PFWD Phase Forward (MM)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2009

OR

For the transition period from                                 to                                 

Commission File Number: 000-50839

Phase Forward Incorporated

(Exact name of registrant as specified in its charter)

(888) 703-1122

(Registrant’s telephone number, including area code)

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

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

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

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

As of July 31, 2009, the registrant had 43,218,073 shares of common stock outstanding.

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PHASE FORWARD INCORPORATED

QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended June 30, 2009

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Part I—Financial Information

Item 1. Condensed Consolidated Financial Statements

Phase Forward Incorporated

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except per share amounts)

See accompanying notes.

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Phase Forward Incorporated

Condensed Consolidated Statements of Income

(unaudited)

(in thousands, except per share amounts)

See accompanying notes.

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Phase Forward Incorporated

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

See accompanying notes.

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Phase Forward Incorporated

Notes to Condensed Consolidated Financial Statements

(unaudited)

(in thousands, except share and per share amounts)

1.               Basis of Presentation

The accompanying unaudited condensed consolidated financial statements included herein have been prepared by Phase Forward Incorporated (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such SEC rules and regulations. Management of the Company believes that the disclosures herein are adequate to make the information presented not misleading. In the opinion of management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and reflect all material adjustments (consisting only of those of a normal and recurring nature) which are necessary to present fairly the consolidated financial position of the Company as of June 30, 2009, the results of its operations for the three and six months ended June 30, 2008 and 2009 and its cash flows for the six months ended June 30, 2008 and 2009. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2009.

As of June 30, 2009, the Company’s significant accounting policies and estimates, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, have not changed except for the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 141 (R), Business Combinations , SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51, SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133, SFAS 162, The Hierarchy of Generally Accepted Accounting Principles, and SFAS 165. Subsequent Events .  The Company evaluates subsequent events through the date of filing its Quarterly Report on Form 10-Q.  See Note 19 for additional information regarding the Company’s adoption of these pronouncements.

On April 22, 2009, the Company acquired all of the outstanding common stock of Waban Software, Inc. (“Waban”), a provider of platform solutions for the automation and compliance of clinical data analysis and reporting.  Waban’s Statistical Computing Environment and Clinical Data Repository (SCE/CDR) solutions provide automation, traceability and control of the key activities involved in the integration, analysis and reporting on clinical trial data.  The results of Waban have been included in the Company’s condensed consolidated financial statements since the date of acquisition (see Note 5).

2.                  Revenue Recognition and Deferred Set Up Costs

The Company derives revenues from software licenses and services. License revenues are derived principally from the sale of term licenses for the following software products offered by the Company: InForm™, Clintrial™, Empirica Study ™, Empirica ™ Trace , Empirica™ Signal, CTSD™, Waban CDR ™ and Waban SCE ™ . Service revenues are derived principally from the Company’s delivery of the hosted solutions of its InForm™, Clarix™, Empirica Signal, CTSD and Empirica Study software products, and consulting services and customer support, including training, for all of the Company’s products.

The components of revenue are as follows:

The Company recognizes software license revenues in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition, as amended, while revenues resulting from application hosting services are recognized in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-3, Application of

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AICPA Statement of Position 97-2 to Arrangements that include the Right to Use Software Stored on Another Entity’s Hardware , SEC Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, and EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.

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

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

The Company generally enters into software term licenses for its InForm , Clintrial, Empirica Trace, Waban CDR and Waban SCE products with its customers for 3 to 5-year periods. License agreements for other licensed products are generally for annual or multi-year terms.  These arrangements typically include multiple elements: software license, consulting services and customer support. The Company bills its customers in accordance with the terms of the underlying contract. Generally, the Company bills license fees annually in advance for each year of the license term. Payment terms are generally net 30 days.

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

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

The Company continues to sell additional perpetual licenses for the Clintrial, Empirica Trace, Waban CDR and Waban SCE software products in certain situations to its existing customers with the option to purchase customer support. The Company has established vendor specific objective evidence of fair value for the customer support. Accordingly, license revenues are recognized upon delivery of the software and when all other revenue recognition criteria are met. Customer support revenues are recognized ratably over the term of the underlying support arrangement. The Company generates customer support and maintenance revenues from its perpetual license customer base. Training revenues are recognized as earned.

In addition to making its software products available to customers through licenses, the Company offers its InForm , Empirica Signal , CTSD and Empirica Study software solutions through a hosted application solution delivered through a standard Web-browser.  The Company’s Clarix solution is presently available only on a hosted application basis.

Revenues resulting from InForm  and Clarix application hosting services consist of three stages for each clinical trial: the first stage involves application set up, including design, implementation of the system and server configuration; the second stage involves application hosting and related support services; and the third stage involves services required to close out, or lock, the database for the clinical trial. Services provided for the first and third stages are provided on a fixed fee basis based upon the complexity of the

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trial and system requirements. Services for the second stage are charged separately as a fixed monthly fee. The Company recognizes revenues from all stages of the InForm  and Clarix hosting service ratably over the hosting period. Fees charged and costs incurred for the trial system design, set up and implementation are deferred until the start of the hosting period and are amortized and recognized ratably over the estimated hosting period. The deferred costs include incremental direct costs with third parties and certain internal direct costs related to the trial and application set up, as defined under SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Indirect Costs of Leases . These costs include salary and benefits associated with direct labor costs incurred during trial set up, as well as third-party subcontract fees and other contract labor costs. Work performed outside the original scope of work is contracted for separately as an additional fee and is generally recognized ratably over the remaining term of the hosting period. Fees for the first and third stages of the service are billed based upon milestones. Fees for application hosting and related services in the second stage are generally billed quarterly in advance. Bundled into this revenue element are revenues attributable to the software license used by the customer.

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

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

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

One customer, GlaxoSmithKline, accounted for approximately 12% of the Company’s total revenues in the three months ended June 30, 2008 and 13% of the Company’s total revenues in the six months ended June 30, 2008. The same customer accounted for $863 or 2% of accounts receivable outstanding as of December 31, 2008.  In the three and six months ended June 30, 2009, no customer accounted for 10% or more of the Company’s total revenues for the period.

The Company deferred $1,074 and $1,295 of set up costs and amortized $878 and $985 of set up costs in the three months ended June 30, 2008 and 2009, respectively, and deferred $2,279 and $2,590 of set up costs and amortized $1,683 and $1,902 of set up costs in the six months ended June 30, 2008 and 2009, respectively.  The amortization of deferred set up costs is a component of cost of service revenues.

The Company may also enter into arrangements to provide consulting services separate from a license arrangement. In these situations, revenue is recognized in accordance with SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, on either a time and materials basis or using the proportional performance method. If the Company is not able to produce reasonably dependable estimates, revenue is recognized upon completion of the project and final acceptance from the customer. If significant uncertainties exist about project completion or receipt of payment, the revenue is deferred until the uncertainty is resolved. Provisions for estimated losses on contracts are recorded during the period in which they are identified.

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

In accordance with EITF Issue No. 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred, the Company included $188 and $257 of out-of-pocket expenses in service revenues and cost of service revenues in the three months ended June 30, 2008 and 2009, respectively, and included $343 and $378 of out-of-pocket expenses in service revenues and cost of service revenues in the six months ended June 30, 2008 and 2009, respectively.

Internal Use Software and Website Development Costs

The Company follows the guidance of EITF Issue No. 00-2, Accounting for Web Site Development Costs, which sets forth the accounting for website development costs based on the website development activity. The Company follows the guidance set forth in SOP No. 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use , in accounting for the development of its on demand use systems. SOP No. 98-1 requires companies to capitalize qualifying computer software costs which are incurred during the application development stage, and to amortize them over the software’s estimated useful life. The Company capitalized $196 and $172 during the three months ended June 30, 2008 and 2009, respectively, and $196 and $378 during the six months ended June 30, 2008 and 2009 respectively, related to Company-wide financial systems and outside software development costs associated with the Company’s hosting operation, and has included these amounts in purchased computer software in the accompanying unaudited condensed consolidated financial statements.  The Company amortizes such costs when the systems or software becomes operational. Costs are amortized over the estimated useful life of the respective system or software.  Amortization

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expense was $23 and $28 during the three months ended June 30, 2008 and 2009, respectively, and $48 and $38 during the six months ended June 30, 2008 and 2009 respectively.

Computer Software Development Costs and Research and Development Expenses

The Company has evaluated the establishment of technological feasibility of its products in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed . The Company sells products in a market that is subject to rapid technological change, new product development and changing customer needs. Accordingly, the Company has concluded that technological feasibility is not established until the development stage of the product is nearly complete. The Company defines technological feasibility as the completion of a working model. The time period during which costs could be capitalized, from the point of reaching technological feasibility until the time of general product release, is very short, and consequently, the amounts that could be capitalized are not material to the Company’s financial position or results of operations. Therefore, the Company has charged all such costs to research and development expense in the period incurred.

3.                  Prepaid Sales Commissions and Royalties

For arrangements where revenues are recognized over the relevant contract period, the Company defers related commissions paid to its direct sales force and software license royalties paid to third parties, and amortizes these expenses over the period in which the related revenues are recognized.

Commission payments are nonrefundable unless the sales representatives do not achieve their specific quota, amounts due from a customer are determined to be uncollectible or if the customer subsequently changes or terminates the level of service, in which case commissions paid are recoverable by the Company. The Company deferred $2,361 and $3,123 of commissions and amortized to sales and marketing expense $2,035 and $1,965 in the three months ended June 30, 2008 and 2009, respectively, and deferred $4,380 and $5,107 of commissions and amortized to sales and marketing expense $3,818 and $3,709 in the six months ended June 30, 2008 and 2009, respectively.

The Company’s royalty obligation is based upon the license and customer support revenues earned for certain products in an arrangement. The Company has the right to recover the royalties in the event the arrangement is cancelled. The Company deferred $521 and $638 of royalties and amortized to cost of revenues $648 and $819 in the three months ended June 30, 2008 and 2009, respectively, and deferred $1,569 and $1,727 of royalties and amortized to cost of revenues $1,340 and $1,480 in the six months ended June 30, 2008 and 2009, respectively.

4.                  Warranties and Indemnification

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

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

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

5.                  Acquisitions

Maaguzi, LLC (Non-recognized subsequent event)

On July 27, 2009, the Company acquired privately held Maaguzi LLC (“Maaguzi”), an innovative provider of Web-based, electronic patient reported outcomes (ePRO) and late phase solutions, for approximately $11,000  in cash.  The acquisition of Maaguzi extends the Company’s integrated clinical research suite and marks the Company’s entry into the increasingly important ePRO and observational studies markets.  The acquisition of Maaguzi will be accounted for as a purchase under SFAS No. 141 (R). Accordingly, the results of Maaguzi will be included in the consolidated financial statements of the Company from the date of acquisition.

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Covance (Non-recognized subsequent event)

On July 15, 2009, the Company entered into an agreement to purchase the Interactive Voice & Web Response Services (IVRS/IWRS) business of Covance Inc. (“Covance”) for $10,000 in cash. As part of this transaction, the Company and Covance have also agreed to enter into a multi-year marketing agreement to provide the Company’s InForm electronic data capture (EDC) solution and Clarix interactive response technology solution to Covance clients.  The acquisition is expected to be completed by the middle of August 2009.  The acquisition will be accounted for as a purchase under SFAS No. 141 (R).  Accordingly, the results of the acquired IVRS/IWRS business will be included in the consolidated financial statements of the Company from the date of acquisition.

Waban Software, Inc.

On April 22, 2009, the Company acquired all of the outstanding common stock of Waban Software, Inc. (“Waban”), a provider of platform solutions for the automation and compliance of clinical data analysis and reporting.  Waban’s Statistical Computing Environment and Clinical Data Repository (SCE/CDR) solutions provide automation, traceability and control of the key activities involved in the integration, analysis and reporting on clinical trial data.  The aggregate purchase price was $13,766 in cash, of which $7,747 has been recorded as goodwill.  The Company acquired the technology of Waban to allow it to penetrate the market for statistical computing and clinical data repository solutions.  The acquisition of Waban has been accounted for as a purchase under SFAS No. 141 (R).  Under SFAS No. 141(R), all of the assets acquired and liabilities assumed in the transaction are recognized at their acquisition-date fair values, while transaction costs and restructuring costs associated with the transaction are expensed as incurred.

Purchase Price.  The $13,766 purchase price for Waban is based on the acquisition-date fair value of the consideration transferred, which was calculated based on the initial cash paid and any working capital adjustments as of 90 days after the acquisition date. Working capital adjustments have been classified as “Accrued expenses” in the accompanying unaudited condensed consolidated balance sheet for the period ended June 30, 2009. The acquisition-date fair value of the consideration consisted of the following:

Preliminary Allocations of Assets and Liabilities.  For the purposes of the condensed consolidated balance sheets, the Company has made preliminary allocations of the purchase price for Waban to the net tangible assets and intangible assets, goodwill, deferred income taxes and deferred revenue. However, the Company is in the process of completing its valuations of certain intangible assets and deferred revenue. The difference between the aggregate purchase price and the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. The final allocations of the purchase price to intangible assets, goodwill, deferred income taxes and deferred revenue may differ materially from the information presented in these unaudited condensed consolidated financial statements. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

Under SFAS No. 141(R), based on the preliminary allocations, $4,758, $3,174 and $973 of the intangible assets acquired from Waban relate to developed technology, customer relationships and tradenames, respectively.  In accordance with SFAS No. 142, Goodwill and Other Intangible Assets , the

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Company will periodically evaluate the assets allocated to intangible assets.  Developed technology, customer relationships and tradenames will be amortized over a period of 15 years, 15 years and 8 years, respectively.  If an allocated asset becomes impaired or is abandoned, the carrying value of the related intangible asset will be written down to its fair value and an impairment charge will be taken in the period in which the impairment occurs. These intangible assets will be tested for impairment on an annual basis, or earlier if impairment indicators are present.

The difference between the consideration transferred to acquire the business and the fair value of assets acquired and liabilities assumed is allocated to goodwill. None of the goodwill is expected to be deductible for income tax purposes. As of June 30, 2009, there were no changes in the recognized amounts of goodwill resulting from the acquisition of Waban.

Waban Financial Information.  The results of operations of Waban have been included in the condensed consolidated financial statements since the acquisition date. Waban had $280 in revenues in the period from the acquisition date (April 22, 2009) to June 30, 2009, and Waban’s net operating loss in the period from the acquisition date to June 30, 2009 was immaterial to the Company’s condensed consolidated financial results.  Pro forma results of operations for the three and six months ended June 30, 2008 and 2009, assuming the acquisition of Waban had taken place at the beginning of each period, would not differ significantly from the actual reported results.

6.                     Net Income Per Share

Basic and diluted net income per share is presented in conformity with SFAS No. 128, Earnings Per Share .  Basic net income per common share for all periods presented was determined by dividing net income applicable to common stockholders by the weighted average number of common shares outstanding during the period. Weighted average shares outstanding exclude unvested restricted common stock. Diluted net income per share includes the effects of all dilutive, potentially issuable common shares using the treasury stock method.

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

Diluted weighted average common shares outstanding do not include options, awards and units outstanding to purchase 394,463 and 99,883 common equivalent shares for the three months ended June 30, 2008 and 2009, respectively, and do not include options, awards, and units outstanding to purchase 399,176 and 100,138 common equivalent shares for the six months ended June 30, 2008 and 2009, respectively as their effect would have been anti-dilutive.

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7.       Foreign Currency Translation

The financial statements of the Company’s foreign subsidiaries are translated in accordance with SFAS No. 52, Foreign Currency Translation.   The reporting currency for the Company is the U.S. dollar. The functional currency of the Company’s subsidiaries in Australia, Belgium, France, India, Japan, Romania and the United Kingdom are the local currencies of those countries. Accordingly, the assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars using the exchange rate in effect at each balance sheet date. Revenue and expense accounts are translated using an average rate of exchange during the period. Gains and losses arising from transactions denominated in foreign currencies are primarily related to intercompany accounts that have been determined to be temporary in nature and cash accounts and accounts receivable denominated in non-functional currencies.   The Company recorded foreign currency gains/(losses) of $15 and $(174) in the three months ended June 30, 2008 and 2009, respectively, and $14 and $(26) in the six months ended June 30, 2008 and 2009, respectively.  Such gains/(losses) are included in other income in the accompanying unaudited condensed consolidated statements of income.

Foreign currency translation adjustments are accumulated as a component of other comprehensive income as a separate component of stockholders’ equity.

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

The Company accounts for its investments in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities . Under SFAS No. 115, securities that the Company has the intent and ability to hold to maturity are reported at amortized cost, which approximates market value, and are classified as held-to-maturity. Securities for which it is not the Company’s intent to hold to maturity are classified as either available-for-sale securities or trading securities. Available-for-sale securities are reported at fair value, with temporary unrealized gains (losses) excluded from earnings and reported in a separate component of stockholders’ equity and other than temporary unrealized losses included in earnings. Trading securities are reported at fair value, with unrealized gains (losses) included in earnings. The Company considers all highly liquid investments with original maturities of 90 days or less at the time of purchase to be cash equivalents and investments with original maturities of between 91 days and one year to be short-term investments. The Company considers investments with maturities greater than one year to be long-term investments.  All securities, with the exception of auction rate securities (“ARS”), are classified as held-to-maturity securities. The auction rate securities are debt instruments issued by various municipalities throughout the United States.  In prior periods and up through the execution of the signed settlement agreement with UBS in November 2008 as further discussed below, the ARS were  classified as available-for-sale because it was the Company’s intent not to hold them to maturity. Upon the execution of the settlement agreement with UBS, the Company elected to make a one-time transfer of the ARS from available-for-sale securities to trading securities.  Accordingly, on a prospective basis, all unrealized gains (losses) for these trading securities have been included in earnings.

Cash, cash equivalents, short-term and long-term investments as of December 31, 2008 and June 30, 2009 consist of the following:

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The Company has had no realized gains or losses from the sale of cash equivalents or short-term investments.

As of December 31, 2008 and June 30, 2009 the Company held ARS totaling $24,050 and $24,000, respectively, at par value, which were classified as long-term investments and short-term investments, respectively, in the accompanying unaudited condensed consolidated balance sheets, and which are recorded at fair value.  These ARS are debt instruments issued by various states throughout the United States to finance student loans.  The types of ARS that the Company owns are backed by student loans, 95% of which are guaranteed under the Federal Family Education Loan Program, and all have credit ratings of AAA (or equivalent) from a recognized rating agency.  Historically, the carrying value of ARS approximated fair value due to the frequent resetting of the interest rates. With the liquidity issues experienced in the global credit and capital markets, the Company’s ARS have experienced multiple failed auctions. While the Company continues to earn and receive interest on these investments at the maximum contractual rate, the estimated fair value of these ARS no longer approximates par value.

In November 2008, the Company accepted an offer from and entered into an agreement (the “Agreement”) with UBS AG (“UBS”) with respect to all of the Company’s ARS held at that time.  As a UBS client who holds ARS, the Company will receive certain rights, which will entitle the Company to sell ARS to UBS affiliates during the period from June 30, 2010 to July 2, 2012 for a price equal to par value.  In accepting the Agreement, the Company granted UBS the authority to sell or auction the ARS at par at any time up until the expiration date of the Agreement and released UBS from any claims relating to the marketing and sale of ARS.  UBS obligations under the Agreement are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Agreement.  UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Agreement.  If UBS has insufficient funding to buy back the ARS and the auction process continues to fail, the Company may incur further losses on the carrying value of the ARS.

The Company performed a fair value calculation of these ARS as of December 31, 2008 and June 30, 2009.  Fair value was determined using a secondary market indications method (direct discounts) and a discounted cash flow method as recent auctions of these securities were not successful, resulting in the Company continuing to hold these securities and issuers paying interest at the maximum contractual rate. This valuation technique considers the following: time left to maturity, the rate of interest paid on the securities, the amount of principal to be repaid to the holders of the securities; the credit worthiness of the issuer and guarantors (if any) and the sufficiency of the collateral; trading characteristics of the securities; ability to borrow against the ARS; evidence from secondary market sales; and the market-clearing yield for the securities. Based upon the valuation performed, the Company concluded that the fair value of these ARS at December 31, 2008 was $18,022, a decline of $6,028 from par value. Since the Company’s signed Agreement with UBS indicates that the Company intends to sell the ARS to UBS affiliates before their stated maturity dates under the terms of the ARS, the decline in fair value is deemed other-than-temporary. Accordingly, the Company recorded a loss on these securities of $6,028 in the accompanying unaudited condensed consolidated statement of income for the year ended December 31, 2008 as it was deemed to be other-than-temporary.

As of June 30, 2009, the Company concluded that the fair value of these ARS increased to $18,436 and therefore, recorded the change in fair value of these securities from December 31, 2008 of $414 in the accompanying unaudited condensed consolidated statement of income for the six months ended June 30, 2009.  During the three months ended June 30, 2009 the fair value of these ARS decreased $23 and therefore, the Company recorded the change in fair value of these securities in the accompanying unaudited condensed consolidated statement of income for the three months ended June 30, 2009.  As of June 30, 2009, it is the Company’s intent to sell the ARS on June 30, 2010 in accordance with its rights under the Agreement.  Accordingly, they were reclassified from long-term investments to short-term investments in the accompanying unaudited condensed consolidated balance sheets.

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The Company elected to measure the fair value of the put option under the Agreement (the “put option”) under the fair value option of SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities- including an amendment of FASB Statement No. 115 . Fair value was determined using a discounted cash flow method, which considered the following factors: term of the agreement, the availability to borrow against the ARS, the creditworthiness of UBS and current market interest rates. Based on the valuation performed, the Company concluded that the fair value of the put option was $5,322 as of December 31, 2008.  Accordingly, a gain of $5,322 was recorded in the consolidated statement of income for the year ended December 31, 2008 with a corresponding long term asset, “securities settlement agreement”, in the consolidated balance sheet at December 31, 2008.  Based on the valuation performed as of June 30, 2009 the Company concluded that the fair market value of the securities settlement agreement was $5,336, resulting in an increase in fair value of $199 and $14 being recorded in the Company’s accompanying unaudited condensed consolidated statements of income for the three and six months ended June 30, 2009, respectively. As of June 30, 2009, it is the Company’s intent to sell the ARS on June 30, 2010 in accordance with its rights under the settlement agreement, and accordingly reclassified the fair value of the “securities settlement agreement” from long-term-assets to current assets in the accompanying unaudited condensed consolidated balance sheets.

Refer to Note 18 for further discussion on the adoption of SFAS No. 157, Fair Value Measurements , and SFAS No. 159.

9.        Goodwill and Intangible Assets

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

The goodwill resulting from acquisitions is reviewed for impairment on an annual basis in accordance with SFAS No. 142 .   Consistent with prior years, the Company conducted its annual impairment test of goodwill during the fourth quarter of 2008.  Based on the results of the first step of the goodwill impairment test, the Company determined that no impairment of goodwill existed at December 31, 2008, as the carrying amount of goodwill of the reporting unit was less than its fair value and therefore, the second step of the goodwill impairment test was not necessary.

A rollforward of the net carrying amount of goodwill is as follows: