WEBMD CORPORATION


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


	[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 (the “Exchange Act”) 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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

WebMD®, Digital Office Manager®, DIM_DX®, Envoy®, ExpressBill®, Intergy®, Medifax®, Medifax-EDI®, Medscape®, MEDPOR®, Medpulse®, POREX®, Publishers’ Circle®, The Little Blue Book^TM, The Little Yellow Book^TM, The Medical Manager®, ULTIA^TM, WebMD Health Hub^TM and WellMed® are trademarks of WebMD Corporation or its subsidiaries.

This Quarterly Report on Form 10-Q contains both historical and forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. These forward-looking statements are not based on historical facts, but rather reflect management’s current expectations concerning future results and events. These forward-looking statements generally can be identified by use of expressions such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “will” or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals are, or may be deemed to be, forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be different from any future results, performance and achievements expressed or implied by these statements. In addition to the risk factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Our Future Financial Condition or Results of Operations” beginning on page 32, the following important risks and uncertainties could affect future results, causing those results to differ materially from those expressed in our forward-looking statements:


	•	the failure to achieve sufficient levels of customer utilization and market acceptance of new or updated products and services,

	•	the inability to successfully deploy new or updated applications,

	•	difficulties in forming and maintaining relationships with customers and strategic partners,

	•	the inability to attract and retain qualified personnel, and

	•	general economic, business or regulatory conditions affecting the healthcare, information technology, Internet and plastic industries being less favorable than expected.

These factors and the risk factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Our Future Financial Condition or Results of Operations” beginning on page 32 are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report. We expressly disclaim any intent or obligation to update any forward-looking statements to reflect subsequent events or circumstances.

The unaudited consolidated financial statements of WebMD Corporation (the “Company”) have been prepared by management and reflect all adjustments (consisting of only normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. The results of operations for the three and six months ended June 30, 2004 are not necessarily indicative of the results to be expected for any subsequent period or for the entire year ending December 31, 2004. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted under the Securities and Exchange Commission’s rules and regulations.

As described in Note 3, on August 1, 2003, the Company completed the sale of two operating units of its Plastic Technologies segment. Accordingly, the historical results of these two operating units have been presented as discontinued operations in the accompanying unaudited consolidated financial statements.

The unaudited consolidated financial statements and notes included herein should be read in conjunction with the Company’s audited consolidated financial statements and notes for the year ended December 31, 2003, which were included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company is subject to uncertainties such as the impact of future events, economic, environmental and political factors and changes in the Company’s business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparation of the Company’s financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in reported results of operations; if material, the effects of changes in estimates are disclosed in the notes to the consolidated financial statements. Significant estimates and assumptions by management affect: the allowance for doubtful accounts, the carrying value of inventory, the carrying value of prepaid content and distribution services, the carrying value of long-lived assets (including goodwill and intangible assets), the amortization period of long-lived assets (excluding goodwill), the carrying value, capitalization and amortization of software development costs, the carrying value of short-term and long-term investments, the provision for taxes and related deferred tax accounts, certain accrued expenses, revenue recognition, restructuring costs, contingencies, litigation and the value attributed to warrants issued for services.

Inventory is stated at the lower of cost or market value using the first-in, first-out basis. Cost includes raw materials, direct labor and manufacturing overhead. Market value is based on current replacement cost

for raw materials and supplies and on net realizable value for work-in-process and finished goods. Inventory consisted of the following as of June 30, 2004 and December 31, 2003:

The Company accounts for its stock-based employee compensation plans using the intrinsic value method under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations. No stock-based employee compensation cost is reflected in net income (loss) with respect to options granted with an exercise price equal to the market value of the underlying common stock on the date of grant. Stock-based awards to non-employees are accounted for based on provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), and EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” The following table illustrates the effect on net income (loss) and net income (loss) per common share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:

The pro forma results above are not intended to be indicative of or a projection of future results. Pro forma information regarding net income (loss) has been determined as if employee stock options granted subsequent to December 31, 1994 were accounted for under the fair value method of SFAS No. 123. The fair value for 2004 options was estimated at the date of grant using the Black-Scholes option pricing model employing weighted average assumptions that were substantially consistent with the 2003 assumptions except with respect to the volatility assumption, which was 0.6 for options granted during the six months ended June 30, 2004. The 2003 assumptions were included in Note 15 to the consolidated financial statements contained in the Company’s 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

The Company has elected to follow APB No. 25 and related interpretations in accounting for employee stock options because the alternative fair value accounting method provided for under SFAS No. 123 requires the use of option valuation models that were not developed for use in valuing employee stock options. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s employee stock options.

Basic income (loss) per common share and diluted income (loss) per common share are presented in conformity with SFAS No. 128, “Earnings Per Share” (“SFAS No. 128”). In accordance with SFAS No. 128, basic income (loss) per common share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted income (loss) per common share has been computed using the weighted-average number of shares of common stock outstanding during the period, increased to consider the effect of potentially dilutive securities. The following table presents the calculation of basic and diluted income (loss) per common share (shares in thousands):

The Company has excluded convertible subordinated notes and restricted stock, as well as certain outstanding warrants and stock options, from the calculation of diluted income (loss) per common share because such securities were either anti-dilutive or were not convertible into common stock in accordance with their terms during the periods presented. The following table presents the total number of shares that

could potentially dilute basic income (loss) per common share in the future that were not included in the computation of diluted income (loss) per common share during the periods presented (shares in thousands):

Certain reclassifications have been made to the prior period financial statements to conform with the current period presentation.

On April 30, 2004, the Company acquired Dakota Imaging, Inc. (“Dakota”), a privately held company based in Baltimore, Maryland. Dakota is a provider of automated healthcare claims processing technology and Business Process Outsourcing services. Dakota’s technology and services assist its customers in reducing costly manual processing of healthcare documents and increase auto-adjudication and auto-payment of medical claims through advanced data scrubbing. The Company paid approximately $39,717 in cash at closing and has agreed to pay up to an additional $25,000 in cash over a three-year period beginning in April 2005 if certain financial milestones are achieved. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed on the basis of their respective fair values. In connection with the preliminary allocation of the purchase price, goodwill of $28,380 and intangible assets subject to amortization of $13,100 were recorded. The Company does not expect that the goodwill or intangible assets will be deductible for tax purposes. The intangible assets are comprised of $4,400 relating to customer relationships with estimated useful lives of ten years and $8,700 relating to acquired technology with an estimated life of five years. The financial information of Dakota has been included in the financial statements of the Company from April 30, 2004, the closing date of the acquisition, and is included in the Transaction Services segment.

During the six months ended June 30, 2004, the Company acquired one physician services company for an aggregate cost of $70, which was paid in cash, and agreed to pay up to $30 beginning in 2005 if the acquired company meets certain financial milestones. In connection with the preliminary allocation of the purchase price, intangible assets subject to amortization of $85 were recorded, principally related to customer relationships and non-compete agreements. The financial information of this company has been included in the financial statements of the Company from the acquisition closing date and is included in the Physician Services segment.

On December 22, 2003, the Company completed its acquisition of Medifax-EDI, Inc. (“Medifax”), a privately held company based in Nashville, Tennessee. Medifax provides real-time medical eligibility transaction services and other claims management solutions to hospitals, medical centers, physician practices and other medical organizations throughout the United States. These services enable healthcare

providers to verify insurance coverage for their patients on a real-time basis. The total purchase consideration was approximately $280,065, comprised of $276,065 in cash and $4,000 of estimated acquisition costs, for all of the outstanding capital stock of Medifax. Prior to closing, Medifax distributed its Pharmacy Services companies to its owner and these companies were not included in the transaction. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed on the basis of their respective fair values. In connection with the preliminary allocation of the purchase price, goodwill of $179,090 and intangible assets subject to amortization of $92,700 were recorded. The Company does not expect that the goodwill or intangible assets will be deductible for tax purposes. The intangible assets are comprised of $72,600 relating to customer relationships with estimated useful lives of fifteen years, $8,600 relating to acquired technology with an estimated useful life of five years, $8,400 relating to payer connections with estimated useful lives of fifteen years and $3,100 relating to a tradename with an estimated useful life of one year. The financial information of Medifax has been included in the financial statements of the Company from December 22, 2003, the closing date of the acquisition, and is included in the Transaction Services segment.

On September 25, 2003, the Company completed its acquisition of a privately held dental clearinghouse based in Hartford, Connecticut. The Company paid $5,805 in cash for all of the outstanding capital stock of the acquired company and agreed to pay up to an additional $4,200 beginning in 2005 if certain revenue related milestones are achieved. The additional payment may be made over a three-year period by issuing shares of the Company’s common stock or in cash. The additional payment may exceed $4,200 if all or a portion of the additional payment is made by issuing shares of the Company’s stock and if the value of the Company’s stock exceeds certain price levels. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed on the basis of their respective fair values. In connection with the preliminary allocation of the purchase price, goodwill of $3,478 and an intangible asset subject to amortization of $2,392 were recorded. The Company does not expect that the goodwill or intangible assets will be deductible for tax purposes. The intangible asset is acquired technology with an estimated useful life of five years. The financial information of the acquired company has been included in the financial statements of the Company from September 25, 2003, the closing date of the acquisition, and is included in the Transaction Services segment.

On July 17, 2003, the Company completed its acquisition of Advanced Business Fulfillment, Inc. (“ABF”), a privately held company based in St. Louis, Missouri. ABF provides healthcare paid-claims communications services for third-party administrators and health insurers. ABF’s services allow its customers to outsource print-and-mail activities for the distribution of checks, remittance advice and explanations of benefits. The total purchase consideration for ABF was approximately $112,891, comprised of $108,368 in cash and $4,523 of acquisition costs for all of the outstanding capital stock of ABF. Additionally, the Company agreed to pay up to an additional $150,000 beginning in April 2004 if certain financial milestones are achieved. The additional payment may be made over a three-year period by issuing shares of the Company’s common stock or, at the Company’s option in certain circumstances, in cash. The additional payment may exceed $150,000 if all or a portion of the additional payment is made by issuing shares of the Company’s stock and if the value of the Company’s stock exceeds certain price levels at the time of payment. During April 2004, the Company paid $17,455 in cash as a result of the achievement of certain financial milestones. This payment resulted in an increase to goodwill. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed on the basis of their respective fair values. In connection with the allocation of the purchase price, goodwill of $61,453 and intangible assets subject to amortization of $47,000 were recorded. The Company expects that substantially all of the goodwill recorded will be deductible for tax purposes. The intangible assets are comprised of $41,000

relating to customer relationships with estimated useful lives of ten years, $4,900 relating to acquired unpatented technologies with estimated useful lives of nine months to six years and $1,100 relating to a trade name with an estimated useful life of three years. The financial information of the acquired company has been included in the financial statements of the Company from July 17, 2003, the closing date of the acquisition, and is included in the Transaction Services segment.

On May 29, 2003, the Company acquired The Little Blue Book (“LBB”), a company which maintains a database containing practice information for over 380,000 physicians, and publishes a pocket-sized reference book containing physician information. The total purchase consideration for LBB was approximately $10,535, comprised of $10,400 in cash and acquisition costs of $135. Additionally, the Company will pay up to $2,500 if LBB meets certain financial milestones during the years ending December 31, 2003 and 2004. During April 2004, the Company paid $1,500 in cash as a result of the achievement of certain financial milestones. This payment resulted in an increase to goodwill. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed on the basis of their respective fair values. In connection with the allocation of the purchase price, goodwill of $8,661 and intangible assets subject to amortization of $2,815 were recorded. The Company expects that substantially all of the goodwill recorded will be deductible for tax purposes. The intangible assets are comprised of $1,787 relating to a trade name with an estimated useful life of seven years, $761 relating to customer relationships with estimated useful lives of five years and $267 relating to acquired technology with an estimated useful life of three years. The financial information of LBB has been included in the financial statements of the Company from May 29, 2003, the closing date of the acquisition, and is included in the Portal Services segment.

On April 30, 2003, the Company acquired the assets and assumed certain liabilities of a company which provides healthcare benefit decision support tools and solutions to its clients through online technology. The total purchase consideration for this acquisition was approximately $4,052, comprised of $4,000 in cash and acquisition costs of $52. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed on the basis of their respective fair values. In connection with the allocation of the purchase price, goodwill of $4,070 and an intangible asset subject to amortization of $710 were recorded. The Company expects that substantially all of the goodwill recorded will be deductible for tax purposes. The intangible asset represents the fair value of customer relationships with estimated useful lives of five years. The financial information of the acquired business has been included in the financial statements of the Company from April 30, 2003, the closing date of the acquisition, and is included in the Portal Services segment.

In 2003, the Company acquired seven practice services companies for an aggregate cost of $2,182, which was paid in cash. Additionally, the Company will pay up to $675 beginning in 2005 if some of the acquired companies meet certain financial milestones. These acquisitions were accounted for using the purchase method of accounting and, accordingly, the purchase prices were allocated to assets acquired and liabilities assumed based on their respective fair values. In connection with the preliminary allocation of the purchase prices, goodwill of $1,469 and intangible assets subject to amortization of $1,054 were recorded. The Company expects that substantially all of the goodwill recorded will be deductible for tax purposes. The intangible assets are comprised of $351 related to non-compete agreements with estimated useful lives of three to five years and $703 related to customer relationships with estimated useful lives of nine years. The financial information of these companies has been included in the financial statements of the Company from the respective acquisition closing dates and is included in the Physician Services segment.

The following unaudited pro forma financial information for the six months ended June 30, 2003 gives effect to the acquisitions of ABF and Medifax, including the amortization of intangible assets, as if they had occurred on January 1, 2003. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transactions had been consummated at the date indicated, nor is it necessarily indicative of future operating results of the consolidated companies, and should not be construed as representative of these results for any future period. The remaining acquisitions in 2004 and 2003 have been excluded as the pro forma impact of such acquisitions was not significant to the six months ended June 30, 2004 and June 30, 2003.

As more fully discussed in Note 3 to the consolidated financial statements contained in the Company’s 2003 Annual Report on Form 10-K, the Company entered into an agreement for a strategic alliance with Time Warner, Inc. in May 2001. Under the agreement, the Company is the primary provider of healthcare content, tools and services for use on certain America Online properties. The original term of the agreement was for three years, ending in May 2004. The Company had a right to extend the agreement for an additional three-year term if the Company’s revenue share did not exceed certain thresholds during the original three-year term. These thresholds were not met and the Company exercised its right to extend the contract term until May 2007. Under the terms of the extension, the Company’s revenue share will be subject to a minimum annual guarantee.

As more fully discussed in Note 3 to the consolidated financial statements contained in the Company’s 2003 Annual Report on Form 10-K, the Company entered into a strategic relationship with Microsoft in April 2001, including an agreement to program the MSN health channel. That agreement has been amended to change the expiration date from June 30, 2004 to December 31, 2004.

On August 1, 2003, the Company completed the sale of two operating units of Porex, Porex Bio Products, Inc. (“Porex Bio”) and Porex Medical Products, Inc. (“Porex Medical”) to enable Porex to focus on its porous materials businesses. Accordingly, the historical financial information of these operating units has been reclassified as discontinued operations in the accompanying consolidated financial statements for the prior year period. The operating units were sold in two separate transactions for an aggregate sales price of $46,500. An impairment charge of $33,113 was recorded in the results for the quarter ended June 30, 2003 to reduce the long-lived assets of Porex Bio and Porex Medical to fair value. The write-down consisted of $27,564 of goodwill, $4,162 of trade name and patent intangibles and $1,387

of other long-lived assets consisting primarily of manufacturing equipment. The impairment charge was based on the fair value of the divested businesses as determined by the expected proceeds from disposition. During the three months ended September 30, 2003, the Company recorded a loss on disposal of $3,491, primarily representing certain costs related to the disposition. Summarized operating results for the discontinued units for the three and six months ended June 30, 2003 were as follows:

On March 19, 2004, the Company issued $100,000 of Convertible Redeemable Exchangeable Preferred Stock (“Preferred Stock”) in a private transaction to CalPERS/PCG Corporate Partners, LLC (“CalPERS/PCG Corporate Partners”). CalPERS/PCG Corporate Partners is a private equity fund managed by the Pacific Corporate Group and principally backed by California Public Employees’ Retirement System, or CalPERS.

The Preferred Stock has a liquidation preference of $100,000 in the aggregate and is convertible into 10,638,297 shares of the Company’s common stock in the aggregate, representing a conversion price of $9.40 per share of common stock. The Company may not redeem the Preferred Stock prior to March 2007. Thereafter, the Company may redeem any portion of the Preferred Stock at 105% of its liquidation preference; provided that any redemption by the Company prior to March 2008 shall be subject to the condition that the average closing sale prices of the Company’s common stock is at least $13.16 per share, subject to adjustment. The Company is required to redeem all shares of the Preferred Stock then outstanding in March 2012, at a redemption price equal to the liquidation preference of the Preferred Stock, payable in cash or, at the Company’s option, in shares of the Company’s common stock.

If the average closing sales price of the Company’s common stock during the three-month period ended on the fourth anniversary of the issuance date is less than $7.50 per share, holders of the Preferred Stock will have a right to exchange the Preferred Stock into the Company’s 10% Subordinated Notes (“10% Notes”) due March 2010. The 10% Notes may be redeemed, in whole or in part, at any time thereafter at the Company’s option at a price equal to 105% of the principal amount of the 10% Notes being redeemed.

Holders of the Preferred Stock will not receive any dividends unless the holders of common stock do, in which case holders of the Preferred Stock will be entitled to receive ordinary dividends in an amount equal to the ordinary dividends the holders of the Preferred Stock would have received had they converted such Preferred Stock into common stock immediately prior to the record date for such dividend distribution. So long as the Preferred Stock remains outstanding, the Company is required to pay to CalPERS/PCG Corporate Partners, on a quarterly basis, an aggregate annual fee of 0.35% of the face amount of the then outstanding Preferred Stock.

On June 25, 2003, the Company issued $300,000 aggregate principal amount of 1.75% Convertible Subordinated Notes due 2023 (the “1.75% Notes”) in a private offering. On July 7, 2003, the Company issued an additional $50,000 aggregate principal amount of the 1.75% Notes. Unless previously redeemed or converted, the 1.75% Notes will mature on June 15, 2023. Interest on the 1.75% Notes accrues at the

rate of 1.75% per annum and is payable semiannually on June 15 and December 15, commencing December 15, 2003. The Company will also pay contingent interest of 0.25% per annum of the average trading price of the 1.75% Notes during specified six-month periods, commencing on June 20, 2010, if the average trading price of the 1.75% Notes for specified periods equals 120% or more of the principal amount of the 1.75% Notes.

The 1.75% Notes are convertible into an aggregate of 22,742,040 shares of the Company’s common stock (representing a conversion price of $15.39 per share) if the sale price of the Company’s common stock exceeds 120% of the conversion price for specified periods and in certain other circumstances. The 1.75% Notes are redeemable by the Company after June 15, 2008 and prior to June 20, 2010, subject to certain conditions, including the sale price of the Company’s common stock exceeding certain levels for specified periods. If the 1.75% Notes are redeemed by the Company during this period, the Company will be required to make additional interest payments. After June 20, 2010, the 1.75% Notes are redeemable at any time for cash at 100% of their principal amount. Holders of the 1.75% Notes may require the Company to repurchase their 1.75% Notes on June 15, 2010, June 15, 2013 and June 15, 2018, for cash at 100% of the principal amount of the 1.75% Notes, plus accrued interest. Upon a change in control, holders may require the Company to repurchase their 1.75% Notes for, at the Company’s option, cash or shares of the Company’s common stock, or a combination thereof, at a price equal to 100% of the principal amount of the 1.75% Notes being repurchased.

The Company incurred issuance costs related to the 1.75% Notes of approximately $10,875, which are included in other assets in the accompanying consolidated balance sheets. The issuance costs are being amortized to interest expense in the accompanying consolidated statements of operations, using the effective interest method over the period from issuance through June 15, 2010, the earliest date on which holders can demand redemption.

On April 1, 2002, the Company issued $300,000 aggregate principal amount of 3 1/4% Convertible Subordinated Notes due 2007 (the “3 1/4% Notes”) in a private offering. Interest on the 3 1/4% Notes accrues at the rate of 3 1/4% per annum and is payable semiannually on April 1 and October 1. Unless previously redeemed or converted, the 3 1/4% Notes will mature on April 1, 2007. At the time of issuance, the 3 1/4% Notes were convertible into an aggregate of approximately 32,386,916 shares of the Company’s common stock (representing a conversion price of $9.26 per share), subject to adjustment in certain circumstances. During the three months ended June 30, 2003, $1 principal amount of the 3 1/4% Notes was converted into 107 shares of the Company’s common stock in accordance with the provisions of the 3 1/4% Notes. As of June 30, 2004, the 3 1/4% Notes were convertible into an aggregate of approximately 32,386,808 shares of the Company’s common stock. The 3 1/4% Notes are redeemable at the Company’s option, at any time on or after April 5, 2005. The redemption price, as a percentage of principal amount, is 101.3% beginning April 5, 2005 and 100.65% beginning April 1, 2006.

The Company incurred issuance costs related to the 3 1/4% Notes of $8,000, which are included in other assets in the accompanying consolidated balance sheets. The issuance costs are being amortized using the effective interest method over the term of the 3 1/4% Notes. The amortization of the issuance costs is included in interest expense in the accompanying consolidated statements of operations.

On March 29, 2001, the Company announced a stock repurchase program (the “Program”). Under the Program, the Company was originally authorized to use up to $50,000 to purchase shares of its common stock from time to time beginning on April 2, 2001, subject to market conditions. On November 2, 2001, the maximum aggregate amount of purchases under the Program was increased to

$100,000 and on November 7, 2002 it was increased to $150,000. As of June 30, 2004, the Company had repurchased a total of 22,859,606 shares at a cost of approximately $111,235 under the Program, of which 546,250 shares were repurchased during the three months ended March 31, 2004 for an aggregate purchase price of $4,877. The Company did not repurchase any of its common stock during the three months ended June 30, 2004. As of June 30, 2003, the Company had repurchased a total of 22,060,656 shares at a cost of approximately $104,167 under the Program, of which 2,058,496 shares and 2,069,496 shares were repurchased during the three and six months ended June 30, 2003 for an aggregate purchase price of $18,032 and $18,125, respectively. These repurchased shares are reflected as treasury stock in the accompanying consolidated balance sheets. As of June 30, 2004, the Company had $38,765 available to repurchase shares of its common stock under the Program.

Segment information has been prepared in accordance with the Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). The accounting policies of the segments are consistent with those described in the summary of significant accounting policies in Note 1 to the consolidated financial statements contained in the Company’s 2003 Annual Report on Form 10-K. Inter-segment revenues represent sales of Transaction Services products into the Physician Services customer base and are reflected at rates comparable to those charged to third parties for comparable products. The performance of the Company’s business is monitored based on income or loss before taxes, non-cash and other items. Non-cash and other items include depreciation, amortization, gain on investments, other income, costs and expenses related to the investigation by the United States Attorney for the District of South Carolina and the SEC (“legal expense”), non-cash expenses related to content, advertising and distribution services acquired in exchange for the Company’s equity securities in acquisitions and strategic alliances, and stock compensation expense primarily related to stock options issued and assumed in connection with acquisitions and restricted stock issued to employees.

Transaction Services or WebMD Envoy provides healthcare reimbursement cycle management services, including transmission of transactions between healthcare payers and physicians, pharmacies, dentists, hospitals, laboratory companies and other healthcare providers using dial-up, Internet and dedicated communication methods. WebMD Envoy also provides automated patient billing services to providers, including statement printing and mailing services. In addition, WebMD Envoy provides third party administrators and health insurers with automated healthcare claims processing technology and outsourcing services for document processing, scanning, data scrubbing and online secure document management, as well as paid-claims communication services, including print-and-mail services for the distribution of checks, remittance advice and explanation of benefits.

Physician Services or WebMD Practice Services develops and markets integrated physician practice management systems, including administrative, financial and clinical applications and services, under The Medical Manager, Intergy, ULTIA and Medical Manager Network Services brands. These systems and services allow physician offices to automate their scheduling, billing and other administrative tasks, to transmit transactions electronically, to maintain electronic medical records and to automate documentation of patient encounters.

Portal Services or WebMD Health provides online healthcare information, educational services and related resources for consumers and healthcare professionals, both directly and through its relationships with leading general consumer Internet portals. WebMD Health also provides online content for use by media and healthcare partners on their Web sites. WebMD Health develops and sells online and offline channels of communication and sponsorship programs to pharmaceutical, biotech, medical device and

consumer products companies, particularly those who are interested in influencing healthcare decisions. In addition, WebMD Health provides a suite of online tools and related services to employers and health plans for use by their employees and plan members.

Plastic Technologies or Porex develops, manufactures and distributes proprietary porous plastic products and components used in healthcare, industrial and consumer applications, as well as in finished products used in the medical device and surgical markets.

Summarized financial information for each of the Company’s operating segments and a reconciliation to net income (loss) is presented below:

As of June 30, 2004 and December 31, 2003, the Company’s short-term investments and marketable debt securities consisted of certificates of deposit, municipal bonds, asset backed securities, Federal Agency Notes and U.S. Treasury Notes and marketable equity securities consisted of equity investments in publicly traded companies. As of June 30, 2004 and December 31, 2003, all of the Company’s marketable

securities were classified as available-for-sale. The following table summarizes the amortized cost basis and estimated fair value of the Company’s investments:

The amortized cost and estimated fair value by maturity of securities are shown in the following table. Securities are classified according to their contractual maturities without consideration of principal amortization, potential prepayments or call options. Accordingly, actual maturities may differ from contractual maturities.

Comprehensive loss is comprised of net income (loss) and other comprehensive loss. Other comprehensive loss includes certain changes in equity that are excluded from net income (loss), such as changes in unrealized holding losses on available-for-sale marketable securities and foreign currency translation adjustments. The following table presents the components of other comprehensive loss for the three and six months ended June 30, 2004 and 2003:

The foreign currency translation gains (losses) are not currently adjusted for income taxes as they relate to permanent investments in non-U.S. subsidiaries.

The changes in the carrying amount of goodwill for the year ended December 31, 2003 and the six months ended June 30, 2004 are as follows:

Amortization expense was $6,125 and $12,140 for the three and six months ended June 30, 2004, respectively, and $8,573 and $29,259 for the three and six months ended June 30, 2003, respectively. Aggregate amortization expense for intangible assets is estimated to be:

The United States Attorney for the District of South Carolina is conducting an investigation of the Company. Based on the information available to the Company as of the date of this Quarterly Report, the Company believes that the investigation relates principally to issues of financial reporting for Medical Manager Corporation, a predecessor of the Company (by its merger into the Company in September 2000), and the Company’s Medical Manager Health Systems subsidiary; however, the Company cannot be sure of the investigation’s exact scope or how long it may continue. The Company intends to continue to

fully cooperate with the authorities in this matter. While the Company is not able to estimate, at this time, the amount of the expenses that it will incur in connection with the investigation, it expects that they may continue to be significant. For the three and six months ended June 30, 2004, those expenses are reflected as “Legal Expenses” in the accompanying consolidated statements of operations.

In the normal course of business, the Company and its subsidiaries are involved in various other claims and legal proceedings. While the ultimate resolution of these matters, including those discussed in Part II, Item 1 of this Quarterly Report and in the Company’s 2003 Annual Report on Form 10-K under the heading “Legal Proceedings,” has yet to be determined, the Company does not believe that their outcome will have a material adverse effect on the Company’s consolidated financial position or results of operations.

On July 12, 2004, the Company entered into a definitive agreement to acquire VIPS, Inc. (“ViPS”), a privately held provider of information technology, decision support solutions and consulting services to government, Blue Cross Blue Shield and commercial healthcare payers. ViPS develops and provides a full range of solutions for systems support, claims processing, provider performance measurement, quality improvement, fraud prevention, disease management and predictive modeling. The Company will pay approximately $160,000 in cash at closing. The purchase price is subject to customary post-closing adjustments.

This Item 2 contains forward-looking statements with respect to possible events, outcomes or results that are, and are expected to continue to be, subject to risks, uncertainties and contingencies, including those identified in this Item. See “Cautionary Statement Regarding Forward-Looking Statements” on page 3.

Management’s discussion and analysis of financial condition and results of operations, or MD&A, is provided as a supplement to the consolidated financial statements and notes thereto included elsewhere in this Quarterly Report and to provide an understanding of our results of operations, financial condition, and changes in financial condition. Our MD&A is organized as follows:


	•	Introduction. This section provides a general description of WebMD, a brief discussion of our operating segments and background information on certain trends, strategies and other matters discussed in this MD&A.

	•	Critical Accounting Policies and Estimates. This section discusses those accounting policies that both are considered important to our financial condition and results of operations, and require us to exercise subjective or complex judgments in their application. In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Note 1 to the Consolidated Financial Statements contained in our 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

	•	Results of Operations and Results of Operations by Operating Segment. These sections provide our analysis and outlook for the significant line items on our consolidated statements of operations, on both a company-wide and a segment-by-segment basis.

	•	Liquidity and Capital Resources. This section provides an analysis of our liquidity and cash flows, as well as a discussion of our outstanding debt and commitments, that existed as of June 30, 2004.

	•	Factors That May Affect Our Future Financial Condition or Results of Operations. This section describes circumstances or events that could have a negative effect on our financial condition or results of operations, or that could change, for the worse, existing trends in some or all of our businesses. The factors discussed in this section are in addition to factors that may be described elsewhere in this Quarterly Report.

WebMD Corporation is a Delaware corporation that was incorporated in December 1995 and commenced operations in January 1996 as Healtheon Corporation. We changed our name to Healtheon/WebMD Corporation in November 1999 and to WebMD Corporation in September 2000. Our common stock has traded on the Nasdaq National Market under the symbol “HLTH” since February 11, 1999.

On August 1, 2003, we completed the sale of two operating units of our Plastic Technologies segment. Accordingly, the historical results of these two operating units, including the loss related to the divestitures, have been reclassified as discontinued operations in our financial statements.


	•	Transaction Services or WebMD Envoy. We provide healthcare reimbursement cycle management services, including transmission of transactions between healthcare payers and physicians, pharmacies, dentists, hospitals, laboratory companies and other healthcare providers using dial-up, Internet and dedicated communication methods. We provide automated patient billing services to providers, including statement printing and mailing services. In addition, we provide third party


		administrators and health insurers with automated healthcare claims processing technology and outsourcing services for document processing, scanning, data scrubbing and online secure document management, as well as paid-claims communication services, including print-and-mail services for the distribution of checks, remittance advice and explanation of benefits.

	•	Physician Services or WebMD Practice Services. We develop and market integrated physician practice management systems, including administrative, financial and clinical applications and services, under The Medical Manager, Intergy, ULTIA and Medical Manager Network Services brands. These systems and services allow physician offices to automate their scheduling, billing and other administrative tasks, to transmit transactions electronically, to maintain electronic medical records and to automate documentation of patient encounters.

	•	Portal Services or WebMD Health. We provide online healthcare information, educational services and related resources for consumers and healthcare professionals, both directly and through our relationships with leading general consumer Internet portals. We also provide online content for use by media and healthcare partners in their Web sites. We develop and sell online and offline channels of communication and sponsorship programs to pharmaceutical, biotech, medical device and consumer products companies, particularly those who are interested in influencing healthcare decisions. In addition, we provide a suite of online tools and related services to employers and health plans for use by their employees and plan members.

	•	Plastic Technologies or Porex. We develop, manufacture and distribute proprietary porous plastic products and components used in healthcare, industrial and consumer applications, as well as in finished products used in the medical device and surgical markets.

Implementation of the HIPAA Transaction Standards. Under the Healthcare Insurance Portability and Accountability Act of 1996, or HIPAA, Congress mandated a package of interlocking administrative simplification rules, including rules to establish standards and requirements for the electronic transmission of certain healthcare transactions, which we refer to as the Transaction Standards. The compliance date for the Transaction Standards was October 16, 2003. The Transaction Standards are applicable to the portions of our business involving the processing of healthcare transactions among physicians, payers, patients and other healthcare industry participants, including WebMD Envoy and Medical Manager Network Services. In order to implement the Transaction Standards, WebMD Envoy has made and continues to make significant changes to its systems and the software it uses internally. Similarly, the implementation has required payers and providers to simultaneously implement changes to their systems and/or internal procedures. As a result, this implementation process and related testing has been an immense challenge for the healthcare industry, including WebMD. As a leading clearinghouse for healthcare transactions and a leading vendor of physician office management information systems, WebMD has been the focus of a great deal of scrutiny in the implementation process and has received some criticism for difficulties encountered by our customers and for delays in correcting some of those problems. Given the nature and scope of the changes being implemented, the large number of healthcare industry participants involved and our position in the industry, we expected that there would be some processing problems and delays. We continue to work diligently to identify and resolve these problems as they occur, while at the same time committing significant resources to keeping the implementation process moving forward. We expect that the majority of work related to the HIPAA Transaction Standards will be completed by December 31, 2004.

Outsourcing by Healthcare Payers. We are continuing our efforts to transform WebMD Envoy from a commercial clearinghouse to a business process outsourcer. In order to be more efficient, many healthcare payers are focusing upon core activities — building cost-effective provider networks, marketing their services to employers, and adjudicating claims payment — and are outsourcing pre- and post-adjudication administrative activities, such as printing and mailing checks and explanation of benefits and other document management activities, including conversion of paper claims to electronic form. By

Our discussion and analysis of WebMD’s financial condition and results of operations are based upon our Consolidated Financial Statements and Notes to Consolidated Financial Statements, which were prepared in conformity with accounting principles generally accepted in the United States. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience, current business factors, and various other assumptions that we believe are necessary to form a basis for making judgments about the carrying values of assets and liabilities and disclosure of contingent assets and liabilities. We are subject to uncertainties such as the impact of future events, economic, environmental and political factors, and changes in our business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in preparation of our financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in reported results of operations; if material, the effects of changes in estimates are disclosed in the notes to our consolidated financial statements.

We evaluate our estimates on an ongoing basis, including those related to revenue recognition, short-term and long-term investments, deferred tax assets, income taxes, collectibility of customer receivables, prepaid content and distribution services, long-lived assets including goodwill and other intangible assets, software development costs, inventory valuation, certain accrued expenses, accruals related to our restructuring program, contingencies, litigation and the value attributed to warrants issued for services.

We believe the following reflects our critical accounting policies and our more significant judgments and estimates used in the preparation of our consolidated financial statements:


	•	Revenue. Our revenue recognition policies for each reportable segment are as follows:


	Transaction Services or WebMD Envoy. Healthcare payers and providers pay us fees for our services, generally on a per transaction basis or monthly basis. We recognize revenue as we perform the service. Healthcare payers and providers also pay us one-time implementation and annual maintenance fees. We recognize revenue from these fees ratably over the term of the respective agreements.

	Physician Services or WebMD Practice Services. Healthcare providers pay us one-time fees for the purchase of our practice management systems. We recognize revenue from these one-time fees when we enter into noncancelable agreements with our customers, the products have been delivered and there are no uncertainties regarding product acceptance and delivery, no significant future performance obligations exist, fees are fixed and determinable and collectability is probable. Amounts received in advance of meeting these criteria are deferred until we meet these criteria. Revenue from multiple-element software arrangements is recognized using the residual method as vendor specific objective evidence (“VSOE”) of fair value exists for the undelivered elements, but not for all of the delivered elements. The residual method requires revenue to be allocated to the undelivered elements based on the fair value of such elements, as indicated by VSOE. VSOE is based on the price charged when an element is sold separately. Healthcare providers also pay us fees for maintenance and support of their practice management system, including the hardware and software. We recognize revenue from these fees ratably over the contract period, typically in one year or less. Healthcare providers also pay us fees for transmitting transactions to payers and patients. We recognize revenue from these fees, which are generally paid on a monthly or per transaction basis, as we provide the service.


	Portal Services or WebMD Health. Customers pay us for advertising, sponsorship, healthcare management tools, continuing medical education (“CME”), content syndication and distribution, and e-commerce transactions related to our online distribution channels and the online and offline distribution channels of our strategic partners. Revenue from advertising is recognized as advertisements are delivered. Revenues from sponsorship arrangements and healthcare management tools are recognized ratably over the term of the applicable agreement. Revenue from CME arrangements is recognized over the period we satisfy the minimum credit hour requirements of the applicable agreements. Revenue from fixed fee content license or carriage fees is recognized ratably over the term of the applicable agreement. E-commerce revenue is recognized when a subscriber or consumer utilizes our Internet-based services or purchases goods or services through our Web site or a Web site co-branded with one of our strategic partners. Subscription revenue, including subscription revenue from sponsorship arrangements, is recognized over the subscription period. When contractual arrangements contain multiple elements, revenue is allocated to the elements based on their relative fair values, determined using prices charged when elements are sold separately.

	Plastic Technologies or Porex. We develop, manufacture and distribute porous plastic products and components. For standard products, we recognize revenue upon shipment of product, net of sales returns and allowances. For sales of certain custom products, we recognize revenue upon completion and customer acceptance. Recognition of amounts received in advance of meeting these criteria is deferred until we meet these criteria.


	•	Long-Lived Assets. Our long-lived assets consist of property and equipment, goodwill and other intangible assets. Goodwill and other intangible assets arise from the acquisitions we have made. The amount assigned to intangible assets is subjective and based on our estimates of the future benefit of the intangible asset using accepted valuation techniques, such as discounted cash flow and replacement cost models. Our long-lived assets, excluding goodwill, are amortized over their estimated useful lives, which we determined based on the consideration of several factors including the period of time the asset is expected to remain in service. We evaluate the carrying value and remaining useful lives of long-lived assets, excluding goodwill, whenever indicators of impairment are present. We evaluate the carrying value of goodwill annually. We use a discounted cash flow approach to determine the fair value of goodwill. There was no impairment of goodwill noted as a result of our impairment testing in 2003.

	•	Investments. Our investments, at June 30, 2004, consist principally of certificates of deposit, municipal bonds, asset-backed securities, Federal Agency Notes, U.S. Treasury Notes and equity investments in publicly traded companies. Each reporting period we evaluate the carrying value of our investments and record a loss on investments when we believe an investment has experienced a decline in value that is other than temporary. We do not recognize gains on an investment until sold. Future changes in market or economic conditions or operating results of our investments could result in gains or losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s carrying value.

	•	Deferred Tax Assets. Our deferred tax assets are comprised primarily of net operating loss carryforwards. At June 30, 2004, we had net operating loss carryforwards of approximately $1.9 billion. These loss carryforwards may be used to offset taxable income in future periods, reducing the amount of taxes we might otherwise be required to pay. Due to a lack of a history of generating taxable income, we record a valuation allowance equal to 100% of our net deferred tax assets. In the event that we are able to generate taxable earnings in the future and determine it is more likely than not that we can realize our deferred tax assets, an adjustment to the valuation allowance would be made which may increase income in the period that such determination was made.

	•	Restructuring and Integration. In connection with our restructuring and integration efforts, modifications to our strategic relationship with News Corporation resulted in a change in the


		carrying value of advertising services we have the rights to, classified as prepaid content and distribution services. We estimated the fair value of our rights under the new agreement using a discounted cash flow approach. This estimate also affects the amortization of this asset in future periods over the contractual term. Also, in connection with our restructuring and integration efforts, we recorded charges for estimated future lease obligations and lease cancellation penalties related to exited facilities based on many different variables, such as the term to expiration, contractual rights under the lease agreement and current real estate market conditions. Future changes in any of these variables, such as a change in real estate market conditions, could have an impact on these estimates.

The following table sets forth our consolidated statements of operations data and expresses that data as a percentage of revenue for the periods presented (amounts in thousands):

Revenue is derived from our four business segments: Transaction Services, Physician Services, Portal Services and Plastic Technologies. Our Transaction Services include administrative services, such as transaction processing for medical, dental and pharmacy claims, automated healthcare claims processing and document management technology and outsourcing services, automated print-and-mail services, paid-claims communication services and clinical lab and reporting services, such as lab test orders and results. A significant portion of Transaction Services revenue is generated from the country’s largest national and regional healthcare payers. Our Physician Services include sales of practice management systems, including administrative, financial and clinical applications and services, under The Medical Manager, Intergy, ULTIA and Medical Manager Network Services brands. We also sell support and maintenance services related to the hardware and software associated with our practice management systems. Portal Services include advertising, sponsorship, continuing medical education, content syndication and distribution, and e-commerce transactions through our online distribution channels and the online and offline distribution channels of our strategic partners. A significant portion of Portal Services revenue is derived from a small number of customers. Our customers include pharmaceutical companies, biotech companies, medical device companies and media companies. Portal Services also provides a suite of online tools and related services to employers and health plans for use by their employees and plan members. Our Plastic Technologies revenue includes the sale of porous plastic components used to control the flow of fluids and gases for use in healthcare, industrial and consumer applications, as well as in finished products used in the medical device and surgical markets.

Cost of operations consists of costs related to services and products we provide to customers and costs associated with the operation and maintenance of our networks. These costs include salaries and related expenses for network operations personnel and customer support personnel, telecommunication costs, maintenance of network equipment, cost of postage related to our automated print-and-mail services and paid-claims communication services, cost of hardware related to the sale of practice management systems, a portion of facilities expenses, leased personnel and facilities costs, sales commissions paid to certain distributors of our Transaction Services products and non-cash expenses related to content and distribution services. In addition, cost of operations includes raw materials, direct labor and manufacturing overhead, such as fringe benefits and indirect labor related to our Plastic Technologies segment.

Development and engineering expense consists primarily of salaries and related expenses associated with the development of applications and services. Expenses include compensation paid to development and engineering personnel, fees to outside contractors and consultants, and the maintenance of capital equipment used in the development process.

Sales, marketing, general and administrative expense consists primarily of advertising, product and brand promotion, salaries and related expenses for sales, administrative, finance, legal, information technology, human resources and executive personnel. These expenses include items related to account management and marketing personnel, commissions, costs and expenses for marketing programs and trade shows, and fees for professional marketing and advertising services, as well as fees for professional services, costs of general insurance and costs of accounting and internal control systems to support our operations. Also included are non-cash expenses related to content and distribution services acquired in exchange for our equity securities and stock compensation expense primarily related to the amortization of deferred compensation. Content and distribution services consist of advertising, promotion and distribution services from our arrangements with News Corporation, Microsoft, AOL and other partners. Stock compensation primarily relates to deferred compensation associated with the intrinsic value of the unvested portion of stock options issued in exchange for outstanding stock options of companies we acquired in 2000, the excess of the market price over the exercise price of options granted to employees and the market price of restricted stock granted to employees.

Legal expense consists of costs and expenses related to the investigation by the United States Attorney for the District of South Carolina and the SEC.

The following discussion includes a comparison of the results of operations for the three and six months ended June 30, 2004 to the three and six months ended June 30, 2003. Amounts are in thousands unless otherwise noted.

Revenues for the three months ended June 30, 2004 were $281,881, compared to $233,418 for the three months ended June 30, 2003. The Transaction Services, Portal Services and Plastic Technologies segments were responsible for $48,016, $5,314 and $2,141, respectively, of the revenue increase for the quarter, which was partially offset by a decrease in revenue of $5,024 in Physician Services and an increase of $1,984 in inter-segment eliminations.

Revenues for the six months ended June 30, 2004 were $553,095, compared to $454,949 for the six months ended June 30, 2003. Transaction Services, Portal Services and Plastic Technologies segments were responsible for $96,302, $9,443 and $3,236, respectively, of the revenue increase for the six-month period, which was partially offset by a decrease in revenue of $6,029 in Physician Services and an increase of $4,806 in inter-segment eliminations.

Revenue from customers acquired through the 2004 Acquisitions and 2003 Acquisitions contributed $38,938 to the overall increase in revenue of $48,463 for the three months ended June 30, 2004, and $79,652 to the overall increase in revenue of $98,146 for the six months ended June 30, 2004. For purposes of this discussion, only revenue from existing customers of the acquired business on the date of the acquisition is considered to be revenue from acquired customers. We integrate acquisitions as quickly

Cost of Operations. Cost of operations was $163,961 and $326,603 for the three and six months ended June 30, 2004, compared to $135,441 and $261,286 in the prior year periods. Our cost of operations represented 58.2% and 59.0% of revenues for the three and six months ended June 30, 2004, compared to 58.0% and 57.4% for the three and six months ended June 30, 2003. The inclusion of the Medifax operations had a favorable impact on cost of operations as a percentage of revenue for both the three and six month periods ended June 30, 2004 when compared to a year ago, as Medifax products have higher gross margins than the average gross margins of other products we offer. Partially offsetting the favorable impact of the inclusion of the Medifax operations for both the three and six months ended June 30, 2004 when compared to a year ago was the inclusion of the ABF operations which have products with lower gross margins, due to the high cost of postage associated with providing ABF’s services. Excluding the effect of the ABF and Medifax acquisitions, cost of operations for both the three and six month periods ended June 30, 2004 when compared to a year ago was also impacted by higher sales commissions, as a percentage of revenue, paid to our channel partners and higher costs related to our implementation efforts with respect to the HIPAA Transaction Standards and our “all-payer” transaction services. Included in cost of operations were non-cash expenses related to content and distribution services of $346 and $601 during the three and six months ended June 30, 2004 and $827 during both the three and six months ended June 30, 2003, respectively.

Development and Engineering. Development and engineering expense was $12,991 and $24,087 for the three and six months ended June 30, 2004, compared to $10,403 and $21,320 in the prior year periods. The increase in development and engineering expense for the three and six month periods was primarily attributable to inclusion of the expenses of the Medifax and ABF operations in the 2004 periods.

Sales, Marketing, General and Administrative. Sales, marketing, general and administrative expense increased 20.1% and 16.6% to $83,298 and $160,292 for the three and six months ended June 30, 2004, compared to $69,359 and $137,467 in the prior year periods. Included in sales, marketing, general and administrative expense are non-cash expenses related to content and distribution services and stock compensation. Non-cash expenses related to content and distribution services were $5,645 and $10,683 for the three and six months ended June 30, 2004, compared to $5,176 and $11,322 for the prior year periods. Non-cash stock compensation was $2,736 and $4,441 for the three and six months ended June 30, 2004, compared to $3,801 and $7,558 for the prior year periods. The decrease in non-cash stock compensation is primarily related to the vesting schedules of options issued and assumed in connection with acquisitions we made in 2000, partially offset by additional compensation expense during the three months ended June 30, 2004 related to restricted stock issued to certain employees in March 2004.

Sales, marketing, general and administrative expense, excluding the non-cash expenses discussed above, increased to $74,917 and $145,168 or 26.6% and 26.2% of revenue, for the three and six months ended June 30, 2004, compared to $60,382 and $118,587, or 25.9% and 26.1% of revenue, for the prior year periods. The increase in sales, marketing, general and administrative expense for both the three and six months ended June 30, 2004 is due to higher personnel and professional services costs related to our implementation efforts with respect to the HIPAA Transaction Standards and our “all-payer” transaction services and our readiness efforts related to Section 404 of the Sarbanes-Oxley Act of 2002. Partially offsetting the increase in sales, marketing, general and administrative expense as a percentage of revenue for both the three and six months ended June 30, 2004 was the impact of the inclusion, in 2004, of the ABF operations which have lower administrative expenses as a percentage of revenue than our other operations.

Depreciation, Amortization and Other. Depreciation, amortization and other expense decreased to $13,148 and $25,733 for the three and six months ended June 30, 2004, compared to $14,944 and $41,864 in the prior year periods. The decrease was the result of intangible assets relating to certain acquisitions

Legal Expense. Legal expense was $2,215 and $4,252 for the three and six months ended June 30, 2004 and represents the costs and expenses incurred related to the investigation by the United States Attorney for the District of South Carolina and the SEC. Over the course of the investigation, we expect that these costs and expenses may continue to be significant.

Interest Income. Interest income was $4,511 and $9,994 during the three and six months ended June 30, 2004, compared to $4,985 and $10,033 in the prior year periods. This decrease was primarily due to lower average rates of return, partially offset by higher average investment balances.

Interest Expense. Interest expense was $4,838 and $9,586 for the three and six months ended June 30, 2004, compared to $2,926 and $5,741 for the prior year periods. Interest expense increased for the three and six months ended June 30, 2004, compared to prior year periods as a result of interest expense and amortization of debt issuance costs related to the 1.75% Convertible Subordinated Notes issued in June and July of 2003.

Other Income, Net. Other income during the three and six months ended June 30, 2004 includes a gain on the sale of marketable securities of $447. Also included in other income during the six months ended June 30, 2004 was a gain of $121 from the sale of property offset by a loss on the sale of marketable securities of $84. Other income during the three and six months ended June 30, 2003 includes a benefit of $1,118, related to a state tax refund which applied to a pre-acquisition tax year of a company we acquired. Also included in other income during the six months ended June 30, 2003 is a gain of $183, primarily related to investments in two marketable securities that were called for early redemption during the quarter ended March 31, 2003.

Income Tax Provision. The income tax provision of $613 and $1,544 for the three and six months ended June 30, 2004, and $1,001 and $1,988 for the three and six months ended June 30, 2003, primarily related to tax expense for operations that are profitable in certain states and foreign countries in which we do not have net operating losses to offset that income.

Discontinued Operations. Loss from discontinued operations during the three and six months ended June 30, 2003 represents the operating results of the discontinued units of the Plastic Technologies segment. Included in the loss from discontinued operations during the three and six months ended June 30, 2003 is an impairment charge of $33,113 to reduce certain long-lived assets of the discontinued units to fair value.

We evaluate the performance of our business segments based upon income or loss before taxes, non-cash and other items. Non-cash and other items include depreciation, amortization, expenses related to the investigation by the United States Attorney for the District of South Carolina and the SEC (“legal expense”), gain on investments, other income, non-cash expenses related to content, advertising and distribution services acquired in exchange for our equity securities in acquisitions and strategic alliances, and stock compensation expense primarily related to stock options issued and assumed in connection with acquisitions and restricted stock issued to employees. The accounting policies of the segments are consistent with those described in the summary of significant accounting policies in Note 1 to the consolidated financial statements contained in our 2003 Annual Report on Form 10-K. We record inter-segment revenues at rates comparable to those charged to third parties for comparable services. Inter-segment revenues are eliminated in consolidation.

Summarized financial information for each of our operating segments and a reconciliation to net income (loss) is presented below (amounts in thousands):

The following discussion is a comparison of the results of operations for each of our operating segments for the three and six months ended June 30, 2004 to the three and six months ended June 30, 2003.

Transaction Services. Revenues were $166,037 and $329,816 for the three and six months ended June 30, 2004, compared to $118,021 and $233,514 for the prior year periods. Revenues from customers acquired through the 2004 Acquisitions and 2003 Acquisitions contributed $38,361 and $78,194 of the increase for the three and six months ended June 30, 2004. The remaining increases of $9,655 and $18,108 for the three and six months ended June 30, 2004 were primarily the result of increased sales of our paid-claims communication services, EDI transaction services and automated print-and-mail services.

Income before taxes, non-cash and other items was $28,914 and $58,764 for the three and six months ended June 30, 2004, an increase of $6,572 or 29.4% and $12,371 or 26.7%, compared to the prior year periods. As a percentage of revenue, income before taxes, non-cash and other items declined to 17.4% and 17.8% for the three and six months ended June 30, 2004, compared to 18.9% and 19.9% for the prior year periods. These decreases were primarily due to higher sales commissions paid to our channel partners, and increased costs related to our implementation efforts with respect to the HIPAA Transaction Standards and our “all-payer” transaction services. These higher costs were partially offset by the inclusion, in 2004, of the higher operating margins of ABF and Medifax.

Physician Services. Revenues were $71,773 and $142,779 for the three and six months ended June 30, 2004, a decrease of $5,024 and $6,029 compared to the prior year periods. The decrease in revenues for both the three and six months ended June 30, 2004, compared to a year ago, related to lower systems sales resulting from longer and more complex sales cycles and from HIPAA implementation and other transition challenges related to our “all-payer” transaction services, partially offset by a continued increase in Network Services revenues. Revenue from customers acquired through the 2004 Acquisitions and 2003 Acquisitions was $577 and $958 for the three and six months ended June 30, 2004, respectively.

Income before taxes, non-cash and other items was $1,771 and $3,122 for the three and six months ended June 30, 2004, compared to $6,359 and $12,656 in the prior year periods. As a percentage of revenue, income before taxes, non-cash and other items was 2.5% and 2.2% for the three and six months ended June 30, 2004, compared to 8.3% and 8.5% for the prior year periods. These decreases as a percentage of revenue were primarily attributable to the lower systems sales discussed above combined with lower systems margins.

Portal Services. Revenues were $31,852 and $58,161 for the three and six months ended June 30, 2004, an increase of $5,314 or 20.0% and $9,443 or 19.4%, compared to the prior year periods. These increases were primarily attributable to growth in online revenues from pharmaceutical and medical device companies, as well as increases in revenues from large employers and commercial payers for our web-based health and benefits management solutions. Revenues from customers acquired through the 2003 Acquisitions contributed $500 to the increase in Portal Services revenue for the six months ended June 30, 2004.

Income before taxes, non-cash and other items was $7,626 and $12,168 for the three and six months ended June 30, 2004, an increase of $1,434 or 23.2% and $1,958 or 19.2%, compared to the prior year periods. As a percentage of revenue, income before taxes, non-cash and other items was 23.9% and 20.9% for the three and six months ended June 30, 2004, compared to 23.3% and 21.0% for the prior year periods. The increase as a percentage of revenue for the three months ended June 30, 2004, compared to a year ago, was primarily the result of reduced marketing expenses combined with variability in the timing of revenues.

Plastic Technologies. Revenues were $20,737 and $39,158 for the three and six months ended June 30, 2004, an increase of $2,141 and $3,236 compared to the prior year periods. The increase for the three months ended June 30, 2004, compared to a year ago, was primarily due to increased sales of writing instrument components and, to a lesser extent, sales of a new consumer filtration product. Also contributing to the increase in revenues during the six months ended June 30, 2004, compared to a year ago, was the favorable impact of foreign exchange rates.

Income before taxes, non-cash and other items was $6,275 and $11,317 for the three and six months ended June 30, 2004, an increase of $768 or 13.9% and $1,150 or 11.3%, compared to the prior year periods. As a percentage of revenue, income before taxes, non-cash and other items was 30.3% and 28.9% for the three and six months ended June 30, 2004, compared to 29.6% and 28.3% for the prior year periods. These increases as a percentage of revenue were primarily due to an increase in sales of higher margin products and the leveraging effect of certain fixed manufacturing costs.

Corporate includes expenses shared across all segments, such as executive personnel, corporate finance, legal, human resources and risk management. Corporate expenses increased to $14,228 and $27,533 during the three and six months ended June 30, 2004, compared to $12,381 and $24,843 in the prior year periods, primarily as a result of higher professional services costs related to our readiness efforts related to Section 404 of the Sarbanes-Oxley Act of 2002.

Inter-Segment Eliminations. The increase in inter-segment eliminations for the three and six months ended June 30, 2004, compared to the prior year periods, resulted from higher sales of Transaction Services products into the Physician Services customer base.

We have incurred significant operating and net losses since we began operations and, as of June 30, 2004, we had an accumulated deficit of $10.2 billion. We plan to continue to invest in acquisitions, strategic relationships, infrastructure and product development.

As of June 30, 2004, we had $207,217 in cash and cash equivalents and short-term investments and working capital of $145,437. Additionally, we had long-term investments of $592,105 in marketable debt securities and $3,206 in marketable equity securities. We invest our excess cash principally in U.S. Treasury obligations and Federal Agency Notes and expect to do so in the future.

Cash provided by operating activities was $40,648 for the six months ended June 30, 2004, compared to $37,319 for the six months ended June 30, 2003. The cash provided by operating activities for the six months ended June 30, 2004 was primarily attributable to the net income of $11,476 and non-cash charges of $42,956, partially offset by net changes in operating assets and liabilities of $13,300. The negative impact of changes in operating assets and liabilities may reverse in future periods, depending on the timing of each period end in relation to items such as payroll and billing cycles, payments from customers, payments to vendors, interest payments relating to our 1.75% and 3 1/4% Convertible Subordinated Notes and interest receipts relating to our investments in marketable securities. The cash provided by operating activities for the six months ended June 30, 2003 was primarily attributable to non-cash charges of $62,345 and the loss from discontinued operations of $30,245, partially offset by a net loss of $33,628 and net changes in operating assets and liabilities of $26,013. The non-cash charges consist of depreciation and amortization, non-cash expenses related to content and distribution services, stock compensation and amortization of debt issuance costs.

Cash used in investing activities was $15,127 for the six months ended June 30, 2004, compared to $50,383 for the six months ended June 30, 2003. Cash used in investing activities for the six months ended June 30, 2004 related to $274,600 of purchases of available-for-sale securities and cash paid in relation to business combinations of $58,060 offset by $329,163 of proceeds from maturities and sales of available-for-sale securities. Cash used in investing activities for the six months ended June 30, 2003 primarily related to purchases of held-to-maturity securities, partially offset by maturities and redemptions of held-to-maturity securities. Investments in property and equipment were $12,047 and $8,861 for the six months ended June 30, 2004 and 2003, respectively.

Cash provided by financing activities was $117,992 for the six months ended June 30, 2004, compared to $294,390 for the six months ended June 30, 2003. Cash provided by financing activities for the six months ended June 30, 2004 principally related to the net proceeds of $98,115 from the issuance of our convertible redeemable exchangeable preferred stock and proceeds of $25,011 primarily related to exercises of employee stock options. Cash provided by financing activities for the six months ended June 30, 2003 primarily related to $290,500 of net proceeds from the issuance of our 1.75% Convertible Subordinated Notes on June 25, 2003. During the six months ended June 30, 2004 and 2003, $4,877 and $18,125, respectively, was used for repurchases of our common stock.

As of June 30, 2004, we did not have any material commitments for capital expenditures. Our principal commitments at June 30, 2004 were our commitments related to the $350,000 of 1.75% Convertible Subordinated Notes due in June of 2023, the $299,999 of 3 1/4% Convertible Subordinated Notes due in April of 2007, our $100,000 of Convertible Redeemable Exchangeable Preferred Stock and obligations under operating leases. Additionally, we had commitments to make potential earnout payments of up to an aggregate of $163,450, as of June 30, 2004, related to completed acquisitions.

Our contractual obligations, contingencies and commitments for minimum lease payment obligations under non-cancelable operating leases have not changed materially from December 31, 2003.

We believe that, for the foreseeable future, we will have sufficient cash resources to meet the commitments described above and our current anticipated working capital and capital expenditure requirements, including the capital requirements related to the roll-out of new or updated products in 2004

and 2005. Our future liquidity and capital requirements will depend upon numerous factors, including the success of the integration of our businesses, retention of customers at current volume and revenue levels, our existing and new application and service offerings, competing technological and market developments, potential future acquisitions and additional repurchases of our common stock. In addition, we have been incurring, and expect to continue to incur, costs relating to our own implementation of the HIPAA Transaction Standards and for assistance we provide to our customers in their implementation efforts. Our ability to perform our services in compliance with HIPAA and the cost to us of doing so will depend on, among other things, the status of the compliance efforts of our payer and provider customers and the extent of the need to adjust our systems and procedures in response to changes in their systems and procedures. We may need to raise additional funds to support expansion, develop new or enhanced applications and services, respond to competitive pressures, acquire complementary businesses or technologies or take advantage of unanticipated opportunities. If required, we may raise such additional funds through public or private debt or equity financing, strategic relationships or other arrangements. There can be no assurance that such financing will be available on acceptable terms, if at all, or that such financing will not be dilutive to our stockholders.

We recently announced that, at the direction of our Board of Directors, our management has begun a process of exploring alternatives, with respect to our Portal Services business, relating to a possible public offering of equity in that business. No decision has been made regarding the form that any such transaction would take and our Board of Directors may determine not to pursue such a transaction. In addition, we cannot provide assurance that any such transaction, if pursued, will be successfully completed.

Factors That May Affect Our Future Financial Condition or Results of Operations

This section describes circumstances or events that could have a negative effect on our financial results or operations or that could change, for the worse, existing trends in some or all of our businesses. The occurrence of one or more of the circumstances or events described below could have a material adverse effect on our financial condition, results of operations and cash flows or on the trading prices of the common stock and convertible notes that we have issued. The risks and uncertainties described below are not the only ones facing WebMD. Additional risks and uncertainties that are not currently known to us or that we currently believe are immaterial may also adversely affect our business and operations.

There can be no assurance that healthcare payers will continue to use WebMD Envoy and other independent companies to transmit healthcare transactions. Some payers currently offer electronic data transmission services to healthcare providers that bypass third-party EDI service providers such as WebMD Envoy. In addition, some payers currently offer electronic data transmission services through affiliated clearinghouses that compete with WebMD Envoy. See “We may lose customers that compete with one or more of our businesses because they perform services internally instead of using a third party provider” below. We cannot provide assurance that we will be able to maintain our existing relationships with payers or develop new relationships on satisfactory terms, if at all. Although the standardization of formats and data standards required by HIPAA is only partial and we believe that use of clearinghouses will continue to be the most efficient way for most providers to transact electronically with multiple payers, such standardization may facilitate additional use of EDI links for transmission of transactions between a greater number of healthcare payers and providers without use of a clearinghouse. Any significant increase in the utilization of links between healthcare providers and payers without use of a third party clearinghouse could have a material adverse effect on WebMD Envoy’s transaction volume and financial results. In addition, any increase in the ability of payers to bypass third party EDI service providers may

Some of our existing payer and provider customers and some of our strategic partners may compete with us or plan to do so or belong to alliances that compete with us or plan to do so. For example, some payers currently offer, through affiliated clearinghouses, Web portals and other means, electronic data transmission services to healthcare providers that allow the provider to bypass third party EDI service providers such as WebMD Envoy. We cannot provide assurance that we will be able to maintain our existing links to payers or develop new connections on satisfactory terms, if at all. In addition, some of our other services allow healthcare payers to outsource business processes that they have been or could be performing internally and, in order for us to be able to compete, use of our services must be more efficient for them than use of internal resources.

We have developed relationships with practice management system vendors and large submitters of healthcare claims to increase the usage of our WebMD Envoy transaction services. WebMD Practice Services is a competitor of these practice management system vendors. These vendors, as a result of our ownership of WebMD Practice Services or for other reasons, may choose in the future to diminish or terminate their relationships with WebMD Envoy. Some other large submitters of claims compete with, or may have significant relationships with entities that compete with, WebMD Envoy or WebMD Health. To the extent that we are not able to maintain mutually satisfactory relationships with the larger practice management system vendors and large submitters of healthcare EDI transactions, WebMD Envoy’s transaction volume and financial results could be adversely affected.

Lengthened sales, installation and implementation cycles for WebMD Practice Services applications may result in unanticipated fluctuations in its revenues

WebMD Practice Services is seeking to increase its sales to larger physician groups and clinics. These sales are typically not only larger in size, but also involve more complex practice management and electronic medical records applications. As a result, we expect longer sales, contracting, installation and implementation cycles for these customers. These sales may be subject to delays due to customers’ internal procedures for approving large expenditures and for deploying new technologies; implementation may be subject to delays based on the availability of the internal customer resources needed. We are unable to control many of the factors that will influence the timing of the buying decisions of potential customers or the pace at which installation and training may occur. Unexpected delays in these sales or in their implementation may result in unanticipated fluctuations in the revenues of WebMD Practice Services.

WebMD Practices Services faces competition for the support services it markets to owners of The Medical Manager systems, as well as for similar services that we market to owners of certain other practice management systems that we have acquired. Physician practices may seek such support from third parties, including businesses that support or manage information technology for various types of clients and businesses that specialize in systems for physicians, some of whom may formerly have been independent dealers of The Medical Manager software or of practice management systems we have acquired. We cannot provide assurance that we will be able to compete successfully against these service providers. In addition, some physician practices, especially larger ones, may use their own employees and other internal resources to support their practice management systems.

A substantial portion of WebMD Health’s revenues come from a relatively small number of companies. Thus, the loss of a small number of these relationships or a reduction in the purchases by a portion of these sponsors could have a material adverse effect on our Portal Services revenues. We may lose such relationships or experience a reduction in purchases if customers decide not to renew their commitments or renew at lower levels, which may occur if we fail to meet our customers’ expectations or needs or fail to keep up with our competition or for reasons outside our control, including changes in economic and regulatory conditions affecting the healthcare industry or changes specific to the businesses of particular customers. For more information, see “Risks Related to Providing Products and Services to the Healthcare Industry — Developments in the healthcare industry could adversely affect our business” below and “Business — Government Regulation” in our 2003 Annual Report on Form 10-K.

We could be subject to claims by third parties, and to liability, as a result of the activities, products or services of our strategic partners or resellers of our products and services. Even if these claims do not result in liability to us, investigating and defending these claims could be expensive, time-consuming and result in adverse publicity that could harm our business.

We must introduce new healthcare information services and technology solutions and improve the functionality of our existing products and services in a timely manner in order to retain existing customers and attract new ones. However, we may not be successful in responding to technological and regulatory developments and changing customer needs. The pace of change in the markets we serve is rapid, and there are frequent new product and service introductions by our competitors and by vendors whose products and services we use in providing our own products and services. If we do not respond successfully to technological and regulatory changes and evolving industry standards, our products and services may become obsolete. Technological changes may also result in the offering of competitive products and services at lower prices than we are charging for our products and services, which could result in our losing sales unless we lower the prices we charge. In addition, there can be no assurance that the products we develop or license will be able to compete with the alternatives available to our customers. For more information about the competition we face, see “Business — Healthcare Information Services and Technology Solutions — Competition for Our Healthcare Information Services and Technology Solutions” in our 2003 Annual Report on Form 10-K.

We rely on a combination of internal development, strategic relationships, licensing and acquisitions to develop our products and services. The cost of developing new healthcare information services and technology solutions is inherently difficult to estimate. Our development and implementation of proposed products and services may take longer than originally expected, require more testing than originally anticipated and require the acquisition of additional personnel and other resources. If we are unable to develop new or updated products and services on a timely basis and implement them without significant disruptions to the existing systems and processes of our customers, we may lose potential sales and harm our relationships with current or potential customers.

For example, we have been incurring, and expect to continue to incur, significant expenses relating to implementation of the HIPAA electronic transaction and code sets standards and our “all-payer” suite of services, including expenses for additional technical and customer service personnel.


	•	Implementation of the HIPAA transaction standards requires us, among other things, to make significant changes to the software WebMD Envoy uses internally, to engage in testing with its customers and to implement additional quality assurance processes. If our reprogramming and testing are not completed on a timely basis, we could lose customers and revenues.

	•	Implementation of our “all-payer” suite of transaction services requires us to expand our connectivity to support a broader set of transaction services to non-commercial payers in key markets as well as to improve the functional capability of our claims and accounts receivable management solutions. We may not have enough technicians, programmers and customer service personnel to meet the demands placed on those functions by our customers and partners during the implementation period, which could adversely affect our relationships with them.

The amount and timing of future expenses for the HIPAA and “all-payer” implementations are difficult to estimate and may exceed amounts we have budgeted or continue for longer than expected. For more information, see “Business — Government Regulation” in our 2003 Annual Report on Form 10-K.

There can be no assurance that healthcare providers and payers will accept from us new or updated products and services or products and services that result from integrating existing and/or acquired products and services. Providers and payers may choose to use similar products and services offered by our competitors if they are already using products and services of those competitors and have made extensive investments in hardware, software and training relating to those products and services. Even providers and payers who are already our customers may not purchase new or updated products or services, especially when they are initially offered. Providers and payers using our existing products and services may refuse to adopt new or updated products and services when they have made extensive investments in hardware, software and training relating to those existing products and services. In addition, there can be no assurance that any pricing strategy that we implement for any such products and services will be economically viable or acceptable to the target markets. Failure to achieve broad penetration in target markets with respect to new or updated products and services could have a material adverse effect on our business prospects.

For example, we are working to transform WebMD Envoy from a commercial claims clearinghouse to a supplier of a full complement of reimbursement cycle management solutions, including outsourcing of pre- and post-adjudication services for payer customers, sending claims transactions and receiving electronic remittance advice transactions for our provider and vendor customers, and other value-added services. However, there can be no assurance that customers who use our services for sending and receiving claims will use our other services, that our other services will attract additional customers or that such services will generate sufficient revenues to cover the costs of developing, marketing and providing those services.

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

Undetected errors in the software and systems we provide to customers or the software and systems we use to provide services could cause serious problems for our customers. For example, errors in our transaction processing systems can result in healthcare payers paying the wrong amount or making payments to the wrong payee. If problems like these occur, our customers may seek compensation from us or may seek to terminate their agreements with us, withhold payments due to us, seek refunds from us of part or all of the fees charged under those agreements or initiate litigation or other dispute resolution procedures. We also provide products and services that assist in healthcare decision-making, including some that relate to patient medical histories and treatment plans. If these products malfunction or fail to provide accurate and timely information, we could be subject to product liability claims. In addition, we could face breach of warranty or other claims or additional development costs if our software and systems do not meet contractual performance standards, do not perform in accordance with their documentation, or do not meet the expectations that our customers have for them. Our software and systems are inherently complex and, despite testing and quality control, we cannot be certain that errors will not be found in prior versions, current versions or future versions or enhancements. See also “During times when we are making significant changes to our products and services, there are increased risks of performance problems” below.

We attempt to limit, by contract, our liability for damages arising from negligence, errors or mistakes. However, contractual limitations on liability may not be enforceable in certain circumstances or may otherwise not provide sufficient protection to us from liability for damages. We maintain liability insurance coverage, including coverage for errors and omissions. However, it is possible that claims could exceed the amount of our applicable insurance coverage or that this coverage may not continue to be available on acceptable terms or in sufficient amounts. Even if these claims do not result in liability to us, investigating and defending against them could be expensive and time consuming and could divert management’s attention away from our operations. In addition, negative publicity caused by these events may delay market acceptance of our products and services, including unrelated products and services.

We process payer and provider transactions and data at our own facilities and at a data center in Tampa, Florida that is operated by an independent third party. We have contingency plans for emergencies with our systems; however, we have limited backup facilities to process information if these facilities are not functioning. The occurrence of a major catastrophic event or other system failure at any of our facilities or at the third-party facility could interrupt data processing or result in the loss of stored data, which could have a material adverse impact on our business.

Our payer and provider customer satisfaction and our business could be harmed if WebMD Envoy experiences transmission delays or failures or loss of data in its systems. WebMD Envoy’s systems are complex and, despite testing and quality control, we cannot be certain that problems will not occur or that they will be detected and corrected promptly if they do occur. See also “During times when we are making significant changes to our products and services, there are increased risks of performance problems” below.

If we do not respond successfully to technological and regulatory changes and evolving industry standards, our products and services may become obsolete. See “Our ability to generate revenue could suffer if we do not continue to update and improve our existing products and services and develop new ones” above. The software and systems that we sell and that we use to provide services are inherently complex and, despite testing and quality control, we cannot be certain that errors will not be found in any enhancements, updates and new versions that we market or use. Even if new products and services do not

For example, we have had and may continue to have transmission or processing problems relating to implementation of the HIPAA electronic transaction and code sets standards and our “all-payer” suite of services. See “Developing and implementing new or updated products and services may take longer and cost more than expected” above. These problems include: transmission failures resulting from sending large batches of electronic transactions to non-commercial payers who have been accustomed to receiving transactions through a greater number of smaller batches; enrollment and other set-up errors resulting from initiating services to large numbers of customers simultaneously; and various other transmission, processing, interfacing and service problems resulting from the implementation of new software and new business processes.

A significant security breach could damage our reputation or result in liability. We retain and transmit confidential information, including patient health information, in our processing centers and other facilities. It is critical that these facilities and infrastructure remain secure and be perceived by the marketplace as secure. We may be required to expend significant capital and other resources to protect against security breaches and hackers or to alleviate problems caused by breaches. Despite the implementation of security measures, this infrastructure or other systems that we interface with, including the Internet and related systems, may be vulnerable to physical break-ins, hackers, improper employee or contractor access, computer viruses, programming errors, attacks by third parties or similar disruptive problems. Any compromise of our security, whether as a result of our own systems or systems that they interface with, could reduce demand for our services. See also “Business — Government Regulation — Health Insurance Portability and Accountability Act of 1996 — Security Standards” in our 2003 Annual Report on Form 10-K.

WebMD Envoy provides the transaction services, including the “all-payer” transaction services, used by the Medical Manager Network Services customers of our Practice Services business. As an increasing number of our WebMD Practice Services customers rely on us to provide our “all-payer” suite of transaction services, disruptions to those services could cause some of those customers to obtain some or all of their software support requirements from competitors of ours or could cause some customers to switch to a competing physician practice management or billing software solution.

WebMD Envoy relies on a limited number of suppliers to provide some of the telecommunications services necessary for its transaction services. The telecommunications industry has been subject to significant changes as a result of changes in technology, regulation and the underlying economy. Recently, many telecommunications companies have experienced financial problems and some have sought bankruptcy protection. Some of these companies have discontinued telecommunications services for which they had contractual obligations to WebMD Envoy. WebMD Envoy’s inability to source telecommunications services at reasonable prices due to a loss of competitive suppliers could affect its ability to maintain its margins until it is able to raise its prices to its customers and, if it is not able to raise its prices, could have a material adverse effect on its financial results.

Almost all of the revenues of WebMD Health, WebMD Envoy and WebMD Practice Services come from customers in various parts of the healthcare industry. In addition, a significant portion of Porex’s revenues come from products used in healthcare or related applications. Developments that result in a reduction of expenditures by customers or potential customers in the healthcare industry could have a material adverse effect on our business. General reductions in expenditures by healthcare industry participants could result from, among other things:


	•	government regulation or private initiatives that affect the manner in which healthcare providers interact with patients, payers or other healthcare industry participants, including changes in pricing or means of delivery of healthcare products and services (for additional discussion of the potential effects of regulatory matters on our business and on participants in the healthcare industry, see the other “Risks Related to Providing Products and Services to the Healthcare Industry” described below in this section and “Business — Government Regulation” in our 2003 Annual Report on Form 10-K);

	•	consolidation of healthcare industry participants;

	•	reductions in governmental funding for healthcare; and

	•	adverse changes in business or economic conditions affecting healthcare payers or providers, pharmaceutical companies, medical device manufacturers or other healthcare industry participants.

Even if general expenditures by industry participants remain the same or increase, developments in the healthcare industry may result in reduced spending on information technology and services or in some or all of the specific segments of that market we serve or are planning to serve. For example, use of our products and services could be affected by:


	•	changes in the billing patterns of healthcare providers;

	•	changes in the design of health insurance plans;

	•	changes in the contracting methods payers use in their relationships with providers; and

	•	decreases in marketing expenditures by pharmaceutical companies or medical device manufacturers, including as a result of governmental regulation or private initiatives that discourage or prohibit promotional activities by pharmaceutical or medical device companies.

In addition, expectations of our customers regarding pending or potential industry developments may also affect their budgeting processes and spending plans with respect to products and services of the types we provide.

The healthcare industry has changed significantly in recent years and we expect that significant changes will continue to occur. However, the timing and impact of developments in the healthcare industry are difficult to predict. We cannot provide assurance that the markets for our products and services will continue to exist at current levels or that we will have adequate technical, financial and marketing resources to react to changes in those markets.

Application of the Transaction Standards to WebMD. October 16, 2003 was the deadline for covered entities to comply with HIPAA’s electronic transaction and code sets standards (which we refer to as the Transaction Standards). Failure to comply with the Transaction Standards may subject WebMD Envoy to civil monetary penalties, and possibly to criminal penalties. On July 24, 2003, the Centers for Medicare & Medicaid Services, or CMS, released its “Guidance on Compliance with HIPAA Transactions and Code

Sets After the October 16, 2003 Implementation Deadline” (which we refer to as the CMS Guidance). In addition, on July 24, 2003, CMS officials participated in an “Open Door Forum” teleconference during which they provided additional clarification on planned enforcement practices. CMS also urged the adoption of “contingency plans” to help prevent disruptions in the healthcare payment system. Under CMS’s contingency plan for Medicare, it will continue to accept claims in both HIPAA standard and legacy formats, with the legacy formats to be accepted for a period to be determined by CMS based upon a regular reassessment of the readiness of its electronic “trading partners.” In response, WebMD Envoy announced a contingency plan, pursuant to which it continues to process HIPAA standard transactions and, for a limited period of time, will also process legacy transactions as appropriate based on applicable law and the needs of our business partners.

On February 27, 2004, CMS modified its Medicare contingency plan to delay the payment of electronic claims that are not HIPAA-compliant. Specifically, effective July 1, 2004, only claims that are compliant with the Transaction Standards are to be reported as electronic media claims (EMC), which may be paid no earlier than after a 13-day waiting period. All other claims (including both electronic claims that are not compliant with the Transaction Standards, as well as paper claims) may be paid no earlier than after a 26-day waiting period. Calling it a “measured step toward ending the contingency plan entirely,” CMS implemented the change to encourage providers to move more quickly with their efforts to achieve HIPAA compliance. This policy may provide an incentive for providers who cannot send HIPAA standard claims from their desktop to use a clearinghouse, such as WebMD Envoy, to do so.

CMS has made clear that it expects each party to every transaction to be accountable for compliance with the new standards. However, the CMS Guidance provides for a flexible, complaint-driven enforcement strategy that will take into consideration good faith efforts to comply with the Transaction Standards. We believe that CMS’s enforcement approach assisted in reducing disruptions in the flow of electronic transactions that otherwise could have occurred. However, one short-term effect of CMS’s approach and related transition matters may be that, as a result of the extended period of testing and implementation, there could be fewer electronic transactions for us to process in 2004 than would otherwise have been the case.

We cannot provide assurance regarding how CMS will regulate clearinghouses in general or WebMD Envoy in particular. In addition, even though major disruptions in the flow of electronic transactions may be less likely in light of CMS’s current approach to enforcement of the Transaction Standards, we have experienced isolated disruptions and some delays and we expect that there will continue to be some problems for a period of time. We continue to work diligently to identify and resolve problems as they occur. The costs to us of dealing with those problems are inherently difficult to estimate and may be more than we expect and/or continue for longer than anticipated. In addition, most of our trading partners are currently operating under their own contingency plans and, accordingly, we would expect that there will be further disruptions during the adjustment period that occurs once CMS requires all applicable parties to perform in accordance with the Transaction Standards. We may not have enough technicians, programmers and customer service personnel to meet the demands placed on those functions by our customers and partners during that adjustment period, which could adversely affect our relationships with them.

Implementation Challenges. Implementation of the Transaction Standards has presented us with significant technical and operational challenges. For example, the Transaction Standards cover not only transaction formats, but also required content, including some content not previously collected by most providers. We are working with our trading partners on quality assurance and testing as we enhance our clearinghouse services for transmitting additional data content provided for in the Transaction Standards. We plan to place these services into production as both our systems and payers’ adjudication systems become fully capable of handling the additional data content. As with any highly complex transition involving significant modifications to trading partner systems, we are experiencing some problems during this process. Another aspect of the implementation challenges resulting from the Transaction Standards is the increase in computing capacity required. The Transaction Standards formats are much larger than the pre-existing ones. We are utilizing more computing capacity than we had anticipated. As a result, our

From October 16, 2003 to the date of this Quarterly Report, a large majority of the claims we have received from submitters used legacy formats and very few contained the additional data content provided for in the Transaction Standards. A small number of our submitters currently send some additional HIPAA data content that does not yet pass through our clearinghouse. In order to facilitate transmission of claims with the standard HIPAA format, our clearinghouse software uses edits, including the use of default data, in the transmission of claims from our clearinghouse and some data received by us is not transmitted by us. To date, our software, editing procedures and production criteria for additional HIPAA content have not had a material effect on our ability to process and transmit transactions.

Implementation Costs. We have been incurring, and expect to continue to incur, significant expenses relating to implementation of the Transaction Standards. Implementation of the Transaction Standards requires us, among other things, to make significant changes to the software WebMD Envoy uses internally, to engage in testing with its customers and to implement additional quality assurance processes. If our reprogramming and testing are not completed on a timely basis, we could lose customers and revenues. In addition, our ability to perform our transaction services in compliance with HIPAA and the cost to us of doing so will depend on, among other things, the status of the compliance efforts of our payer and provider customers and the extent of the need to adjust our systems and procedures in response to changes in their systems and procedures. We cannot control when or how payers, providers, practice management system vendors or other healthcare participants will comply with the Transaction Standards or predict how their compliance efforts will affect their relationships with us, including the volume of transactions for which they use our services. Our technological and strategic responses to the Transaction Standards may result in conflicts with, or other adverse changes in our relationships with, some healthcare industry participants, including some who are existing or potential customers for our products and services or existing or potential strategic partners.

Use of Direct Links. Although the standardization of formats and data standards required by HIPAA is only partial and we believe that use of clearinghouses will continue to be the most efficient way for most providers to transact electronically with multiple payers, such standardization may facilitate use of direct EDI links for transmission of transactions between a greater number of healthcare payers and providers without use of a clearinghouse. Any significant increase in the utilization of direct links between healthcare providers and payers could have a material adverse effect on WebMD Envoy’s transaction volume and financial results.

For additional information regarding the Transaction Standards and a discussion of the risks and challenges associated with other portions of HIPAA and related regulations, see “Business — Government Regulation” in our 2003 Annual Report on Form 10-K.

Risks Relating to the HIPAA Privacy Standards. The HIPAA Standards for Privacy of Individually Identifiable Health Information, which we refer to as the Privacy Standards, establish a set of basic national privacy standards and fair information practices for the protection by health plans, healthcare clearinghouses, healthcare providers and their business associates of individually identifiable health information. This rule became effective on April 14, 2001 and the compliance date for most entities was April 14, 2003. The Privacy Standards apply to the portions of our business that process healthcare transactions or provide certain technical services to other participants in the healthcare industry, and

Risks Relating to the HIPAA Unique Employer Identifier Standard. The HIPAA Unique Employer Identifier Standard establishes a standard for identifying employers in healthcare transactions where information about the employer is transmitted electronically, as well as requirements concerning its use by covered entities. This rule requires the use of an employer identification number (EIN) as assigned by the IRS on all standard transactions that require an employer identifier to identify a person or entity as an employer. This standard applies to the portions of our business that process healthcare transactions or provide certain technical services to other participants in the healthcare industry, and certain of our portal services may be affected through contractual relationships. Most participants in the healthcare industry must be in compliance with the Unique Employer Identifier Standard by July 30, 2004. The effect of the Unique Employer Identifier Standard on our business is difficult to predict and there can be no assurances that we will adequately address the risks created by the Unique Employer Identifier Standard and its implementation or that we will be able to take advantage of any resulting opportunities.

Risks Relating to the HIPAA Security Standards. On February 20, 2003, HHS published the final HIPAA Security Standards. The Security Standards establish detailed requirements for safeguarding patient information that is electronically transmitted or electronically stored. The rule establishes 42 implementation specifications, 20 of which are “required,” meaning they must be implemented as specified in the rule. Twenty-two are “addressable.” Complying with addressable implementation specifications requires a business to assess whether they constitute a reasonable and appropriate safeguard for the particular business; if not, an alternative approach must be designed and implemented to achieve the particular standard. The Security Standards apply to the portions of our business that process healthcare transactions, that provide certain technical services to other participants in the healthcare industry, or that enable electronic communications of patient information among healthcare industry participants, and certain of our portal services may be affected through contractual relationships. Most participants in the healthcare industry must be in compliance with the Security Standards by April 21, 2005. Some of the Security Standards are technical in nature, while others may be addressed through policies and procedures for using information systems. The Security Standards may require us to incur significant costs in evaluating our products and in establishing that our systems meet the 42 specifications. We are unable to predict what changes might be made to the Security Standards prior to the 2005 implementation deadline or how those changes might help or hinder our business. The effect of the Security Standards on our business is difficult to predict and there can be no assurances that we will adequately address the risks created by the Security Standards and their implementation or that we will be able to take advantage of any resulting opportunities.

Risks Relating to the HIPAA NPI Standard. On January 23, 2004, HHS published the final HIPAA standard for a unique health identifier for health care providers, commonly referred to as the National Provider Identifier Standard, or the NPI Standard. The NPI Standard requires health care providers that transmit any health information in electronic form in connection with a HIPAA covered transaction to obtain a single, 10 position all-numeric NPI from the National Provider System (NPS), and to use the NPI in standard transactions where a provider identifier is required. The NPI Standard requires health plans and health care clearinghouses to use a provider’s NPI to identify the provider on all standard transactions where that provider’s identifier is required. The NPI Standard is effective May 23, 2005. Most participants in the healthcare industry must be in compliance with the NPI Standard by May 23, 2007.

WebMD Health’s Medscape physician portal is a leading provider of online continuing medical education, or CME, to physicians and other healthcare professionals, offering a wide selection of free, regularly updated online CME activities. We receive funding from pharmaceutical and medical device companies for these CME programs. See “Business — Healthcare Information Services and Technology Solutions — WebMD Health — Medscape from WebMD — Continuing Medical Education (CME)” in our 2003 Annual Report on Form 10-K.

Our CME activities are planned and implemented in accordance with the Essential Areas and Policies of the Accreditation Council for Continuing Medical Education, or ACCME, which oversees providers of CME credit, and other applicable accreditation standards. In addition, some of our programs have been produced in collaboration with other ACCME-accredited CME providers. Medscape received provisional ACCME accreditation as a CME provider in July 2002 and full accreditation, for a four-year period, beginning in July 2004. Such accreditation allows Medscape to continue to certify online CME activities.

Provision of CME may also be subject to government regulation by the Food and Drug Administration, or FDA, and the Office of Inspector General, or OIG, of the United States Department of Health and Human Services, a federal agency responsible for interpreting certain federal laws relating to healthcare. Among the goals of regulation of CME are ensuring that funding of CME programs by pharmaceutical and medical device companies is not a means for them to


	•	improperly promote their products,

	•	provide improper remuneration to physicians or others in a position to generate business for the sponsoring companies, or

	•	improperly influence or control the content of CME programs.

See “Business — Government Regulation — Regulation of Healthcare Relationships” and “— FDA and FTC Regulation of Drug and Medical Device Advertising and Promotion” in our 2003 Annual Report on Form 10-K and “Other government regulation of healthcare and healthcare information technology creates risks and challenges with respect to our compliance efforts and our business strategies” below.

Increased regulatory scrutiny of CME sponsorship by pharmaceutical or medical device companies, changes to existing regulations or accreditation standards, or changes in internal compliance procedures of potential sponsors may require Medscape to make changes in the way it offers or provides CME programs, may slow sponsors’ internal approval processes for CME, and may reduce the volume of sponsored CME programs implemented by Medscape to levels that are lower than expected.

General. The healthcare industry is highly regulated and is subject to changing political, regulatory and other influences. These factors affect the purchasing practices and operations of healthcare organizations. Federal and state legislatures and agencies periodically consider programs to reform or revise the United States healthcare system. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may respond by reducing their investments or postponing investment decisions, including investments in our applications and services. We are unable to predict future proposals with any certainty or to predict the effect they would have on our business. In addition, existing laws and regulations could create liability, cause us to incur additional costs or restrict our operations. Although we carefully review our practices with regulatory experts in an effort to

Healthcare Relationships. A federal law commonly known as the Federal Healthcare Programs anti-kickback law and several similar state laws prohibit payments that are intended to induce healthcare providers either to refer patients or to acquire or arrange for or recommend the acquisition of healthcare products or services. These laws are broad and may apply to some of our activities or our relationships with our customers, advertisers or strategic partners. Other federal and state laws generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent, or are for items or services that were not provided as claimed. Since we provide transaction services to healthcare providers, we cannot provide assurance that the government will regard errors in transactions processed by us as inadvertent and not in violation of these laws. In addition, our transaction services include providing edits, using logic, mapping and defaults, to enhance the information submitted in claims in order to assist in claims processing. We believe that our editing practices are in compliance with industry practice; however, it is possible that a court or governmental agency might interpret these laws in a different manner, which could result in liability and adversely affect our business. In addition, changes in these laws could also require us to incur costs or restrict our business operations. Many anti-kickback and false claims laws prescribe civil and criminal penalties for noncompliance that can be substantial. Even an unsuccessful challenge by regulatory authorities of our practices could cause us adverse publicity and be costly for us to respond to.

Regulation of Medical Devices. Certain of Porex’s products are medical devices regulated by the Food and Drug Administration, or FDA, such as plastic and reconstructive surgical implants. These products are subject to comprehensive FDA regulation under the Food, Drug and Cosmetic Act and implementing regulations. In addition, the FDA regulates WebMD Practice Services’ DIM_DX® System as a medical image management device. If the FDA were to find that we have not complied with regulatory requirements, it can bring a wide variety of enforcement actions that could result in severe civil and criminal sanctions. Porex is also subject to similar regulation in international markets, with similar risks. Future products that we wish to bring to market may require clearances or approvals from governmental authorities, which may be expensive, time-consuming and burdensome to obtain or which may never be obtained.

For more information regarding healthcare regulation to which we are or may be subject, see “Business — Government Regulation” in our 2003 Annual Report on Form 10-K.

The Internet and its associated technologies are subject to government regulation. Our failure, or the failure of our business partners, to accurately anticipate the application of applicable laws and regulations, or any other failure to comply, could create liability for us, result in adverse publicity, or negatively affect our business. In addition, new laws and regulations, or new interpretations of existing laws and regulations, may be adopted with respect to the Internet or other online services covering user privacy, patient confidentiality, consumer protection and other issues, including pricing, content, copyrights and patents, distribution, and characteristics and quality of products and services. We cannot predict whether these laws or regulations will change or how such changes will affect our business. Government regulation of the Internet could limit the effectiveness of the Internet for services that we are providing or developing or even prohibit particular services.

For more information regarding government regulation of the Internet to which we are or may be subject, see “Business — Government Regulation” in our 2003 Annual Report on Form 10-K.

Internet user privacy has become a controversial issue both in the United States and abroad. We have privacy policies posted on our consumer portals and our professional portal that we believe comply with applicable laws requiring notice to users about our information collection, use and disclosure practices. However, whether and how existing privacy and consumer protection laws in various jurisdictions apply to the Internet is still uncertain and may take years to resolve. Any legislation or regulation in the area of privacy of personal information could affect the way we operate our Web sites and could harm our business. Further, we can give no assurance that the statements on our portals, or our practices, will be found sufficient to protect us from liability or adverse publicity in this area.

Some of our portal services may, through contractual relationships, be affected by the HIPAA Privacy Standards and Security Standards. For more information regarding the HIPAA Privacy and Security Standards and other regulation of the collection, use and disclosure of personal information to which we may be subject, see “Business — Government Regulation” in our 2003 Annual Report on Form 10-K.

WebMD Health generates revenues by, among other things, selling sponsorships of specific pages, sections or events on its online physician and consumer portals and related e-mailed newsletters. Our WebMD Health sponsors include pharmaceutical, biotech, medical device and consumer products companies that are interested in communicating with and educating our audience or parts of our audience. While we currently attract a large audience of health-involved consumers and clinically active healthcare professionals to our online offerings, we cannot provide assurance that we will continue to do so. Users of our portals have numerous other online and offline sources of healthcare information services. In addition, some of WebMD Health’s traffic and new members come to it through relationships with third parties, including MSN and AOL, and, as a result, may vary based on the amount of traffic to sites of the third parties and other factors outside our control and may cease if the relationship ends.

From time to time, we implement changes to the hardware and software platforms we use for creating and delivering our Web sites. During and after the implementation of those changes, a platform may not perform as expected, which could result in interruptions in the operation of our Web sites, an increase in response time of those sites or an inability to track performance metrics.

Any significant interruption in our ability to operate our Web sites could have an adverse effect on our relationship with users and sponsors and, as a result, on our financial results.

Our Web sites are designed to operate 24 hours a day, seven days a week, without interruption. To do so, we rely on communications and hosting services provided by third parties. We also rely on internal systems to prepare and deliver content for our Web sites and for other purposes. We do not maintain redundant systems or facilities for some of these services. To operate without interruption, both we and our service providers must guard against:


	•	damage from fire, power loss and other natural disasters;

	•	communications failures;

	•	software and hardware errors, failures or crashes;


	•	security breaches, computer viruses and similar disruptive problems; and

	•	other potential interruptions.

We have experienced periodic system interruptions in the past, and we cannot guarantee that they will not occur again. In addition, our Web sites may, at times, be required to accommodate higher than usual volumes of traffic. At those times, our Web sites may experience slower response times or system failures. Any sustained or repeated interruptions or disruptions in these systems or increase in their response times could result in reduced usage of our Web sites and could damage our relationships with strategic partners, advertisers and sponsors. Although we maintain insurance for our business, we cannot guarantee that our insurance will be adequate to compensate us for all losses that may occur or to provide for costs associated with business interruptions.

Our ability to deliver our Internet-based services is dependent on the development and maintenance of the infrastructure of the Internet by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity and security, as well as timely development of complementary products such as high-speed modems, for providing reliable Internet access and services. The Internet has experienced, and is likely to continue to experience, significant growth in the number of users and the amount of traffic. If the Internet continues to experience increased usage, the Internet infrastructure may be unable to support the demands placed on it. In addition, the performance of the Internet may be harmed by increased usage.

The Internet has experienced a variety of outages and other delays as a result of damages to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage as well as the availability of the Internet to us for delivery of our Internet-based services. In addition, our customers who utilize our Web-based services depend on Internet service providers, online service providers and other Web site operators for access to our Web site. All of these providers have experienced significant outages in the past and could experience outages, delays and other difficulties in the future due to system failures unrelated to our systems. Any significant interruptions in our services or increases in response time could result in a loss of potential or existing users of and advertisers and sponsors on our Web site and, if sustained or repeated, could reduce the attractiveness of our services.

The law governing the validity and enforceability of online agreements and other electronic transactions is evolving. We could be subject to claims by third parties that our online agreements with consumers and physicians that provide the terms and conditions for use of our portal services are unenforceable. A finding by a court that these agreements are invalid could harm our business and require costly changes to our portals.

We could be subject to third-party claims based on the nature and content of information supplied on our Web sites by us or third parties, including content providers, medical advisors or users. We could also be subject to liability for content that may be accessible through our Web sites or third-party Web sites linked from our Web sites or through content and information that may be posted by users in chat rooms, bulletin boards or on Web sites created by professionals using our Web site application. Even if these claims do not result in liability to us, investigating and defending against these claims could be expensive and time consuming and could divert management’s attention away from our operations.

Demand for our Porex products may change materially as a result of economic or market conditions and other trends that affect the industries in which Porex participates. In addition, because a significant portion of our Porex products are components that are eventually integrated into or used with products manufactured by customers for resale to end-users, the demand for these product components is dependent on product development cycles and marketing efforts of these other manufacturers, as well as variations in their inventory levels, which are factors that we are unable to control. Accordingly, the amount of Porex’s sales to manufacturer customers can be difficult to predict and subject to wide quarter-to-quarter variances.

A significant portion of our Porex products are integrated into end products used in various industries, some of which are characterized by rapidly changing technology, evolving industry standards and practices and frequent new product introductions. Accordingly, Porex’s success depends to a substantial degree on our ability to develop and introduce in a timely manner products that meet changing customer requirements and to differentiate our offerings from those of our competitors. If we do not introduce new Porex products in a timely manner and make enhancements to existing products to meet the changing needs of our Porex customers, some of our products could become obsolete over time, in which case our customer relationships, revenue and operating results would be negatively impacted.

We cannot be certain, when we engage in Porex research and development activities, whether potential new products or product enhancements will be accepted by the customers for which they are intended. Achieving market acceptance for new or enhanced products may require substantial marketing efforts and expenditure of significant funds to create awareness and demand by potential customers. In addition, sales and marketing efforts with respect to these products may require the use of additional resources for training our existing Porex sales forces and customer service personnel and for hiring and training additional salespersons and customer service personnel. There can be no assurance that the revenue opportunities from new or enhanced products will justify amounts spent for their development and marketing. In addition, there can be no assurance that any pricing strategy that we implement for any new or enhanced Porex products will be economically viable or acceptable to the target markets.

Some of Porex’s products require high-grade plastic resins with specific properties as raw materials. While Porex has not experienced any material difficulty in obtaining adequate supplies of high-grade plastic resins that meet its requirements, it relies on a limited number of sources for some of these plastic resins. If Porex experiences a reduction or interruption in supply from these sources, it may not be able to access alternative sources of supply within a reasonable period of time or at commercially reasonable rates, which could have a material adverse effect on its business and financial results.

Any significant disruption in Porex’s manufacturing operations, including as a result of fire, power interruptions, equipment malfunctions, labor disputes, material shortages, earthquakes, floods, computer viruses, sabotage, terrorist acts or other force majeure, could have a material adverse effect on Porex’s ability to deliver products to customers and, accordingly, its financial results.

The products sold by Porex, whether sold directly to end-users or sold to other manufacturers for inclusion in the products that they sell, expose it to potential risk of product liability claims, particularly with respect to Porex’s life sciences, clinical, surgical and medical products. Some of Porex’s products are designed to be permanently implanted in the human body. Design defects and manufacturing defects with respect to such products sold by Porex or failures that occur with the products of Porex’s manufacturer customers that contain components made by Porex could result in product liability claims and/or a recall of one or more of Porex’s products. Porex believes that it carries adequate insurance coverage against product liability claims and other risks. We cannot assure you, however, that claims in excess of Porex’s insurance coverage will not arise. In addition, Porex’s insurance policies must be renewed annually. Although Porex has been able to obtain adequate insurance coverage at an acceptable cost in the past, we cannot assure you that Porex will continue to be able to obtain adequate insurance coverage at an acceptable cost.

In most instances, Porex enters into indemnity agreements with its manufacturing customers. These indemnity agreements generally provide that these customers would indemnify Porex from liabilities that may arise from the sale of their products that incorporate Porex components to, or the use of such products by, end-users. While Porex generally seeks contractual indemnification from its customers, any such indemnification is limited, as a practical matter, to the creditworthiness of the indemnifying party. If Porex does not have adequate contractual indemnification available, product liability claims, to the extent not covered by insurance, could have a material adverse effect on its business, operating results and financial condition.

Since March 1991, Porex has been named as one of many co-defendants in a number of actions brought by recipients of mammary implants distributed by Porex in the United States. For a description of these actions, see the information under “Legal Proceedings — Porex Mammary Implant Litigation” in our 2003 Annual Report on Form 10-K.

Since Porex sells its products worldwide, its business is subject to risks associated with doing business internationally. In addition, Porex has manufacturing facilities in the United Kingdom, Germany and Malaysia. Accordingly, Porex’s operations and financial results could be harmed by a variety of factors, including:


	•	changes in foreign currency exchange rates;

	•	changes in a specific country’s or region’s political or economic conditions, particularly in emerging markets;

	•	trade protection measures and import or export licensing requirements;

	•	potentially negative consequences from changes in tax laws;

	•	difficulties in managing international and geographically diverse operations;

	•	differing protection of intellectual property; and

	•	unexpected changes in regulatory requirements.

Porex is subject to foreign and domestic environmental laws and regulations and is subject to scheduled and random checks by environmental authorities. Porex’s business involves the handling, storage and disposal of materials that are classified as hazardous. Although Porex’s safety procedures for handling, storage and disposal of these materials are designed to comply with the standards prescribed by applicable

The United States Attorney for the District of South Carolina is conducting an investigation of our company. Based on the information available to WebMD as of the date of this Quarterly Report, we believe that the investigation relates principally to issues of financial reporting for Medical Manager Corporation, a predecessor of WebMD (by its merger into WebMD in September 2000), and our Medical Manager Health Systems subsidiary; however, we cannot be sure of the investigation’s exact scope or how long it may continue. In addition, WebMD understands that the SEC is conducting a formal investigation into this matter. Adverse developments in connection with the investigations, if any, including as a result of matters that the authorities or WebMD may discover, could have a negative impact on our company and on how it is perceived by investors and potential investors and customers and potential customers. In addition, the management effort and attention required to respond to the investigations and any such developments could have a negative impact on our business operations.

WebMD intends to continue to fully cooperate with the authorities in this matter. While we are not able to estimate, at this time, the amount of the expenses that we will incur in connection with the investigations, we expect that they may continue to be significant.

The markets in which we operate are intensely competitive, continually evolving and, in some cases, subject to rapid technological change. Many of our competitors have greater financial, technical, product development, marketing and other resources than we do. These organizations may be better known than we are and have more customers than we do. We cannot provide assurance that we will be able to compete successfully against these organizations or any alliances they have formed or may form. For more information about the competition we face, see “Business — Healthcare Information Services and Technology Solutions — Competition for Our Healthcare Information Services and Technology Solutions” and “Business — Porex — Competition” in our 2003 Annual Report on Form 10-K.

Our performance depends on attracting and retaining key personnel, including executives, product managers, software developers and other technical personnel and sales and marketing personnel. Failure to do so could have a material adverse effect on the performance of our business and the results of our operations.

Our intellectual property is important to all of our businesses. We rely on a combination of trade secret, patent and other intellectual property laws and confidentiality procedures and non-disclosure contractual provisions to protect our intellectual property. We believe that our non-patented proprietary technologies and business and manufacturing processes are protected under trade secret, contractual and other intellectual property rights. However, those rights do not afford the statutory exclusivity provided by patented processes. In addition, the steps that we take to protect our intellectual property, proprietary information and trade secrets may prove to be inadequate and, whether or not adequate, may be expensive.

There can be no assurance that we will be able to detect potential or actual misappropriation or infringement of our intellectual property, proprietary information or trade secrets. Even if we detect misappropriation or infringement by a third party, there can be no assurance that we will be able to enforce our rights at a reasonable cost, or at all. In addition, our rights to intellectual property, proprietary information and trade secrets may not prevent independent third-party development and commercialization of competing products or services.

We could be subject to claims that we are misappropriating or infringing intellectual property or other proprietary rights of others. These claims, even if not meritorious, could be expensive to defend and divert management’s attention from our operations. If we become liable to third parties for infringing these rights, we could be required to pay a substantial damage award and to develop non-infringing technology, obtain a license or cease selling the products or services that use or contain the infringing intellectual property. We may be unable to develop non-infringing products or services or obtain a license on commercially reasonable terms, or at all. We may also be required to indemnify our customers if they become subject to third-party claims relating to intellectual property that we license or otherwise provide to them, which could be costly.

We began operations in January 1996 and have incurred net losses in each year since our inception and, as of June 30, 2004, we had an accumulated deficit of approximately $10.2 billion. Although we generated net income, determined in accordance with generally accepted accounting principles, during certain quarterly periods, including the quarterly period ended June 30, 2004, we incurred a net loss for the year ended December 31, 2003. We currently intend to continue to invest in infrastructure development, applications development, sales and marketing, and acquisitions and whether we continue to incur losses in a particular period will depend on, among other things, the amount of such investments and whether those investments lead to increased revenues.

Our business and operations may subject us to claims, litigation and other proceedings brought by private parties and governmental authorities. For information regarding certain proceedings to which we are currently a party, see “Legal Proceedings” in our 2003 Annual Report on Form 10-K and Part II, Item 1 of this Quarterly Report.

We intend to seek to acquire or to engage in business combinations with companies engaged in complementary businesses. In addition, we may enter into joint ventures, strategic alliances or similar arrangements with third parties. These transactions may result in changes in the nature and scope of our operations and changes in our financial condition. Our success in completing these types of transactions will depend on, among other things, our ability to locate suitable candidates and negotiate mutually acceptable terms with them, as well as the availability of financing. Significant competition for these opportunities exists, which may increase the cost of and decrease the opportunities for these types of transactions. Financing for these transactions may come from several sources, including:


	•	cash and cash equivalents on hand and marketable securities,

	•	proceeds from the incurrence of indebtedness, and

	•	proceeds from the issuance of additional common stock, preferred stock, convertible debt or other securities.


	•	cause substantial dilution of the percentage ownership of our stockholders at the time of the issuance,

	•	cause substantial dilution of our earnings per share, and

	•	adversely affect the prevailing market price for our outstanding securities.

We do not intend to seek securityholder approval for any such acquisition or security issuance unless required by applicable law or regulation or the terms of existing securities.

We have in the past acquired, and may in the future acquire, businesses, technologies, services, product lines and other assets. The successful integration of the acquired businesses and assets into our operations, on a cost-effective basis, can be critical to our future performance. The amount and timing of the expected benefits of any acquisition, including potential synergies between WebMD and the acquired business, are subject to significant risks and uncertainties. These risks and uncertainties include, but are not limited to, those relating to:


	•	our ability to maintain relationships with the customers of the acquired business;

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

	•	our ability to retain or replace key personnel;

	•	potential conflicts in payer, provider, strategic partner, sponsor or advertising relationships;

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

	•	compliance with regulatory requirements.

We cannot guarantee that any acquired businesses will be successfully integrated with our operations in a timely or cost-effective manner, or at all. Failure to successfully integrate acquired businesses or to achieve anticipated operating synergies, revenue enhancements or cost savings could have a material adverse effect on our business, financial condition and results of operations.

Although our management attempts to evaluate the risks inherent in each transaction and to value acquisition candidates appropriately, we cannot assure you that we will properly ascertain all such risks or that acquired businesses and assets will perform as we expect or enhance the value of our company as a whole. In addition, acquired companies or businesses may have larger than expected liabilities that are not covered by the indemnification, if any, we are able to obtain from the sellers.

Our future liquidity and capital requirements will depend upon numerous factors, including the success of the integration of our businesses, our existing and new applications and service offerings, competing technologies and market developments, potential future acquisitions and additional repurchases of our common stock. We may need to raise additional funds to support expansion, develop new or enhanced applications and services, respond to competitive pressures, acquire complementary businesses or technologies or take advantage of unanticipated opportunities. If required, we may raise such additional funds through public or private debt or equity financing, strategic relationships or other arrangements. There can be no assurance that such financing will be available on acceptable terms, if at all, or that such financing will not be dilutive to our stockholders.

The primary objective of our investment activities is to preserve principal and maintain adequate liquidity, while at the same time maximizing the yield we receive from our investment portfolio. This objective is accomplished by adherence to our investment policy, which establishes the list of eligible securities and credit requirements for each investment.

Changes in prevailing interest rates will cause the principal amount of the investment to fluctuate. To minimize this risk, we maintain our portfolio of cash equivalents, short-term investments and marketable securities in commercial paper, non-government debt securities, money market funds and highly liquid U.S. Treasury Notes. We view these high grade securities within our portfolio as having similar market risk characteristics.

Principal amounts expected to mature are $0.2 million, $55.3 million, $453.7 million and $85.0 million during the remainder of 2004, 2005, 2006 and 2007, respectively. These include investments totaling $507.6 million in Federal Agency Notes that are callable, subjecting us to interest rate risk on the reinvestment of these securities. We believe that the impact of any call and resulting reinvestment of proceeds would not have a material effect on our financial condition or results of operations.

We have not utilized derivative financial instruments in our investment portfolio.

Currently, substantially all of our sales and expenses are denominated in United States dollars; however, Porex is exposed to fluctuations in foreign currency exchange rates, primarily the rate of exchange of the United States dollar against the Euro. This exposure arises primarily as a result of translating the results of Porex’s foreign operations to the United States dollar at exchange rates that have fluctuated from the beginning of the accounting period. Porex has not engaged in foreign currency hedging activities to date. Foreign currency translation gains (losses) were $(0.0) million and $(0.3) million, during the three and six month periods ended June 30, 2004, and $1.2 million and $1.5 million, during the three and six month periods ended June 30, 2003.

As required by Exchange Act Rule 13a-15(b), WebMD management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of WebMD’s disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of June 30, 2004. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that WebMD’s disclosure controls and procedures provided reasonable assurance that all material information required to be filed in this Quarterly Report has been made known to them in a timely fashion.

In connection with the evaluation required by Exchange Act Rule 13a-15(d), WebMD management, including the Chief Executive Officer and Chief Financial Officer, concluded that no changes in WebMD’s internal control over financial reporting occurred during the second quarter of 2004 that have materially affected, or are reasonably likely to materially affect, WebMD’s internal control over financial reporting.

Merrill Lynch Fundamental Growth Fund, Inc. et al. v. McKesson HBOC, Inc., et al.

As more fully described in Part I, Item 3 of our 2003 Annual Report on Form 10-K (as previously updated in Part II, Item 1 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004), WebMD was named as a defendant in the action Merrill Lynch Fundamental Growth Fund, Inc., et al. v. McKesson HBOC, Inc., et al., Case No. 405792, in the San Francisco Superior Court. The original complaint in this matter alleged that McKesson HBOC (now known as McKesson Corp.), HBO and Company (which we refer to as HBOC), certain officers and directors of those firms, Arthur Andersen LLP, and Bear Stearns & Co. engaged in a number of practices whereby HBOC and later McKesson HBOC improperly recognized revenues. On September 4, 2003, the plaintiffs filed a fourth amended complaint, naming WebMD and two other defendants, General Electric Capital Corporation, Inc. and Computer Associates International, Inc., for the first time. The complaint alleges that WebMD aided and abetted alleged fraud by certain defendants and conspired with those defendants in relation to HBOC’s and McKesson HBOC’s alleged improper recognition of approximately $14 million in revenue on two software transactions. The plaintiffs also allege that WebMD made certain negligent misrepresentations with respect to these transactions. On December 16, 2003, WebMD filed a demurrer, seeking dismissal of plaintiffs’ two claims against it.

In March 2004, McKesson Corp. filed cross-complaints against General Electric Capital Corporation, Inc., Computer Associates International, Inc., and WebMD for declaratory relief and indemnification, alleging that each of these cross-defendants is obligated to indemnify McKesson if McKesson is compelled to pay any sum as the result of any damages, judgment or other awards recovered by the plaintiffs against McKesson. McKesson seeks judicial determinations of the comparative fault of McKesson and each cross-defendant for damages claimed by the plaintiffs, if any such damages are found to exist, and declarations of the amount that each cross-defendant is obligated to indemnify McKesson if McKesson is compelled to pay any sum as the result of any damages, judgment or other awards recovered by the plaintiffs against McKesson. On June 8, 2004, WebMD filed a demurrer, seeking dismissal of McKesson’s claims.

On July 22, 2004, the Court sustained WebMD’s demurrer to the plaintiffs’ claims against WebMD, finding that the plaintiffs’ claims against WebMD are time barred. WebMD’s demurrer to McKesson’s cross-complaint is still pending with the Court.

Litigation Regarding Distribution of Shares in Healtheon Initial Public Offering

As more fully described in Part I, Item 3 of our 2003 Annual Report on Form 10-K, in the summer and fall of 2001, seven purported class action lawsuits were filed against Morgan Stanley & Co. Incorporated and Goldman Sachs & Co., underwriters of the initial public offering of the Company (then known as Healtheon) in the United States District Court for the Southern District of New York. Three of these suits also named WebMD and certain former officers and directors of WebMD as defendants. These suits, which were filed in the wake of reports of governmental investigations of the underwriters’ practices in the distribution of shares in certain initial public offerings, were consolidated with lawsuits involving over 300 other initial public offerings that occurred in 1999, 2000, and 2001.

After a lengthy mediation under the auspices of former United States District Judge Nicholas Politan, the issuer defendants in the consolidated action (including WebMD), the affected insurance companies and the plaintiffs reached an agreement on a settlement to resolve the matter among the participating issuer defendants, their current and former officers and directors, their insurers and the plaintiffs. The settlement calls for the participating issuers’ insurers jointly to guarantee that plaintiffs recover a certain amount in the IPO litigation and certain related litigation from the underwriters and other non-settling defendants. Accordingly, in the event that the guarantee becomes payable, the agreement calls for WebMD’s insurance carriers, not WebMD, to pay WebMD’s pro rata share.

The Plaintiffs and the participating issuer defendants, including WebMD, have now reached agreement on the form of a settlement agreement. On June 10, 2004, Plaintiffs submitted to the court a Stipulation and Agreement of Settlement with Defendant Issuers and Individuals. The motion for preliminary approval of the settlement is pending with the court.

(a) On April 28, 2004, WebMD issued 400,000 shares of WebMD common stock to a service provider, in a transaction exempt from registration under Section 4(2) of the Securities Act. The shares were issued upon exercise of an outstanding option. The aggregate exercise price received by WebMD was $1.6 million. On May 25, 2004, WebMD issued 144,234 shares of WebMD common stock to Horizon Blue Cross Blue Shield of New Jersey in a transaction exempt from registration under Section 3(a)(9) of the Securities Act. The shares were issued upon exercise of an outstanding warrant.

(b) During the three months ended June 30, 2004, WebMD did not repurchase any equity securities that are registered by us pursuant to Section 12 of the Exchange Act.

(a) The exhibits listed in the accompanying Exhibit Index on page E-1 are filed or furnished as part of this Quarterly Report.

(b) The following Current Reports on Form 8-K were filed during the quarter ended June 30, 2004:


	•	Current Report on Form 8-K, filed April 7, 2004, regarding announcement of agreement to acquire Dakota Imaging, Inc.

	•	Current Report on Form 8-K, filed May 6, 2004, regarding announcement of results for the quarter ended March 31, 2004.

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.

E-1 EX-2.1 2 g89773exv2w1.htm EX-2.1 AGREEMENT AND PLAN OF MERGER EX-2.1 AGREEMENT AND PLAN OF MERGER

TABLE OF CONTENTS


ARTICLE I —CERTAIN DEFINITIONS			1
	Section 1.1	Certain Definitions	1
	Section 1.2	Interpretation	13
ARTICLE II —THE MERGER			13
	Section 2.1	The Merger	13
	Section 2.2	Outstanding Shares	14
	Section 2.3	Articles of Merger	14
	Section 2.4	Articles of Incorporation	14
	Section 2.5	By-laws	14
	Section 2.6	Officers	14
	Section 2.7	Directors	14
	Section 2.8	Preferred Stock Consideration	14
	Section 2.9	Purchase Price; Repayment of Loans	15
	Section 2.10	Conversion of Shares	18
	Section 2.11	Exchange of Certificates	18
	Section 2.12	Dissenting Shares	20
	Section 2.13	Options	20
	Section 2.14	Closing	21
	Section 2.15	Withholding Taxes	21
ARTICLE III —REPRESENTATIONS AND WARRANTIES OF THE COMPANY			21
	Section 3.1	Organization and Qualification; Subsidiaries	21
	Section 3.2	Authorization	22
	Section 3.3	Non-contravention	22
	Section 3.4	Consents	22
	Section 3.5	Capitalization; Subsidiaries	22
	Section 3.6	Financial Statements	23
	Section 3.7	Absence of Certain Developments	24
	Section 3.8	Compliance with Laws; Governmental Authorizations; Licenses; Etc	26
	Section 3.9	Litigation	26
	Section 3.10	Taxe	26
	Section 3.11	Environmental Matters	29
	Section 3.12	Employee Matters	29
	Section 3.13	Employee Benefit Plans	30
	Section 3.14	Intellectual Property Rights	31
	Section 3.15	Contracts	33
	Section 3.16	Insurance	35
	Section 3.17	Real Property	35
	Section 3.18	Transaction With Affiliates	36
	Section 3.19	Brokers	36
	Section 3.20	Government Contracts	36
	Section 3.21	HIPAA	39


	Section 3.22	Compliance with Healthcare Laws and Regulations.	40
	Section 3.23	Customers and Suppliers	41
	Section 3.24	NO ADDITIONAL REPRESENTATIONS	41
ARTICLE IV — REPRESENTATIONS AND WARRANTIES OF PARENT AND NEWCO			41
	Section 4.1	Organization	41
	Section 4.2	Authorization	42
	Section 4.3	Non-contravention	42
	Section 4.4	No Consents	42
	Section 4.5	Litigation	42
	Section 4.6	Brokers	42
	Section 4.7	Parent and Newco Board	42
	Section 4.8	Stockholder Approval	42
	Section 4.9	Financial Ability	43
	Section 4.10	Acknowledgement by Parent and Newco	43
ARTICLE V —COVENANTS AND AGREEMENTS			43
	Section 5.1	Stockholder Matters	43
	Section 5.2	Access and Information	43
	Section 5.3	Conduct of Business by the Company	44
	Section 5.4	Closing Documents	46
	Section 5.5	Best Efforts; Further Assurances	46
	Section 5.6	Public Announcements	47
	Section 5.7	Exclusive Dealing	47
	Section 5.8	Employee Benefit Plans	48
	Section 5.9	Indemnification of Directors and Officers	48
	Section 5.10	Newco	49
	Section 5.11	FIRPTA	49
	Section 5.12	Letters of Credit	49
	Section 5.13	280G Covenant	49
ARTICLE VI —CONDITIONS TO CLOSING			50
	Section 6.1	Mutual Conditions	50
	Section 6.2	Conditions to the Obligations of Parent and Newco	50
	Section 6.3	Conditions to the Obligations of the Company	52
ARTICLE VII —TERMINATION AMENDMENT AND WAIVER			53
	Section 7.1	Termination	53
	Section 7.2	Effect of Termination	54
ARTICLE VIII —SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION			54
	Section 8.1	Survival of Representations.	54
	Section 8.2	General Indemnification	54
	Section 8.3	Indemnification Claims.	55


	Section 8.4	Limitations on Indemnification Obligations	59
	Section 8.5	Exclusive Remedy	60
	Section 8.6	Treatment of Indemnity Payments	60
	Section 8.7	Provisions Controlling Tax Matters	60
	Section 8.8	Broadview Engagement Letter.	60
ARTICLE IX —REPRESENTATIVE OF THE HOLDERS OF COMPANY EQUITY SECURITIES			64
	Section 9.1	Authorization of Representative	64
ARTICLE X —MISCELLANEOUS			67
	Section 10.1	Notices	67
	Section 10.2	Exhibits and Schedules	68
	Section 10.3	Computation of Time	68
	Section 10.4	Expenses	69
	Section 10.5	Governing Law	69
	Section 10.6	Assignment; Successors and Assigns; No Third Party Rights	69
	Section 10.7	Counterparts	69
	Section 10.8	Titles and Headings	69
	Section 10.9	Entire Agreement	69
	Section 10.10	Severability	69
	Section 10.11	No Strict Construction	70
	Section 10.12	Specific Performance	70
	Section 10.13	Waiver of Jury Trial	70
	Section 10.14	Failure or Indulgence not Waiver	70
	Section 10.15	Amendments	70

Exhibits & Schedules


Exhibit A		*Net Working Capital as of December 31, 2003*
Exhibit B		*Articles of Merger*
Exhibit C		*Form of Escrow Agreement*
Exhibit D-1		*Form of Legal Opinion of Company Counsel*
Exhibit D-2		*Form of Legal Opinion of Maryland Counsel to the Company*
Exhibit 5.3		*E-mail Addresses*
Exhibit 5.8		*Employee Benefit Plans*
Exhibit 6.2(c)		*Company Required Consents*
Exhibit 6.3(b)		*Parent and Newco Required Consents*
Exhibit 8.5A		*Surviving Tax Indemnities*
Schedule A		*List of Option Agreements*
Schedule 3.1		*Jurisdictions of Incorporation*
Schedule 3.3		*Non-contravention*
Schedule 3.4		*Consents*
Schedule 3.5(a)		*Capitalization*
Schedule 3.5(b)		*Subsidiaries*
Schedule 3.6		*Financial Statements*
Schedule 3.6A		*Net Working Capital Calculation*
Schedule 3.6(c)		*Letters of Credit and Guarantees*
Schedule 3.7		*Absence of Certain Developments*
Schedule 3.8(a)		*Compliance with Laws*
Schedule 3.8(b)		*Governmental Authorizations*
Schedule 3.8(c)		*Governmental Actions*
Schedule 3.9		*Litigation*
Schedule 3.10(a)		*Taxes and Tax Returns*
Schedule 3.10(c)		*Tax Groups*
Schedule 3.10(e)		*Tax Return Extensions*
Schedule 3.10(j)		*Tax Inclusions and Exclusions*
Schedule 3.10(n)		*Tax Notices*
Schedule 3.11		*Environmental Matters*
Schedule 3.12(a)		*Employee Matters*
Schedule 3.12(c)		*Classification of Employees*
Schedule 3.13(a)		*Employee Benefit Plans*
Schedule 3.13(b)		*Multiemployer Benefit Plans*
Schedule 3.13(c)		*Employee Benefit Plan Compliance*
Schedule 3.13(h)		*Effects of Merger on Employee Benefit Plans*
Schedule 3.14		*Intellectual Property Rights*
Schedule 3.15		*Contracts*
Schedule 3.16		*Insurance*
Schedule 3.17		*Real Property*
Schedule 3.18		*Transactions with Affiliates*
Schedule 3.20(a)		*Government Contracts*
Schedule 3.20(b)(i)		*Government Contracts Claims*
Schedule 3.20(b)(ii)		*Government Contracts Status*

AGREEMENT AND PLAN OF MERGER

AGREEMENT AND PLAN OF MERGER, dated July 9, 2004, by and among WebMD Corporation, a Delaware corporation (“WebMD”) (for the limited purposes described on the signature pages hereto); Envoy Corporation, a Delaware corporation (“Parent”); Valor, Inc., a Maryland corporation (“Newco”); and VIPS, Inc., a Maryland corporation (the “Company”).

WHEREAS, the respective Boards of Directors of Parent, Newco and the Company have approved the merger of Newco with and into the Company on the terms and subject to the conditions set forth herein;

WHEREAS, in furtherance thereof, the Boards of Directors of each of Parent, Newco and the Company have approved this Agreement and the Merger (as defined below), upon the terms of and subject to the conditions set forth in this Agreement;

WHEREAS, pursuant to the Merger, shares of Common Stock (as defined below) and Preferred Stock (as defined below) will be converted into the Common Stock Consideration (as defined below) and the Preferred Stock Consideration (as defined below), respectively, in the manner set forth herein;

WHEREAS, each of Jenny Morgan, Arthur Lehrer and Glen Steinbach have entered into an employment agreement with the Company (collectively, the “Employment Agreements”) that will become effective as of the Closing provided the respective party thereto is still employed by the Company; and

WHEREAS, each of (a) Cornerstone (as defined below), (b) First Data Corporation and First Financial Management Corporation, (c) BA Capital Company, L.P., (d) Jenny Morgan, (e) Arthur Lehrer and (f) Glen Steinbach have entered into certain letter agreements with Parent as of the date hereof, whereby each such party has agreed to certain covenants with Parent.

NOW, THEREFORE, in consideration of the mutual covenants contained herein, and intending to be legally bound, the parties hereto agree as follows:

ARTICLE I —Certain Definitions

Section 1.1 Certain Definitions. As used in this Agreement, the following terms have the respective meanings set forth below.

“Accounting Firm” has the meaning set forth in Section 2.9(b).

“Actual Adjustment” means (x) the Purchase Price as set forth on the Final Statement of Purchase Price (as herein defined) minus (y) the Estimated Purchase Price.

“Actual Value” has the meaning set forth in Section 2.9(b).

“Affiliate” means, with respect to any Person, any other Person who directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common

control with, such Person. The term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise, and the terms “controlled” and “controlling” have meanings correlative thereto.

“Agreed Amount” means, with respect to any Claimed Amount, that portion of such Claimed Amount that the applicable Responsible Party agrees in a Response is payable pursuant to the provisions of Article VIII or Article VIIIA, as the case may be.

“Agreement” means this Agreement and Plan of Merger.

“Annual Financial Statements” has the meaning set forth in Section 3.6(a).

“Articles of Amendment and Restatement” means the Company’s Articles of Amendment and Restatement as in effect from time to time.

“Articles of Merger” has the meaning set forth in Section 2.3.

“Audited Financial Statements” has the meaning set forth in Section 5.5(e).

“Broadview Engagement Letter” means that certain letter agreement dated January 15, 2004 between Broadview International LLC and the Company.

“Business Day” means a day, other than a Saturday or Sunday, on which commercial banks in New York City are open for the general transaction of business.

“Buyer Indemnitee” has the meaning set forth in Section 8.2(a).

“Cap” has the meaning set forth in Section 8.4(a)(iii).

“Cash and Cash Equivalents” means the sum of the fair market value (expressed in United States dollars) of all cash and cash equivalents (including marketable securities and short term investments) of the Company and the Subsidiaries (as herein defined) as of immediately prior to the Closing.

“Certificates” means the outstanding certificates which immediately prior to the Effective Time represent shares of Common Stock or shares of Preferred Stock, as applicable.

“Claim” has the meaning set forth in Section 9.1(a).

“Claim Notice” shall mean written notification which contains (i) a description of the Losses incurred or reasonably expected to be incurred by the Indemnified Party and the Claimed Amount of such Losses, to the extent then known, (ii) a statement that the Indemnified Party is entitled to indemnification under Article VIII for such Losses and a reasonable explanation of the basis therefor, and (iii) a demand for payment in the amount of such Losses.

“Claimed Amount” shall mean the amount of any Losses incurred or reasonably expected to be incurred by the Indemnified Party.

“Class A Common Stock” means the Class A Common Stock, par value $0.001 per share, of the Company.

“Class B Common Stock” means the Class B Common Stock, par value $0.001 per share, of the Company.

“Closing” has the meaning set forth in Section 2.14.

“Closing Date” has the meaning set forth in Section 2.14.

“Closing Date Funded Indebtedness” means the Funded Indebtedness as of immediately prior to the Closing.

“COBRA” means Part 6 of Subtitle B of Title I of ERISA, Section 4980B of the Code and any similar state law.

“Code” means the Internal Revenue Code of 1986, as amended.

“Common Stock” means, collectively, the Class A Common Stock and the Class B Common Stock.

“Common Stock Consideration” means, with respect to each outstanding share of Common Stock (other than Dissenting Common Shares), (A) an amount equal to the Purchase Price divided by the sum of the number of shares of Common Stock outstanding immediately prior to the Effective Time plus the number of shares of Common Stock issuable upon the exercise of all Vested Options outstanding immediately prior to the Effective Time, plus, (B) if and when payable, a Pro Rata Portion of (i) amounts payable, directly or indirectly, to the Company Securityholders pursuant to Section 2.9(c) hereof and (ii) amounts payable, directly or indirectly, to the Company Securityholders from the Escrow Account pursuant to the terms hereof and the Escrow Agreement.

“Company-Developed Internal Systems” has the meaning set forth in Section 3.14(g).

“Company Equity Securities” has the meaning set forth in Section 9.1(a).

“Company Intellectual Property” means the Intellectual Property Rights owned or used by or licensed to the Company or any Subsidiary and incorporated in the Customer Deliverables or used by the Company or any Subsidiary in connection with the Internal Systems.

“Company Securityholders” means holders of Company Equity Securities.

“Confidentiality Agreement” has the meaning set forth in Section 5.2(c).

“Contracts” has the meaning set forth in Section 3.15.

“Contract Proceedings” has the meaning set forth in Section 3.20(b)(i).

“Cornerstone” means Cornerstone Equity Investors, LLC.

“Credit Agreement” has the meaning set forth in the definition of “Funded Indebtedness” in this Section 1.1.

“Creditors” has the meaning set forth in Section 6.2(e).

“Customer Deliverables” means (a) the products (including software and documentation) that the Company or any Subsidiary currently distributes, markets, sells, provides (including on an ASP basis) or licenses to its users or customers, or has distributed, marketed, sold, provided (including on an ASP basis) or licensed within the previous five years to its users or customers; and (b) the services that the Company or any Subsidiary currently provides or has provided within the previous five years to its users or customers.

“Director Stock and Option Agreements” means (i) the Director Stock and Option Agreement made and entered into as of January 31, 2000 by and between the Company and Robert Levenson, (ii) the Director Stock and Option Agreement made and entered into as of January 31, 2001 by and between the Company and Robert Levenson, (iii) the Director Stock and Option Agreement made and entered into as of February 16, 2000 by and between the Company and Thomas P. Staudt, and (iv) the Director Stock and Option Agreement made and entered into as of January 31, 2001 by and between the Company and Thomas P. Staudt.

“Dispute” shall mean the dispute resulting if the Responsible Party in a Response disputes that all or part of the Claimed Amount is payable pursuant to the provisions of Article VIII or Article VIIIA, as the case may be.

“Dissenting Common Shares” has the meaning set forth in Section 2.12.

“Dissenting Preferred Shares” has the meaning set forth in Section 2.12.

“Dissenting Shares” has the meaning set forth in Section 2.12.

“E&Y Audit Opinion” has the meaning set forth in Section 5.5(e).

“Effective Time” has the meaning set forth in Section 2.3.

“Employee Benefit Plan” means each “employee benefit plan” (as such term is defined in Section 3(3) of ERISA) and each other employee benefit plan, program or arrangement maintained, sponsored or contributed to by the Company or any of its Subsidiaries, including any such plan, program or arrangement relating to insurance coverage, severance benefits, disability benefits, deferred compensation, bonuses, stock options, stock purchase, phantom stock, stock appreciation, or other forms of incentive compensation or post-retirement compensation.

“Employee Confidentiality Agreements” has the meaning set forth in Section 3.12(a).

“Employment Agreements” has the meaning set forth in the recitals.

“Enterprise Value” means One Hundred Sixty Million Dollars ($160,000,000.00).

“Environmental Laws” shall mean all federal, state, local and foreign statutes, regulations, ordinances and similar provisions having the force or effect of law concerning pollution or protection of the environment as such requirements are enacted and in effect on or prior to the Closing Date.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“ERISA Affiliate” means any entity that is considered a single employer with the Company under Section 414 of the Code.

“Escrow Account” has the meaning set forth in Section 2.9(a).

“Escrow Agent” has the meaning set forth in Section 2.9(a).

“Escrow Agreement” has the meaning set forth in Section 2.9(a).

“Escrow Amount” has the meaning set forth in Section 2.9(a).

“Escrow Funds” has the meaning set forth in Section 2.9(a).

“Estimated Common Stock Consideration” has the meaning at forth in Section 2.9(a).

“Estimated Option Consideration” has the meaning set forth in Section 2.13(a).

“Estimated Purchase Price” means a good faith estimate of the Purchase Price, as determined by the Company’s Chief Financial Officer based upon the Company’s most recent financial statements as of the date of such estimate while taking into account changes in the Company’s financial position since the date of such financial statements. In connection with determining the Estimated Purchase Price, the Company’s Chief Financial Officer shall (i) use the actual (A) Enterprise Value, (B) amount of Preferred Stock Payments and (C) the aggregate exercise price for all Vested Options outstanding as of immediately prior to the Effective Time and (ii) estimate (A) the Net Working Capital Adjustment, (B) the amount of the Net Income Tax Adjustment, (C) the amount of Cash and Cash Equivalents, (D) the amount of Closing Date Funded Indebtedness and (E) the amount of Seller Expenses.

“Exchange Act” means the Securities Act of 1934, as amended (together with the rules and regulations promulgated thereunder).

“Expense Funds” has the meaning set forth in Section 9.1(b).

“Final Statement of Purchase Price” has the meaning set forth in Section 2.9(b).

“Financial Statements” has the meaning set forth in Section 3.6(a).

“Funded Indebtedness” means, as of any date, without duplication, the outstanding principal amount of, accrued and unpaid interest on and other payment obligations (including any prepayment premiums payable as of such date if such principal and interest is paid in full as of such date) arising under any obligations of the Company or any Subsidiary consisting of

(i) indebtedness for borrowed money or indebtedness issued in substitution or exchange for borrowed money or for the deferred purchase price of property or services (other than trade payables and accrued expenses arising in the ordinary course of business but including all seller notes and “earn-out” payments), (ii) indebtedness evidenced by any note, bond, debenture or other debt security or (iii) obligations under any interest rate, currency or other hedging agreements, (iv) obligations under conditional sale or other title retention agreements related to property purchased by the Company or any Subsidiary (other than accounts payable and accrued expenses incurred in the ordinary course of business), and (v) all obligations of any Person other than the Company or any Subsidiary secured by any Lien on property or assets owned by the Company and/or any of its Subsidiaries, whether or not the obligations secured thereby have been assumed by the Company and/or any of its Subsidiaries, in each case, as of such date, excluding any undrawn letters of credit and including, without limitation, pursuant to (x) the Credit Agreement, dated as of October 6, 1998, as amended, among the Company and the other parties thereto (the “Credit Agreement”), (y) the Investment Agreement, dated as of October 6, 1998, as amended, among the Company and the other parties thereto (the “Investment Agreement”) and (z) the Note Acquisition Agreement, dated as of June 28, 2000, between the Company, Cornerstone Equity Investor IV, L.P. and BancAmerica Capital Investors SBIC I, L.P. (the “Note Acquisition Agreement”) Notwithstanding the foregoing, “Funded Indebtedness” shall not include any obligations under operating leases or capitalized leases.

“GAAP” means generally accepted accounting principles as in effect in the United States on the date of this Agreement.

“Government Contracts” has the meaning set forth in Section 3.20(a).

“Governmental Authority” means any national, federal, state, provincial, county, municipal or local government, foreign or domestic, or the government of any political subdivision of any of the foregoing, or any entity, authority, agency, ministry or other similar body exercising executive, legislative, judicial, regulatory or administrative authority or functions of or pertaining to government, including any authority or other quasi-governmental entity established to perform any of such functions.

“Hazardous Materials” shall mean (a) petroleum and petroleum products, radioactive materials, asbestos-containing materials, mold, urea formaldehyde foam insulation, transformers or other equipment that contain polychlorinated biphenyls and radon gas, (b) any other chemicals, materials or substances defined as or included in the definition of “hazardous substances”, “hazardous wastes”, “hazardous materials”, “extremely hazardous wastes”, “restricted hazardous wastes”, “toxic substances”, “toxic pollutants”, “contaminants” or “pollutants”, or words of similar import, under any applicable Environmental Law, and (c) any other chemical, material or substance which is regulated by any Environmental Law.

“Healthcare Laws” has the meaning set forth in Section 3.22(a).

“High Value” has the meaning set forth in Section 2.9(b).

“HIPAA Commitments” has the meaning set forth in Section 3.21.

“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder.

“Indemnified Party” shall mean a party entitled, or seeking to assert rights, to indemnification under Article VIII.

“Intellectual Property Rights” means all:

(a) patents, patent applications, patent disclosures and all related continuation, continuation-in-part, divisional, reissue, reexamination, utility model, certificate of invention and design patents, patent applications, registrations and applications for registrations;

(b) trademarks, service marks, trade dress, Internet domain names, logos, trade names and corporate names and registrations and applications for registration thereof;

(d) mask works and registrations and applications for registration thereof;

(e) copyright, confidential information and trade secrets embodied in computer software and documentation;

(f) inventions, trade secrets and confidential business information, whether patentable or nonpatentable and whether or not reduced to practice, know-how, manufacturing and product processes and techniques, research and development information, financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information;

(g) other proprietary rights relating to any of the foregoing (including remedies against infringements thereof and rights of protection of interest therein under the laws of all jurisdictions); and

(h) copies and tangible embodiments thereof.

“Interim Financial Statements” has the meaning set forth in Section 3.6(a).

“Internal Systems” means the internal computer systems of the Company or any Subsidiary that are used in and in connection with its business or operations, including computer hardware systems, software applications and embedded systems and associated documentation.

“Investment Agreement” has the meaning set forth in the definition of “Funded Indebtedness” in this Section 1.1.

“Knowledge” means, with respect to any Person, actual knowledge or information which any Person should have known after reasonable inquiry; provided that in the case of the Company, such knowledge shall be limited to the Knowledge of Jenny Morgan, Arthur Lehrer, Walt Ellenberger, Glen Steinbach, Sara King (only with respect to matters set forth in Sections

3.12 and 3.13), Bruce Laliberte (only with respect to matters set forth in Section 3.14), Karen Borda, James Thompson and Jeff Zinn.

“Leased Property” has the meaning set forth in Section 3.17.

“Lease Letter of Credit” has the meaning set forth in Section 5.12.

“Legal Proceeding” shall mean any action, suit, proceeding, claim, arbitration or investigation before any Governmental Authority or before any arbitrator or mediator.

“Lien” means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind other than (i) mechanic’s, materialmen’s, and similar liens, (ii) liens arising under worker’s compensation, unemployment insurance, social security, retirement, and similar legislation and (iii) liens on goods in transit incurred pursuant to documentary letters of credit, in each case arising in the ordinary course of business of the Company and not material to the Company.

“Loss” has the meaning set forth in Section 8.2(a).

“Low Value” has the meaning set forth in Section 2.9(b).

“Major Customer” has the meaning set forth in Section 3.23.

“Major Supplier” has the meaning set forth in Section 3.23.

“Material Adverse Effect” means a material adverse effect upon the business, assets, liabilities, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries, taken as a whole; provided, however, that any adverse effect resulting from changes in the following, after the date of this Agreement, shall not be taken into account in determining whether a “Material Adverse Effect” has occurred or would reasonably be expected to occur: (i) conditions affecting the health care or the software industry generally or the United States economy generally; (ii) national or international political or social conditions, including the engagement by the United States in hostilities; (iii) GAAP; (iv) any laws, rules, regulations, orders, or other binding directives issued by any Governmental Authority; or (v) financial, banking or securities markets (including any disruption thereof and any decline in the price of any security or market index).

“Material Leases” has the meaning set forth in Section 3.17.

“Merger” has the meaning set forth in Section 2.1.

“Merger Documents” means, collectively, this Agreement, the Articles of Merger, and all other agreements and documents entered into in connection with the Merger and the other transactions contemplated hereby.

“MGCL” has the meaning set forth in Section 2.1.

“Most Recent Balance Sheet” has the meaning set forth in Section 3.6(a).

“Most Recent Balance Sheet Date” has the meaning set forth in Section 3.6(a).

“Multiemployer Plan” has the meaning set forth in Section 3(37) of ERISA.

“Net Income Tax Adjustment” means (x) the aggregate amount of income Taxes receivable minus (y) the aggregate amount of income Taxes payable, in each case by the Company and its Subsidiaries on a consolidated basis as of the Closing Date. For purposes of this definition, (i) the amount of income Taxes receivable or payable shall be determined based on a closing of the books of the Company at the end of the Closing Date but without giving effect to any extraordinary items occurring after Closing and (ii) the amount of any income Tax receivable shall be computed without regard to any decision by the Company to apply any overpayment of Taxes to a current or future payment of Tax.

“Net Working Capital” means, as of any date:

(I)(A) accounts receivable (net of reserves for doubtful accounts) plus (B) unbilled accounts receivable, plus (C) cost and estimated gross profit in excess of billings on uncompleted contracts plus (D) prepaid expenses plus (E) inventory

minus

(II)(A) accounts payable and accrued expenses plus (B) unearned revenues plus (C) billings in excess of cost and estimated gross profit on uncompleted contracts,

in each case, of the Company and the Subsidiaries, on a consolidated basis, as of such date, as determined in accordance with GAAP and (A) using the same accounting methods, policies, practices, and procedures, with consistent classification, judgments, and estimation methodology, as were used by the Company and the Subsidiaries in preparing the Net Working Capital as of December 31, 2003, which is attached as Exhibit A hereto, and (B) without giving effect to the transactions contemplated by this Agreement. Notwithstanding the foregoing, “Net Working Capital” shall not include any Cash and Cash Equivalents, Net Income Tax Adjustment, deferred income Taxes, property and equipment, capitalized software development costs, goodwill and other intangible assets, Funded Indebtedness, Seller Expenses, and any fees, expenses or other liabilities incurred in connection with any financing by Parent, Newco and their respective affiliates of the transactions contemplated hereby.

“Net Working Capital Adjustment” means (i) the amount by which Net Working Capital as of immediately prior to the Closing exceeds $5,200,000 or (ii) the amount by which Net Working Capital as of immediately prior to the Closing is less than $4,700,000, in each case, if applicable; provided that any amount which is calculated pursuant to clause (ii) above shall be deemed to be a negative number.

“Non-Satisfaction Notice” has the meaning set forth in Section 6.2(d).

“Note Acquisition Agreement” has the meaning set forth in the definition of “Funded Indebtedness” in this Section 1.1.

“Option Agreements” means the option agreements entered into by and between the Company and certain Persons as described in Schedule A attached hereto, each as amended, restated or modified from time to time.

“Option Plan” means the Company’s 1998 Stock Option Plan, as amended from time to time.

“Options” means each option or warrant to acquire or purchase shares of the capital stock of the Company, including without limitation, the (i) vested and unvested options to purchase up to 2,616,493 shares of Class A Common Stock outstanding as of the date hereof issued to certain current and former employees of the Company pursuant to the Option Plan or otherwise and pursuant to certain Option Agreements, (ii) vested options to purchase up to 40,000 shares of Class A Common Stock outstanding as of the date hereof issued to certain directors of the Company pursuant to the Director Stock and Option Agreements, and (iii) warrants to purchase up to 1,857,923 shares of Class A Common Stock or Class B Common Stock outstanding as of the date hereof pursuant to the Warrant.

“Parent Plans” has the meaning set forth in Section 5.8(b).

“Permitted Liens” means such of the following as to which no enforcement, collection, execution, levy or foreclosure proceeding shall have been commenced: (a) Liens for taxes, assessments and governmental charges or levies not yet due and payable; (b) Liens imposed by law, such as materialmen’s, mechanics’, carriers’, workmen’s and repairmen’s Liens and other similar Liens arising in the ordinary course of business securing obligations that (i) are not overdue and (ii) are not in excess of $100,000 in the aggregate at any time; (c) pledges or deposits to secure obligations under workers’ compensation laws or similar legislation or to secure public or statutory obligations; and (d) minor survey exceptions, reciprocal easement agreements and other customary encumbrances on title to real property that (i) were not incurred in connection with any indebtedness, (ii) do not render title to the property encumbered thereby unmarketable and (iii) do not, individually or in the aggregate, materially adversely affect the value or use of such property.

“Person” means an individual, partnership, corporation, limited liability company, joint stock company, unincorporated organization or association, trust, joint venture, association or other organization, whether or not a legal entity, or a Governmental Authority.

“Preferred Stock” means the Series A Preferred Stock, par value $0.01 per share of the Company.

“Preferred Stock Consideration” means, with respect to each outstanding share of Preferred Stock, an amount equal to the Redemption Price (as such term is defined in the Articles of Amendment and Restatement) of such share, calculated as of the Closing Date.

“Preferred Stock Payments” means the aggregate amount of Preferred Stock Consideration payable to the holders of the Preferred Stock.

“Proposed Cash and Cash Equivalents” has the meaning set forth in Section 2.9(b).

“Proposed Closing Date Calculations” has the meaning set forth in Section 2.9(b).

“Proposed Closing Date Funded Indebtedness” has the meaning set forth in Section 2.9(b).

“Proposed Closing Date Statement of Net Working Capital” has the meaning set forth in Section 2.9(b).

“Proposed Net Income Tax Adjustment” has the meaning set forth in Section 2.9(b).

“Proposed Purchase Price Calculation” has the meaning set forth in Section 2.9(b).

“Proposed Seller Expenses” has the meaning set forth in Section 2.9(b).

“Pro Rata Portion” means, with respect to any payment, that portion of such payment as equals (A) the amount of such payment divided by (B) the sum of the number of shares of Common Stock outstanding immediately prior to the Effective Time plus the number of shares of Common Stock issuable upon the exercise of all Vested Options outstanding immediately prior to the Effective Time.

“Purchase Price” means (i) the Enterprise Value, plus (ii) the Net Working Capital Adjustment (which may be a negative number, in which case such amount would be deducted from, rather than added to, Enterprise Value), plus (iii) the Net Income Tax Adjustment (which may be a negative number, in which case such amount would be deducted from, rather than added to, Enterprise Value), plus (iv) the amount of Cash and Cash Equivalents, plus (v) the aggregate exercise price for all Vested Options outstanding as of immediately prior to the Effective Time minus (vi) the amount of Closing Date Funded Indebtedness minus (vii) the Preferred Stock Payments minus (vi) the amount of Seller Expenses minus (viii) the Escrow Amount.

“Purchase Price Dispute Notice” has the meaning set forth in Section 2.9(b).

“Release” means disposing, discharging, injecting, spilling, leaking, leaching, dumping, emitting, escaping, emptying, seeping, placing, appearing and the like into or upon any land, building, surface, subsurface or water or air or otherwise entering into the environment.

“Response” shall mean a written response containing the information provided for in Section 8.3(f) or a written response containing the information provided for in Section 8.6A(b) or other written notice evidencing a dispute making applicable the dispute resolution provisions of Section 8.7A.

“Responsible Party” means (i) with respect to any instance where a Buyer Indemnitee is an Indemnified Party, Cornerstone, or (ii) with respect to any instance where a Seller Indemnitee is an Indemnified Party, the Parent.

“Section 8.2(a)(iii) Threshold” has the meaning set forth in Section 8.4(a)(iv).

“Securities Act” means the Securities Act of 1933, as amended (together with the rules and regulations promulgated thereunder).

“Seller Expenses” means the aggregate of (i) the out of pocket expenses payable as of the Closing by the Company in connection with the consummation of the transactions contemplated hereby to any legal counsel, accountants, investment bankers, or consultants, including, without limitation, the collective amount payable by the Company or any of its Subsidiaries to Broadview International LLC, Kirkland & Ellis LLP, and Whiteford, Taylor & Preston L.L.P. as of the Closing plus (ii) the Expense Funds plus (iii) any transfer, sale, use, stamp, conveyance, value added, recording, registration, documentary, filing and other non-income Taxes and administrative fees (including, without limitation, notary fees) arising in connection with the consummation of the Merger and payable by the Company or the Surviving Corporation; provided that in no event shall Seller Expenses include any expenses incurred by any legal counsel, accountants, investment bankers, or consultants hired by WebMD, Parent, Newco or any of their respective Affiliates.

“Seller Indemnitee” has the meaning set forth in Section 8.2(b).

“Stockholder Consent” means the written consent to the Merger by the requisite stockholders of the Company pursuant to the provisions of the MGCL.

“Subsidiary” means, with respect to any Person, any corporation, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a partnership, association or other business entity, a majority of the partnership or other similar ownership interests thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a partnership, association or other business entity if such Person or Persons shall be allocated a majority of partnership, association or other business entity gains or losses or shall be or control the managing director, managing member, general partner or other managing Person of such partnership, association or other business entity. Unless the context requires otherwise, each reference to a Subsidiary shall be deemed to be a reference to a Subsidiary of the Company.

“Surviving Corporation” has the meaning set forth in Section 2.1.

“Taxes” (including with correlative meaning “Tax” and “Taxable”) shall mean (x) any and all taxes, and any and all other charges, fees, levies, duties, deficiencies, customs or other similar assessments or liabilities in the nature of a tax, including, without limitation any income, gross receipts, ad valorem, premium, value-added, alternative or add-on minimum, excise, real property, personal property, assets, sales, use, capital stock, capital gains, documentary, recapture, transfer, transfer gains, estimated withholding, employment, unemployment, insurance, unemployment compensation, social security, business license, business organization, environmental, workers compensation, payroll, profits, license, lease, service, service use, gains, and other taxes severance, stamp, occupation, windfall profits, customs, duties, franchise and

other taxes imposed by the United States of America or any state, local or foreign government, or any agency thereof, or other political subdivision of the United States or any such government, (y) any interest, fines, penalties, assessments or additions to tax resulting from, attributable to or incurred in connection with any tax or any contest or dispute thereof described in this paragraph or any contest or dispute thereof, and (z) any items described in this paragraph that are attributable to another person but that the Company is liable to pay by law, by contract, or otherwise.

“Tax Return” means any return, report, declaration, claim for refund, information return or other document (including any related or supporting schedule, statement or information) filed or required to be filed in connection with the determination, assessment or collection of any Tax of any party or the administration of any laws, regulations or administrative requirements relating to any Tax (including any amendment thereof).

“Termination Date” has the meaning set forth in Section 7.1(b).

“Third Party Action” shall mean any suit, claim, action or proceeding by a person or entity other than a party to this Agreement or any affiliate of any such party for which indemnification may be sought under Article VIII.

“Threshold” has the meaning set forth in Section 8.4(a)(ii).

“Unvested Options” means all Options other than Vested Options.

“Vested Options” means all Options that are vested and exercisable as of the Effective Time.

“Warrant” means the Common Stock Purchase Warrant (No. CSW-1) issued by the Company to BA Capital Company, L.P. (f/k/a Nationsbanc Capital Corporation).

Section 1.2 Interpretation. Unless otherwise indicated to the contrary herein by the context or use thereof: (i) the words, “herein,” “hereto,” “hereof” and words of similar import refer to this Agreement as a whole and not to any particular Section or paragraph hereof; (ii) the word “including” means “including, but not limited to”; (iii) masculine gender shall also include the feminine and neutral genders, and vice versa; and (iv) words importing the singular shall also include the plural, and vice versa.

ARTICLE II —The Merger

Section 2.1 The Merger. Upon the terms and subject to the conditions of this Agreement, at the Effective Time, Newco shall, pursuant to the provisions of the Maryland General Corporation Law (as amended from time to time, the “MGCL”), be merged with and into the Company (the “Merger”), and the separate corporate existence of Newco shall thereupon cease in accordance with the provisions of the MGCL. The Company shall be the surviving corporation in the Merger and shall continue to exist as said surviving corporation under its present name pursuant to the provisions of the MGCL. The separate corporate existence of the Company with all its rights, privileges, powers and franchises shall continue unaffected by the

Merger. The Merger shall have the effects specified in the MGCL. From and after the Effective Time, the Company is sometimes referred to herein as the “Surviving Corporation.”

Section 2.2 Outstanding Shares.

(a) As of the date hereof, the number of issued and outstanding shares of capital stock of Newco is 100 shares of common stock.

(b) As of the date hereof, the number of outstanding shares of capital stock of the Company is as follows:

(1) 20,837,781 shares of Class A Common Stock; and

(2) 16,789,417 shares of Preferred Stock.

Section 2.3 Articles of Merger. On the Closing Date, the parties hereto shall cause articles of merger substantially in the form attached hereto as Exhibit B (the “Articles of Merger”), in accordance with the relevant provisions of the MGCL to be properly executed and filed in accordance with the MGCL and shall make all other filings or recordings required under the MGCL. The Merger shall be effective at the time and on the date of the filing of the Articles of Merger in accordance with the MGCL, which filing shall occur on the Closing Date (the “Effective Time”).

Section 2.4 Articles of Incorporation. The articles of incorporation of the Surviving Corporation shall be amended as of the Effective Time in the manner set forth in the Articles of Merger. Such amended articles of incorporation of the Surviving Corporation shall continue in full force and effect until further amended in the manner prescribed by the provisions of the MGCL.

Section 2.5 By-laws. The by-laws of Newco, substantially in the form previously provided to the Company (but otherwise in form and substance satisfactory to Newco) in effect immediately prior to the Effective Time shall be the by-laws of the Surviving Corporation until amended in accordance with applicable law.

Section 2.6 Officers. The officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation and will hold office until their successors are duly elected or appointed and qualify in the manner provided in the articles of incorporation or by-laws of the Surviving Corporation or as otherwise provided by law, or until their earlier death, resignation or removal.

Section 2.7 Directors. The directors of Newco immediately prior to the Effective Time shall be the directors of the Surviving Corporation and will serve until their successors are duly elected or appointed and qualify in the manner provided in the articles of incorporation or by-laws of the Surviving Corporation or as otherwise provided by law, or until their earlier death, resignation or removal.

Section 2.8 Preferred Stock Consideration. On the Closing Date, contemporaneously with the filing of the Articles of Merger, Parent shall pay, or shall cause the Company, Newco or

the Surviving Corporation to pay the amount of the Preferred Stock Payments, in cash by wire transfer of immediately available funds to the holders of the Preferred Stock as of immediately prior to the Closing in accordance with the terms of Section 2.10 and 2.11.

Section 2.9 Purchase Price; Repayment of Loans.

(a) Estimated Purchase Price; Escrow Amount. No later than one business day prior to the Closing, the Company shall deliver to Parent and Cornerstone a calculation of the Estimated Purchase Price, which shall be certified as a good faith estimate of the Purchase Price by the Company’s Chief Financial Officer after consultation with Parent and Cornerstone. On the Closing Date, contemporaneously with the filing of the Articles of Merger, Parent shall pay, or shall cause the Company, Newco or the Surviving Corporation to pay the following:

(i) Sixteen Million Dollars ($16,000,000.00) of cash (such cash, the “Escrow Amount” and such cash, the “Escrow Funds”) shall be deposited into an escrow account (the “Escrow Account”), which shall be established pursuant to an escrow agreement (the “Escrow Agreement”), which Escrow Agreement (x) shall be entered into on the Closing Date among the Parent, Cornerstone and an escrow agent to be mutually agreed upon between Newco and Cornerstone (“Escrow Agent”) and (y) shall be substantially in the form of Exhibit C attached hereto; and

(ii) Each holder of the Common Stock (other than any Dissenting Common Shares) as of immediately prior to the Closing shall receive an amount per share of Common Stock in accordance with the terms of Sections 2.10 and 2.11 (the “Estimated Common Stock Consideration”) equal to the Estimated Purchase Price divided by the sum of the number of shares of Common Stock outstanding immediately prior to the Effective Time plus the number of shares of Common Stock issuable upon exercise of all Vested Options outstanding immediately prior to the Effective Time.

(b) Preparation of the Final Statement of Purchase Price.

(i) As soon as practicable, but no later than 60 days after the Closing Date, Parent shall prepare and deliver to Cornerstone a proposed calculation of (A) the Net Working Capital as of immediately prior to the Closing (the “Proposed Closing Date Statement of Net Working Capital”), (B) the Net Income Tax Adjustment (the “Proposed Net Income Tax Adjustment”) (C) the amount of Cash and Cash Equivalents (the “Proposed Cash and Cash Equivalents”), (D) the amount of Closing Date Funded Indebtedness (the “Proposed Closing Date Funded Indebtedness”), (E) the amount of Seller Expenses (the “Proposed Seller Expenses”), and (F) a proposed calculation of the Purchase Price (the “Proposed Purchase Price Calculation”) and, in each case, the components thereof. The Proposed Closing Date Statement of Net Working Capital, the Proposed Net Income Tax Adjustment, the Proposed Cash and Cash Equivalents, the Proposed Closing Date Funded Indebtedness, the Proposed Seller Expenses and the Proposed Purchase Price Calculation shall collectively be referred to herein from time to time as the “Proposed Closing Date Calculations”.

(ii) If Cornerstone does not give written notice of dispute (a “Purchase Price Dispute Notice”) to Parent within 30 days of receiving the Proposed Closing Date Calculations, Cornerstone and the other parties hereto agree that (A) the Proposed Closing Date Statement of Net Working Capital shall be deemed to set forth the Net Working Capital as of immediately prior to the Closing, (B) the Proposed Net Income Tax Adjustment shall be deemed to set forth the Net Income Tax Adjustment, (C) the Proposed Cash and Cash Equivalents shall be deemed to set forth the Cash and Cash Equivalents, (D) the Proposed Closing Date Funded Indebtedness shall be deemed to set forth the Closing Date Funded Indebtedness, (E) the Proposed Seller Expenses shall be deemed to set forth the Seller Expenses and (F) the Proposed Purchase Price Calculation shall be deemed to set forth the Purchase Price. If Cornerstone gives a Purchase Price Dispute Notice to Parent (which Purchase Price Dispute Notice must set forth, in reasonable detail, the items and amounts in dispute) within such 30-day period, Parent and Cornerstone will use reasonable efforts to resolve the dispute during the 30-day period commencing on the date Parent receives the applicable Purchase Price Dispute Notice from Cornerstone. If Cornerstone and Parent do not obtain a final resolution within such 30-day period, then the items in dispute shall be submitted immediately to the Bethesda, Maryland office of BDO Seidman, LLP (the “Accounting Firm”). The Accounting Firm shall be required to render a determination of the applicable dispute within 60 days after referral of the matter to the Accounting Firm, which determination must be in writing and must set forth, in reasonable detail, the basis therefor. The determination of the Accounting Firm shall be conclusive and binding upon Cornerstone, Parent and the other parties hereto. Parent will revise the Proposed Closing Date Calculations as appropriate to reflect the resolution of any objections thereto pursuant to this Section 2.9(b)(ii). The “Final Statement of Purchase Price” shall mean the Proposed Purchase Price Calculation together with any revisions thereto pursuant to this Section 2.9(b)(ii).

(iii) In the event Cornerstone and Parent submit any unresolved objections to an Accounting Firm for resolution as provided in Section 2.9(b)(ii) above, the responsibility for the fees and expenses of the Accounting Firm shall be as follows:

(A) if such Accounting Firm resolves all of the remaining objections in favor of Parent’s position (the Purchase Price so determined is referred to herein as the “Low Value”), then all of the fees and expenses of the Accounting Firm shall be paid from the Escrow Amount;

(B) if the Accounting Firm resolves all of the remaining objections in favor of Cornerstone’s position (the Purchase Price so determined is referred to herein as the “High Value”), then Parent will be responsible for all of the fees and expenses of the Accounting Firm; and

(C) if such Accounting Firm neither resolves all of the remaining objections in favor of Parent’s position nor resolves all of the remaining objections in favor of Cornerstone’s position (the Purchase Price so determined is referred to herein as the “Actual Value”), then that fraction of the fees and expenses of the Accounting Firm equal to (x) the difference between the High

Value and the Actual Value over (y) the difference between the High Value and the Low Value shall be paid from the Escrow Account, and Parent will be responsible for the remainder of the fees and expenses of the Accounting Firm.

(iv) Parent will make the financial records of the Surviving Corporation and its Subsidiaries available to Cornerstone and its accountants and other representatives at reasonable times at any time during the review by Cornerstone of, and the resolution of any objections with respect to, the Proposed Closing Date Calculations. Cornerstone shall not disclose or make use of, and shall cause each of its accountants and other representatives not to disclose or make use of, any such information, other than to the extent necessary to enforce its rights hereunder.

(i) If the Actual Adjustment is a positive amount, Parent and/or Surviving Corporation will pay to each holder of the Common Stock (other than any Dissenting Common Shares) as of immediately prior to the Effective Time and to each holder of Vested Options as of immediately prior to the Effective Time, an amount equal to, for each such share of Common Stock and/or for each share of Common Stock for which such Vested Option was exercisable for as of immediately prior to the Effective Time, a Pro Rata Portion of such positive amount (as reduced by the last sentence of this Section 2.9(c)(i)), net of applicable withholding Taxes, if any, by check or by wire transfer or delivery of other immediately available funds, in each case, within three business days after the date on which the Purchase Price is finally determined pursuant to Section 2.9(b) above. Notwithstanding the foregoing, such positive amount shall first be appropriately reduced by the amount payable to Broadview International LLC pursuant to the terms of the Broadview Engagement Letter as a result of the required payment to the Company Securityholders pursuant to this Section 2.9(c)(i) (without regard to this last sentence of Section 2.9(c)(i)), and such reduced amount shall be paid by the Company to Broadview International LLC.

(ii) If the Actual Adjustment is a negative amount, then within three business days after the date on which the Purchase Price is finally determined pursuant to Section 2.9(b) above, the Surviving Corporation and Cornerstone shall deliver joint written instructions to the Escrow Agent instructing the Escrow Agent to deliver to the Surviving Corporation an amount equal to the lesser of (x) an amount equal to such negative amount and (y) the amount of the Escrow Funds then held by the Escrow Agent in the Escrow Account.

(d) Repayment of Loans. Parent shall cause the Surviving Corporation to pay, immediately following the Effective Time, the following:

(i) indebtedness outstanding in connection with the Credit Agreement;

(ii) indebtedness outstanding in connection with the Investment Agreement; and

(iii) indebtedness outstanding in connection with the Note Acquisition Agreement.

Section 2.10 Conversion of Shares.

(a) Conversion of Preferred Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of any holder thereof or any party hereto, each share of Preferred Stock issued and outstanding immediately prior to the Effective Time (other than (i) shares held in the Company’s treasury or by any of the Subsidiaries and (ii) Dissenting Preferred Shares) shall be canceled and converted into the right to receive the Preferred Stock Consideration, payable in cash to the holder thereof, without interest thereon, upon surrender of the Certificate formerly representing such share, all in accordance with Section 2.8 and Section 2.11.

(b) Conversion of Common Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of any holder thereof or any party hereto, each share of Common Stock issued and outstanding immediately prior to the Effective Time (other than (i) shares held in the Company’s treasury or by any of the Subsidiaries and (ii) Dissenting Common Shares) shall be canceled and converted into the right to receive the Common Stock Consideration, payable in cash to the holder thereof, without interest thereon, upon surrender of the Certificate formerly representing such share, all in accordance with Section 2.9 and Section 2.11.

(c) Treasury Shares. Each share of Common Stock or Preferred Stock held in the treasury of the Company or by any Subsidiary immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holders thereof, be canceled, retired and cease to exist as of the Effective Time and no payment shall be made with respect thereto.

(d) Newco Shares. As of the Effective Time, each share of capital stock of Newco issued and outstanding immediately prior to the Effective Time shall, without any action on the part of Newco, be converted on a one-for-one basis into shares of the corresponding class of capital stock of the Surviving Corporation.

(e) Holders of Certificates. From and after the Effective Time, the holders of Certificates (other than Certificates representing Dissenting Shares) shall cease to have any rights with respect to such Certificates, except the right to receive the Common Stock Consideration or the Preferred Stock Consideration, as applicable, with respect to each of the shares represented thereby.

Section 2.11 Exchange of Certificates.

(a) Upon surrender of any Certificates (other than Certificates representing Dissenting Shares), together with duly executed stock powers, on or prior to the Closing Date to Parent, Newco or the Surviving Corporation, the holder of each Certificate shall receive from the Surviving Corporation on the Closing Date in exchange for each share of Preferred Stock or Common Stock evidenced thereby, the Preferred Stock Consideration or the Estimated Common Stock Consideration, as applicable, in the form of cash by wire transfer of immediately available funds, to which such holder is entitled pursuant to Section 2.8, Section 2.9 and/or Section 2.10, without interest. At the time of distribution of the information statement in accordance with

Section 5.1, the Company shall mail or otherwise deliver to each record holder of any Certificates a form of letter of transmittal for return to the Company (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Company) and instructions for use in effecting the surrender of the Certificates and payment therefor. At any time after the Effective Time, upon surrender to the Surviving Corporation of any Certificates (other than Certificates surrendered pursuant to the first sentence of this Section 2.11(a) and other than Certificates representing Dissenting Shares), together with such duly executed letter of transmittal, the holder of each such Certificate shall receive from the Surviving Corporation immediately thereafter in exchange therefor, the Preferred Stock Consideration or the Estimated Common Stock Consideration, as applicable, payable in cash pursuant to Section 2.8, Section 2.9 and/or Section 2.10, in the form of cash by wire transfer of immediately available funds, to which such holder is entitled pursuant to such sections of the Agreement, without interest; provided, however, that any such payments for less than $10,000 to a particular holder may be made by check. Each Certificate surrendered pursuant to this Section 2.11(a) shall be canceled. If payment or delivery is to be made to a Person other than the Person in whose name a Certificate so surrendered is registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or otherwise in proper form for transfer, that the signatures on the certificate or any related stock power shall be properly guaranteed and that the Person requesting such payment either pay any transfer or other Taxes required by reason of the payment to a Person other than the registered holder of the Certificate so surrendered or establish to the satisfaction of the Surviving Corporation that such Tax has been paid or is not applicable. Until surrendered in accordance with the provisions of this Section 2.11, each Certificate (other than Certificates canceled pursuant to Section 2.10(c) and Certificates representing Dissenting Shares) shall represent for all purposes only the right to receive the Preferred Stock Consideration or the Common Stock Consideration, as applicable, in the form provided for by this Agreement, without interest. Except as provided herein, all cash paid upon surrender of the Certificates in accordance with this Section 2.11 shall be deemed to have been paid in satisfaction of all rights pertaining to the shares of Common Stock or Preferred Stock represented thereby.

(b) In the event that any Certificate (other than any Certificate representing Dissenting Shares) shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the registered holder of such lost, stolen or destroyed Certificate in form and substance acceptable to Parent and Newco (if such affidavit is accepted before the Effective Time) or the Surviving Corporation (if such affidavit is accepted after the Effective Time), the Surviving Corporation will issue in exchange for such lost, stolen or destroyed Certificate the Preferred Stock Consideration or the Common Stock Consideration, as applicable, in respect thereof in the manner set forth in Section 2.8, Section 2.9 and/or Section 2.10.

(c) If Certificates are not surrendered prior to the date that is three years after the Effective Time, unclaimed amounts (including interest thereon) of Preferred Stock Consideration and Common Stock Consideration shall, to the extent permitted by applicable law, become the property of the Surviving Corporation and may be commingled with the general funds of the Surviving Corporation, free and clear of all claims or interest. Notwithstanding the foregoing, any stockholders of the Company who have not theretofore complied with the provisions of this Section 2.11 shall thereafter look only to the Surviving Corporation and only as general creditors

thereof for payment for their claims in the form and amounts to which such stockholders are entitled.

(d) After the Effective Time, there shall be no transfers on the stock transfer books of the Surviving Corporation of the shares of Preferred Stock or Common Stock that were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates (other than Certificates representing Dissenting Shares) are presented to the Surviving Corporation, they shall be canceled and exchanged for the Preferred Stock Consideration or the Common Stock Consideration, as applicable, as provided for, and in accordance with, the provisions of this Section 2.11.

Section 2.12 Dissenting Shares. Each share of Common Stock or Preferred Stock issued and outstanding immediately prior to the Effective Time held by stockholders who shall have properly exercised their appraisal rights with respect thereto under Section 3-203 of the MGCL (such shares of Common Stock, the “Dissenting Common Shares”, such shares of Preferred Stock, the “Dissenting Preferred Shares”, and all such shares, collectively, the “Dissenting Shares”) shall not be converted into the right to receive the Common Stock Consideration or Preferred Stock Consideration, as applicable, pursuant to the Merger, but shall be entitled to receive payment of the appraised value of such shares in accordance with the provisions of Section 3-203 of the MGCL, except that each Dissenting Share held by a stockholder who shall thereafter withdraw his or her demand for appraisal or shall fail to perfect his or her right to such payment as provided in such Section 3-203 shall be deemed to be converted, as of the Effective Time, into the right to receive the Common Stock Consideration or Preferred Stock Consideration, as applicable, in the form such holder otherwise would have been entitled to receive as a result of the Merger.

Section 2.13 Options.

(a) As promptly as practicable following the Closing, the Surviving Corporation shall pay to each holder of any Vested Option an amount of cash in respect thereof equal to the product of (i) the excess of the Estimated Common Stock Consideration over the exercise price per share of Common Stock for which such Vested Option is exercisable, and (ii) the number of shares of Common Stock subject to such Vested Option (such gross amount of cash, the “Estimated Option Consideration”). The payment of Estimated Option Consideration by the Company shall be net of applicable withholding taxes, if any. In addition, each holder of a Vested Option shall be entitled to receive for each share for which such Vested Option is exercisable immediately prior to the Effective Time (A) any applicable payment pursuant to the provisions of Section 2.9(c)(i) hereof, and (B) a Pro Rata Portion of any amounts payable, directly or indirectly, to the Company Securityholders from the Escrow Agreement pursuant to the terms hereof and the Escrow Agreement. Any such payments made from the Escrow Agreement on behalf of the Vested Options shall be made to the Surviving Corporation (on behalf of the then former holders of Vested Options), and the Surviving Corporation shall use the funds received from the Escrow Agreement to promptly make the applicable payments to the then former holders of Vested Options, net of applicable withholding taxes, if any. No payments shall be made by the Parent, Newco, the Company or the Surviving Corporation to any holder of Options which are unvested as of the Effective Time. For purposes of clarification, under this Section 2.13(a) the holder of the Warrant shall be treated as a holder of Vested Options, and, in

connection with the Merger, the Warrant shall not be exercised, but shall be converted solely into the right to receive the consideration contemplated by this Section 2.13(a).

(b) Prior to the Closing, the Company shall take the actions necessary to give effect to the provisions of this Section 2.13, including without limitation pursuant to (i) the terms of the Option Plan, including Section 5.5 thereof, (ii) the terms of the Warrant, and (iii) the terms of the Director Stock and Option Agreements, including Section 8 thereof.

(c) The Company shall take or cause to be taken all actions necessary to cause the Option Plan to terminate as of the Effective Time, and to ensure that no holder of Options issued pursuant to the Option Plan or any participant in the Option Plan shall have any rights thereunder to acquire any equity securities of the Company, the Surviving Corporation or any Subsidiary.

Section 2.14 Closing. The closing of the transactions contemplated hereby (the “Closing”) shall take place at the offices of Whiteford, Taylor & Preston L.L.P., Seven Saint Paul Street, Baltimore, Maryland 21202, at 10:00 A.M. on the Business Day following the satisfaction or waiver of the conditions set forth in Article VI (other than those conditions that by their terms cannot be satisfied until the Closing), or on such date and time as the Company and Newco shall mutually agree. The time and date of the Closing is herein called the “Closing Date”.

Section 2.15 Withholding Taxes. Notwithstanding any other provision in this Agreement, Parent, Newco, the Company, the Surviving Corporation and the Escrow Agent shall have the right to deduct and withhold Taxes from any payments to be made hereunder (including any payments to be made under the Escrow Agreement) if such withholding is required by law and to collect any necessary Tax forms, including Form W-9 or the appropriate series of Form W-8, as applicable, or any similar information, from any stockholder of the Company and any other recipient of any payment hereunder. To the extent that amounts are so withheld and paid to the appropriate taxing authority, such withheld amounts shall be treated for all purposes of this Agreement as having been delivered and paid to the applicable stockholder of the Company or other recipient of payment in respect of which such deduction and withholding was made.

ARTICLE III —Representations and Warranties of the Company

The Company hereby represents and warrants to Parent and Newco as follows:

Section 3.1 Organization and Qualification; Subsidiaries. Each of the Company and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation specified on Schedule 3.1 and has the corporate power and authority and all licenses, permits and authorizations necessary to own or lease its property and assets and to carry on its business as presently conducted. Each of the Company and its Subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction wherein the nature of its business or the ownership of its assets makes such qualification necessary, except where the failure to be so qualified and in good standing would not have a Material Adverse Effect. The Company has previously provided to Parent and Newco true and complete copies of (i) its articles of amendment and restatement and all amendments thereto or restatements thereof, (ii) its by-laws as currently in effect and (iii) true and complete

copies of the certificate or articles of incorporation and by-laws, as currently in effect, of each Subsidiary.

Section 3.2 Authorization. The Company has the corporate power and authority to execute and deliver this Agreement and each other Merger Document to be executed by the Company in connection herewith and to perform its obligations hereunder and thereunder, all of which have been duly authorized by all requisite corporate action, including the Stockholder Consent. This Agreement has been duly authorized, executed and delivered by the Company and, assuming that this Agreement has been duly and validly authorized, executed and delivered by Parent and Newco, constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforceability hereof may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally or (ii) applicable equitable principles (whether considered in a proceeding at law or in equity).

Section 3.3 Non-contravention. Except as set forth in Schedule 3.3, neither the execution and delivery of this Agreement or any other Merger Document, the consummation of the Merger and the other transactions contemplated hereby nor the fulfillment of and the performance by the Company of its obligations hereunder will (i) contravene any provision contained in the Company’s Articles of Amendment and Restatement or By-laws, (ii) conflict with, violate or result in a breach (with or without the lapse of time, the giving of notice or both) of, or constitute a default (with or without the lapse of time, the giving of notice or both) under (A) any Government Contract, any other contract with a customer to which the Company or any Subsidiary is a party or any other contract, agreement, commitment, indenture, mortgage, lease, pledge, note, bond, license, permit or other instrument or obligation material to the Company and its Subsidiaries taken as a whole or (B) any judgment, order, decree, statute, law, rule or regulation or other restriction of any Governmental Authority, in each case to which the Company or any of the Subsidiaries is a party or by which any of them is bound or to which any of their respective assets or properties are subject, (iii) result in the creation or imposition of any Lien, other than any Permitted Lien, on any of the assets or properties of the Company or the Subsidiaries, or (iv) result in the acceleration of, or permit any Person to terminate, modify, cancel, accelerate or declare due and payable prior to its stated maturity, any obligation of the Company or any Subsidiaries.

Section 3.4 Consents. Except for (i) filing and recordation of appropriate merger documents as required by the MGCL, (ii) filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the HSR Act, and (iii) filings and approvals set forth in Schedule 3.4, no notice to, filing with, or authorization, registration, consent or approval of any Governmental Authority or other Person is, to the Company’s Knowledge, necessary for the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby or thereby by the Company.

Section 3.5 Capitalization; Subsidiaries

(a) The Company’s authorized capital stock consists solely of 220,000,000 authorized shares of Class A Common Stock, 20,837,781 of which are presently issued and outstanding; 220,000,000 authorized shares of Class B Common Stock, none of which are presently issued

and outstanding; and 20,000,000 shares of Preferred Stock, 16,789,417 of which have been designated as Series A Preferred Stock and are presently issued and outstanding, in each case, which shares are held beneficially and of record by the Persons set forth on Schedule 3.5(a) in the amounts set forth opposite such Person’s name. No shares of the Company’s capital stock are held as treasury shares. Up to 4,846,243 shares of Class A Common Stock are reserved for issuance upon exercise of all outstanding Options under the Option Plan and the Warrant. Except as set forth in this Section 3.5(a) or in Schedule 3.5(a), the Company does not have (i) any shares of Common Stock or Preferred Stock reserved for issuance, or (ii) any outstanding or authorized option, warrant or other right, relating to its capital stock or any outstanding securities or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire from it, any shares of its capital stock. Except as set forth in this Section 3.5(a), Schedule 3.5(a) or in this Agreement, there are no (i) outstanding obligations of the Company or any of the Subsidiaries to repurchase, redeem or otherwise acquire any capital stock of the Company or (ii) voting trusts, proxies or other agreements among the Company’s stockholders with respect to the voting or transfer of the Company’s capital stock. All of the issued and outstanding shares of capital stock of the Company have been duly authorized, validly issued, are fully paid and are nonassessable. Except as set forth on Schedule 3.5(a), there are no outstanding or authorized stock appreciation, phantom stock or similar rights with respect to the Company.

(b) All Subsidiaries of the Company are listed on Schedule 3.5(b). All of the outstanding capital stock of, or other ownership interests in, each Subsidiary of the Company is owned beneficially and of record by the Company, directly or indirectly, is validly issued, fully paid and nonassessable and free and clear of any preemptive rights (other than such rights as may be held by the Company), restrictions on transfer, Taxes or Liens. There are no (i) authorized or outstanding securities of the Company or any of the Subsidiaries convertible into or exchangeable for, or options or warrants or the right to subscribe for, or providing for the issuance or sale of, any capital stock or other ownership interest in, or any other securities of, any Subsidiary, (ii) voting trusts, proxies or other agreements among the Subsidiaries’ stockholders with respect to the voting or transfer of the Subsidiaries’ capital stock, or (iii) outstanding obligations of the Company or any of the Subsidiaries to repurchase, redeem or otherwise acquire any outstanding shares of capital stock or other ownership interests in any Subsidiary. All of the issued and outstanding shares of capital stock of each of the Company’s Subsidiaries have been duly authorized and validly issued, and are fully paid and nonassessable.

(c) Except for the Subsidiaries listed on Schedule 3.5(b), the Company does not control or have any equity participation or similar interest in any corporation, partnership, limited liability company, joint venture, trust or other business association or entity. All of the issued and outstanding equity securities of the Company have been offered, issued and sold by the Company in compliance with all applicable federal and state securities laws.

Section 3.6 Financial Statements.

(a) Attached hereto as Schedule 3.6 are true and complete copies of the following financial statements (such financial statements, the “Financial Statements”):

(i) the unaudited consolidated balance sheets of the Company as of December 31, 2002 and December 31, 2003, and the related unaudited consolidated statements of cash flows, operations and stockholders’ equity for the years ending on December 31, 2001, December 31, 2002 and December 31, 2003 (the “Annual Financial Statements”); and

(ii) the unaudited consolidated balance sheet of the Company as of May 31, 2004 (such balance sheet, the “Most Recent Balance Sheet”, and the date of such balance sheet, the “Most Recent Balance Sheet Date”) and the related unaudited consolidated statements of cash flows and operations for the five-month period ending on such date (the “Interim Financial Statements”).

(b) The Financial Statements (i) have been prepared, in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, except as may be indicated in the notes thereto and except for the absence of footnotes and, in the case of the Interim Financial Statements, subject to normal year-end adjustments which are consistent with past practices, and (ii) fairly present, in all material respects, the consolidated financial position of the Company as of the dates thereof and its consolidated results of operations for the periods then ended (subject to the absence of footnotes and, in the case of the Interim Financial Statements, to normal year-end adjustments which are consistent with past practices). Attached hereto as Schedule 3.6A is a calculation of the Net Working Capital of the Company and the Subsidiaries, on a consolidated basis, as of December 31, 2002, December 31, 2003 and May 31, 2004 (the “Net Working Capital Calculation”).

(c) Except as set forth on Schedule 3.6(c), (i) there are no letters of credit issued for the account of the Company or any Subsidiary and (ii) neither the Company nor any Subsidiary has guaranteed (or entered into any arrangement having the economic effect of a guarantee of) the indebtedness of any Person other than the Company or any Subsidiary.

(d) Neither the Company nor any Subsidiary has any liability (whether known or unknown, whether absolute or contingent, whether liquidated or unliquidated and whether due or to become due), except (i) as set forth on Schedule 3.6, or as disclosed, set forth or reserved for in the Financial Statements (including the notes thereto), (ii) liabilities and/or obligations incurred in the ordinary course of business since the Most Recent Balance Sheet Date, (iii) contractual liabilities arising in the ordinary course of business under the contracts listed on Schedule 3.15 hereto, and/or (iv) any other liabilities (whether known or unknown, whether absolute or contingent, whether liquidated or unliquidated and whether due or to become due) which, in the case of clauses (iii) and (iv), individually or in the aggregate have not had or would not reasonably be expected to have a Material Adverse Effect.

Section 3.7 Absence of Certain Developments. Except as set forth in Schedule 3.7, during the period beginning on January 1, 2004 and ending on the date hereof, there has not been any Material Adverse Effect and the Company has conducted its business in the ordinary and usual course consistent with past practices. Without limiting the generality of the foregoing, during the period beginning on January 1, 2004 and ending on the date hereof:

(a) neither the Company nor any of its Subsidiaries has incurred Funded Indebtedness in aggregate amounts in excess of $100,000;

(b) neither the Company nor any of its Subsidiaries has made any acquisition (by merger, consolidation, or acquisition of stock or assets or otherwise) of any other Person;

(c) neither the Company nor any of its Subsidiaries has created or permitted the creation of any Lien, other than Permitted Liens, on any of its assets, tangible or intangible;

(d) except for sales to customers of the Company’s products and services in the ordinary course of business, neither the Company nor any of its Subsidiaries has sold, assigned or transferred any of its material tangible assets;

(e) neither the Company nor any of its Subsidiaries has (i) entered into or amended any written employment or severance or similar agreement with any employee or any collective bargaining agreement, (ii) adopted or amended, or materially increased the payments to or benefits under, any profit sharing, bonus, thrift, stock option plan, deferred compensation, savings, insurance, restricted stock, pension, retirement, or other employee benefit plan for or with any of its directors, officers or employees, (iii) granted any increase in compensation payable or to become payable or the benefits provided to its directors or officers, or (iv) granted, other than in the ordinary course of business, any increase in compensation payable or to become payable to its employees (other than officers);

(f) neither the Company nor any of its Subsidiaries has issued any credit memo to or for the benefit of any customer, or otherwise issued or granted credits, rebates or similar discounts with respect to services previously rendered or products previously sold;

(g) neither the Company nor any of its Subsidiaries has (i) made or changed any Tax election or (ii) made any material change in any method of accounting or accounting practice used by it, other than any such changes required by GAAP;

(h) there has not been any material casualty, loss, damage or destruction not covered by insurance which has materially, adversely affected the properties of the Company and its Subsidiaries, taken as a whole;

(i) neither the Company nor any Subsidiary has made any capital expenditure or commitment in excess of $50,000 for additions to property, plant and equipment;

(j) neither the Company nor any Subsidiary has forgiven, canceled or waived any material rights under any material debt or claim by the Company or the applicable Subsidiary other than in the ordinary course of business;

(k) neither the Company nor any Subsidiary has issued, sold or otherwise disposed of any debenture, note, stock, or equity interest or modified or amended any right of any holder thereof;

(l) neither the Company nor any Subsidiary has terminated, disposed of, or permitted to lapse, any material license or permit; and

(m) there has not been any amendment to the Articles of Amendment and Restatement or By-laws of the Company or any of its Subsidiaries.

Section 3.8 Compliance with Laws; Governmental Authorizations; Licenses; Etc.

(a) Except as set forth in Schedule 3.8(a), the business of each of the Company and its Subsidiaries has been operated in compliance, in all material respects, with all applicable laws, rules, regulations, codes, ordinances, orders, policies and guidelines of all Governmental Authorities, including as required as a result of the Company’s status as a government contractor; provided that this Section 3.8(a) shall not be applicable with respect to Healthcare Laws, which shall be addressed separately in Section 3.22.

(b) Except as set forth in Schedule 3.8(b), each of the Company and its Subsidiaries has all material permits, licenses, approvals, certificates and other authorizations, and has made all material notifications, registrations, certifications and filings with all Governmental Authorities, necessary or advisable for the operation of its business as currently conducted.

(c) Except as set forth in Schedule 3.8(c), as of the date hereof, there is no action, case or proceeding pending or, to the Company’s Knowledge, threatened by any Governmental Authority with respect to (i) any alleged violation by the Company or its Affiliates of any statute, law, rule, regulation, code, ordinance, order, policy or guideline of any Governmental Authority, or (ii) any alleged failure by the Company or its Affiliates to have any permit, license, approval, certification or other authorization required in connection with the operation of the business of each of the Company and its Subsidiaries.

Section 3.9 Litigation. Except as set forth in Schedule 3.9, as of the date hereof, there are no judgments, decrees, lawsuits, actions, proceedings, claims, complaints, injunctions, orders or investigations by or before any Governmental Authority pending or, to the Company’s Knowledge, threatened against the Company or its Subsidiaries (i) relating to the Company, any Subsidiary, or their respective businesses or properties, or (ii) seeking to enjoin the transactions contemplated hereby. The Company is not a party to any litigation or threatened litigation which would reasonably be expected to affect or prohibit the consummation of the transactions contemplated hereby. Neither the Company nor any of its Subsidiaries has been a party to any litigation matter since January 1, 2001.

Section 3.10 Taxes.

(a) Except as set forth on Schedule 3.10(a), each of the Company and its Subsidiaries has properly filed on a timely basis all Tax Returns that each is and was required to file, and all such Tax Returns were true, correct and complete in all material respects. Except as set forth in Schedule 3.10(a), each of the Company and its Subsidiaries has properly paid on a timely basis all Taxes, whether or not shown on any of their respective Tax Returns, that were due and payable. All Taxes that the Company and its Subsidiaries are or were required by law to withhold or collect have been withheld or collected and, to the extent required, have been properly paid on a timely basis to the appropriate Governmental Authority. The Company and its Subsidiaries have complied with all information reporting and back-up withholding requirements including maintenance of the required records with respect thereto, in connection

with amounts paid to any employee, independent contractor, creditor or other third party.

(b) The unpaid Taxes of the Company and its Subsidiaries for periods through the date of the Most Recent Balance Sheet Date do not exceed the accruals and reserves for Taxes (excluding accruals and reserves for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the Most Recent Balance Sheet. All Taxes attributable to the period from and after the Most Recent Balance Sheet Date and continuing through the Closing Date are, or will be, attributable to the conduct by the Company or its Subsidiaries of their operations in the ordinary course of business and are, or will be, consistent both as to type and amount with Taxes attributable to such comparable period in the immediately preceding year.

(c) Except as provided in Schedule 3.10(c), neither the Company nor its Subsidiaries is and has never been a member of any group of corporations with which it has filed (or been required to file) consolidated, combined, or unitary Tax Returns. Neither the Company nor its Subsidiaries has any actual or potential liability under Treasury Regulation Section 1.1502-6 (or any comparable or similar provision of federal, state, local, or foreign law), or as a transferee or successor, by contract, or otherwise for any Taxes of any Person (including without limitation any affiliated, combined, or unitary group of corporations or other entities that included the Company and its Subsidiaries during a prior Taxable period). Except as provided in Exhibit 8.5A, neither the Company nor its Subsidiaries is a party to, bound by, or obligated under any Tax allocation, Tax sharing, Tax indemnity or similar agreement.

(d) The Company has delivered or made available to the Parent (i) complete and correct copies of all Tax Returns of the Company and its Subsidiaries relating to Taxes for all Taxable periods for which the applicable statute of limitations has not yet expired and (ii) complete and correct copies of all private letter rulings, revenue agent reports, information document requests, notices of proposed deficiencies, deficiency notices, protests, petitions, closing agreements, settlement agreements, pending ruling requests and any similar documents submitted by, received by or agreed to by or on behalf of the Company or its Subsidiaries relating to Taxes for all Taxable periods for which the applicable statute of limitations has not yet expired. No examination or audit of any Tax Return of the Company or its Subsidiaries by any Governmental Authority is currently in progress or, to the Knowledge of the Company, threatened or contemplated. Neither the Company nor its Subsidiaries has been informed by any jurisdiction that the jurisdiction believes that the Company or its Subsidiaries was required to file any Tax Return that was not filed.

(e) Neither the Company nor its Subsidiaries has (i) waived any statute of limitations with respect to Taxes or agreed to extend the period for assessment or collection of any Taxes, (ii) except as set forth on Schedule 3.10(e), requested any extension of time within which to file any Tax Return, which Tax Return has not yet been filed, or (iii) executed or filed any power of attorney relating to Taxes with any Governmental Authority.

(f) Neither the Company nor its Subsidiaries is a party to any Tax litigation.

(g) There are no Liens or other encumbrances, other than Permitted Liens, with respect to Taxes upon any of the assets or properties of the Company or its Subsidiaries, other than with respect to Taxes not yet due and payable.

(h) Neither the Company nor its Subsidiaries has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(l)(A)(ii) of the Code.

(i) Assuming that the Company has fully complied with Section 5.13 of this Agreement, neither the Company nor its Subsidiaries has made any payments, is obligated to make any payments, or is a party to any agreement, contract, arrangement, or plan that could obligate it to make any payments, that are as of the Closing Date, separately or in the aggregate, “excess parachute payments” within the meaning of Section 280G of the Code (without regard to Sections 280G(b)(4) and 280G(b)(5) thereof).

(j) None of the assets of the Company or its Subsidiaries (i) is property that is required to be treated as being owned by any other person pursuant to the provisions of former Section 168(f)(8) of the Internal Revenue Code of 1954, (ii) is “tax exempt use property” within the meaning of Section 168(h) of the Code, (iii) directly or indirectly secures any debt the interest on which is tax exempt under Section 103(a) of the Code, or (iv) is subject to a lease under Section 7701(h) of the Code or under any predecessor section.

(k) Neither the Company nor its Subsidiaries will be required to include any item of income in, or exclude any item of deduction from, Taxable income for any Taxable period (or portion thereof) ending after the Closing Date as a result of any (i) change in method of accounting for a Taxable period ending on or prior to the Closing Date (or as a result of the transactions contemplated by this Agreement) under Section 481 of the Code (or any corresponding or similar provision of federal, state, local or foreign Tax law); (ii) “closing agreement” as described in Section 7121 of the Code (or any corresponding or similar provision of state, local or foreign Tax law) executed on or prior to the Closing Date; (iii) deferred intercompany gain or any excess loss account described in Treasury Regulations under Section 1502 of the Code (or any corresponding or similar provision of state, local or foreign Tax law); (iv) installment sale or open transaction disposition made on or prior to the Closing Date; or (v) except as set forth on Schedule 3.10(k), prepaid amount received on or prior to the Closing Date. The Company and its Subsidiaries currently utilize the accrual method of accounting for income Tax purposes and such method of accounting has not changed in the past five (5) years.

(l) Neither the Company nor its Subsidiaries has participated in or cooperated with an international boycott within the meaning of Section 999 of the Code.

(m) Neither the Company nor its Subsidiaries has distributed to their stockholders or security holders stock or securities of a controlled corporation, nor have stock or securities of the Company or its Subsidiary been distributed, in a transaction to which Section 355 or Section 361 of the Code applies.

(n) Schedule 3.10(n) sets forth each jurisdiction that has sent notices or communications of any kind requesting information relating to the Company’s or such Subsidiary’s nexus with such jurisdiction.

(o) Neither the Company nor any Subsidiary is a “consenting corporation” within the meaning of Section 341(f) of the Code, and none of the assets of the Company or any Subsidiary are subject to an election under Section 341(f) of the Code.

(p) The representations and warranties in this Section 3.10 are the sole and exclusive representations and warranties of the Company concerning Tax matters.

Section 3.11 Environmental Matters. Except as set forth on Schedule 3.11 hereto:

(a) The Company is in compliance with all Environmental Laws, except for any failures to so comply as would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. To the Knowledge of the Company, there has been no Release of any Hazardous Material on any of the Leased Property or, during the period of the Company’s or any Subsidiary’s ownership or lease thereof, on any property formerly owned or leased by the Company or any Subsidiary.

(b) The Company has not received any written notice, report or other information regarding any actual or alleged violation of Environmental Laws, or any liabilities or potential liabilities for personal injury, property damage or investigatory or cleanup obligations arising under Environmental Laws, in either case the subject of which would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

Section 3.12 Employee Matters.

(a) Schedule 3.12(a) contains a list of all employees of the Company and its Subsidiaries as of the date hereof, along with the position and the annual rate of compensation of each such person. Except as set forth on Schedule 3.12(a), each Person who is or has been an employee of the Company or any of its Subsidiaries within the last three years and who has had access to proprietary information about the Company or such Subsidiary has entered into a confidentiality/assignment of inventions agreement with the Company or such Subsidiary (such agreements, the “Employee Confidentiality Agreements”). The Company has made available to Parent a copy or form of each Employee Confidentiality Agreement. Schedule 3.12(a) contains a list, as of the date hereof, of all employees of the Company or any of its Subsidiaries who are a party to a non-competition agreement with the Company or any of its Subsidiaries, and copies of such agreements have previously been made available to Parent. The execution of this Agreement will not affect the legality, validity, binding effect or enforceability of the agreements referenced in the preceding three sentences. Schedule 3.12(a) contains a list of all employees of the Company or any Subsidiary who are not citizens of the United States. Except as set forth in Schedule 3.12(a), to the Knowledge of the Company, as of the date hereof, no employee of the Company or any of its Subsidiaries who is paid an annual salary in excess of $100,000 has announced any plans to terminate employment with the Company or any of its Subsidiaries.

(b) Neither the Company nor any of its Subsidiaries has entered into any collective bargaining agreements with respect to the employees. There is no labor strike, labor dispute, or

work stoppage or lockout pending or, to the Company’s Knowledge, threatened against or affecting the Company or any of its Subsidiaries and during the past two years there has been no such action. To the Company’s Knowledge, no union organization campaign is in progress with respect to any of the employees, and no question concerning representation exists respecting such employees. There is no unfair labor practice, charge or complaint pending against the Company or any of its Subsidiaries. Neither the Company nor any of its Subsidiaries has engaged in any plant closing or employee layoff activities within the last two (2) years that would violate or in any way implicate the Worker Adjustment Retraining and Notification Act of 1988, as amended, or any similar state or local plant closing or mass layoff statute, rule or regulation.

(c) Except as set forth on Schedule 3.12(c), the Company has classified all individuals who perform services for the Company correctly under the Employee Benefit Plans, ERISA and the Code as common law employees, independent contractors, leased employees, and exempt or non-exempt employees.

Section 3.13 Employee Benefit Plans

(a) Schedule 3.13(a) lists all Employee Benefit Plans.

(b) Except as set forth on Schedule 3.13(b) no Employee Benefit Plan is a Multiemployer Plan or a plan that is subject to Title IV of ERISA, and no Employee Benefit Plan provides health or other welfare benefits to former employees of the Company or any of its Subsidiaries other than as required by COBRA.

(c) Except as set forth on Schedule 3.13(c), each Employee Benefit Plan is maintained and administered in compliance with its terms and in all material respects with the applicable requirements of ERISA, the Code and any other applicable laws. Each Employee Benefit Plan that is intended to be qualified under Section 401(a) of the Code has received a determination from the Internal Revenue Service that it is so qualified and, to the Company’s Knowledge, there are no facts or circumstances that would be reasonably likely to adversely affect the qualified status of any such Employee Benefit Plan.

(d) No material liability under Title IV of ERISA has been or, to the Company’s Knowledge, is expected to be incurred by the Company, any of its Subsidiaries or any ERISA Affiliate.

(e) The Company and the ERISA Affiliates have complied, in all material respects, with the requirements of COBRA.

(f) None of the Company, any of its Subsidiaries or, to the Company’s Knowledge, any other Person has engaged in any transaction with respect to any Employee Benefit Plan that would be reasonably likely to subject the Company or any of its Subsidiaries to any material Tax or penalty (civil or otherwise) imposed by ERISA, the Code or other applicable law.

(g) With respect to each Employee Benefit Plan, the Company has made available to Parent and Newco true, complete and correct copies, to the extent applicable, of (i) the plan and trust documents and the most recent summary plan description, (ii) the most recent annual report

(Form 5500 series), (iv) the most recent financial statements, and (v) the most recent Internal Revenue Service determination letter.

(h) Except as set forth on Schedule 3.13(h), the consummation of the transactions contemplated hereby shall not result in an increase in or accelerate the vesting of any of the benefits available under any Employee Benefit Plan.

(i) There are no pending claims (other than routine benefit claims) or lawsuits that have been asserted relating to any Employee Benefit Plan and no Employee Benefit Plan has been, within the past three years, or currently is, under audit or examination by any governmental agency.

Section 3.14 Intellectual Property Rights(a) .

(a) Schedule 3.14 lists each patent, patent application, copyright registration or application therefor, mask work registration or application therefor, and registered trademark, registered service mark and domain name registration or application therefor of the Company or the Subsidiaries

(b) The Company owns or has a license to all Intellectual Property Rights necessary (i) to use, create, have made, sell, implement, market, reproduce and distribute the Customer Deliverables as currently used, created, made, sold, implemented, marketed, reproduced and distributed and (ii) to operate the Internal Systems as currently operated. The Company Intellectual Property will be owned or available for use by the Surviving Corporation immediately following the Closing on substantially identical terms and conditions as it was owned or available for use by the Company immediately prior to the Closing, except as described in Schedule 3.14. The Company and the Subsidiaries have taken all reasonable measures to protect the proprietary nature of each item of Company Intellectual Property that it owns or is under an obligation to protect (to the extent such obligations require the Company to take such measures), and to maintain in confidence all trade secrets and confidential information, that it owns or is under an obligation to protect (to the extent such obligations require the Company to maintain in confidence such secrets and confidential information). No other Person has any rights to any of the Company Intellectual Property owned by the Company or the Subsidiary (except pursuant to agreements or licenses specified in Schedule 3.14), and, to the Knowledge of the Company, no other Person is infringing, violating or misappropriating any of the Company Intellectual Property owned by the Company, except as described in Schedule 3.14. For the sake of clarity, the representations in this Section 3.14(b) shall not apply to Customer Deliverables first produced by the Company or its Subsidiaries for a Governmental Authority (whether directly or pursuant to a subcontract) and that are not described in Schedule 3.20(c).

(c) (i) None of the Customer Deliverables, or the manufacturing, importation, sale, marketing, distribution, provision or use thereof as currently conducted by the Company (excluding, for this subsection (i), third party components or components created to third party specifications therein, unless and only to the extent modified or designed in any part by the employees of Company) and (ii) to the Company’s Knowledge, none of the third party components or components created to third party specifications in the Customer Deliverables, or

the manufacturing, importation, sale, marketing, distribution, provision or use thereof as currently conducted by the Company: infringes or violates, or constitutes a misappropriation of, any Intellectual Property Rights of any Person. To the Company’s Knowledge, none of the Internal Systems, or the use thereof as currently used by the Company, infringes or violates, or constitutes a misappropriation of, any Intellectual Property Rights of any Person. Schedule 3.14 lists any complaint, claim or notice, or written threat thereof, received by the Company or any Subsidiary alleging any such infringement, violation or misappropriation, and any claims or disputes that to the Knowledge of the Company concern any Company Intellectual Property.

(d) Schedule 3.14 identifies each item of Company Intellectual Property contained in the Company’s standard, latest version of its Customer Deliverables (which, for the sake of clarity, does not include services) made available to customers, users and the public, which item is owned (in whole or part) by a party other than the Company or any Subsidiary (excluding off-the-shelf software components licensed by or to the Company or the Subsidiaries pursuant to nonnegotiable standard form, mass market or “shrink wrap” licenses), and lists the agreement or other basis for those rights; to the extent that any such item of Company Intellectual Property requiring identification in Schedule 3.14 by this subsection (d) is embodied by, part of, or otherwise represented by a specifically identifiable product, the specifically identifiable product may be listed in Schedule 3.14 as representative of that item of Company Intellectual Property.

(e) Neither the Company nor any Subsidiary has disclosed material source code for the Customer Deliverables owned by the Company (or that the Company has an obligation not to disclose) to any Person, except pursuant to escrow agreements entered into in the ordinary course of business and the agreements listed in Schedule 3.14, and the Company and the Subsidiary have taken all reasonable measures to prevent disclosure of such source code. The Company’s entering into this Agreement or the consummation of the transactions contemplated hereby will not trigger a release condition of any agreement with a third party for the release of such source code from escrow. For the sake of clarity, this Section 3.14(e) shall not apply to Customer Deliverables first produced by the Company or its Subsidiaries for a Governmental Authority (whether directly or pursuant to a subcontract) and that are not described in Schedule 3.20(c).

(f) Except as set forth in Schedule 3.14, all of the copyrightable materials that are material to the ongoing business of the Company (including software, but excluding off-the-shelf software components licensed by or to the Company or the Subsidiaries pursuant to nonnegotiable standard form, mass market or “shrink wrap” licenses, unless and only to the extent such software or other copyrightable materials are modified by the employees of the Company) comprising, or otherwise embedded in, integrated in, incorporated in or bundled with the Customer Deliverables have been created by employees of the Company or the Subsidiaries within the scope of their employment by the Company or any Subsidiary, or by independent contractors of the Company or the Subsidiaries who have executed binding agreements assigning all right, title and interest in such copyrightable materials to the Company or the Subsidiaries; to the extent that any such material copyrightable materials requiring identification in Schedule 3.14 by this subsection is embodied by, part of, or otherwise represented by a specifically identifiable product, the specifically identifiable product may be listed in Schedule 3.14 as representing that item of material copyrightable materials. For the purposes of this Section 3.14(f), a product shall be deemed “specifically identifiable” if a programmer or engineer of ordinary skill in the product, who has access to the Internal Systems and Customer

Deliverables as they existed on the Effective Date, could reasonably be expected to ascertain the identity of such product with specificity after reasonable inquiry. Except as set forth in Schedule 3.14, no portion of such copyrightable materials was jointly developed with any third party (other than, for the sake of clarity, the independent contractors contemplated by the foregoing sentence).

(g) Except as set forth in Schedule 3.14: (i) the Internal Systems to the extent developed by the Company (“Company-Developed Internal Systems”) and the standard, latest version of the Customer Deliverables are free from significant defects or programming errors and conform in all material respects to the written documentation and specifications therefor; and (ii) the Internal Systems other than the Company-Developed Internal Systems are free from significant defects or programming errors and conform in all material respects to the written documentation and specifications therefor, unless such defect, error or nonconformity would not materially and adversely affect the ongoing business of the Company. In addition: (i) the Company-Developed Internal Systems and the standard, latest version of the Customer Deliverables do not contain any disabling device, virus, worm, back door, Trojan horse or other disruptive or malicious code that could reasonably be expected to impair their intended performance or otherwise permit unauthorized access to, hamper, delete or damage any computer system, software, network or data; and (ii) the Company has used reasonable efforts to scan the Internal Systems on a regular basis with an industry standard virus scanning program.

Section 3.15 Contracts. Schedule 3.15 sets forth all contracts (except for purchase orders executed in the normal course of business), agreements, leases, permits or licenses, to which, as of the date hereof, the Company or any Subsidiary is a party or is otherwise bound, of the type described below (the “Contracts”):

(a) all agreements or commitments for the purchase by the Company or any of its Subsidiaries of machinery, equipment or other personal property or any services, other than those requiring payments after the date of this Agreement of less than $50,000 individually or $200,000 in the aggregate;

(b) all employment agreements providing for annual compensation in excess of $100,000 and all consulting or severance agreements;

(c) all material license, royalty or other similar agreements relating to any of the Company Intellectual Property owned by the Company or any Subsidiary;

(d) all agreements containing covenants restraining or limiting the freedom of the Company or any Subsidiary to engage in any line of business or compete with any Person including, without limitation, by restraining or limiting the right to solicit customers or that could reasonably be expected, following the Closing, to restrain or limit the freedom of the Parent or any Affiliate thereof to engage in any line of business or compete with any Person;

(e) all mortgages, indentures, notes, bonds or other agreements relating to indebtedness for borrowed money in excess of $250,000 incurred or provided by the Company or any of the Subsidiaries;

(f) all partnership agreements and joint venture agreements to which the Company or any of its Subsidiaries is a party;

(g) any agreement (or group of related agreements) for the lease of personal property from third parties providing for annual lease payments in excess of $100,000;

(h) any agreement (or group of related agreements) with any customers;

(i) any agreement (or group of related agreements) with software vendors, distributors or sales agents allowing for the resale, marketing or distribution of the Company’s or any Subsidiary’s services or products;

(j) any agreement concerning confidentiality;

(k) any agreement containing a right of first refusal;

(l) any agreement that provides for the Company or any Subsidiary to be the exclusive or a preferred provider of any product or service to any Person or the exclusive or a preferred recipient of any product or service of any Person during any period of time or that otherwise involves the granting by any Person to the Company or any Subsidiary of exclusive or preferred rights of any kind;

(m) any agreement that provides for any Person to be the exclusive or a preferred provider of any product or service to the Company or any Subsidiary, or the exclusive or a preferred recipient of any product or service of the Company or any Subsidiary during any period of time or that otherwise involves the granting by the Company or the Subsidiary to any Person of exclusive or preferred rights of any kind;

(n) any agreement in which the Company or any Subsidiary has agreed to specific service level commitments, the violation of which would result in the imposition of specified liabilities or penalties against the Company or its applicable Subsidiary;

(o) any agreement under which the Company or any Subsidiary has created, incurred, assumed or guaranteed (or may create, incur, assume or guarantee) indebtedness or under which it has imposed (or may impose) a Lien, other than any Permitted Lien, on any of its assets, tangible or intangible;

(p) any agreement in which the Company or any Subsidiary has granted manufacturing rights, “most favored nation” or similar pricing provisions or marketing or distribution rights relating to any product or territory;

(q) any agreement for (i) the disposition of any of the assets or business of the Company or any Subsidiary (other than sales of products and services in the ordinary course of business) for consideration in excess of $100,000 in the aggregate, or (ii) the acquisition of any assets or business from any other persons or entities for consideration in excess of $100,000 in the aggregate, other than purchases, in the ordinary course of business, from suppliers;

(r) any other agreement (or group of related agreements) not otherwise listed on any disclosure schedule to this Agreement involving more than $50,000; and

(s) any commitment to enter into any of the foregoing contracts or agreements described in clauses (a) through (r).

Each Contract set forth on Schedule 3.15 is a valid and binding agreement of the Company or a Subsidiary, as the case may be, enforceable in accordance with its terms (subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting generally the enforcement of creditors’ rights and subject to general principles of equity). Except as set forth on Schedule 3.15, neither the Company, any Subsidiary nor, to the Knowledge of the Company, any other party, is in breach or violation of, or default under, any material provision of any Contract, and, to the Knowledge of the Company, no event has occurred, is pending or is threatened, which, after the giving of notice, with lapse of time, or otherwise, would constitute a breach or default of any material provision of any Contract by the Company, any Subsidiary, or any other party under such Contract. The Company has made available to Newco true and complete copies of all Contracts, including all amendments thereto.

Section 3.16 Insurance. Schedule 3.16 contains an accurate and complete description of all policies of fire, liability, workers’ compensation, property, casualty and other forms of insurance owned or held by the Company and its Subsidiaries as of the date hereof. All such policies or equivalent replacement policies are in full force and effect, all premiums with respect thereto covering all periods up to and including the Effective Time will have been paid, and no notice of cancellation or termination has been received with respect to any such policy. Except as set forth on Schedule 3.16, neither the Company nor any of its Subsidiaries will be liable for retroactive premiums or similar payments, and each of the Company and its Subsidiaries is otherwise in compliance in all material respects with the terms of such policies. Except as set forth on Schedule 3.16, there is no claim pending or, to the Knowledge of the Company, any existing facts which are reasonably likely to result in a claim under any such policy, and if any of the foregoing have been disclosed, no such claim or existing facts were questioned, denied or disputed by the underwriter of such policy. Neither the Company nor any of its Subsidiaries has been denied insurance coverage at any time during the past five years and no policies have been cancelled or have been refused to be renewed by the insurer in the past five years except as set forth in Schedule 3.16. Neither the Company nor any Subsidiary has any Knowledge of any threatened termination of, or, other than in the ordinary course of business, premium increase with respect to, any such policy except as set forth in Schedule 3.16. Except as set forth on Schedule 3.16, neither the Company nor the Subsidiary has failed to timely give any notice required or failed to satisfy any subjectivities under such insurance policies or binders of insurance.

Section 3.17 Real Property. The Company does not own any real property. Schedule 3.17 sets forth (whether as lessee or lessor) a list of all leases of real property (such real property, the “Leased Property”) to which the Company is a party or by which it is bound, in each case, as of the date hereof, except for any lease or agreement under which the aggregate annual rental payments do not exceed $50,000 (each a “Material Lease”, and collectively the “Material Leases”). The Company has not sublet, assigned or otherwise transferred any of the Leased Property or any portion thereof to any third party. Except as set forth on Schedule 3.17,

each Material Lease is valid and binding on the Company and, to the Company’s Knowledge, on the other parties thereto and is in full force and effect. Except as set forth on Schedule 3.17, the Company and, to the Company’s Knowledge, each of the other parties thereto has performed in all material respects all material obligations required to be performed by it under each Material Lease. To the Company’s Knowledge, the Leased Property complies with all applicable laws and is benefited by those licenses or permits required to be maintained for the development, or use or occupancy of any portion of the Leased Property, except to the extent such failure to comply would not have a Material Adverse Effect. Neither the Company nor any Subsidiary nor, to the Knowledge of the Company, any other party, is in breach or violation of, or default under, any Material Lease, and, to the Knowledge of the Company, no event has occurred, is pending or is threatened, which, after the giving of notice, with lapse of time, or otherwise, would constitute a breach or default by the Company or any Subsidiary or any other party under such Material Lease. To the Knowledge of the Company, each parcel of Leased Property is in compliance in all material respects with all applicable laws and governmental orders.

Section 3.18 Transaction With Affiliates. Except as set forth on Schedule 3.18, none of the Company’s stockholders, directors or officers nor any of their respective Affiliates or members of their immediate family is involved in any business arrangement or relationship with the Company or the Subsidiaries other than employment arrangements entered into in the ordinary course of business, and none of the Company’s stockholders, directors or officers nor any of their respective Affiliates or members of their immediate family owns any property or right, tangible or intangible, which is used by the Company or the Subsidiaries.

Section 3.19 Brokers. Except for Broadview International LLC no Person is or will be entitled to a broker’s, finder’s, investment banker’s, financial adviser’s or similar fee from the Company or its Subsidiaries in connection with this Agreement or any of the transactions contemplated hereby.

Section 3.20 Government Contracts.

(a) Schedule 3.20(a) sets forth a complete and accurate list of Government Contracts (as defined herein). Copies of all Government Contracts that are true, accurate and complete in all material respects have been made available to Parent prior to the date hereof. Except as provided in Schedule 3.20(a), the Government Contracts are valid and binding and enforceable in accordance with their terms, and have been lawfully executed for the Company by persons duly authorized to do so and, to the Knowledge of the Company, by authorized representatives of applicable Governmental Authorities. Except as provided in Schedule 3.20(a), the Company and its Subsidiaries are not in, and to the Knowledge of the Company the execution and delivery of this Agreement by the Company and the consummation of the Transactions will not result in, any material violation, breach or default of any material term or provision of (a) any contract with a Governmental Authority, (b) any subcontract issued at any tier under a prime contract with a Governmental Authority, or (c) any bid, proposal or quotation made in connection with a contract with a Governmental Authority or a subcontract issued under a contract related to the Business with a Governmental Authority, in effect as of the date of this Agreement (collectively, “Government Contracts”). The Company and its Subsidiaries are not in, and to the Knowledge of the Company the execution and delivery of this Agreement by the Company and the

consummation of the Transactions will not result in, any material violation, breach or default of any provision of any order, statute, rule or regulation governing any Government Contract.

(b) The following representations and warranties of the Company in paragraphs (i) through (vi) are made with respect to, and are limited to, the period of three (3) years ending on the date of this Agreement.

(i) Schedule 3.20(b)(i) sets forth, as of the date hereof, descriptions of all material internal investigations authorized by senior management conducted by or initiated by the Company or its Subsidiaries, audit reports, final decisions, claims, protests, appeals, lawsuits (including, without limitation, any qui tam suit involving the Company), consent orders, ongoing investigations, prosecutions, civil or administrative proceedings or settlement negotiations (collectively, “Contract Proceedings”) with respect to the Government Contracts and identifies any material corrective action, restitution or disciplinary action initiated or taken by any Governmental Authority, the Company or its Subsidiaries as a result of such Contract Proceedings. Except as set forth in Schedule 3.20(b)(i), as of the date hereof, with respect to, or relating in any way to, the Government Contracts, neither the Company nor its Subsidiaries have conducted or initiated any internal investigation authorized by senior management, or made a voluntary disclosure to a Governmental Authority, engaged in or been charged with or to the Knowledge of the Company been provided with notice from a Governmental Authority of a material claim or allegation related to, to the Knowledge of the Company and its Subsidiaries, been under investigation, with regard to any of the following: (a) defective pricing with the meaning of the Truth in Negotiations Act, as amended; (b) failure to comply with contractual requirements regarding applicable pricing, discounting or price reduction obligations; (c) failure to correct accounting, estimating, inventory, material requirements planning, material management and accounting systems, government property records, or purchasing system deficiencies; (d) material mischarging of direct and/or indirect costs; (e) delivery of products, material, components, items or services that do not or did not meet specifications or standards therefore, or delivery of foreign-made material, components or items where domestic-made material, components or items were required; (f) improperly soliciting, obtaining, attempting to solicit or obtain or making or offering to make any payment for any nonpublic proprietary or source selection information; or (g) material failure to comply with contractual requirements concerning subject inventions made or first reduced to practice under the Government Contracts.

(ii) The Company has not received a cure notice, a show cause notice, a suspension of work notice or a stop work order under any Government Contract; to the Knowledge of the Company, all material amounts previously charged to or presently carried as chargeable by the Company to any cost-reimbursement Government Contract have been or will be reasonable, allowable, and allocable to each such Government Contract; no Government Contract has been terminated for default or for the convenience of the Government; except as set forth on Schedule 3.20(b)(ii), neither the Company nor its Subsidiaries has received any written information from a Governmental Authority indicating that any option with respect to any Government Contract will not be exercised or that any Government Contract or subcontract will be terminated or canceled; neither

the Company nor its Subsidiaries has received any requests with respect to any Government Contract for equitable adjustment or claims (other than routine invoice errors in nominal amounts); neither the Company nor its Subsidiaries has been notified of any material warranty claims with respect to any Government Contract; except as set forth on Schedule 3.20(b)(ii), the Company has not received from any Governmental Authority any materially unfavorable past performance assessments, evaluations, or ratings with respect to any Government Contract; neither the Company nor any Subsidiary has violated the Service Contract Act or failed to pay any compensation required by it with respect to any Government Contract; and there exist no assignments of claims with respect to the Government Contracts, whether pursuant to the Assignment of Claims Act or otherwise.

(iii) Neither the Company nor any Subsidiary has been suspended or debarred from bidding on contracts or subcontracts with any Governmental Authority; no such suspension or debarment has, to the Knowledge of the Company, been initiated or threatened; and to the Knowledge of the Company the consummation of the transactions contemplated by this Agreement will not result in any such suspension or debarment. To the Knowledge of the Company, except in the ordinary course of business, neither the Company nor any Subsidiary has been audited or investigated within the past 5 years nor is it now being audited or investigated by the U.S. Department of Health and Human Services or any constituent agency thereof, the U.S. Government Accounting Office, the General Services Administration, the U.S. Department of Defense or any of its agencies, the Defense Contract Audit Agency, the Defense Contract Administrative Service, the U.S. Department of Justice, the U.S. Department of Labor, the U.S. Department of Treasury, the Inspector General or auditor general or similar functionary of any U.S. Governmental Authority, any similar agencies or instrumentalities of any state or foreign Governmental Authority, or any prime contractor with a Governmental Authority nor, to the Knowledge of the Company, has any such audit or investigation been threatened. Neither the Company nor any Subsidiary has any agreements, contracts or commitments that require it to obtain or maintain a security clearance with any Governmental Authority.

(iv) To the Knowledge of the Company the Company and its Subsidiaries have not materially misused or disclosed any classified information, or any records subject to the Privacy Act (5 U.S.C. § 552a). The Company has not violated, in any material respect, (i) the Procurement Integrity Act; (ii) the Lobbying Disclosure Act of 1995 or representations made on any disclosure of lobbying activities submitted by the Company to any Governmental Authority or (iii) any ethical requirement applicable to the Company as set forth in Subparts 3.1 through 3.5 and/or Subparts 3.8 through 3.9 of Title 48 of the Code of Federal Regulations. To the Knowledge of the Company, the Company and its Subsidiaries have materially complied with and truly executed all representations and certifications submitted in connection with its Government Contracts.

(v) All test and inspection results and reports and certificates that the Company and its Subsidiaries have provided pursuant to, or in pursuit of, any Government Contract, or as a part of the delivery under any Government Contract of any product or system designed, engineered, manufactured, or sold by the Company and its

Subsidiaries, were true, complete and correct in all material respects; and the Company and its Subsidiaries have provided to appropriate Governmental Authorities all test and inspection results and reports and such certifications and documentation as is or as may have been required by applicable Government Contracts or laws pertaining to Government Contracts.

(vi) All equipment and fixtures loaned, bailed, delivered or otherwise furnished to or held by the Company and its Subsidiaries by or on behalf of any Governmental Authority, have been maintained in all material respects in the condition they were when loaned, bailed, delivered, or otherwise furnished to the Company and its Subsidiaries, ordinary wear and tear excepted, and where applicable the Company and its Subsidiaries have complied in all material respects with the government property provisions of the Government Contracts.

(c) (i) Except for the items described in Schedule 3.20(c) and any associated technical data (as defined at 48 C.F.R. 27.401), no Governmental Authority or higher-tier contractor has any rights greater than “Restricted Rights” or “Limited Rights,” as applicable (as defined at 48 C.F.R. 27.401) with respect to any Company Intellectual Property or associated technical data (as defined at 48 C.F.R. 27.401) in any material respect. For each item described therein, Schedule 3.20(c) describes (i) the contract number and the Governmental Authority having such rights, (ii) a description of the Company Intellectual Property subject to such rights and (iii) the type of rights obtained or to be obtained by the Governmental Authority or higher-tier contractor in such Company Intellectual Property. The Company and all Subsidiaries have complied with all applicable regulations and contract requirements (including restrictive markings on or in the Company Intellectual Property) in all material respects.

(ii) With respect to Customer Deliverables first produced by the Company or its Subsidiaries for a Governmental Authority (whether directly or pursuant to a subcontract) and that are not described in Schedule 3.20(c), (i) the Company does not represent that the Company or its Subsidiaries have any rights, and (ii) the Company does not represent that there are any limitations on the use or disclosure by any Governmental Authority or higher-tier subcontractor of the source code or other software or technical data (as defined at 48 C.F.R. 27.401) associated with such Customer Deliverables.

Section 3.21 HIPAA.

(a) Each of the Company and the Subsidiaries comply with and have implemented all such measures required for it to comply with its obligations as a Covered Entity for its “Health Plan” and as a Business Associate as agreed upon with any “Covered Entity” (as such capitalized terms are defined in HIPAA and the regulations promulgated thereunder), including without limitation, the privacy and security regulations (45 C.F.R. 160 and 164) and the transaction and code set regulations (45 C.F.R. 162) promulgated under HIPAA. Neither the Company nor any of the Subsidiaries is a Covered Entity other than for its “Health Plan.” With respect to any HIPAA regulatory requirements, including any contractual privacy and security commitments for “Protected Health Information” (as that term is defined in the HIPAA privacy and security regulations), for which the Company’s or any Subsidiary’s (including any Affiliates) compliance or its customers’ compliance with HIPAA is required (collectively, the “HIPAA Commitments”),

(i) the Company and its Subsidiaries are in material compliance with the HIPAA Commitments;

(ii) the transactions contemplated by this Agreement will not violate any of the HIPAA Commitments;

(iii) the Company and its Subsidiaries have not received written inquiries from the U.S. Department of Health and Human Services or any other Governmental Authority regarding the Company’s compliance with the HIPAA Commitments; and

(iv) the HIPAA Commitments have not been rejected by any applicable certification organization which has reviewed such HIPAA Commitments or to which any such HIPAA Commitment has been submitted.

(b) The Company and its Subsidiaries have either entered into or made reasonable and good faith efforts to enter into appropriate valid, written Business Associate agreements with appropriate parties.

Section 3.22 Compliance with Healthcare Laws and Regulations.

(a) The Company and its Subsidiaries are conducting and have (within the period of three (3) years prior to the date of this Agreement) conducted their business and operations in compliance in all material respects with, and neither the Company nor any of its Subsidiaries has engaged in any activities that would constitute a violation, in any material respect, of applicable civil or criminal statutes, laws, ordinances, rules and regulations of any federal, state, local or foreign Governmental Authority with respect to regulatory matters relating to the provision, administration, and/or payment for healthcare products or services (collectively, “Healthcare Laws”), including, without limitation, to the extent applicable: (i) rules and regulations governing the operation and administration of Medicare, Medicaid, or other federal health care programs; (ii) 42 U.S.C. § 1320a-7(b), commonly referred to as the “Federal Anti-Kickback Statute,” (iii) 42 U.S.C. § 1395nn, commonly referred to as the “Stark Law,” (iv) 31 U.S.C. §§ 3729-33, commonly referred to as the “False Claims Act” and (v) rules and regulations of the U.S. Food and Drug Administration.

(b) For the period of three (3) years prior to the date of this Agreement: the Company has not received any written notice or communication from any Governmental Authority alleging noncompliance with any Healthcare Laws; there is no civil, criminal or administrative action, suit, demand, claim, complaint, hearing, investigation, notice, demand letter, warning letter, proceeding or request for information related to noncompliance with, or otherwise involving, any Healthcare Laws pending against the Company or any Subsidiary; the Company and the Subsidiaries have no material liability (whether actual or contingent) for failure to comply with any Healthcare Laws; there has not been any material violation of any Healthcare Laws by the Company or any Subsidiary in its submissions or reports to any Governmental Entity that, to the Knowledge of the Company, could reasonably be expected to require investigation, corrective action or enforcement action; neither the Company nor any of its Subsidiaries has been debarred or excluded from participation in Medicare, Medicaid, or any other federal or state healthcare

program; and the Company has maintained, in all material respects, all records required under any Healthcare Laws.

Section 3.23 Customers and Suppliers. Schedule 3.23 sets forth a list of (a) each of the top ten customers of the Company and its Subsidiaries (by volume in dollars of sales to such customers) for the twelve-month period immediately preceding the Most Recent Balance Sheet Date (each such person, a “Major Customer”) and the amount of revenues accounted for by such customer during each such period and (b) each of the top five suppliers of the Company and its Subsidiaries (by volume in dollars of purchases from such suppliers) for the twelve-month period immediately preceding the Most Recent Balance Sheet Date (each such person, a “Major Supplier”). Except as set forth on Schedule 3.23, between the Most Recent Balance Sheet Date and the date hereof, neither the Company nor any of its Subsidiaries has received written notice from any Major Customer, nor, to the Knowledge of the Company, has any Major Customer threatened, that it intends to terminate or materially modify its existing agreement with the Company and its Subsidiaries, or materially reduce the aggregate amount paid to the Company and its Subsidiaries for products and services. Except as set forth on Schedule 3.23, between the Most Recent Balance Sheet and the date hereof, neither the Company nor any of its Subsidiaries has received written notice from any Major Supplier, nor, to the Knowledge of the Company, has any Major Supplier threatened, that it intends to terminate or materially modify its existing agreement with the Company and its Subsidiaries, or materially increase the aggregate amount charged to the Company and its Subsidiaries for products and services. As of the date hereof, neither the Company nor any of its Subsidiaries has received written notice from any Major Customer or any Major Supplier that it intends to file a petition under applicable bankruptcy laws or otherwise seek relief from or make an assignment for the benefit of its creditors and, to the Company’s Knowledge, no such notice or action has been threatened.

Section 3.24 NO ADDITIONAL REPRESENTATIONS. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN ARTICLE III OF THIS AGREEMENT, THE COMPANY EXPRESSLY DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND OR NATURE, EXPRESS OR IMPLIED, AS TO THE CONDITION, VALUE OR QUALITY OF THE BUSINESS OR THE ASSETS OF THE BUSINESS, AND THE COMPANY SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY OF MERCHANTABILITY, USAGE, SUITABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE WITH RESPECT TO THE ASSETS OF THE BUSINESS, OR ANY PART THEREOF, OR AS TO THE WORKMANSHIP THEREOF, OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER LATENT OR PATENT.

ARTICLE IV — Representations and Warranties of Parent and Newco

Parent and Newco jointly and severally represent and warrant to the Company:

Section 4.1 Organization. Each of Parent and Newco is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite corporate power and authority to own, lease and operate its property and assets and to carry on its business as presently conducted. Each of Parent and Newco has delivered to the Company true and complete copies of its certificate of incorporation (and all amendments thereto) and by-laws (as currently in effect).

Section 4.2 Authorization. Each of Parent and Newco has the corporate power and authority to execute and deliver this Agreement and each other agreement or instrument to be executed in connection herewith and to perform its obligations hereunder and thereunder, all of which have been duly authorized by all requisite corporate action. This Agreement and each other agreement or instrument to be executed in connection herewith has been duly authorized, executed and delivered by Parent and Newco and constitutes a valid and binding agreement of Parent and Newco, enforceable against Parent and Newco in accordance with its terms.

Section 4.3 Non-contravention. The execution, delivery and performance by Parent and Newco of this Agreement and the Articles of Merger, the consummation of the Merger and each of the other transactions contemplated hereby will not (i) contravene any provision contained in such entity’s certificate of incorporation or by-laws, (ii) conflict with, violate or result in a material breach (with or without the lapse of time, the giving of notice or both) of or constitute a material default (with or without the lapse of time, the giving of notice or both) under (A) any contract, agreement, commitment, indenture, mortgage, lease, pledge, note, bond, license, permit or other instrument or obligation or (B) any judgment, order, decree, statute, law, rule or regulation or other restriction of any Governmental Authority, in each case to which such entity is a party or by which it is bound or to which any of its assets or properties are subject, (iii) result in the acceleration of, or permit any Person to terminate, modify, cancel, accelerate or declare due and payable prior to its stated maturity any material obligation of such entity or (iv) require any authorization, consent, approval, exemption or other action by or declaration or notice to any Person or Government Authority (except for the applicable requirements of the HSR Act and any applicable foreign antitrust laws or regulations).

Section 4.4 No Consents. Except for (i) filing and recordation of appropriate merger documents as required by the MGCL, (ii) filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the HSR Act, and (ii) filings and approvals set forth in Schedule 4.4, no notice to, filing with, or authorization, registration, consent or approval of any Governmental Authority or other Person is necessary for the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby by Parent and Newco.

Section 4.5 Litigation. Neither Parent nor Newco is party to any litigation or threatened litigation which would reasonably be expected to affect or prohibit the consummation of the transactions contemplated hereby.

Section 4.6 Brokers. No Person is or will be entitled to a broker’s, finder’s, investment banker’s, financial adviser’s or similar fee from Parent or Newco in connection with this Agreement or any of the transactions contemplated hereby.

Section 4.7 Parent and Newco Board. The respective boards of directors of Parent and Newco, by unanimous written consent, have approved the execution of this Agreement.

Section 4.8 Stockholder Approval. Parent, as sole stockholder of Newco, has approved this Agreement and the transactions contemplated hereby by written consent in lieu of special meeting of stockholders, and no other stockholder vote, approval or consent of any holder of capital stock of each of Parent or Newco is required or necessary to consummate the Merger.

Section 4.9 Financial Ability. Parent has funds available to consummate the transactions contemplated hereby, including, without limitation, the ability to make all payments due (i) to the holders of Preferred Stock, Common Stock and Options in accordance with the terms hereof and (ii) all payments due or necessary (if any) in order to comply with the terms and conditions of all agreements evidencing indebtedness of the Company.

Section 4.10 Acknowledgement by Parent and Newco. Each of Parent and Newco acknowledges and agrees that it has conducted its own independent review and analysis of the business, assets, condition, operations and prospects of the Company and its Subsidiaries. In entering into this Agreement, Parent and Newco have relied solely upon their own investigation and analysis and the representations and warranties of the Company set forth in this Agreement, and each of Parent and Newco acknowledges that, other than as set forth in this Agreement, none of the Company, its Subsidiaries, or any of their respective directors, officers, employees, Affiliates, stockholders, agents or representatives makes or has made any representation or warranty, either express or implied, as to the accuracy or completeness of any of the information provided or made available to each of Parent and Newco and their respective agents or representatives prior to the execution of this Agreement.

ARTICLE V — Covenants and Agreements

Section 5.1 Stockholder MattersPlease do not type any text in this area

The Company will, within 5 Business Days of the date hereof, send an information statement to the holders of the Common Stock and the Preferred Stock which have not executed the Stockholder Consent.

Section 5.2 Access and Information.

(a) From the date hereof, Parent and Newco shall be entitled to make or cause to be made such reasonable investigation of the Company and its Subsidiaries, and the financial and legal condition thereof, as Parent and Newco deem reasonably necessary or advisable during normal business hours and upon advance notice, and the Company shall cooperate with any such investigation. Parent and Newco agree to use reasonable efforts to conduct any such inquiries with sensitivity to the Company’s interests in preserving its relationships with its employees, customers and suppliers.

(b) From the date hereof, the Company and its Subsidiaries shall reasonably cooperate with any reasonable request by Parent which request is made by Parent in order to assist WebMD in complying with Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder, in connection with the transactions contemplated hereby.

(c) All information disclosed in writing, whether before or after the date hereof, pursuant to this Agreement or in connection with the transactions contemplated by, or the discussions and negotiations preceding, this Agreement to Parent and Newco (or their representatives or affiliates) shall be kept confidential by such Persons in accordance with the confidentiality agreement dated February 17, 2004 by and between the Company and WebMD (the “Confidentiality Agreement”) and shall not be used by any Person, other than in connection with the transactions contemplated by this Agreement.

Section 5.3 Conduct of Business by the Company. Please do not type any text in this area.From the date hereof to the Effective Time, the Company will and will cause each of its Subsidiaries to, except as otherwise expressly provided herein, or consented to in writing by Parent and Newco conduct its business only in the ordinary and regular course in substantially the same manner heretofore conducted and in compliance in all material respects with all applicable laws, and will not take or omit to be taken any action, or permit its Affiliates to take or to omit to take any action, which would result in a Material Adverse Effect or which would have a material adverse effect on the ability of the Company to operate its business in the manner in which it is conducted at the time of the Closing. Without limiting the generality of the foregoing, from the date hereof to the Effective Time, the Company will not and will cause each of its Subsidiaries not to, except as otherwise expressly required herein or consented to by Parent in writing, take any action or omit to take any action, or agree to take or omit to take any action, which would result in:

(a) the Company intentionally creating circumstances under which the officer’s certificate referred to in Section 6.2(h)(i) cannot be delivered at the Closing;

(b) the issuance or sale of any stock or other securities of the Company or any Subsidiary or any options, warrants or rights to acquire any such stock or other securities (except pursuant to the conversion or exercise of Preferred Shares or Options outstanding on the date hereof), or the amendment of any of the terms of any Options or the repurchase or redemption of any stock or other securities of the Company (except from former employees, directors or consultants in accordance with agreements providing for the repurchase of shares at their original issuance price in connection with any termination of employment with or services to the Company);

(c) incurrence by the Company or any Subsidiary of any additional Funded Indebtedness, or making any loans or advances to any Person by the Company or any Subsidiary, except for (x) Funded Indebtedness, loans or advances in a principal amount not to exceed, in the aggregate, $50,000, and (y) draws, in the ordinary course of business, on the revolving credit facility governed by the Credit Agreement;

(d) any change by the Company or any Subsidiary in accounting practices, methods or assumptions, or any change in its policies or practices in respect of collection of receivables, or payment of accounts payable or accrued expenses, in each case, except as may be required by GAAP;

(e) the authorization, declaration or setting aside of any dividend payment or other distribution, payable in cash, stock, property or otherwise, with respect to any equity security of the Company;

(f) the reclassification, combination, split, subdivision or redemption, or purchase or other acquisition of any equity security of the Company or any of its Subsidiaries or the issuance of any other securities in respect of, or in lieu of or in substitution for shares of equity securities of the Company or its Subsidiaries;

(g) the acquisition or agreeing to an acquisition by the Company or any Subsidiary (including, without limitation, by merger, consolidation, or acquisition of stock or assets) of any interest in any corporation, partnership, other business organization or any division thereof;

(h) except as specifically required by this Agreement, the entry by the Company or any of its Subsidiaries into any business arrangement with any of the stockholders, directors or officers of the Company;

(i) the acquisition, sale, lease, license or disposal of any assets or property by the Company or any Subsidiary (including any shares or other equity interests in or securities of any Subsidiary or any corporation, partnership, association or other business organization or division thereof), other than purchases, licensing and sales of assets in the ordinary course of business;

(j) the mortgaging or pledging by the Company or any Subsidiary of any of its property or assets or the subjecting of any such property or assets to any Lien, other than Permitted Liens;

(k) the amendment of the charter, by-laws or other organizational documents of the Company or any Subsidiary;

(l) the making by the Company or any Subsidiary of any new elections, or changes to any current elections, with respect to Taxes;

(m) the entry by the Company or any Subsidiary into any contract that, if in existence on the date of this Agreement, would have been required to be listed on Schedule 3.15(a), (b), (d), (f), (g), (i), (j) (k), (l), (m), (o), (p), or (q) or on Schedule 3.18;

(n) the making or committing to make by the Company or any Subsidiary any capital expenditure in excess of $50,000 in the aggregate;

(o) the institution or settlement by the Company or any Subsidiary of any Legal Proceeding; or

(p) the Company or any Subsidiary agreeing in writing to take any of the actions described in clauses (a) through (o) above.

Without limiting the foregoing, from the date hereof to the Effective Time, the Company will not, and will cause each of its Subsidiaries not to, take any action or omit to take any action, or agree to take or omit to take any action, without the written consent of Parent (which written consent shall not be unreasonably withheld), which would result in the entry by the Company or any Subsidiary into any contract with a customer or prospective customer which would be reasonably expected to result in aggregate payments by such customer to the Company or any Subsidiary in excess of $300,000 in the first 12 months of such contract; provided that: (x) no such consent shall be required with respect to renewals of existing contracts upon the expiration thereof on terms substantially similar to the terms of the existing contracts; and (y) if, pursuant to the terms of this paragraph, the Company seeks the written consent of Parent to enter into a contract, such consent shall be deemed granted by Parent if, within two Business Days of the Company sending an e-mail to each representative of Parent identified on Exhibit 5.3 at the e-mail address set forth opposite such person’s name summarizing the material terms of the proposed customer contract, the Company has not received (via e-mail to the representative of the Company identified on Exhibit 5.3 at the e-mail address set forth opposite such person’s name) an objection to the entry into such customer contract, which objection shall state the grounds for such objection.

Section 5.4 Closing Documents. The Company shall, prior to or on the Closing Date, execute and deliver, or cause to be executed and delivered to Parent and Newco, the documents or instruments described in Section 6.2. Parent and Newco shall, prior to or on the Closing Date, execute and deliver, or cause to be executed and delivered, to the Company, the documents or instruments described in Section 6.3.

Section 5.5 Best Efforts; Further Assurances.

(a) Subject to the terms and conditions herein provided, each of the parties hereto shall use its reasonable best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement. The Company shall use its commercially reasonable efforts to obtain, at its sole expense, all such waivers, consents or approvals from Governmental Authorities or third parties and to give all such notices to Governmental Authorities and third parties, as are required to be listed in Schedule 3.4 hereto; provided that the failure to obtain any such waiver, consent or approval shall not be a condition to the Merger unless specifically listed on Exhibit 6.2(c) hereto. The Parent shall cooperate with the Company in obtaining all such waivers, consents or approvals, as may be reasonably requested by the Company in connection therewith. The Parent shall use its commercially reasonable efforts to obtain, at its sole expense, all such waivers, consents or approvals from Governmental Authorities or third parties and to give all such notices to Governmental Authorities and third parties, as are required to be listed in Exhibit 6.3(b) hereto. The Company shall cooperate with the Parent in obtaining all such waivers, consents or approvals, as may be reasonably requested by the Parent in connection therewith. Each party shall bear its own costs incurred in connection with obtaining such consents and shall pay its own HSR Act filing fee. Each party hereto shall make an appropriate filing, if necessary, pursuant to the HSR Act with respect to the transactions contemplated by this Agreement promptly after the date hereof and shall supply as promptly as practicable to the appropriate Governmental Authorities any additional information and documentary material that may be requested pursuant to the HSR Act. Without limitation of the foregoing, the Company, Newco and their respective Affiliates shall not extend any waiting period or comparable period under the HSR Act or enter into any agreement with any Governmental Authority not to consummate the transactions contemplated hereby, except with the prior written consent of the other parties hereto. Notwithstanding anything to the contrary in this Agreement, the Parent shall not be obligated to sell or dispose of or hold separately (through a trust or otherwise) any assets or businesses of the Parent, the Company or their respective Affiliates, or otherwise restrict the conduct of the businesses of the Parent, the Company or their respective Affiliates.

(b) In the event any claim, action, suit, investigation or other proceeding by any Governmental Authority or other Person is commenced which questions the validity or legality of the Merger or any of the other transactions contemplated hereby or seeks damages in connection therewith, the parties agree, subject to reasonable business judgment, to cooperate and use reasonable best efforts to defend against such claim, action, suit, investigation or other proceeding and, if an injunction or other order is issued in any such action, suit or other proceeding, to use reasonable best efforts to have such injunction or other order lifted, and to cooperate reasonably regarding any other impediment to the consummation of the transactions contemplated hereby.

(c) The Company shall give prompt written notice to the Parent and Newco of (i) the occurrence, or failure to occur, of any event which occurrence or failure would cause any representation or warranty of the Company contained in the Merger Documents to be untrue or inaccurate in any material respect at any time from the date hereof to the Effective Time or that will result in the failure to satisfy any of the conditions specified in Article VI and such written notice shall specify the representation or warranty so breached (provided that such notice shall not be deemed to cure the breach of any such representation or warranty or amend and/or supplement the schedule related to such representation or warranty) and (ii) any failure of the Company to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it under the Merger Documents.

(d) The Parent or Newco shall give prompt written notice to the Company of (i) the occurrence, or failure to occur, of any event which occurrence or failure would cause any representation or warranty of the Parent or Newco contained in the Merger Documents to be untrue or inaccurate in any material respect at any time from the date hereof to the Effective Time or that will result in the failure to satisfy any of the conditions specified in Article VI and such written notice shall specify the representation or warranty so breached (provided that such notice shall not be deemed to cure the breach of any such representation or warranty or amend and/or supplement the schedule related to such representation or warranty) and (ii) any failure of the Parent or Newco to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by either of them under the Merger Documents.

(e) The Company shall use commercially reasonable efforts to cause Ernst & Young LLP to complete, as promptly as practicable, an audit of the Annual Financial Statements in a manner that will result in Ernst & Young LLP issuing an unqualified opinion (the “E&Y Audit Opinion”), and upon such completion, the Company shall promptly deliver such audited Financial Statements with the E&Y Audit Opinion to the Parent (the “Audited Financial Statements”). Following delivery of the Audited Financial Statements to the Parent, the Company will make available to the Parent and its representatives the financial records (including the work papers of the Company’s independent accountants) of the Company and its Subsidiaries.

Section 5.6 Public Announcements. The timing and content of the initial announcement of this Agreement or the Merger to the financial community, government agencies, employees or the general public shall be mutually agreed upon in advance by the Company and Parent. Thereafter, Parent and the Company shall consult with each other before issuing, and shall provide each other with the opportunity to review and comment upon, all announcements regarding any aspect of this Agreement or the Merger to the financial community, government agencies, employees or the general public; provided that each party hereto may make any such announcement which it in good faith believes, based on advice of counsel, is necessary or advisable in connection with any requirement of law or regulation, it being understood and agreed that each party shall promptly provide the other parties hereto with copies of any such announcement.

Section 5.7 Exclusive Dealing. During the period from the date of this Agreement through the Closing Date or the termination of this Agreement pursuant to Section 7.1, the Company shall not take, nor will the Company permit any of its respective affiliates,

representatives, consultants, financial advisors, attorneys, accountants or other agents to take, any action to solicit, encourage, initiate or engage in discussions or negotiations with, or provide any information to or enter into any agreement with any person (other than Parent, Newco and/or their affiliates) concerning any purchase of any of the Company’s equity securities or any merger, sale of substantial assets or similar transaction involving the Company (other than assets sold in the ordinary course of business). The Company hereby agrees to request of each potential acquirer of the Company to which information, documents or other materials were provided within the six months prior to the date hereof that such potential acquirer promptly after such request either (a) return to the Company all such information, documents and other materials and all copies thereof, or (b) destroy (such destruction to be certified in writing to the Company by such potential acquirer) all such information, documents and other materials and all copies thereof.

Section 5.8 Employee Benefit Plans. (a) Except as set forth on Exhibit 5.8, on, or as soon as reasonably practicable after, the Closing Date, the Parent will cause the Company’s employees that become employees of the Parent or its Affiliates after the Effective Time, to be eligible for a group medical plan and other employee benefit plans, programs or policies, which are the same as, or comparable to, those maintained for similarly situated employees of the Parent.

(b) Parent and Newco hereby agree that, from and after the Closing Date, Parent shall grant or cause the Surviving Corporation and its Subsidiaries to grant all employees of the Company and its Subsidiaries credit for any service with the Company and its Subsidiaries earned prior to the Closing Date (i) for eligibility, vesting and, except with respect to qualified retirement plans, benefit accrual purposes and (ii) for purposes of vacation accrual under any employee benefit plan, program or arrangement established or maintained by Parent or any of its Subsidiaries on or after the Closing Date (the “Parent Plans”). In addition, Parent and Newco hereby agree that Parent shall or shall cause (i) the Surviving Corporation and its Subsidiaries to waive all pre-existing condition exclusion and actively-at-work requirements and similar limitations, eligibility waiting periods and evidence of insurability requirements under any Parent Plans to the extent waived or satisfied by an employee under any Employee Benefit Plan as of the Closing Date, and (ii) any covered expenses incurred on or before the Closing Date by any employee (or covered dependent thereof) of the Company or any of its Subsidiaries to be taken into account for purposes of satisfying applicable deductible, coinsurance and maximum out-of-pocket provisions after the Closing Date under any applicable Parent Plan, provided that such expenses are documented to the reasonable satisfaction of the Parent.

Section 5.9 Indemnification of Directors and Officers. The articles of incorporation and by-laws (or equivalent governing instruments) of the Surviving Corporation and each of its Subsidiaries shall contain provisions no less favorable with respect to indemnification of directors and officers of the respective entities than are set forth in the articles of amendment and restatement and by-laws of the respective entities as of the date hereof, which provisions shall not be amended, repealed or otherwise modified for a period of six years after the Effective Time in any manner that would adversely affect the rights thereunder of individuals who at or prior to the Effective Time were directors or officers of the respective entities. Parent shall cause the Surviving Corporation to renew, to the extent such renewals are available, the Company’s existing directors’ and officers’ liability insurance policy for an additional two years after the

expiration of the current policy period and, if the insurer terminates such policy during such time, to purchase any extended reporting period or “tail” coverage available under such policy; provided, however, that in no event shall Parent and the Surviving Corporation be required to pay more than an aggregate of $50,000 to fulfill their obligations under this Section 5.9.

Section 5.10 Newco. The Parent will take all action necessary (a) to cause Newco to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this Agreement and (b) to ensure that, prior to the Effective Time, Newco shall not conduct any business or make any investments other than as specifically contemplated by this Agreement and will not have any assets (other than a de minimis amount of cash paid to Newco for the issuance of its stock to the Parent).

Section 5.11 FIRPTA. Prior to the Closing, the Company shall deliver to the Parent a notice that the Common Stock and Preferred Stock are not “U.S. real property interests” in accordance with Treasury Regulations under Sections 897 and 1445 of the Code. If Parent does not receive the notice described above on or before the Closing Date, Parent, Newco, the Company, or the Surviving Corporation shall be permitted to withhold from the payments to be made pursuant to this Agreement any required withholding tax under Section 1445 of the Code.

Section 5.12 Letters of Credit. The Parent acknowledges that the Company has an obligation under the lease for its corporate headquarters in Towson, Maryland to provide the landlord with one or more letters of credit (collectively, the “Lease Letter of Credit”) and that the Lease Letter of Credit currently provided by the Company to such landlord has been issued under the Credit Agreement. The Parent hereby agrees that on or prior to the Closing, Parent will either (i) issue a back up letter of credit to Bank of America in a manner such that, assuming all other amounts outstanding under the Credit Agreement have been paid in full, Bank of America will release the Liens it has on the Company’s and its Subsidiaries’ assets in a manner that satisfies the condition regarding the release of Liens under the Credit Agreement set forth in Section 6.2(e), (ii) issue a replacement Lease Letter of Credit to such landlord in exchange for the current Lease Letter of Credit or (iii) take such actions with such landlord (such as signing a guaranty) which results in such landlord releasing the Lease Letter of Credit; provided, that, notwithstanding the foregoing, Parent shall not contact such landlord without first consulting with the Company.

Section 5.13 280G Covenant

Prior to the Closing Date, the Company shall submit to a stockholder vote the right of any “disqualified individual” (as defined in Section 280G(c) of the Code) to receive acceleration of vesting of any stock options by virtue of action by the Board of Directors after the date hereof and that otherwise would not be vested by their terms or pursuant to the terms of existing employment agreements as of immediately after the Closing, in a manner that satisfies the stockholder approval requirements for the small business exemption of Section 280G(b)(5) of the Code and any regulations (including proposed regulations) promulgated thereunder. Consistent with the requirements of Section 280G(b)(5) and the regulations, such vote shall establish the “disqualified individual’s” right to such accelerated vesting.

ARTICLE VI -Conditions to Closing

Section 6.1 Mutual Conditions. The respective obligations of each party to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment at or prior to the Effective Time of each of the following conditions:

(a) No Injunction. At the Effective Time there shall be no effective injunction, writ or preliminary restraining order or any order of any nature issued by a court or Governmental Authority of competent jurisdiction to the effect that the Merger may not be consummated as herein provided, no proceeding or lawsuit shall have been commenced by any Governmental Authority or other Person for the purpose of obtaining any such injunction, writ or preliminary restraining order and no written notice shall have been received from any such Governmental Authority indicating an intent to restrain, prevent, materially delay or restructure the transactions contemplated hereby.

(b) HSR Waiting Period. Any waiting period (and any extension thereof) under the HSR Act applicable to the transactions contemplated hereby shall have expired or shall have been terminated.

Section 6.2 Conditions to the Obligations of Parent and Newco. The obligations of Parent and Newco to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment prior to or at Closing of each of the following conditions, any and all of which may be waived, in whole or in part, by Parent and Newco to the extent permitted by applicable law:

(a) Representations, Warranties and Covenants. All representations and warranties made by the Company in Article III of this Agreement (other than the representations and warranties of the Company described in the second sentence of this Section 6.2(a)) shall be true and correct as of the date hereof and as of the Closing Date as though such representations and warranties were made as of the Closing Date (or on the date specified in the case of any representation or warranty which specifically relates to an earlier date), in each case, except to the extent the facts, event or circumstances causing failure of such representations and warranties to be true and correct as of such dates, individually or in the aggregate, would not have or be reasonably likely to have a Material Adverse Effect or a material adverse effect on the ability of the Company, immediately following the Closing, to operate its business in the manner in which it is conducted at the time of the Closing (provided that as a result of the Material Adverse Effect qualification contained in this sentence above, for purposes of determining satisfaction of the condition to closing contained in this first sentence of Section 6.2(a) only, any materiality or Material Adverse Effect qualifications contained in the representations and warranties made by the Company in Article III of this Agreement shall be deemed to be removed). All representations and warranties made by the Company in Sections 3.2, 3.5(a), 3.5(b) and 3.6(a) that are qualified as to materiality shall be true and correct in all respects, and all other representations and warranties made by the Company in Sections 3.2, 3.5(a), 3.5(b) and 3.6(a) shall be true and correct in all material respects, in each case as of the date hereof and as of the Closing Date as though such representations and warranties were made as of the Closing Date (or on the date specified in the case of any representation or warranty which specifically relates to an earlier date). The Company shall have duly performed or complied with, in all material respects, all of

the covenants, obligations and conditions to be performed or complied with by it under the terms of this Agreement on or prior to or at Closing.

(b) Material Adverse Effect. Since the date of this Agreement, there will not have occurred and there will have been no change, event or development that has had or may reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; provided that any adverse effect resulting from the public announcement of the transactions contemplated by this Agreement shall not be taken into account in determining whether, for purposes of this Section 6.2(b), a “Material Adverse Effect” has occurred or may reasonably be expected to occur.

(c) Consents. The Company shall have obtained at its own expense (and shall have provided copies thereof to Parent) all of the waivers, permits, consents, approvals, or authorizations, and effected all of the registrations, filings and notices (collectively, “Consents or Notices”), in each case, set forth on Exhibit 6.2(c), and any other material Consents or Notices which are required on the part of the Company or its Subsidiaries for the execution delivery or performance of this Agreement or the consummation of the transactions contemplated hereby; provided that the parties hereto agree, for purposes of this Section 6.2(c), the Consents or Notices listed on Schedule 3.3 and Schedule 3.4, other than item 3 on Schedule 3.4, are not material.

(d) Audited Financial Statements. The Audited Financial Statements referred to in Section 5.5(e) above shall have been delivered, accompanied by the E&Y Audit Opinion, and such Audited Financial Statements shall not differ in any material respect from the Annual Financial Statements for the same periods included in Schedule 3.6; provided that the condition set forth in this Section 6.2(d) shall be deemed satisfied at 11:59 p.m., New York time, on the Section 6.2(d) Deadline unless prior to the Section 6.2(d) Deadline the Company and Cornerstone have received from Parent a written notice stating that Parent believes that the condition set forth in this Section 6.2(d) has not been satisfied and an explanation, in reasonable detail, of such belief by Parent. For purposes of this Section 6.2(d), the “Section 6.2(d) Deadline” means 5:00 p.m., New York time, on the fifth full Business Day after the first date on which Parent has had: (1) the Audited Financial Statements and the E&Y Audit Opinion, (2) access to the financial records and work papers contemplated by the last sentence of Section 5.5(e); and (3) five Business Days prior written notice of the first full Business Day on which the criteria in clauses (1) and (2) of this definition will actually be met (such written notice to be provided by the Company only after it has confirmed with Ernst &Young that such criteria will be met).

(e) Pay-off Letters, Notes and Releases of Liens. With respect to each holder of Closing Date Funded Indebtedness (the “Creditors”), the Company shall have received and provided Parent (i) a copy of a pay-off letter in a customary form reasonably acceptable to Parent and (ii) the executed originals of all then outstanding notes evidencing the loans (or appropriate loss affidavits and indemnities); and, with respect to each of the Liens on the Company’s assets held by the Creditors, the Company shall have received and provided a copy to Parent of UCC termination statements and any other required documents to be filed in release of such Liens upon the payment of the applicable indebtedness by the Surviving Corporation.

(f) Unvested Options. The Board of Directors of the Company shall have taken all action necessary for all Unvested Options to automatically become Vested Options as of immediately prior to the Effective Time subject only to obtaining from the requisite stockholders of the Company the approval contemplated pursuant to Section 5.13.

(g) Employment Agreements. Each of the Employment Agreements shall have become effective, and each employee party to an Employment Agreement shall then be employed by the Company.

(h) Closing Deliveries. Prior to or at the Closing, the Company shall have delivered the following closing documents in form and substance reasonably acceptable to Parent:

(i) a certificate of the President of the Company, dated the Closing Date, to the effect that the conditions specified in Section 6.2(a) has been satisfied;

(ii) a certified copy of the resolutions of the Company’s Board of Directors authorizing the execution, delivery and consummation of this Agreement and the transactions contemplated hereby;

(iii) a certified copy of the resolutions of the stockholders of the Company adopting and approving this Agreement, the other Merger Documents to the extent required to be approved and the transactions contemplated hereby and thereby;

(iv) a legal opinion from Kirkland & Ellis LLP, counsel to the Company in substantially the form attached hereto as Exhibit D-1, addressed to Parent and dated as of the Closing Date; and

(v) a legal opinion from Whiteford, Taylor & Preston, Maryland counsel to the Company in substantially the form attached hereto as Exhibit D-2, addressed to Parent and dated as of the Closing Date.

(i) Audit Opinion. The E&Y Audit Opinion regarding the Annual Financial Statements shall not have been withdrawn or modified.

Section 6.3 Conditions to the Obligations of the Company. The obligations of the Company to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment at or prior to the Closing of each of the following conditions, any and all of which may be waived in whole or in part by the Company to the extent permitted by applicable law:

(a) Representations, Warranties and Covenants. All representations and warranties made by Parent and Newco in this Agreement shall be true and correct as of the date hereof and as of the Closing Date as though such representations and warranties were made as of the Closing Date (or on the date specified in the case of any representation or warranty which specifically relates to an earlier date), in each case, except to the extent the failure of such representations and warranties to be true and correct as of such dates, individually or in the aggregate, would not have a material adverse effect on the ability of Parent or Newco to perform its obligations hereunder. Parent and Newco shall have duly performed or complied with, in all material

respects, all of the covenants, obligations and conditions to be performed or complied with by each of them under the terms of this Agreement on or prior to or at the Closing.

(b) Consents. Each of Parent and Newco shall have obtained at its own expense (and shall have provided copies thereof to the Company) all of the waivers, permits, consents, approvals, or authorizations, and effected all of the registrations, filings and notices, in each case, set forth on Exhibit 6.3(b).

(c) Closing Deliveries. Prior to or at the Closing, Parent and Newco shall have delivered to the Company the following closing documents in form and substance reasonably acceptable to the Company:

(i) a certificate of the President or a Vice President of Parent and Newco, dated the Closing Date, to the effect that (1) the Person signing such certificate is familiar with this Agreement and (2) the condition specified in Section 6.3(a) has been satisfied;

(ii) certified copies of the resolutions of the board of directors of each of Parent and Newco authorizing the execution, delivery and consummation of this Agreement and the transactions contemplated hereby and thereby; and

(iii) a certified copy of the resolutions of the sole stockholder of Newco adopting and approving this Agreement, the Merger and the transactions contemplated hereby.

ARTICLE VII — Termination Amendment and Waiver

Section 7.1 Termination. This Agreement may be terminated and the Merger may be abandoned at any time, notwithstanding the approval thereof by the stockholders of the Company at any time prior to Closing:

(a) by mutual consent of the Company, Parent and Newco;

(b) by either the Company or Parent and Newco, if the Merger shall not have been consummated on or before the date 90 days after the date of this Agreement (provided that the Termination Date shall be extended to the date 180 days after the date of this Agreement if the Closing shall not have occurred by reason of the failure of the condition set forth in Section 6.1(b) hereof) (the “Termination Date”), unless extended by written agreement of the parties hereto; provided, however, that the right to terminate this Agreement and abandon the Merger under this paragraph shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Merger to occur on or prior to such date;

(c) by either Parent or Newco or the Company, if any Governmental Authority shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall have become final and nonappealable;

(d) by Parent by giving written notice to the Company in the event the Company is in breach of any representation, warranty or covenant contained in this Agreement, and such breach (i) individually or in combination with any other such breach, would cause the conditions set forth in Section 6.2(a) not to be satisfied and (ii) is not cured within 20 days following delivery by the Parent to the Company of written notice of such breach; or

(e) by the Company by giving written notice to the Parent in the event the Parent or Newco is in breach of any representation, warranty or covenant contained in this Agreement, and such breach (i) individually or in combination with any other such breach, would cause the conditions set forth in Section 6.3(a) not to be satisfied and (ii) is not cured within 20 days following delivery by the Company to Parent of written notice of such breach.

Section 7.2 Effect of Termination. If this Agreement is terminated pursuant to Section 7.1 hereof, (a) all rights and obligations of the parties hereunder shall terminate and no party shall have any liability to the other party, except for obligations of the parties hereto in Sections 5.2(b), 5.6 and 10.4, which shall survive the termination of this Agreement and (b) termination shall not preclude either party from suing the other party for any breach of this Agreement.

ARTICLE VIII — Survival of Representations; Indemnification

Section 8.1 Survival of Representations.• Please do not type any text in this area. The representations and warranties of the Company, Parent and Newco contained in this Agreement (whether or not contained in Articles III and IV) or in any certificate delivered pursuant to Section 6.2 or Section 6.3 shall survive the Closing for a period of one year after the Closing Date; provided, however, that the representations and warranties of the Company set forth in Sections 3.5, 3.10 and 3.13 shall survive the Closing for a period of two years after the Closing Date.

Section 8.2 General Indemnification.

(a) After the Closing, Parent, Newco and the Surviving Corporation (each a “Buyer Indemnitee” and together the “Buyer Indemnitees”) shall be indemnified, defended and held harmless from the Escrow Account from any damages, losses, liabilities, obligations, claims of any kind, interest or expenses (including, without limitation, reasonable attorneys’ fees and expenses) (“Loss”) suffered or paid, directly or indirectly, as a result of, in connection with, or arising out of:

(i) the failure of any representation or warranty made by the Company (A) contained in this Agreement to be true and correct as of the date of this Agreement or as of the Closing Date or (B) in any certificate delivered to Parent and Newco pursuant to Section 6.2 to be true and correct as of the Closing Date;

(ii) any breach by the Company of any of its covenants or agreements contained herein which are to be performed by the Company on or before the Closing Date;

(iii) the matters referred to in the letter identified in item 2 under heading “(c)” on Schedule 3.14 (and any other infringement claim arising from the assertion of the

registered patent which is the genesis of such letter or of any other patent asserted in connection with such infringement claim), including any claim, action or proceeding against the Company or any of its Subsidiaries, regardless of whether brought by the sender of such letter or any other party, whether or not such party is referred to in such letter (but only to the extent such matters are not otherwise reserved for in the Net Working Capital as of immediately prior to the Closing);

(iv) any claim by a person who was a stockholder or Optionholder of the Company prior to the Effective Time, seeking to assert, or based upon: (i) ownership or rights to ownership of any shares of stock of the Company issued prior to the Effective Time (other than the right to receive the consideration pursuant to this Agreement or appraisal rights under the applicable provisions of the MGCL); or (ii) any claim that his, her or its shares of stock of the Company or Options were wrongfully repurchased or terminated by the Company prior to the Effective Time; or

(v) any liability arising from the Broadview Engagement Letter (other than as expressly provided in Section 2.9(c)(i)).

(b) After the Closing, each of Parent and the Surviving Corporation agrees to indemnify, defend and hold each Company Securityholder as of the date of this Agreement (each a “Seller Indemnitee” and together the “Seller Indemnitees”) harmless from any Loss suffered or paid, directly or indirectly, as a result of, in connection with, or arising out of (i) the failure of any representation or warranty made by Parent or Newco (A) in this Agreement contained in Article IV of this Agreement to be true and correct as of the date of this Agreement or (B) in any certificate delivered to the Company pursuant to Section 6.3 to be true and correct as of the Closing Date, (ii) any breach by Parent of any of its covenants or agreements contained herein, or (iii) any breach by the Surviving Corporation (including by way of being the successor of Newco and the Company) of any of its covenants or agreements contained herein which are to be performed by the Surviving Corporation after the Closing Date.

(c) The obligations to indemnify and hold harmless pursuant to clause (i) of Section 8.2(a) and pursuant to clause (i) of Section 8.2(b) shall survive the consummation of the transactions contemplated hereby for the period set forth in Section 8.1, except for claims for indemnification pursuant to such clauses asserted prior to the end of such period which claims shall survive until final resolution thereof.

Section 8.3 Indemnification Claims.

(a) Notice of Third Party Actions. An Indemnified Party shall give written notification to the Responsible Party of the commencement of any Third Party Action. Such notification shall be given within 20 days after receipt by the Indemnified Party of notice of such Third Party Action, and shall describe in reasonable detail (to the extent known by the Indemnified Party) the facts constituting the basis for such Third Party Action and the amount of the claimed Losses; provided, however, that no delay or failure on the part of the Indemnified Party in so notifying the Responsible Party shall deprive the Indemnified Party of its rights to indemnification hereunder except to the extent of any damage or liability caused by or arising out of such delay or failure.

(b) Indemnification of Third Party Actions for the Benefit of the Buyer Indemnitees. The obligations and liabilities with respect to a Third Party Action for which any Buyer Indemnitee is entitled to indemnification pursuant to this Article VIII will be subject to the following terms and conditions:

(i) Cornerstone will have the right, but not the obligation, to defend against and to direct the defense of any such Third Party Action and any related Legal Proceeding at the sole cost and expense of Cornerstone (which costs and expenses shall be on behalf of, and reimbursable on a pro rata basis by, the Company Securityholders) and with counsel of Cornerstone’s choosing (subject to the approval of Parent, which will not be unreasonably withheld or delayed) and Parent and Surviving Corporation will reasonably cooperate in the defense thereof. Parent may participate in such defense with counsel of its own choosing, provided that the Parent will not, following written notice of Cornerstone’s election to defend against and direct the defense of any such Third Party Action, be entitled to indemnification under this Article VIII for any fees of other counsel or any other expenses with respect to the defense of such Legal Proceeding incurred by Parent or any of its affiliates in connection with the defense of such Legal Proceeding. If Cornerstone assumes the defense of a Third Party Action, no compromise, discharge or settlement of, or admission of liability in connection with, such claims may be effected by Cornerstone without the written consent of the Parent (which consent will not be unreasonably withheld or delayed) unless (x) there is no finding or admission of any violation of law or any violation of the rights of any Person and no effect on any other claims that may be made against the Surviving Corporation, Parent or their respective affiliates, and (y) the sole relief provided is monetary damages that are paid in full from the Escrow Account. The Buyer Indemnitees will have no right to indemnification from the Escrow Account in connection with any compromise or settlement of a Third Party Action effected without Cornerstone’s written consent (which consent will not be unreasonably withheld or delayed). Notwithstanding the foregoing, Cornerstone will not have the right to defend against or to direct the defense of any such Third Party Action and any related Legal Proceeding (and the Parent shall expressly have such right) if: (X) Cornerstone or Cornerstone Equity Investors IV, L.P. is also a party to such Third Party Action and the Parent reasonably determines in good faith that the Buyer Indemnitees have available to them one or more defenses or counterclaims that are inconsistent with those of Cornerstone or Cornerstone Equity Investors IV, L.P.; (Y) the amount of the claimed damages in the applicable Third Party Action is at least $1,000,000 greater than the amount of Losses for which the Buyer Indemnities are entitled to indemnification under this Article VIII or (Z) the Third Party Action involves any Governmental Authority as a party thereto, criminal liability, or any Third Party Action in which equitable relief is sought against the Buyer Indemnitees.

(ii) Notwithstanding the provisions of Section 8.3(b)(i) of this Agreement, if Cornerstone fails or refuses to undertake the defense of such Third Party Action within 10 days after delivery of written notification to Cornerstone of the commencement of such Third Party Action or if Cornerstone later withdraws from such defense, the Parent will have the right to undertake the defense of such claim with counsel of its own choosing, with the costs and expenses of such defense to be paid for from the Escrow

Account and with the Company Securityholders bound by any determination made in such Third Party Action or any compromise or settlement effected by Parent.

(iii) The Parent will have the right (including the selection of counsel, which counsel must be reasonably satisfactory to Cornerstone) to defend against, direct the defense of, or, subject to the last sentence of this Section 8.3(b)(iii), settle any Third Party Action described in the last sentence of Section 8.3(b)(i) and any related Legal Proceeding. In connection with any such Third Party Action described in the last sentence of Section 8.3(b)(i), the Parent agrees (i) to keep Cornerstone reasonably informed of its defense and resolution of the Third Party Action, (ii) to report to Cornerstone in writing, at least monthly, as to the amount of Losses (including attorneys’ fees and expenses) incurred as of the date of such report, together with a good faith estimate of the amount of any additional Losses that the Parent expects may be incurred in the future based upon the status of such matters as of such date, and (iii) that it will make reasonable judgments with respect to incurring costs and expenses and other Losses (including the selection of outside counsel) in a similar matter and based on similar factors as it does for similar third party claims for which it has no right to indemnification under this Article VIII. No compromise, discharge or settlement of, or admission of liability in connection with, such claims may be effected by the Parent without the written consent of Cornerstone (which consent will not be unreasonably withheld or delayed), unless the Parent has waived any and all right to indemnification against the Escrow Account in connection therewith.

(c) Indemnification of Third Party Actions for the Benefit of the Seller Indemnitees. The obligations and liabilities with respect to a Third Party Action for which any Seller Indemnitee is entitled to indemnification pursuant to this Article VIII will be subject to the following terms and conditions:

(i) The Parent will have the right, but not the obligation, to defend against and to direct the defense of any such Third Party Action and any related Legal Proceeding at the Parent’s sole cost and expense and with counsel of Parent’s choosing (subject to the approval of Cornerstone, which will not be unreasonably withheld or delayed) and Cornerstone will reasonably cooperate in the defense thereof. Cornerstone may participate in such defense with counsel of its own choosing, provided that the Parent will not, following written notice of its election to defend against and direct the defense of any such Third Party Action, be liable to the Buyer Indemnitees under this Article VIII for any fees of other counsel or any other expenses with respect to the defense of such Legal Proceeding incurred by Cornerstone or any Company Securityholder in connection with the defense of such Legal Proceeding unless Parent is also a party to such Third Party Action and Cornerstone determines in good faith that the Company Securityholders have available to them one or more defenses or counterclaims that are inconsistent with those of the Parent. If the Parent assumes the defense of a Third Party Action, no compromise, discharge or settlement of, or admission of liability in connection with, such claims may be effected by the Parent without the written consent of Cornerstone (which consent will not be unreasonably withheld or delayed) unless (x) there is no finding or admission of any violation of law or any violation of the rights of any Person and no effect on any other claims that may be made against the Company

Securityholders, and (y) the sole relief provided is monetary damages that are paid in full by the Parent. The Parent will have no liability with respect to any compromise or settlement of a Third Party Action effected without its written consent (which consent will not be unreasonably withheld or delayed).

(ii) Notwithstanding the provisions of Section 8.3(c)(i) of this Agreement, if the Parent fails or refuses to undertake the defense of such Third Party Action within 10 days after delivery of written notification to the Parent of the commencement of such Third Party Action or if the Parent later withdraws from such defense, Cornerstone will have the right to undertake the defense of such claim with counsel of its own choosing, with the Parent responsible for the costs and expenses of such defense and bound by any determination made in such Third Party Action or any compromise or settlement effected by Cornerstone.

(d) Cooperation. All of the parties hereto shall cooperate in the defense or prosecution of any Third Party Claim in respect of which indemnity may be sought hereunder and shall furnish such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials and appeals, as may be reasonably requested in connection therewith.

(e) Claim Notice. In order to seek indemnification under this Article VIII, an Indemnified Party shall deliver a Claim Notice to the Responsible Party.

(f) Response. Within 30 days after delivery of a Claim Notice, the Responsible Party shall deliver to the Indemnified Party a Response, in which the Responsible Party shall: (i) agree that the Indemnified Party is entitled to receive all of the Claimed Amount (in which case (x) if the Responsible Party is the Parent, then the Response shall be accompanied by a payment by the Parent to the Indemnified Party of the Claimed Amount, by check or by wire transfer and (y) if the Responsible Party is Cornerstone, then Parent and Cornerstone shall deliver to the Escrow Agent, within three days following the delivery of the Response, a written notice executed by both parties instructing the Escrow Agent to disburse the Claimed Amount to the Parent), (ii) agree that the Indemnified Party is entitled to receive the Agreed Amount (in which case (xx) if the Responsible Party is the Parent, then the Response shall be accompanied by a payment by the Parent to the Indemnified Party of the Agreed Amount, by check or by wire transfer and (yy) if the Responsible Party is Cornerstone, then Parent and Cornerstone shall deliver to the Escrow Agent, within three days following the delivery of the Response, a written notice executed by both parties instructing the Escrow Agent to disburse the Agreed Amount to the Parent), and/or (iii) dispute that the Indemnified Party is entitled to receive any or all of the Claimed Amount.

(g) Dispute. During the 30-day period following the delivery of a Response that reflects a Dispute, the Responsible Party and the Indemnified Party shall use good faith efforts to resolve the Dispute. If the Dispute is not resolved within such 30-day period, such Dispute shall be resolved in a state or federal court sitting in Maryland. In connection with any such Dispute, if the Responsible Party is Cornerstone, then the Parent and Cornerstone shall deliver to the Escrow Agent, promptly following the resolution of the Dispute (whether by mutual agreement, final non-appealable judicial decision or otherwise), a written notice executed by both parties instructing the Escrow Agent as to what (if any) portion of the Escrow Funds shall be disbursed

to the Parent and/or the Company Securityholders (which notice shall be consistent with the terms of the resolution of the Dispute).

Section 8.4 Limitations on Indemnification Obligations.

(a) The rights of the Buyer Indemnities to indemnification pursuant to the provisions of Section 8.2(a) are subject to the following limitations:

(i) the amount of any and all Losses will be determined net of any amounts recovered by Parent, Surviving Corporation or any of their respective affiliates under insurance policies with respect to such Losses;

(ii) the Buyer Indemnitees will not be entitled to recover Losses pursuant to clause (i) of Section 8.2(a) until the total amount which the Buyer Indemnitees would recover under clause (i) of Section 8.2(a) (as limited by the provisions of clause (i) of this Section 8.4(a)), but for this clause (ii), exceeds $1,000,000 (the “Threshold”) and then only for the excess over the Threshold; provided, however, that, subject to clause (iii) of this Section 8.4(a), the Buyer Indemnitees will be entitled to recover all Losses (without regard to the Threshold) as a result of any breach of the representations and warranties contained in Section 3.10 of this Agreement;

(iii) in the aggregate, the Buyer Indemnitees (x) will be entitled to recover no more than $16,000,000 (the “Cap”) and (y) pursuant to this Agreement or in connection with any certificate delivered in connection herewith, will not be entitled to recover Losses from any source other than the Escrow Account; and

(iv) the Buyer Indemnitees will not be entitled to recover Losses pursuant to clause (iii) of Section 8.2(a) until the total amount which the Buyer Indemnitees would recover under clause (iii) of Section 8.2(a) (as limited by the provisions of clause (i) of this Section 8.4(a)), but for this clause (iv), exceeds Two Hundred Thousand Dollars ($200,000) (the “Section 8.2(a)(iii) Threshold”) and then only for the excess over the Section 8.2(a)(iii) Threshold.

Notwithstanding anything contained herein to the contrary, after the Closing, on the date that the amount of cash in the Escrow Account is reduced to zero, the Buyer Indemnitees shall have no further rights to indemnification under this Article VIII.

(b) The rights of the Seller Indemnities to indemnification pursuant to the provisions of Section 8.2(b) are subject to the following limitations:

(i) the Seller Indemnitees will not be entitled to recover Losses pursuant to clause (i) of Section 8.2(b) until the total amount which the Seller Indemnitees would recover under clause (i) of Section 8.2(b), but for this clause (i), exceeds the Threshold and then only for the excess over the Threshold; and

(ii) in the aggregate, the Seller Indemnitees will be entitled to recover no more than the Cap.

(c) No Company Securityholder shall have any right of contribution against the Company or the Surviving Corporation with respect to any amounts payable as a result of the indemnification obligations set forth in Section 8.2(a) hereof.

Section 8.5 Exclusive Remedy. (a) Notwithstanding anything else contained in this Agreement to the contrary, after the Closing, other than for equitable remedies and fraud, (i) indemnification pursuant to the provisions of this Article VIII and Article VIIIA shall be the exclusive remedy for the parties hereto for any misrepresentation or breach of any warranty, covenant or other provision contained in this Agreement or in any certificate delivered pursuant hereto and (ii) making a claim for a proper distribution from the Escrow Account shall be the sole and exclusive remedy available to Parent for any Loss, Losses or other amounts (including, without limitation, any relating to environmental, health or safety matters or Tax matters) arising under the indemnification obligations set forth herein, or otherwise in respect of the transactions contemplated hereby.

Section 8.6 Treatment of Indemnity Payments. Any payments made to an Indemnified Person pursuant to this Article VIII shall be treated as an adjustment to the Purchase Price for Tax purposes.

Section 8.7 Provisions Controlling Tax Matters. The provisions of this Article VIII shall not apply to matters involving Taxes, which shall be governed by Article VIIIA.

Section 8.8 Broadview Engagement Letter. Parent and Cornerstone agree that in connection with any payments from the Escrow Account to the Company Securityholders, Parent and Cornerstone will direct the Escrow Agent to make an appropriate payment to Broadview International LLC to the extent such payment is required pursuant to the terms of the Broadview Engagement Letter.

ARTICLE VIIIA — Tax Matters

Section 8.1A Tax Indemnification.

The Buyer Indemnitees shall be entitled to be reimbursed from the Escrow for the amount of any Loss resulting from, relating to, or constituting (x) a breach of any representation contained in Section 3.10 of this Agreement, (y) the failure to perform any covenant or agreement set forth in this Article VIIIA and Section 5.13, and (z) without duplication, the following Taxes, to the extent not included in the calculation of the Net Income Tax Adjustment or Net Working Capital:

(a) Any Taxes for any Taxable period ending (or deemed pursuant to Section 8.2A of this Agreement to end) on or before the Closing Date due and payable by the Company or any Subsidiary; and

(b) Any Taxes for any Taxable period ending (or deemed pursuant to Section 8.2A of this Agreement to end) on or before the Closing Date for which the Company has any liability as a transferee or successor, or pursuant to any contractual obligation or otherwise.

Section 8.2A Allocation of Certain Taxes.

(a) The Parent and Company agree that if the Company is permitted but not required under applicable foreign, state or local Tax laws to treat the Closing Date as the last day of a taxable period, the Parent and the Company shall treat such day as the last day of a taxable period.

(b) Any Taxes for a taxable period beginning before and ending after the Closing Date shall be paid by the Parent or its Affiliates. In accordance with Section 8.1A, the Parent shall be entitled to be reimbursed from the Escrow in an amount equal to the portion of any such Taxes allocable to the portion of such period ending on the Closing Date which shall be deemed to equal (i) in the case of Taxes that (x) are based upon or related to income or receipts or (y) imposed in connection with any sale or other transfer or assignment of property, the amount which would be payable if the Taxable year ended with the Closing Date, and (ii) in the case of other Taxes imposed on a periodic basis (including property Taxes), the amount of such Taxes for the entire period multiplied by a fraction the numerator of which is the number of calendar days in the period ending with the Closing Date and the denominator of which is the number of calendar days in the entire period. For purposes of the provisions of Section 8.1A of this Agreement, each portion of such period shall be deemed to be a taxable period (whether or not it is in fact a taxable period).

Section 8.3A Preparation and Filing of Tax Returns; Payment of Taxes.

(a) The Parent shall prepare and timely file or shall cause to be prepared and timely filed all Tax Returns for the Company that are required to be filed (taking into account extensions) after the Closing Date. The Parent shall make or cause to be made all payments required with respect to any such Tax Returns. The Parent shall be entitled to be reimbursed from the Escrow for all amounts due under this Section 8.3A for which the Parent is entitled (as determined under Section 8.2A hereof) at least two (2) Business Days prior to the date such amounts are due and payable to the Governmental Authority and the Parent shall sign and timely file, or cause to be signed and timely filed, all such Returns together with the amount of Tax shown thereon to be due. If the amount of such Tax liability for which the Parent is entitled to be reimbursed is the subject of a dispute pursuant to this Section 8.3A on the due date, then the Escrow Agent shall pay to the Parent the amount of such Tax that is not in dispute and will pay the Parent that portion of any additional amount owed, including any interest or penalties thereon when such amount is finally resolved and the Parent shall be required to pay to the relevant Governmental Authority only such amount of Taxes as are not in dispute.

(b) Any Tax Return required to be prepared and filed after the Closing Date for taxable periods (or portions thereof) before the Closing Date shall be prepared on a basis consistent with past practice to the extent permitted under applicable law. The Parent shall permit Cornerstone to review and comment on any Income Tax Return described in the preceding sentence prior to filing to the extent that the Parent may claim reimbursement from the Escrow with respect to any item thereon. The Parent shall provide such Income Tax Returns to Cornerstone 45 days before such Income Tax Returns are required to be filed (together with such additional information regarding such Income Tax Returns as may reasonably be requested by Cornerstone). Cornerstone may comment on such Income Tax Returns within 20 days following

receipt of the returns. The failure of Cornerstone to propose any changes to such Income Tax Returns within such 20 day period shall be deemed to constitute Cornerstone’s approval thereof. If Cornerstone provides comments within the 20 day period, the Parent (i) shall make such revisions as are requested by Cornerstone to the extent the Parent, in its discretion, determines that such change is permitted by applicable law and (ii) notify Cornerstone within 5 days following receipt of the Cornerstone’s comments of the revisions which it disputes. Such notice shall constitute a Response for purposes of Section 8.7A and the procedures therein shall apply. The Parent shall cause a copy of any other Tax Return required to be prepared and filed after the Closing Date that includes a taxable period (or portion thereof) before the Closing Date and as to which the Parent will claim reimbursement from the Escrow with respect to any item thereon to be sent to Cornerstone (to the extent practicable) at least five days before filing or such earlier date as preparation of such Tax return may reasonably allow. In the event Cornerstone wishes to dispute its liability for a portion or all of such Tax reported on such Tax return, it shall send a notice to the Parent within ten days after receipt of the Tax Return. Such notice shall constitute a Response for purposes of Section 8.7A and the procedures therein shall apply.

(c) The Parent and Cornerstone agree to promptly notify the Escrow Agent in writing to release to the Parent any amounts for which the Parent is authorized to be reimbursed from the Escrow hereunder.

Section 8.4A Audits, Assessments, Etc.

Whenever any Governmental Authority sends a notice of an audit, initiates an examination of the Company or any Subsidiary, or otherwise asserts a claim, makes an assessment, or disputes the amount of Taxes for which the Buyer Indemnitees may be entitled to reimbursement from the Escrow, the Parent shall promptly inform Cornerstone. The failure of the Parent to notify Cornerstone promptly shall not affect the rights of the Parent Indemnitees to reimbursement from the Escrow except to the extent of any damage or liability caused by or arising out of such failure. The Parent shall have the exclusive right to control any resulting proceedings. Cornerstone shall have the right to participate at its own expense, in such proceeding, or portion thereof, only to the extent such proceeding, or portion thereof, or determination, or portion thereof, affects the amount of Taxes for which Buyer Indemnitees may be entitled to reimbursement from the Escrow under this Agreement, and the Parent may settle any such proceeding or determination, or portion thereof, to the extent such proceeding or determination affects such amount of Taxes for which Buyer Indemnitees may be entitled to reimbursement from the Escrow under this Agreement only with the prior written consent of Cornerstone, which consent shall not be unreasonably withheld.

Section 8.5A Termination of Tax Sharing Agreements.

Any Tax sharing, Tax indemnity or Tax distribution agreements or similar arrangements with respect to or involving the Company shall, except as provided in Exhibit 8.5A, be terminated prior to the Closing Date and, after the Closing Date, the Parent, the Company, and their Affiliates shall not be bound thereby or have any liability thereunder for amounts due in respect of periods ending on or before the Closing Date.

Section 8.6A Indemnification Claims.

(a) Scope of Article VIIIA. Any claim relating to a breach of obligations under this Article VIIIA shall be pursued in accordance with the procedures for indemnification claims set forth in this Article VIIIA, and shall not otherwise be subject to the terms and conditions, set forth in Article VIII other than Sections 8.1, 8.4(a)(iii) and 8.6 thereof. To the extent there is any inconsistency between the terms of Article VIII and this Article VIIIA with respect to the allocation of responsibility between the Company, the Company Securityholders and the Parent for Taxes relating to the business of the Company and the Subsidiaries, the provisions of this Article VIIIA shall govern.

(b) Claim Procedure. For purposes of clarification, (i) claims for a breach of an obligation under this Article VIIIA may be made by a Buyer Indemnitee at any time on or before the second anniversary of the Closing Date, (ii) in order to seek indemnification under this Article VIIIA, a Buyer Indemnitee shall deliver a Claim Notice to Cornerstone and a copy of the Claim Notice to the Escrow Agent in the form prescribed by the Escrow Agreement, (iii) if funds have been retained in Escrow after the Termination Date (as defined in the Escrow Agreement) with respect to such Claim Notice, upon resolution of the matter the Parent and Cornerstone shall promptly deliver to the Escrow Agent a written notice executed by both parties instructing the Escrow Agent to disburse such retained funds pursuant to the terms of the Escrow Agreement in accordance with the resolution of the matter, and (iv) within 20 days after delivery of a Claim Notice, Cornerstone shall deliver to the Parent a Response in which Cornerstone shall: (1) agree that the Buyer Indemnitee is entitled to receive all of the Claimed Amount in which case Cornerstone and the Parent shall deliver to the Escrow Agent, within three days following the delivery of the Response, a written notice executed by Cornerstone and the Parent instructing the Escrow Agent to disburse the Claimed Amount (or, if lesser, the remaining Escrow Fund) to the Buyer Indemnitee, (2) agree that the Buyer Indemnitee is entitled to receive the Agreed Amount in which case Cornerstone and the Parent shall deliver to the Escrow Agent, within three days following the delivery of the Response, a written notice executed by Cornerstone and the Parent instructing the Escrow Agent to disburse the Agreed Amount (or, if lesser, the remaining Escrow Fund) to the Buyer Indemnitee, or (3) dispute that the Buyer Indemnitee is entitled to receive any of the Claimed Amount.

Section 8.7A Dispute Resolution.

During the 30-day period following the delivery of a Response that reflects a Dispute, the Parent and Cornerstone shall attempt in good faith to resolve the Dispute. If, at the end of the 30-day period, the Parent and Cornerstone have not resolved such Dispute, the Parent and Cornerstone shall refer the Dispute for determination to the Accounting Firm which shall act as an expert, not as an arbitrator, and the parties will be reasonably available and work diligently to facilitate the Accounting Firm to render a determination within a 20-day period immediately following the referral to them. A determination by the Accounting Firm with respect to any item of Dispute submitted to it will be binding on the Parent, Cornerstone and the Company Securityholders solely for purposes of determining the amount, if any, of reimbursement from the Escrow Funds.

The fees and expenses of the Accounting Firm with respect to each Dispute shall be borne as follows:

(i) If the Accounting Firm resolves the Dispute entirely in favor of Parent’s position, then all fees and expenses of the Accounting Firm shall be paid from the Escrow.

(ii) If the Accounting Firm resolves the Dispute entirely in favor of Cornerstone’s position, Parent will be responsible for all of the fees and expenses of the Accounting Firm.

(iii) If the Accounting Firm neither resolves the Dispute entirely in favor of the Parent’s position nor resolves the Dispute entirely in favor of Cornerstone’s position, then the portion of the fees and expenses of the Accounting Firm to be paid from Escrow shall be the amount of fees that bear the same ratio to the total amount of fees as the portion of the Disputed amount determined in favor of Parent bears to the total Tax amount in Dispute and Parent shall pay the remaining fees and expenses of the Accounting Firm.

Section 8.8A Limitations.

The rights of the Buyer Indemnitees under this Article VIIIA shall be limited to the Escrow Fund. Any such payment hereunder shall not be taken into account for purposes of determining the limitations under Section 8.4(a)(ii) (it being understood that, subject to the limitation of Section 8.4(a)(iii), the Buyer Indemnitees will be entitled to recover all Losses under this Article VIIIA (without regard to the Threshold)). Neither Cornerstone nor any Company Securityholder shall have any right of contribution against the Company with respect to any breach by the Company of any of its representations, warranties, covenants or agreements. No Buyer Indemnitee shall be entitled to be reimbursed from the Escrow for a Tax liability for Tax periods ended before the Closing Date if such liability results from the Company (or the Parent), after the Closing, taking an action (including filing or amending a Tax return) with the appropriate Tax authority with respect to such prior Tax period without first being contacted by such Tax authority; provided, however, that the Buyer Indemnitees shall be entitled to be reimbursed from the Escrow for a Tax liability for Tax periods (or portions thereof) ended before the Closing Date if such liability results from (i) the filing of any Tax returns for periods ending after the Closing Date and the filing with, or furnishing to, the appropriate Tax authority of registrations or related documents or requested information necessary or appropriate for compliance with the Tax laws for such periods, (ii) filing or amending returns or furnishing documents or information for any Tax period in response to or otherwise following contact initiated by a Tax authority, (iii) any filing made for the purpose of carrying back losses incurred after the Closing Date to prior periods, or (iv) any filing reporting the occurrence of the Merger.

ARTICLE IX-Representative of the Holders of Company Equity Securities Section 9.1 Authorization of Representative.

(a) Cornerstone is hereby appointed, authorized and empowered to act as a representative, for the benefit of the holders of Common Stock and Vested Options (such

Common Stock and Vested Options, collectively, the “Company Equity Securities”), as the exclusive agent and attorney-in-fact to act on behalf of each holder of Company Equity Securities, in connection with and to facilitate the consummation of the transactions contemplated hereby, including pursuant to the Escrow Agreement, which shall include the power and authority:

(i) to execute and deliver the Escrow Agreement (with such modifications or changes therein as to which Cornerstone, in its sole discretion, shall have consented) and to agree to such amendments or modifications thereto as Cornerstone, in its sole discretion, determines to be desirable;

(ii) to execute and deliver such waivers and consents in connection with this Agreement and the Escrow Agreement and the consummation of the transactions contemplated hereby and thereby as Cornerstone, in its sole discretion, may deem necessary or desirable;

(iii) to enforce and protect the rights and interests of the holders of Company Equity Securities (including Cornerstone, in its capacity as a stockholder in the Company) and to enforce and protect the rights and interests of Cornerstone arising out of or under or in any manner relating to this Agreement and the Escrow Agreement, and each other agreement, document, instrument or certificate referred to herein or therein or the transactions provided for herein or therein (including, without limitation, in connection with any and all claims for indemnification brought under Article VIII or Article VIIIA hereof), and to take any and all actions which Cornerstone believes are necessary or appropriate under the Escrow Agreement and/or this Agreement for and on behalf of the holders of Company Equity Securities, including, without limitation, asserting or pursuing any claim, action, proceeding or investigation (a “Claim”) against Parent, Newco and/or Surviving Corporation, defending any Third Party Claims or Claims by the Purchaser Indemnitees, consenting to, compromising or settling any such Claims, conducting negotiations with Parent, Surviving Corporation and their respective representatives regarding such Claims, and, in connection therewith, to (A) assert any claim or institute any action, proceeding or investigation; (B) investigate, defend, contest or litigate any claim, action, proceeding or investigation initiated by Parent, the Surviving Corporation or any other person, or by any federal, state or local Governmental Authority against Cornerstone and/or any of the holders of Company Equity Securities and/or the Escrow Funds, and receive process on behalf of any or all holders of Company Equity Securities in any such claim, action, proceeding or investigation and compromise or settle on such terms as Cornerstone shall determine to be appropriate, and give receipts, releases and discharges with respect to, any such claim, action, proceeding or investigation; (C) file any proofs of debt, claims and petitions as Cornerstone may deem advisable or necessary; (D) settle or compromise any claims asserted under the Escrow Agreement; and (E) file and prosecute appeals from any decision, judgment or award rendered in any such action, proceeding or investigation, it being understood that Cornerstone shall not have any obligation to take any such actions, and shall not have any liability for any failure to take any such actions;

(iv) to refrain from enforcing any right of the holders of Company Equity Securities or any of them and/or Cornerstone arising out of or under or in any manner relating to this Agreement, the Escrow Agreement or any other agreement, instrument or document in connection with the foregoing; provided, however, that no such failure to act on the part of Cornerstone, except as otherwise provided in this Agreement or in the Escrow Agreement, shall be deemed a waiver of any such right or interest by Cornerstone or by the holders of Company Equity Securities unless such waiver is in writing signed by the waiving party or by Cornerstone; and

(v) to make, execute, acknowledge and deliver all such other agreements, guarantees, orders, receipts, endorsements, notices, requests, instructions, certificates, stock powers, letters and other writings, and, in general, to do any and all things and to take any and all action that Cornerstone, in its sole and absolute discretion, may consider necessary or proper or convenient in connection with or to carry out the transactions contemplated by this Agreement, the Escrow Agreement, and all other agreements, documents or instruments referred to herein or therein or executed in connection herewith and therewith.

(b) Cornerstone shall not be entitled to any fee, commission or other compensation for the performance of its services under this Article IX, but shall be entitled to the payment of all its expenses incurred as representative. In connection with the foregoing, at the Closing, the Surviving Corporation shall transfer $250,000 (the “Expense Funds”) to Cornerstone, to be used by Cornerstone to pay expenses incurred by Cornerstone in its capacity as representative. Once Cornerstone determines, in its sole discretion, that it will not incur any additional expenses in its capacity as representative, then it will appropriately distribute the remaining unused Expense Funds, if any, to the Company Securityholders. In connection with this Agreement, the Escrow Agreement and any instrument, agreement or document relating hereto or thereto, and in exercising or failing to exercise all or any of the powers conferred upon Cornerstone hereunder (i) Cornerstone shall incur no responsibility whatsoever to any holders of Company Equity Securities by reason of any error in judgment or other act or omission performed or omitted hereunder or in connection with the Escrow Agreement or any such other agreement, instrument or document, excepting only responsibility for any act or failure to act which represents willful misconduct, and (ii) Cornerstone shall be entitled to rely on the advice of counsel, public accountants or other independent experts experienced in the matter at issue, and any error in judgment or other act or omission of Cornerstone pursuant to such advice shall in no event subject Cornerstone to liability to any holders of Company Equity Securities. Each holder of Company Equity Securities shall indemnify, pro rata based upon such holder’s share (excluding all Dissenting Common Shares) of the number of shares of Common Stock outstanding as of immediately prior to the Closing (on a fully-diluted basis excluding all unvested Options as of the Effective Time and excluding all Dissenting Common Shares), Cornerstone against all losses, damages, liabilities, claims, obligations, costs and expenses, including reasonable attorneys’, accountants’ and other experts’ fees and the amount of any judgment against them, of any nature whatsoever (including, but not limited to, any and all expense whatsoever reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened or any claims whatsoever), arising out of or in connection with any claim, investigation, challenge, action or proceeding or in connection with any appeal thereof, relating to the acts or omissions of Cornerstone hereunder, or under the Escrow Agreement or otherwise. The foregoing

indemnification shall not apply in the event of any action or proceeding which finally adjudicates the liability of Cornerstone hereunder for its willful misconduct. In the event of any indemnification hereunder, upon written notice from Cornerstone to the holders of Company Equity Securities as to the existence of a deficiency toward the payment of any such indemnification amount, each holder of Company Equity Securities shall promptly deliver to Cornerstone full payment of his or her ratable share of the amount of such deficiency based upon such holder’s share (excluding all Dissenting Common Shares) of the number of shares of Common Stock outstanding as of immediately prior to the Closing (on a fully-diluted basis excluding all unvested Options as of the Effective Time and excluding all Dissenting Common Shares).

(c) All of the indemnities, immunities and powers granted to Cornerstone under this Agreement shall survive the Effective Date and/or any termination of this Agreement and/or the Escrow Agreement.

(d) Parent and Surviving Corporation shall have the right to rely upon all actions taken or omitted to be taken by Cornerstone pursuant to this Agreement and the Escrow Agreement, all of which actions or omissions shall be legally binding upon the holders of Company Equity Securities.

(e) The grant of authority provided for herein (i) is coupled with an interest and shall be irrevocable and survive the death, incompetency, bankruptcy or liquidation of any holder of Company Equity Securities; and (ii) shall survive the consummation of the Merger.

(f) Should Cornerstone resign or be unable to serve, Cornerstone shall appoint a single substitute agent to take on the responsibility of the representative hereunder, whose appointment shall be effective on the date of Cornerstone’s resignation or incapacity.

ARTICLE X -Miscellaneous

Section 10.1 Notices. All notices or other communications required or permitted hereunder shall be in writing and shall be delivered personally, by facsimile or sent by certified, registered or express air mail, postage prepaid, and shall be deemed given when so delivered personally, or by facsimile, or if mailed, two days after the date of mailing, as follows:

If to Parent and Newco:

Envoy Corporation

c/o WebMD Corporation

River Drive Center 2

669 River Drive

Elmwood Park, NJ 07407

Attn: General Counsel

Telecopy: (201) 703-3443

with a copy to (which shall not constitute notice):

Wilmer Cutler Pickering Hale and Dorr LLP

60 State Street

Boston, MA 02109

Facsimile: (617) 526-5000

Attention: Jeffrey A. Stein, Esq.

If to the Company:

VIPS, Inc.

One West Pennsylvania Avenue

Towson, Maryland 21204

Attention: Chief Executive Officer

with a copy to:

Kirkland & Ellis LLP

153 East 53rd Street

New York, NY 10022-4675

Facsimile: (212) 446-4900

Attention: Frederick Tanne, Esq.

If to Cornerstone:

Cornerstone Equity Investors, LLC

717 Fifth Avenue, Suite 1100

New York, New York 10022

Facsimile: (212) 826-6798

Attention: Dana O’Brien

with a copy to:

Kirkland & Ellis LLP

153 East 53rd Street

New York, NY 10022-4675

Facsimile: (212) 446-4900

Attention: Frederick Tanne, Esq.

or to such other address as any party hereto shall notify the other parties hereto (as provided above) from time to time.

Section 10.2 Exhibits and Schedules. All exhibits and schedules hereto, or documents expressly incorporated into this Agreement, are hereby incorporated into this Agreement and are hereby made a part hereof as if set out in full in this Agreement. Disclosure of any fact or item in any Schedule shall not necessarily mean that such fact or item is material to the Company or its Subsidiaries individually or taken as a whole.

Section 10.3 Computation of Time. Whenever the last day for the exercise of any privilege or the discharge or any duty hereunder shall fall upon a Saturday, Sunday, or any date

on which banks in New York City, New York are authorized to be closed, the party having such privilege or duty may exercise such privilege or discharge such duty on the next succeeding day which is a regular business day.

Section 10.4 Expenses. Regardless of whether the transactions provided for in this Agreement are consummated, except as otherwise provided herein, each party hereto shall pay its own expenses incident to this Agreement and the transactions contemplated herein. Parent and Newco understand and acknowledge (but without limiting the adjustment to the Purchase Price effected thereby and the other adjustments set forth in this Agreement) that all Seller Expenses will be paid by the Company in cash at or prior to the Closing.

Section 10.5 Governing Law. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Maryland, without reference to the choice of law or conflicts of law principles thereof.

Section 10.6 Assignment; Successors and Assigns; No Third Party Rights. Except as otherwise provided herein, this Agreement may not, without the prior written consent of the other parties hereto, be assigned by operation of law or otherwise, and any attempted assignment shall be null and void. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors, permitted assigns and legal representatives. This Agreement shall be for the sole benefit of the parties to this Agreement and their respective heirs, successors, permitted assigns and legal representatives and is not intended, nor shall be construed, to give any Person, other than the parties hereto and their respective heirs, successors, assigns and legal representatives, any legal or equitable right, remedy or claim hereunder.

Section 10.7 Counterparts. This Agreement may be executed in one or more counterparts for the convenience of the parties hereto, each of which shall be deemed an original and all of which together will constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Agreement by facsimile shall be effective as delivery of a mutually executed counterpart to this Agreement.

Section 10.8 Titles and Headings. The titles, captions and table of contents in this Agreement are for reference purposes only, and shall not in any way define, limit, extend or describe the scope of this Agreement or otherwise affect the meaning or interpretation of this Agreement.

Section 10.9 Entire Agreement. This Agreement, including the Schedules attached thereto, and the Confidentiality Agreement, constitute the entire agreement among the parties with respect to the matters covered hereby and supersedes all previous written, oral or implied understandings among them with respect to such matters.

Section 10.10 Severability. The invalidity of any portion hereof shall not affect the validity, force or effect of the remaining portions hereof. If it is ever held that any restriction hereunder is too broad to permit enforcement of such restriction to its fullest extent, such restriction shall be enforced to the maximum extent permitted by law.

Section 10.11 No Strict Construction. Each of the parties hereto acknowledge that this Agreement has been prepared jointly by the parties hereto, and shall not be strictly construed against either party.

Section 10.12 Specific Performance. Each of the Company and Parent and Newco acknowledge that the rights of each party to consummate the transactions contemplated hereby are unique and recognize and affirm that in the event of a breach of this Agreement by any party, money damages may be inadequate and the non-breaching party may have no adequate remedy at law. Accordingly, the parties agree that such non-breaching party shall have the right, in addition to any other rights and remedies existing in their favor at law or in equity, to enforce their rights and the other party’s obligations hereunder not only by an action or actions for damages but also by an action or actions for specific performance, injunctive and/or other equitable relief (without posting of bond or other security).

Section 10.13 Waiver of Jury Trial. Each of the parties hereto waives any right it may have to trial by jury in respect of any litigation based on, arising out of, under or in connection with this Agreement or any course of conduct, course of dealing, verbal or written statement or action of any party hereto.

Section 10.14 Failure or Indulgence not Waiver. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or parties exercise of any such right preclude any other or further exercise thereof or any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available.

Section 10.15 Amendments. This Agreement may be amended, at any time prior to the Effective Time, by action taken by the respective boards of directors of the Company, and Parent and Newco. This Agreement (including the provisions of this Section 10.15) may not be amended or modified except by an instrument in writing signed on behalf of all of the parties required pursuant to the preceding sentence.

* * * * * * *

IN WITNESS WHEREOF, the parties hereto have caused this Agreement and Plan of Merger to be duly executed as of the day and year first above written.


		ENVOY CORPORATION

		By:		/s/ K. Robert Draughon Name: K. Robert Draughon Title: Executive Vice President


		VALOR, INC.

		By:		/s/ K. Robert Draughon Name: K. Robert Draughon Title: President


		VIPS, INC.
		By:		/s/ Jenny G. Morgan Name: Jenny G. Morgan Title: President and CEO

WebMD Corporation hereby covenants and agrees with the Company to cause Parent and Newco to perform their respective obligations hereunder, and WebMD Corporation hereby agrees that it shall be jointly and severally liable for all such obligations.

WEBMD CORPORATION


By:		/s/ K. Robert Draughon Name: K. Robert Draughon Title: Executive Vice President

Cornerstone Equity Investors, LLC hereby accepts its appointment as representative for the benefit of the holders of Company Equity Securities as set forth herein and agrees to the provisions hereunder relating thereto.

CORNERSTONE EQUITY INVESTORS, LLC


By:		/s/ Stephen L. Larson Name: Stephen L. Larson Title: Managing Director


Delaware		94-3236644
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)


		Page
		Number

Cautionary Statement Regarding Forward-Looking Statements			3
Part I	Financial Information
Item 1.	Financial Statements:
	Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003		4
	Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003		5
	Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003		6
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		51
Item 4.	Controls and Procedures		51
Part II	Other Information
Item 1.	Legal Proceedings		52
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		53
Item 6.	Exhibits and Reports on Form 8-K		53
Signatures			54
Exhibit Index			E-1
EX-2.1 AGREEMENT AND PLAN OF MERGER
EX-3.3 AMENDED AND RESTATED BYLAWS
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.2 SECTION 906 CERTIFICATION OF CFO


			June 30,			December 31,
			2004			2003

			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	206,611		$	63,298
	Short-term investments			606			207,383
	Accounts receivable, net			187,149			181,173
	Inventory			12,022			12,158
	Current portion of prepaid content and distribution services			16,114			18,116
	Other current assets			24,934			25,973

		Total current assets		447,436			508,101

Marketable debt securities				592,105			451,290
Marketable equity securities				3,206			4,744
Property and equipment, net				75,128			77,278
Prepaid content and distribution services				22,667			31,992
Goodwill				891,406			844,448
Intangible assets, net				185,175			184,130
Other assets				37,221			33,323

			$	2,254,344		$	2,135,306

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	9,767		$	10,390
	Accrued expenses			190,716			208,430
	Deferred revenue			101,516			86,708

		Total current liabilities		301,999			305,528

3 1/4% convertible subordinated notes due 2007				299,999			299,999
1.75% convertible subordinated notes due 2023				350,000			350,000
Other long-term liabilities				1,078			1,182

Commitments and contingencies

Convertible redeemable exchangeable preferred stock, $0.0001 par value; 5,000,000 shares authorized; 10,000 shares issued and outstanding at June 30, 2004				98,181			—
Stockholders’ equity:
	Common stock, $0.0001 par value; 900,000,000 shares authorized; 390,699,641 shares issued at June 30, 2004; 384,751,705 shares issued at December 31, 2003			39			38
	Additional paid-in capital			11,761,696			11,726,734
	Deferred stock compensation			(10,179	)		(4,683	)
	Treasury stock, at cost; 77,123,115 shares at June 30, 2004; 76,576,865 shares at December 31, 2003			(352,735	)		(347,858	)
	Accumulated deficit			(10,200,644	)		(10,212,054	)
	Accumulated other comprehensive income			4,910			16,420

		Total stockholders’ equity		1,203,087			1,178,597

			$	2,254,344		$	2,135,306



		Three Months Ended					Six Months Ended
		June 30,					June 30,

		2004		2003			2004		2003

Revenue		$	281,881	$	233,418		$	553,095	$	454,949
Costs and expenses:
	Cost of operations		163,961		135,441			326,603		261,286
	Development and engineering		12,991		10,403			24,087		21,320
	Sales, marketing, general and administrative		83,298		69,359			160,292		137,467
	Depreciation, amortization and other		13,148		14,944			25,733		41,864
	Legal expense		2,215		—			4,252		—
	Interest income		4,511		4,985			9,994		10,033
	Interest expense		4,838		2,926			9,586		5,741
	Other income, net		447		1,118			484		1,301

Income (loss) from continuing operations before income tax provision			6,388		6,448			13,020		(1,395	)
	Income tax provision		613		1,001			1,544		1,988

	Income (loss) from continuing operations		5,775		5,447			11,476		(3,383	)
	Loss from discontinued operations, net of income taxes		—		(31,717	)		—		(30,245	)

Net income (loss)		$	5,775	$	(26,270	)	$	11,476	$	(33,628	)

Basic income (loss) per common share:
	Income (loss) from continuing operations	$	0.02	$	0.02		$	0.04	$	(0.01	)
	Loss from discontinued operations		—		(0.11	)		—		(0.10	)

Net income (loss)		$	0.02	$	(0.09	)	$	0.04	$	(0.11	)

Diluted income (loss) per common share:
	Income (loss) from continuing operations	$	0.02	$	0.02		$	0.03	$	(0.01	)
	Loss from discontinued operations		—		(0.10	)		—		(0.10	)

Net income (loss)		$	0.02	$	(0.08	)	$	0.03	$	(0.11	)

Weighted-average shares outstanding used in computing income (loss) per common share:
	Basic		312,281		304,001			310,886		303,447

	Diluted		337,763		325,796			332,582		303,447



					Six Months Ended
					June 30,

					2004			2003

Cash flows from operating activities:
	Net income (loss)				$	11,476		$	(33,628	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Loss from discontinued operations				—			30,245
		Depreciation, amortization and other				25,733			41,864
		Amortization of debt issuance costs				1,498			774
		Non-cash content and distribution services				11,284			12,149
		Non-cash stock-based compensation				4,441			7,558
		Gain on investments				(363	)		(183	)
		Gain on the sale of property and equipment				(121	)		—
		Changes in operating assets and liabilities:
			Accounts receivable			(3,389	)		(5,743	)
			Inventory			136			(896	)
			Prepaid content and distribution services			79			(445	)
			Accounts payable			(900	)		1,930
			Accrued expenses			(19,179	)		(26,283	)
			Deferred revenue			10,899			478
			Other, net			(946	)		4,946

				Net cash provided by continuing operations		40,648			32,766
				Net cash provided by discontinued operations		—			4,553

				Net cash provided by operating activities		40,648			37,319

Cash flows from investing activities:
	Proceeds from maturities and sales of available-for-sale securities					329,163			2,631
	Proceeds from maturities and redemptions of held-to-maturity securities					—			102,919
	Purchases of available-for-sale securities					(274,600	)		(6,730	)
	Purchases of held-to-maturity securities					—			(124,931	)
	Proceeds received from the sale of property and equipment					417			—
	Purchases of property and equipment					(12,047	)		(8,861	)
	Cash paid in business combinations, net of cash acquired					(58,060	)		(14,701	)
	Other changes in equity of discontinued operations					—			(4,596	)

				Net cash used in continuing operations		(15,127	)		(54,269	)
				Net cash provided by discontinued operations		—			3,886

				Net cash used in investing activities		(15,127	)		(50,383	)

Cash flows from financing activities:
	Proceeds from issuance of common stock					25,011			28,578
	Payments of notes payable and other					(257	)		(25	)
	Net proceeds from issuance of convertible debt					—			290,500
	Net proceeds from issuance of preferred stock					98,115			—
	Purchases of treasury stock					(4,877	)		(18,125	)

				Net cash provided by continuing operations		117,992			300,928
				Net cash used in discontinued operations		—			(6,538	)

				Net cash provided by financing activities		117,992			294,390
Effect of exchange rates on cash						(200	)		663

Net increase in cash and cash equivalents						143,313			281,989
Changes in cash attributable to discontinued operations						—			(1,901	)
Cash and cash equivalents at beginning of period						63,298			175,596

Cash and cash equivalents at end of period					$	206,611		$	455,684



	Three Months
	Ended				Six Months Ended
	June 30,				June 30,

	2004		2003		2004		2003

Options, warrants and restricted stock		72,403		81,208		72,398		129,370
Convertible notes		55,129		51,880		55,129		51,880

		127,532		133,088		127,527		181,250


		Six Months Ended
		June 30, 2003

Revenue		$	522,949
Income from continuing operations		$	2,919
Net loss		$	(27,326	)
Basic income (loss) per common share:
	Income from continuing operations	$	0.01

	Net loss	$	(0.09	)

Diluted income (loss) per common share:
	Income from continuing operations	$	0.01

	Net loss	$	(0.08	)



	June 30, 2004				December 31, 2003

	Cost Basis		Fair Value		Cost Basis		Fair Value

Short-term investments	$	606	$	606	$	205,962	$	207,383
Marketable debt securities — long-term		595,073		592,105		445,810		451,290
Marketable equity securities — long-term		1,527		3,206		1,773		4,744


		Cost or
		Amortized Cost		Fair Value

Due in one year or less		$	606	$	606
Due after one year through five years			595,073		592,105

	Total	$	595,679	$	592,711


		Transaction			Physician			Portal			Plastic
		Services			Services			Services			Technologies		Total

Balance as of January 1, 2003		$	341,967		$	182,085		$	23,705		$	38,286	$	586,043
	Goodwill recorded during the period		244,021			1,469			12,731			—		258,221
	Adjustments to finalize purchase price allocations		—			(745	)		407			—		(338	)
	Effects of exchange rates		—			—			—			522		522

Balance as of December 31, 2003			585,988			182,809			36,843			38,808		844,448
	Goodwill recorded during the period		45,835			—			1,500			—		47,335
	Adjustments to finalize purchase price allocations		(325	)		—			(116	)		—		(441	)
	Effects of exchange rates		—			—			—			64		64

Balance as of June 30, 2004		$	631,498		$	182,809		$	38,227		$	38,872	$	891,406



		June 30, 2004							December 31, 2003

		Gross Carrying		Accumulated					Gross Carrying		Accumulated
		Amount		Amortization			Net		Amount		Amortization			Net

Customer lists		$	329,604	$	(211,485	)	$	118,119	$	325,160	$	(206,163	)	$	118,997
Trade names			30,316		(23,175	)		7,141		30,316		(19,756	)		10,560
Technology and patents			200,018		(149,715	)		50,303		191,318		(146,905	)		44,413
Non-compete agreements			11,060		(1,448	)		9,612		11,019		(859	)		10,160

	Total	$	570,998	$	(385,823	)	$	185,175	$	557,813	$	(373,683	)	$	184,130


Year ending December 31, 2004 (July 1st to December 31st)			12,537
2005			20,742
2006			17,760
2007			16,949
2008			16,462
Thereafter			100,725


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



		Three Months Ended June 30,										Six Months Ended June 30,


		2004				2003						2004				2003

		$		%		$			%			$		%		$			%

Revenue			281,881		100.0		233,418			100.0			553,095		100.0		454,949			100.0
Cost and expenses:
	Cost of operations		163,961		58.2		135,441			58.0			326,603		59.0		261,286			57.4
	Development and engineering		12,991		4.6		10,403			4.5			24,087		4.4		21,320			4.7
	Sales, marketing, general and administrative		83,298		29.5		69,359			29.7			160,292		29.0		137,467			30.2
	Depreciation, amortization and other		13,148		4.7		14,944			6.4			25,733		4.6		41,864			9.2
	Legal expense		2,215		0.8		—			—			4,252		0.8		—			—
	Interest income		4,511		1.6		4,985			2.1			9,994		1.8		10,033			2.2
	Interest expense		4,838		1.7		2,926			1.2			9,586		1.7		5,741			1.3
	Other income, net		447		0.2		1,118			0.5			484		0.1		1,301			0.3

Income (loss) from continuing operations before income tax provision			6,388		2.3		6,448			2.8			13,020		2.4		(1,395	)		(0.3	)
	Income tax provision		613		0.3		1,001			0.5			1,544		0.3		1,988			0.4

	Income (loss) from continuing operations		5,775		2.0		5,447			2.3			11,476		2.1		(3,383	)		(0.7	)
	Loss from discontinued operations		—		—		(31,717	)		(13.6	)		—		—		(30,245	)		(6.7	)

Net income (loss)			5,775		2.0		(26,270	)		(11.3	)		11,476		2.1		(33,628	)		(7.4	)


	WebMD Envoy’s financial results could be adversely affected if payers conduct electronic data interchange, or EDI, transactions without using a clearinghouse or if their ability to do so allows them to terminate or modify their relationships with us.


1.	Summary of Significant Accounting Policies


2.	Business Combinations and Significant Transactions


3.	Discontinued Operations


5.	Convertible Subordinated Notes


	We may lose customers that compete with one or more of our businesses or because they perform services internally instead of using a third party provider


	WebMD Envoy’s transaction volume and financial results could be adversely affected if we do not maintain relationships with practice management system vendors and large submitters of healthcare EDI transactions


	WebMD Practice Services faces competition in providing support services to owners of The Medical Manager and other systems


	Loss of a small number of sponsors could have a material adverse effect on WebMD Health’s revenues


	Third parties may bring claims as a result of the activities of our strategic partners or resellers of our products and services


	Our ability to generate revenue could suffer if we do not continue to update and improve our existing products and services and develop new ones


	Developing and implementing new or updated products and services may take longer and cost more than expected


	New or updated products and services will not become profitable unless they achieve sufficient levels of market acceptance


	Achieving market acceptance of new or updated products and services is likely to require significant efforts and expenditures


	We could be subject to breach of warranty, product liability or other claims if our software products, information technology systems or transmission systems contain errors or experience failures


	Performance problems with WebMD Envoy’s systems or system failures could cause us to lose customers or cause customers to reduce the number of transactions we process for them


	During times when we are making significant changes to our products and services, there are increased risks of performance problems


	If our systems or the Internet experience security breaches or are otherwise perceived to be insecure, our business could suffer


	WebMD Envoy’s ability to provide transaction services depends on services provided by telecommunications companies


	Developments in the healthcare industry could adversely affect our business


	The HIPAA Transaction and Code Sets Standards creates risks and challenges with respect to our compliance efforts, business strategies and customer relationships


	Other regulations under HIPAA create risks and challenges with respect to our compliance efforts, business strategies and customer relationships


	Changes in government regulation or industry guidelines could adversely affect our continuing medical education offerings


	Other government regulation of healthcare and healthcare information technology creates risks and challenges with respect to our compliance efforts and our business strategies


	Government regulation of the Internet could adversely affect our business