation was made in a Form 8-K filed on July 9, 2008. In accordance with the agreement to settle the Merger Litigation, the shares of common stock of TriZetto held by TriZetto’s executive officers were voted in the aggregate in the same proportion as the vote cast by the other stockholders voting on the Merger at the Special Meeting. The parties to the litigation are in the process of finalizing the Stipulation of Settlement to be submitted to the Court.

In addition to the matters described above, the Company is involved in litigation from time to time relating to claims arising out of its operations in the normal course of business. Except as discussed above, as of the filing date of this quarterly report on Form 10-Q, the Company was not a party to any other legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on its results of operations, financial position and/or cash flows.

Item 1A. Risk Factors

Cautionary Statement

This report, and other documents and statements provided or made by us, contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These statements may include statements about our future revenues, profits, results, the market for our products and services, future service offerings, industry trends, client and partner relationships, our operational capabilities, future financial structure and uses of cash or proposed transactions. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “forecasts,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of such terms and other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the following risks:

We cannot predict if we will be able to sustain our positive net income.

We may not be able to sustain or increase our current level of revenue or positive net income. We currently derive our revenue primarily from providing hosted solutions, software licensing and maintenance, and other services such as consulting. We depend on the continued demand for healthcare information technology and related services. We plan to continue investing in administrative infrastructure, research and development, sales and marketing, and acquisitions. If we are not able to sustain our current levels of revenue or maintain our profitability, our operations may be adversely affected.

Revenue from a limited number of customers comprises a significant portion of our total revenue, and if these customers terminate or modify existing contracts or experience business difficulties, it could adversely affect our earnings.

As of June 30, 2008, we were providing services to 354 unique customers. One of our customers, the Regence Group, represented approximately 10.1% of our consolidated revenue in the first six months of 2008. Although we typically enter into multi-year customer agreements, a majority of our customers are able to reduce or cancel their use of our services before the end of the contract term, subject to monetary penalties. We also provide services to some hosted customers without long-term contracts. In addition, many of our contracts are structured so that we generate revenue based on units of volume, which include the number of members, number of workstations or number of users. If our customers experience business difficulties and the units of volume decline or if a customer ceases operations for any reason, we will generate less revenue under these contracts and our operating results may be materially and adversely impacted.

Our operating expenses are relatively fixed and cannot be reduced on short notice to compensate for unanticipated contract cancellations or reductions. As a result, any termination, significant reduction or modification of our business relationships with any of our significant customers could have a material adverse effect on our business, financial condition, operating results and cash flows.

Our business is changing rapidly, which could cause our quarterly operating results to vary and our stock price to fluctuate.

Our quarterly operating results have varied in the past, and we expect that they will continue to vary in future periods. Our quarterly operating results can vary significantly based on a number of factors, such as:

• our mix of products and services revenue;

• whether our customers choose to license our software under terms and conditions that require revenues to be deferred or recognized ratably over time rather than upfront;

• our ability to add new customers and renew existing accounts;

• selling additional products and services to existing customers;

• long and unpredictable sales cycles;

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• meeting project milestones and customer expectations;

• seasonality in information technology purchases;

• the timing of new customer sales; and

• general economic conditions.

Variations in our quarterly operating results could cause us to not meet the earnings estimates of securities analysts or the expectations of our investors, which could affect the market price of our common stock in a manner that may be unrelated to our long-term operating performance.

We base our expense levels in part upon our expectations concerning future revenue, and these expense levels are relatively fixed in the short-term. If we do not achieve our expected revenue targets, we may not be able to reduce our short-term spending in response. Any shortfall in revenue would have a direct impact on our results of operations.

The intensifying competition we face from both established entities and new entries in the market may adversely affect our revenue and profitability.

The market for our technology and services is highly competitive and rapidly changing and requires potentially expensive technological advances. Many of our competitors and potential competitors have significantly greater financial, technical, product development, marketing and other resources, and greater market recognition than we have. Many of our competitors also have, or may develop or acquire, substantial installed customer bases in the healthcare industry. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion, and sale of their applications or services than we can devote.

Our competitors can be categorized as follows:

• information technology and outsourcing companies, such as Perot Systems Corporation, IBM, Affiliated Computer Services, DST Systems Inc., Electronic Data Systems Corporation and Infocrossing (Wipro);

• healthcare information software vendors, including DST Systems Inc., Perot Systems Corporation, Electronic Data Systems Corporation, and Plexis Healthcare Systems in the health plan market, as well as Mphasis Healthcare Solutions (formerly Eldorado Computing) and SBPA in the benefits administration market, and MMC 2020, Gorman and Dynamics in the Medicare Advantage market;

• healthcare information technology consulting firms, such as First Consulting Group Inc. (being acquired by CSC), Proxicom (acquired by iCrossing) and the consulting divisions or former affiliates of the major accounting firms, such as Deloitte Consulting and Accenture;

• healthcaree-commerce and portal companies, such as BenefitFocus, HLTH Corporation (formerly Emdeon/WebMD), Healthation, HealthTrio, AVOLENT, and edocs;

• enterprise application integration vendors such as Vitria, SeeBeyond, TIBCO, Fuego (acquired by BEA) and M2;

• care management software and service companies such as McKesson, MEDecision, HealthTrio, Landacrop, HLTH Corporation (WebMD), and Click4Care;

• network management vendors such as Portico and McKesson;

• consumer retail software and services companies such as CareGain and FiServ; and

• health plans, themselves, some of whom are providing hosting and BPO services to the marketplace and leveraging capabilities across the aggregated membership of multiple organizations.

Further, other entities that do not presently compete with us may do so in the future, including major software information systems companies and financial services entities.

We believe our ability to compete will depend in part upon our ability to:

• enhance our current technology and services;

• respond effectively to technological changes;

• introduce new capabilities for current and new market segments;

• meet the increasingly sophisticated needs of our customers; and

• maintain and continue to develop partnerships with vendors.

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Increased competition may result in price reductions, reduced margins, and loss of market share, any of which could have a material adverse effect on our results of operations. In addition, pricing, margins, and market share could be negatively impacted further as a greater number of available products in the marketplace increases the likelihood that product and service offerings in our markets become more fungible and price sensitive.

Our sales and implementation cycles are long and unpredictable.

We have experienced and continue to experience long and unpredictable sales cycles, particularly for contracts with large customers, or customers purchasing multiple products and services. Enterprise software typically requires significant capital expenditures by customers, and the decision to outsource IT-related services is complicated and time-consuming. Major purchases by large payer organizations typically range from nine to 12 months or more from initial contact to contract execution. The prospects currently in our pipeline may not sign contracts within a reasonable period of time or at all.

In addition, our implementation cycle has ranged from 12 to 24 months or longer from contract execution to completion of implementation. During the sales cycle and the implementation cycle, we will expend substantial time, effort, and financial resources preparing contract proposals, negotiating the contract, and implementing the solution. We may not realize any revenue to offset these expenditures, and, if we do, accounting principles may not allow us to recognize the revenue during corresponding periods, which could harm our future operating results. Additionally, any decision by our customers to delay implementation may adversely affect our revenues.

Consolidation of healthcare payer organizations and benefits administrators could decrease the number of our existing and potential customers.

There has been and continues to be acquisition and consolidation activity among healthcare payers and benefits administrators. Mergers or consolidations of payer organizations in the future could decrease the number of our existing and potential customers. The acquisition of a customer could reduce our revenue and have a negative impact on our results of operations and financial condition. A smaller overall market for our products and services could also result in lower revenue and margins. In addition, healthcare payer organizations are increasing their focus on consumer directed healthcare, in which consumers interact directly with health plans through administrative services provided by health plans to employer groups. These services compete with the services provided by benefits administrators and could result in additional consolidation in the benefits administration market.

Some of our significant customers may develop their own software solutions, which could decrease the demand for our products.

Some of our customers in the healthcare payer industry have, or may seek to acquire, the financial and technological resources necessary to develop software solutions to perform the functions currently serviced by our products and services. Additionally, consolidation in the healthcare payer industry could result in additional organizations having the resources necessary to develop similar software solutions. If these organizations successfully develop and utilize their own software solutions, they may discontinue their use of our products or services, which could materially and adversely affect our results of operations.

We depend on our software application vendor relationships, and if our software application vendors terminate or modify existing contracts or experience business difficulties, or if we are unable to establish new relationships with additional software application vendors, it could harm our business.

We depend, and will continue to depend, on our licensing and business relationships with third-party software application vendors. Our success depends significantly on our ability to maintain our existing relationships with our vendors and to build new relationships with other vendors in order to enhance our services and application offerings and remain competitive. Although most of our licensing agreements are perpetual or automatically renewable, they are subject to termination in the event that we materially breach such agreements. We may not be able to maintain relationships with our vendors or establish relationships with new vendors. The software, products or services of our third-party vendors may not achieve or maintain market acceptance or commercial success. Accordingly, our existing relationships may not result in sustained business partnerships, successful product or service offerings or the generation of significant revenue for us.

Our arrangements with third-party software application vendors are not exclusive. These third-party vendors may not regard our relationships with them as important to their own respective businesses and operations. They may reassess their commitment to us at any time and may choose to develop or enhance their own competing distribution channels and product support services. If we do not maintain our existing relationships or if the economic terms of our business relationships change, we may not be able to license and offer these services and products on commercially reasonable terms or at all. Our inability to obtain any of these licenses could delay service development or timely introduction of new services and divert our resources. Any such delays could materially adversely affect our business, financial condition, operating results and cash flows.

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Our licenses for the use of third-party software applications are essential to the technology solutions we provide for our customers. Loss of any one of our major vendor agreements may have a material adverse effect on our business, financial condition, operating results and cash flows.

We rely on third-party software vendors for components of our software products.

Our software products contain components developed and maintained by third-party software vendors, and we expect that we may have to incorporate software from third-party vendors in our future products. We may not be able to replace the functions provided by the third-party software currently offered with our products if that software becomes obsolete, defective, or incompatible with future versions of our products or is not adequately maintained or updated. Any significant interruption in the availability of these third-party software products or defects in these products could harm the sale of our products unless and until we can secure or develop an alternative source. Although we believe there are adequate alternate sources for the technology currently licensed to us, such alternate sources may not be available to us in a timely manner, may not provide us with the same functions as currently provided to us or may be more expensive than products we currently use.

We have sustained rapid growth, and our inability to manage this growth could harm our business.

We have rapidly and significantly expanded our operations since inception and may continue to do so in the future. This growth has placed, and may continue to place, a significant strain on our managerial, operational, and financial resources, and information systems. If we are unable to manage our growth effectively, it could have a material adverse effect on our business, financial condition, operating results, and cash flows.

Our acquisition strategy may disrupt our business and require additional financing.

Since our initial public offering in October 1999, we have made ten acquisitions. A significant portion of our historical growth has occurred through acquisitions and we may continue to seek strategic acquisitions as part of our growth strategy. We compete with other companies to acquire businesses, making it difficult to acquire suitable companies on favorable terms or at all. Acquisitions may require significant capital, typically entail many risks, and can result in difficulties integrating operations, personnel, technologies, products and information systems of acquired businesses.

We may be unable to successfully integrate companies that we have acquired or may acquire in the future in a timely manner. If we are unable to successfully integrate acquired businesses, we may incur substantial costs and delays or other operational, technical or financial problems. In addition, the integration of our acquisitions may divert our management’s attention from our existing business, which could damage our relationships with our key customers and employees.

To finance future acquisitions, we may issue equity securities that could be dilutive to our stockholders. We may also incur debt and additional amortization expenses related to goodwill and other intangible assets as a result of acquisitions. The interest expense related to this debt and additional amortization expense may significantly reduce our profitability and have a material adverse effect on our business, financial condition, operating results and cash flows. Acquisitions may also result in large one-time charges as well as goodwill and intangible assets and impairment charges in the future that could negatively impact our operating results.

Our need for additional financing is uncertain as is our ability to raise capital if required.

If we are not able to sustain our positive net income, we may need additional financing to fund operations or growth. We may not be able to raise additional funds through public or private financings at any particular point in the future or on favorable terms. Future financings could adversely affect our common stock and debt securities.

Our business will suffer if our software products contain errors.

The proprietary and third party software products we offer are inherently complex. Despite our testing and quality control procedures, errors may be found in current versions, new versions or enhancements of our products. Significant technical challenges may also arise with our products because our customers purchase and deploy those products across a variety of computer platforms and integrate them with a number of third-party software applications and databases. If new or existing customers have difficulty deploying our products or require significant amounts of customer support, our costs would increase. Moreover, we could face possible claims and higher development costs if our software contains undetected errors or if we fail to meet our customers’ expectations. As a result of the foregoing, we could experience:

• loss of or delay in revenue and loss of market share;

• loss of customers;

• damage to our reputation;

• failure to achieve market acceptance;

• diversion of development resources;

• increased service and warranty costs;

• legal actions by customers against us which could, whether or not successful, increase costs and distract our management; and

• increased insurance costs.

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We could lose customers and revenue if we fail to meet contractual obligations including performance standards and other material obligations.

Many of our service agreements contain performance standards and other post contract obligations. Our failure to meet these standards or breach other material obligations under our agreements could trigger remedies for our customers including termination, financial penalties and refunds that could have a material adverse effect on our business, financial condition, operating results and cash flows.

If our ability to expand our network and computing infrastructure is constrained in any way, we could lose customers and damage our operating results.

We must continue to expand and adapt our network and technology infrastructure to accommodate additional users, increased transaction volumes, changing customer requirements and technological obsolescence. We may not be able to accurately project the rate or timing of increases, if any, in the use of our hosted solutions or be able to expand and upgrade our systems and infrastructure to accommodate such increases. We may be unable to expand or adapt our network infrastructure to meet additional demand or our customers’ changing needs on a timely basis, at a commercially reasonable cost or at all. Our current information systems, procedures and controls may not continue to support our operations while maintaining acceptable overall performance and may hinder our ability to exploit the market for healthcare applications and services. Service lapses could cause our users to switch to the services of our competitors, which could have a material adverse effect on our business, financial condition, operating results and cash flows.

Performance or security problems with our systems could damage our business.

Our customers’ satisfaction and our business could be harmed if we, or our customers, experience any system delays, failures, or loss of data.

Although we devote substantial resources to avoid performance problems, errors may occur. Errors in the processing of customer data may result in loss of data, inaccurate information, and delays. Such errors could cause us to lose customers and be liable for damages. We currently process a substantial number of our customers’ transactions and data at our data centers in Colorado. Although we have safeguards for emergencies and we have contracted backup processing for our customers’ critical functions, the occurrence of a major catastrophic event or other system failure at any of our facilities could interrupt data processing or result in the loss of stored data. In addition, we depend on the efficient operation of telecommunication providers that have had periodic operational problems or experienced outages.

A material security breach could damage our reputation or result in liability to us. We retain confidential customer and federally protected patient information in our data centers. Therefore, it is critical that our facilities and infrastructure remain secure and that our facilities and infrastructure are perceived by the marketplace to be secure. Despite the implementation of security measures, our infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties, or similar disruptive problems.

Our services agreements generally contain limitations on liability, and we maintain insurance with appropriate coverage limits for general liability and professional liability to protect against claims associated with the use of our products and services. However, the contractual provisions and insurance coverage may not provide adequate coverage against all possible claims that may be asserted. In addition, appropriate insurance may be unavailable in the future at commercially reasonable rates. A successful claim in excess of our insurance coverage could have a material adverse effect on our business, financial condition, operating results, and cash flows. Even unsuccessful claims could result in litigation or arbitration costs and may divert management’s attention from our existing business.

Our success depends on our ability to attract, retain and motivate management and other key personnel.

Our success depends in large part on the continued services of management and key personnel. Competition for personnel in the healthcare information technology market is intense, and there are a limited number of persons with knowledge of, and experience in, this industry. We do not have employment agreements with most of our executive officers, so any of these individuals may terminate his or her employment with us at any time. The loss of services from one or more of our management or key personnel, or the inability to hire additional management or key personnel as needed, could have a material adverse effect on our business, financial condition, operating results, and cash flows. Although we currently experience relatively low rates of turnover for our management and key personnel, the rate of turnover may increase in the future. In addition, we expect to further grow our operations and our needs for additional management and key personnel will increase. Our continued ability to compete effectively in our business depends on our ability to attract, retain, and motivate these individuals.

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We rely on an adequate supply and performance of computer hardware and related equipment from third parties to provide services to larger customers and any significant interruption in the availability or performance of third-party hardware and related equipment could adversely affect our ability to deliver our products to certain customers on a timely basis.

As we offer our hosted solution services and software to a greater number of customers and particularly to larger customers, we may be required to obtain specialized computer equipment from third parties that can be difficult to obtain on short notice. Any delay in obtaining such equipment may prevent us from delivering large systems to our customers on a timely basis. We also may rely on such equipment to meet required performance standards. We may have no control over the resources that third parties may devote to service our customers or satisfy performance standards. If such performance standards are not met, we may be adversely impacted under our service agreements with our customers.

Any failure or inability to protect our technology and confidential information could adversely affect our business.

Our success depends in part upon proprietary software and other confidential information. The software and information technology industries have experienced widespread unauthorized reproduction of software products and other proprietary technology. We rely on a combination of copyright, patent, trademark and trade secret laws, confidentiality procedures, and contractual provisions to protect our intellectual property. However, these protections may not be sufficient, and they do not prevent independent third-party development of competitive products or services.

We execute confidentiality and non-disclosure agreements with certain employees and our suppliers, as well as limit access to and distribution of our proprietary information. The departure of any of our management and technical personnel, the breach of their confidentiality and non-disclosure obligations to us, or the failure to achieve our intellectual property objectives could have a material adverse effect on our business, results of operations and financial condition. We have had, and may continue to have, employees leave us and go to work for competitors. If we are not successful in prohibiting the unauthorized use of our proprietary technology or the use of our processes by a competitor, our competitive advantage may be significantly reduced which would result in reduced revenues.

Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.

We cannot be certain that our products do not infringe issued patents or other intellectual property rights of others. In addition, because patent applications in the United States and many other countries are not publicly disclosed until a patent is issued, applications covering technology used in our software products may have been filed without our knowledge. We may be subject to legal proceedings and claims from time to time, including claims of alleged infringement of the patents, trademarks and other intellectual property rights of third parties by us or our licensees in connection with their use of our products. Intellectual property litigation is expensive and time-consuming and could divert our management’s attention away from running our business and seriously harm our business. If we were to discover that our products violated the intellectual property rights of others, we would have to obtain licenses from these parties in order to continue marketing our products without substantial reengineering. We might not be able to obtain the necessary licenses on acceptable terms or at all, and if we could not obtain such licenses, we might not be able to reengineer our products successfully or in a timely fashion. If we fail to address any infringement issues successfully, we would be forced to incur significant costs, including damages and potentially satisfying indemnification obligations that we have with our customers, and we could be prevented from selling certain of our products.

If our consulting services revenue does not grow substantially, our revenue growth could be adversely impacted.

Our consulting services revenue represents a significant component of our total revenue and we anticipate that it will continue to represent a significant percentage of total revenue in the future. The level of consulting services revenue depends upon the healthcare industry’s demand for outsourced information technology services and our ability to deliver products that generate implementation and follow-on consulting services revenue. Our ability to increase services revenue will depend in part on our ability to increase the capacity of our consulting group, including our ability to recruit, train and retain a sufficient number of qualified personnel.

The insolvency of our customers or the inability of our customers to pay for our services could negatively affect our financial condition.

Healthcare payers are often required to maintain restricted cash reserves and satisfy strict balance sheet ratios promulgated by state regulatory agencies. In addition, healthcare payers are subject to risks that physician groups or associations within their organizations become subject to costly litigation or become insolvent, which may adversely affect the financial stability of the payer. If healthcare payers are unable to pay for our services because of their need to maintain cash reserves or failure to maintain balance sheet ratios or solvency, our ability to collect fees for services rendered would be impaired and our financial condition could be adversely affected.

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Changes in government regulation of the healthcare industry could adversely affect our business.

During the past several years, the healthcare industry has been subject to increasing levels of government regulation of, among other things, reimbursement rates and certain capital expenditures. In addition, proposals to substantially reform Medicare, Medicaid, and the healthcare system in general have been or are being considered by Congress. These proposals, if enacted, may further increase government involvement in healthcare, lower reimbursement rates, and otherwise adversely affect the healthcare industry which could adversely impact our business. The impact of regulatory developments in the healthcare industry is complex and difficult to predict, and our business could be adversely affected by existing or new healthcare regulatory requirements or interpretations.

Participants in the healthcare industry, such as our payer customers, are subject to extensive and frequently changing laws and regulations, including laws and regulations relating to the confidential treatment and secure transmission of patient medical records, and other healthcare information. Legislators at both the state and federal levels have proposed and enacted additional legislation relating to the use and disclosure of medical information, and the federal government may enact new federal laws or regulations in the near future. Pursuant to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the Department of Health and Human Services has issued a series of regulations setting forth security, privacy and transactions standards for all health plans, clearinghouses, and healthcare providers to follow with respect to individually identifiable health information. Many of our customers are also subject to state laws implementing the federal Gramm-Leach-Bliley Act, relating to certain disclosures of nonpublic personal health information and nonpublic personal financial information by insurers and health plans.

Our payer customers must comply with HIPAA, its regulations, and other applicable healthcare laws and regulations. In addition, we may be deemed to be a covered entity subject to HIPAA because we offer our customers products that convert data to a HIPAA compliant format. Accordingly, we must comply with certain provisions of HIPAA and in order for our products and services to be marketable, they must contain features and functions that allow our customers to comply with HIPAA and other healthcare laws and regulations. We believe our products currently allow our customers to comply with existing laws and regulations. However, our products may require modification in the future. If we fail to offer solutions that permit our customers to comply with applicable laws and regulations, our business will suffer.

We perform billing and claims services that are governed by numerous federal and state civil and criminal laws. The federal government in recent years has imposed heightened scrutiny on billing and collection practices of healthcare providers and related entities, particularly with respect to potentially fraudulent billing practices, such as submissions of inflated claims for payment and upcoding. Violations of the laws regarding billing and coding may lead to civil monetary penalties, criminal fines, imprisonment, or exclusion from participation in Medicare, Medicaid and other federally funded healthcare programs for our customers and for us. Any of these results could have a material adverse effect on our business, financial condition, operating results, and cash flows.

In addition, laws governing healthcare payers are often not uniform among states. This could require us to undertake the expense and difficulty of tailoring our products in order for our customers to be in compliance with applicable state and local laws and regulations.

Part of our business is subject to government regulation relating to the Internet that could impair our operations.

The Internet and its associated technologies are subject to increasing government regulation. A number of legislative and regulatory proposals are under consideration by federal, state, local, and foreign governments, and agencies. Laws or regulations may be adopted with respect to the Internet relating to liability for information retrieved from or transmitted over the Internet, on-line content regulation, user privacy, taxation and quality of products and services. Many existing laws and regulations, when enacted, did not anticipate the methods of the Internet-based hosted, software and information technology solutions we offer. We believe, however, that these laws may be applied to us. We expect our products and services to be in substantial compliance with all material federal, state and local laws and regulations governing our operations. However, new legal requirements or interpretations applicable to the Internet could decrease the growth in the use of the Internet, limit the use of the Internet for our products and services or prohibit the sale of a particular product or service, increase our cost of doing business, or otherwise have a material adverse effect on our business, results of operations and financial conditions. To the extent that we market our products and services outside the United States, the international regulatory environment relating to the Internet and healthcare services could also have an adverse effect on our business.

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Increased leverage as a result of our convertible note offerings may harm our financial condition and results of operations.

On October 5, 2005, we completed a private placement of $100.0 million aggregate principal amount of our 2.75% Convertible Senior Notes due 2025 (the “2025 Notes”). On April 17, 2007, we completed a private placement of $230.0 million aggregate principal amount of our 1.125% Convertible Senior Notes due 2012 (the “2012 Notes,” and together with the 2025 Notes, defined as the “Notes”). The indebtedness under the Notes constitutes senior unsecured obligations and will rank equal in right of payment with all of the Company’s existing and future senior unsecured debt and senior to all of the Company’s future subordinated debt. The Notes were issued pursuant to indentures with Wells Fargo Bank, National Association, as trustee (the “Indentures”).

As of June 30, 2008, our total consolidated long-term debt was $384.5 million. In addition, the Indentures do not restrict our ability to incur additional indebtedness, and we may choose to incur additional debt in the future. Our level of indebtedness could have important consequences to you, because:

• it could affect our ability to satisfy our debt obligations under the Notes or our credit facility;

• a substantial portion of our cash flows from operations will have to be dedicated to interest and principal payments of our debt obligations and may not be available for operations, expansion, acquisitions or other purposes;

• it may impair our ability to obtain additional financing in the future;

• it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and

• it may make us more vulnerable to downturns in our business, our industry or the economy in general.

Our ability to make payments of principal and interest on our indebtedness depends upon our future performance, which will be subject to our success in marketing our products and services, general economic conditions and financial, business and other factors affecting our operations, many of which are beyond our control. If we are not able to generate sufficient cash flow from operations in the future to service our indebtedness, we may be required, among other things:

• to seek additional financing in the debt or equity markets;

• to refinance or restructure all or a portion of our indebtedness;

• to sell assets; and/or

• to reduce or delay planned expenditures on research and development and/or commercialization activities.

Such measures might not be sufficient to enable us to service our debt. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms or at all.

We have certain repurchase and payment obligations under the Notes and we may not be able to repurchase such Notes or pay the amounts due upon conversion of the Notes when necessary.

On various dates, holders of certain of the Notes may require us to purchase, for cash, all or a portion of their Notes at 100% of their principal amount, plus any accrued and unpaid interest. If a fundamental change occurs, as defined in the Indentures, including a change in control transaction, holders of such Notes may also require us to repurchase, for cash, all or a portion of their Notes. In addition, upon conversion of such Notes if we have made an irrevocable election to settle conversion in cash, we would be required to satisfy our conversion obligation up to the principal amount of the Notes in cash. Our ability to repurchase the Notes and settle the conversion of the Notes in cash is effectively subordinated to our senior credit facility and may be limited by law, by the Indentures, by the terms of other agreements relating to our senior debt and by indebtedness and agreements that we may enter into in the future which may replace, supplement or amend our existing or future debt. Our failure to repurchase the Notes or make the required payments upon conversion would constitute an event of default under the Indentures, which would in turn constitute a default under the terms of our senior credit facility and other indebtedness at that time.

Our common stock price has been, and may continue to be, volatile and our shareholders may not be able to resell shares of our stock at or above the price paid for such shares.

The price for shares of our common stock has exhibited high levels of volatility with significant volume and price fluctuations, which makes our common stock unsuitable for many investors. For example, for the six months ended June 30, 2008, the closing price of our common stock ranged from a high of $21.71 to a low of $15.81. The fluctuations in price of our common stock have occasionally been related to our operating performance. These broad fluctuations may negatively impact the market price of shares of our common stock. The price of our common stock has also been influenced by:

• fluctuations in our results of operations or the operations of our competitors or customers;

• failure of our results of operations to meet the expectations of stock market analysts and investors;

• changes in stock market analyst recommendations regarding us, our competitors or our customers; and

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• the timing and announcements of new products or financial results by us or our competitors.

Future issuances of common stock may depress the trading price of our common stock.

Any future issuance of equity securities, including the issuance of shares upon conversion of the Notes, could dilute the interests of our existing stockholders and could substantially decrease the trading price of our common stock. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy, to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of outstanding warrants or options or for other reasons.

Our stockholder rights plan and charter documents could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders.

Our stockholder rights plan and certain provisions of our certificate of incorporation and Delaware law are intended to encourage potential acquirers to negotiate with us and allow our Board of Directors the opportunity to consider alternative proposals in the interest of maximizing shareholder value. However, such provisions may also discourage acquisition proposals or delay or prevent a change in control, which in turn, could harm our stock price.

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

The following table sets forth all purchases made by us of our common stock during each month within the second quarter of 2008.

Month	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
April 1, 2008 – April 30, 2008(1)	107	$	20.99	—	—
May 1, 2008 – May 31, 2008(2)	1,817	$	21.05	—	—
June 1, 2008 – June 30, 2008	—			—	—
Total	1,924	$	21.05	—	—

(1) All 107 shares repurchased in April were in connection with the satisfaction of employee tax obligations upon the vesting of restricted stock awards.

(2) All 1,817 shares repurchased in May were in connection with the satisfaction of employee tax obligations upon the vesting of restricted stock awards.

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

Proposal 1	Votes For	Votes Against	Votes Abstained
To adopt the Agreement and Plan of Merger, dated as of April 11, 2007, by and among TZ Holdings, L.P., TZ Merger Sub, Inc. and TriZetto.	34,152,269	48,018	8,297

Item 6. Exhibits

The following exhibits are filed as part of this report:

EXHIBIT NUMBER	DESCRIPTION
31.1	Certification of CEO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Accounting Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of CEO and Principal Accounting Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Previously filed.

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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.

	THE TRIZETTO GROUP, INC.
Date: August 8, 2008	By:	/s/ Carl Long
		Carl Long (Principal Accounting Officer and Duly Authorized Officer)

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EXHIBIT INDEX

EXHIBIT NUMBER	DESCRIPTION
31.1	Certification of CEO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Accounting Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of CEO and Principal Accounting Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Previously filed.

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