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®, dakota imaging^TM, 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, ViPS^SM, 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 36, 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 36 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 nine months ended September 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 U.S. generally accepted accounting principles have been condensed or omitted under the Securities and Exchange Commission’s rules and regulations.

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 U.S. generally accepted accounting principles 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 income taxes and related deferred tax accounts, certain accrued expenses, revenue recognition, 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 September 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 nine months ended September 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 August 11, 2004, the Company completed its acquisition of 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 broad range of solutions for claims processing, provider performance measurement, quality improvement, fraud detection, disease management and predictive modeling. The total purchase consideration for ViPS was approximately $166,604 comprised of $165,204 in cash, net of cash acquired, and $1,400 of estimated acquisition costs, subject to customary post-closing adjustments. 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 $66,342 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 $56,300 relating to customer relationships with estimated useful lives ranging from ten to fifteen years, $36,000 relating to acquired technology with estimated useful lives of five years and $400 relating to a trade name with an estimated useful life of one year. The financial information of ViPS has been included in the financial statements of the Company from August 11, 2004, the closing date of the acquisition, and is included in the Transaction Services segment.

On July 16, 2004, the Company acquired Epor, Inc. (“Epor”), a privately held company based in Los Angeles, California. Epor manufactures porous plastic implant products for use in aesthetic and reconstructive surgery of the head and face. The total purchase consideration for Epor was approximately $2,547. The financial information of Epor has been included in the financial statements of the Company from July 16, 2004, the closing date of the acquisition, and is included in the Plastic Technologies segment.

On April 30, 2004, the Company acquired Dakota Imaging, Inc. (“Dakota”), a privately held 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-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 $4,500 relating to customer relationships with estimated useful lives of ten years and $8,600 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 nine months ended September 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 $277,519, comprised of $276,065 in cash and $1,454 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 allocation of the purchase price, goodwill of $3,482 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 $61,128 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 $8,545 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 has agreed to pay up to $675 beginning in 2004 if some of the acquired companies meet certain financial milestones. During the three months ended September 30, 2004, the Company paid $50 in cash as a result of the achievement of 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 allocation of the purchase prices, goodwill of $1,519 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 nine months ended September 30, 2004 and 2003 gives effect to the acquisitions of ABF, Medifax and ViPS, 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 on 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 nine months ended September 30, 2004 and September 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 through August 1, 2003 were as follows:

After the mergers with Medical Manager Corporation, CareInsite, Inc. and OnHealth Network Company in September 2000, the Company’s Board of Directors approved a restructuring and integration plan, with the objective of eliminating duplication and redundancies that resulted from these and certain prior acquisitions and consolidating the Company’s operational infrastructure. The Company’s restructuring and integration efforts continued in 2001, and a plan to include the impact of eliminating functions resulting from the Company’s acquisition of Medscape in December 2001 was initiated. During the three months ended September 30, 2004, the Company recorded an incremental restructuring charge, with respect to the 2000 restructuring plan, of $4,535 in connection with the settlement of a lawsuit against the landlord of a property that the Company leased in 2000, but never occupied, for its then Santa Clara, California operations. The remainder of the settlement cost was previously expensed as part of the 2000

restructuring plan. Under the terms of the settlement, the original lease, which provided for aggregate remaining lease payments of approximately $45,000 over the next eight years, was terminated and the Company will make a cash payment to the landlord of approximately $23,000 during the three months ending December 31, 2004. The Company’s remaining obligations related to its 2000 and 2001 restructuring plans are not material to the Company’s financial position and have been included in accrued expenses in the accompanying consolidated balance sheet.

On March 19, 2004, the Company issued $100,000 of Convertible Redeemable Exchangeable Preferred Stock (the “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.

Holders of the Preferred Stock have the right to vote, together with the holders of the Company’s common stock on an as converted to common stock basis, on matters that are put to a vote of the holders common stock. The Certificate of Designations for the Preferred Stock also provides that the Company will not, without the prior approval of holders of 75% of the shares of Preferred Stock then outstanding, voting as a separate class, issue any additional shares of the Preferred Stock, or create any other class or series of capital stock that ranks senior to or on a parity with the 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 September 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 September 23, 2004, two related proposals were approved at the Company’s annual meeting of stockholders. The first proposal reduced the number of authorized shares of the Company’s Convertible Redeemable Exchangeable Preferred Stock from 5,000,000 to 10,000 (the amount outstanding). The other proposal authorized the Company’s Board of Directors to approve the issuance of up to 4,990,000 shares of preferred stock from time to time in one or more series, to establish from time to time the number of shares to be included in any such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations and restrictions thereof. No shares have been issued pursuant to that authority and the 10,000 shares of Convertible Redeemable Exchangeable Preferred Stock are the only shares of preferred stock of the Company that are outstanding.

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. The maximum aggregate amount of purchases under the Program was subsequently increased to $100,000, $150,000 and $200,000 on November 2, 2001, November 7, 2002 and August 19, 2004, respectively. As of September 30, 2004, the Company had repurchased a total of 25,130,962 shares at a cost of approximately $128,625 under the Program, of which 2,817,606 shares were repurchased during the nine months ended September 30, 2004 for an aggregate purchase price of $22,267 and 2,271,356 shares were repurchased during the three months ended September 30, 2004 for an aggregate purchase price of $17,390. As of September 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 2,069,496 shares were repurchased during the nine months ended September 30, 2003 for an aggregate purchase price of $18,125. No shares were repurchased during the three months ended September 30, 2003. These repurchased shares are reflected as treasury stock in the accompanying consolidated balance sheets. As of September 30, 2004, the Company had $71,375 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 restructuring, 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 Business Services (formerly known as WebMD Envoy) provides healthcare reimbursement cycle management services for healthcare providers and claims management services for healthcare payers, together with related technology solutions. WebMD Business Services transmits transactions electronically between healthcare payers and providers and provides healthcare payers with transaction processing technology, decision support solutions, consulting services and outsourcing services, including document management services for transaction processing and print-and-mail services for the distribution of checks, remittance advice and explanation of benefits. WebMD Business Services also provides automated patient billing services to healthcare providers, including statement printing and mailing services.

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, both directly and through its relationships with leading general consumer Internet portals. WebMD Health, through its Medscape subsidiary, also provides online healthcare information, educational programs and related resources for healthcare professionals, including online continuing medical education, or CME. 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. 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) are presented below:

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

Intangible assets subject to amortization consisted of the following as of September 30, 2004 and December 31, 2003:

Amortization expense was $7,949 and $20,089 for the three and nine months ended September 30, 2004, respectively, and $3,553 and $32,811 for the three and nine months ended September 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 accounting improprieties 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. The Company understands that the SEC is also conducting a formal investigation into 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 investigations, it expects that they may continue to be significant. For the three and nine months ended September 30, 2004, those expenses are reflected as “Legal Expense” 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.

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 September 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.


	•	Transaction Services or WebMD Business Services (formerly known as WebMD Envoy). We provide healthcare reimbursement cycle management services for healthcare providers and claims management services for healthcare payers, together with related technology solutions. We transmit transactions electronically between healthcare payers and providers and provide healthcare payers with transaction processing technology, decision support solutions, consulting services and outsourcing services, including document management services for transaction processing and print-and-mail services for the distribution of checks, remittance advice and explanation of benefits. We


		also provide automated patient billing services to healthcare providers, including statement printing and mailing services.

	•	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, both directly and through our relationships with leading general consumer Internet portals. WebMD Health, through its Medscape subsidiary, also provides online healthcare information, educational programs and related resources for healthcare professionals, including online continuing medical education, or CME. 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. 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 Business Services and Medical Manager Network Services. In order to implement the Transaction Standards, WebMD Business Services 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 problems as they occur.

Diversification of WebMD Business Services; Cross-Selling Opportunities. We are continuing our efforts to transform WebMD Business Services (whose name was recently changed from WebMD Envoy) from an electronic transactions clearinghouse to a provider of healthcare reimbursement cycle management services for healthcare providers and claims management services for healthcare payers. The new name is intended to reflect this transformation, which in turn is intended to allow us to provide the benefits of economies of scale to our customers in various stages of the healthcare reimbursement cycle. 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

We expect that, over time, the revenue and earnings from providing electronic clearinghouse services for healthcare transactions, on their own, may decline. However, we believe that the revenue and earnings of our business process outsourcing and other transaction-related services, in conjunction with our clearinghouse services, is likely to offset any such decline. We are working to cross-sell our additional services to healthcare payers. However, we believe that it is possible that, in the first half of 2005, revenue from clearinghouse services will decline faster than we are able to increase the revenue from our additional services, in part because of the length of the implementation cycle for the additional services. We intend to continue the transformation of WebMD Business Services by developing or acquiring additional transaction-related services and updating our existing ones. Our strategy is to continue to increase the value we are able to provide our payer and provider customers in all aspects of their adoption and implementation of information technology solutions for healthcare transactions.

Introduction of New Clinical Software. Healthcare providers record, use and share various types of clinical data about their patients, including patient histories, examination notes, lab results, medication orders and referrals. Much of this data is currently recorded in handwritten or printed form on paper records, often referred to as patient charts. As the amount of patient information maintained by a practice increases, so do the logistical challenges of moving paper charts from site to site and physician to physician. Many healthcare organizations are finding that the most promising solution to this challenge is the use of electronic medical records. These systems allow providers to share patient charts and other medical records, access them simultaneously and view them from remote locations. WebMD Practice Services has recently released a new suite of clinical software called Intergy EHR. We believe that, in light of the increasing importance of clinical software to healthcare providers, WebMD Practice Services’ success in retaining existing practice management system customers and attracting new customers may depend, in substantial part, on their response to Intergy EHR.

WebMD Health IPO. WebMD has announced that it plans to establish WebMD Health, its Portal Services segment, as a publicly traded company. WebMD stated that, based on the recommendations of its outside advisors, WebMD has decided to take the steps necessary for a sale of approximately 10% of the equity of WebMD Health in an initial public offering. WebMD expects to file a registration statement for the WebMD Health IPO in early 2005, following the release of its year-end financial statements, subject to the Board’s evaluation of market conditions at that time. WebMD does not anticipate making any decisions until after the IPO is completed regarding whether any additional equity will be sold or any other subsequent transaction will occur. WebMD’s Board of Directors has formed a special committee, consisting of Martin Wygod, Mark Adler and Neil Dimick, to provide oversight of the preparations for the WebMD Health IPO.

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 U.S. generally accepted accounting principles. 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

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 Business Services. 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. Healthcare payers also pay us fees for utilizing our software products and related post-contract customer support agreements, which we generally recognize ratably over the term of the maintenance and license agreements. Certain governmental agencies pay us fees for software maintenance and consulting services, which we recognize as we perform those services.

	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, 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. In addition, in connection with our Medscape portal, our customers provide funding for online education programs for healthcare professionals, including online CME. 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 September 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 September 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.

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: transaction processing for medical, dental and pharmacy claims; transaction processing technology, decision support solutions, consulting services and outsourcing services for healthcare payers, including document management services for transaction processing and print-and-mail services for the distribution of checks, remittance advice and explanation of benefits; and automated patient billing services for healthcare providers, including statement printing and mailing services. Additionally, we provide software products and related maintenance contracts to Blue Cross Blue Shield and commercial healthcare payers and we perform software maintenance and consulting services for governmental agencies. 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 nine months ended September 30, 2004 to the three and nine months ended September 30, 2003. Amounts are in thousands unless otherwise noted.

Revenues for the three months ended September 30, 2004 were $299,615, compared to $250,635 for the three months ended September 30, 2003. Each operating segment experienced growth during the three months ended September 30, 2004, compared to a year ago. The Transaction Services, Portal Services, Physician Services and Plastic Technologies segments were responsible for $42,666, $5,853, $1,437 and $292, respectively, of the revenue increase for the quarter, which was partially offset by an increase of $1,268 in inter-segment eliminations.

Revenues for the nine months ended September 30, 2004 were $852,710, compared to $705,584 for the nine months ended September 30, 2003. The Transaction Services, Portal Services and Plastic Technologies segments were responsible for $138,968, $15,296 and $3,528, respectively, of the revenue increase for the nine-month period, which was partially offset by a decrease in revenue of $4,592 in Physician Services and an increase of $6,074 in inter-segment eliminations.

Revenue from customers acquired through the 2004 Acquisitions and 2003 Acquisitions contributed $30,050 to the overall increase in revenue of $48,980, for the three months ended September 30, 2004, and $109,702 to the overall increase in revenue of $147,126, for the nine months ended September 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 as practicable, and only revenue recognized during the first twelve months following the quarter in which the acquisition closed is considered to be revenue from acquired customers.

Cost of Operations. Cost of operations was $168,571 and $495,174 for the three and nine months ended September 30, 2004, compared to $149,270 and $410,556 in the prior year periods. Our cost of operations represented 56.3% and 58.1% of revenues for the three and nine months ended September 30, 2004, compared to 59.6% and 58.2% for the three and nine months ended September 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 nine months ended September 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. Also favorably impacting cost of operations as a percentage of revenue for the three and nine months ended September 30, 2004, when compared to a year ago, was the impact of productivity gains as a result of streamlining our delivery and service infrastructure within the Practice Services operating segment. Partially offsetting these items for both the three and nine months ended September 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. Additionally, we experienced 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 during the 2004 periods, when compared to a year ago. Included in cost of operations were non-cash expenses related to content and distribution services of $104 and $705 during the three and nine months ended September 30, 2004 compared to $1,105 and $1,932 during the three and nine months ended September 30, 2003, respectively.

Development and Engineering. Development and engineering expense was $14,392 and $38,479 for the three and nine months ended September 30, 2004, compared to $11,334 and $32,654 in the prior year periods. The increase in development and engineering expense was primarily attributable to the development and engineering expense of the Medifax and Dakota operations during both the three and nine months ended September 30, 2004 which, due to the timing of these acquisitions, were not included in our results during the respective 2003 periods. The ABF operations had a similar impact on development and engineering expense during the nine months ended September 30, 2004 compared to a year ago. Also contributing to the increase in development and engineering expenses during the 2004 periods, when compared to a year ago, is the increased investment in our product development efforts within the Practice Services operating segment.

Sales, Marketing, General and Administrative. Sales, marketing, general and administrative expense was $84,762 and $245,054 for the three and nine months ended September 30, 2004, compared to $72,450 and $209,917 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 $3,505 and $14,188 for the three and nine months ended September 30, 2004, compared to $4,970 and $16,292 for the prior year periods. Non-cash stock compensation was $2,800 and $7,241 for the three and nine months ended September 30, 2004, compared to $3,390 and $10,948 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 and nine months ended September 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 $78,457 and $223,625 or 26.2% and 26.2% of revenue, for the three and nine months ended September 30, 2004, compared to $64,090 and $182,677, or 25.6% and 25.9% of revenue, for the prior year periods. The increase in sales, marketing, general and administrative expense for both the three and nine months ended September 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 nine months ended September 30, 2004 was the impact of

Depreciation, Amortization and Other. Depreciation, amortization and other expense increased to $15,189 for the three months ended September 30, 2004, compared to $11,097 in the prior year period. The increase was the result of the amortization expense of the tangible and intangible assets related to the Medifax, ViPS and Dakota acquisitions, which, due to the timing of these acquisitions, did not exist in the same period a year ago. Depreciation, amortization and other expense during the nine months ended September 30, 2004 was $40,922 compared to $52,961 during the nine months ended September 30, 2003. This decrease was primarily due to intangible assets relating to certain acquisitions made in 2000 becoming fully amortized since the beginning of the prior year periods. This decrease was partially offset by depreciation and amortization expense related to the tangible and intangible assets acquired through our 2004 and 2003 Acquisitions.

Legal Expense. Legal expense was $2,325 and $6,577 for the three and nine months ended September 30, 2004 compared to $493 for both the three and nine months ended September 30, 2003. Legal expense 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.

Restructuring and Integration Charge. Restructuring and integration charge of $4,535 represents an incremental charge taken in connection with the settlement of a lawsuit against the landlord of a property leased in 2000, but never occupied. The remaining cost of the settlement was previously expensed in connection with the restructuring and integration plan that we announced in September 2000.

Interest Income. Interest income was $4,512 and $14,506 during the three and nine months ended September 30, 2004, compared to $6,401 and $16,434 in the prior year periods. This decrease was due to lower average investment balances as well as lower average interest rates.

Interest Expense. Interest expense was $4,843 and $14,429 for the three and nine months ended September 30, 2004, compared to $4,703 and $10,444 for the prior year periods. While interest expense was relatively unchanged for the three months ended September 30, 2004, compared to the prior year period, the increase for the nine months ended September 30, 2004, compared to the prior year period, was primarily 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 nine months ended September 30, 2004 and 2003 primarily related to net gains on the sale of marketable securities. Included in other income during the nine months ended September 30, 2003 was a benefit of $1,118, related to a state tax refund which applied to a pre-acquisition tax year of a company we acquired.

Income Tax Provision. The income tax provision of $1,435 and $2,979 for the three and nine months ended September 30, 2004, and $1,273 and $3,261 for the three and nine months ended September 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 nine months ended September 30, 2003 represents the operating results of the discontinued units of the Plastic Technologies segment as well as a loss of $3,491 recognized in connection with their disposal on August 1, 2003. Included in the loss from discontinued operations during the nine months ended September 30, 2003 was 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 restructuring, taxes, non-cash and other items. Non-cash and other items include depreciation, amortization, costs and expenses related to the investigation by the United States Attorney for the District

Summarized financial information for each of our operating segments and a reconciliation to net income (loss) are 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 nine months ended September 30, 2004 to the three and nine months ended September 30, 2003.

Transaction Services. Revenues were $174,643 and $504,459 for the three and nine months ended September 30, 2004, compared to $131,977 and $365,491 for the prior year periods. Revenues from customers acquired through the 2004 Acquisitions and 2003 Acquisitions contributed $29,745 and $107,939 to the increase for the three and nine months ended September 30, 2004. The remaining increases of $12,921 and $31,029 for the three and nine months ended September 30, 2004 were primarily

Income before restructuring, taxes, non-cash and other items was $31,750 and $90,514 for the three and nine months ended September 30, 2004, an increase of $9,983 or 45.9% and $22,354 or 32.8%, compared to the prior year periods. As a percentage of revenue, income before restructuring, taxes, non-cash and other items increased to 18.2% for the three months ended September 30, 2004, compared to 16.5% a year ago, and decreased to 17.9% for the nine months ended September 30, 2004, compared to 18.6% a year ago. The acquisitions of Medifax, ABF and ViPS had a favorable impact on operating margins for both the three and nine months ended September 30, 2004. Offsetting the higher margins of these acquisitions were 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.

Physician Services. Revenues were $76,924 and $219,703 for the three and nine months ended September 30, 2004, an increase (decrease) of $1,437 and $(4,592) compared to the prior year periods. The increase in revenues for the three months ended September 30, 2004, compared to a year ago, is primarily due to an increase in Network Services revenue offset by lower systems sales. Network Services revenues were also higher during the nine months ended September 30, 2004, compared to a year ago, however that increase was more than offset by lower systems sales. Systems sales have been impacted by longer and more complex sales cycles and from HIPAA implementation and other transition challenges related to our “all-payer” transaction services. Revenue from customers acquired through the 2004 Acquisitions and 2003 Acquisitions was $305 and $1,263 for the three and nine months ended September 30, 2004.

Income before restructuring, taxes, non-cash and other items was $5,856 and $8,978 for the three and nine months ended September 30, 2004, compared to $3,686 and $16,342 in the prior year periods. As a percentage of revenue, income before restructuring, taxes, non-cash and other items was 7.6% and 4.1% for the three and nine months ended September 30, 2004, compared to 4.9% and 7.3% for the prior year periods. Lower systems sales combined with lower margins, particularly during the March 2004 and June 2004 quarters, were primarily responsible for the operating margin of 4.1% during the nine months ended September 30, 2004. Productivity gains combined with the increased revenues during the three months ended September 30, 2004 have resulted in an increased margin of 7.6% for this period.

Portal Services. Revenues were $37,017 and $95,178 for the three and nine months ended September 30, 2004, an increase of $5,853 or 18.8% and $15,296 or 19.1%, compared to the prior year periods. The increase in revenues for the three months ended September 30, 2004, compared to a year ago, is due to increased sponsorship and advertising revenue, in addition to an increase in revenues from large employers and commercial payers for our web-based health and benefit management solutions. The increase in revenues for the nine months ended September 30, 2004, compared to a year ago, is the result of growth in online revenues from pharmaceutical and medical companies and increased revenues from large employers and commercial payers. Revenues from customers acquired through the 2003 Acquisitions contributed $500 to the increase in Portal Services revenue for the nine months ended September 30, 2004.

Income before restructuring, taxes, non-cash and other items was $10,040 and $22,208 for the three and nine months ended September 30, 2004, an increase of $1,328 or 15.2% and $3,286 or 17.4%, compared to the prior year periods. As a percentage of revenue, income before restructuring, taxes, non-cash and other items was 27.1% and 23.3% for the three and nine months ended September 30, 2004, compared to 28.0% and 23.7% for the prior year periods. The decrease as a percentage of revenue for the three and nine months ended September 30, 2004, compared to a year ago, was primarily the result of increased compensation costs offset by reduced marketing expenses.

Plastic Technologies. Revenues were $19,385 and $58,543 for the three and nine months ended September 30, 2004, compared to $19,093 and $55,015 for the prior year periods. The increase for the three and nine months ended September 30, 2004, compared to a year ago, was primarily due to increased

Income before restructuring, taxes, non-cash and other items was $5,823 and $17,140 for the three and nine months ended September 30, 2004, compared to $5,690 and $15,857 in the prior year periods. As a percentage of revenue, income before restructuring, taxes, non-cash and other items was 30.0% and 29.3% for the three and nine months ended September 30, 2004, compared to 29.8% and 28.8% for the prior year periods. These increases as a percentage of revenue were primarily due to the leveraging effect of certain fixed manufacturing costs.

Corporate includes expenses shared across all operating segments, such as executive, corporate finance, legal, human resources and risk management. Corporate expenses increased to $15,170 and $42,703 during the three and nine months ended September 30, 2004, compared to $12,809 and $37,652 in the prior year periods. As a percentage of revenue, corporate expenses were 5.1% and 5.0% during the three and nine months ended September 30, 2004, compared to 5.1% and 5.3% for the same periods a year ago. While the dollar amounts of corporate expenses have increased when compared to a year ago, these expenses comprise a slightly lower percentage of revenue. Contributing to the increase in the dollar amount of these expenses, when compared to a year ago, were 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 nine months ended September 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 September 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 September 30, 2004, we had $133,988 in cash and cash equivalents and short-term investments and working capital of $68,212. Additionally, we had long-term investments of $515,096 in marketable debt securities and $3,373 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 $79,200 for the nine months ended September 30, 2004, compared to $84,025 for the nine months ended September 30, 2003. The cash provided by operating activities for the nine months ended September 30, 2004 was primarily attributable to the net income of $19,645 and non-cash charges of $65,311, partially offset by net changes in operating assets and liabilities of $5,178. 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 nine months ended September 30, 2003 was primarily attributable to non-cash charges of $83,638 and the loss from discontinued operations of $33,611, partially offset by a net loss of $27,539 and net changes in operating assets and liabilities of $7,593. 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 $140,209 for the nine months ended September 30, 2004, compared to $530,015 for the nine months ended September 30, 2003. Cash used in investing activities for the nine months ended September 30, 2004 related to $274,600 of purchases of available-for-sale securities and cash paid in relation to business combinations of $225,375, net of cash acquired, offset by $384,238 of proceeds from maturities and sales of available-for-sale securities. Cash used in investing activities for the nine months ended September 30, 2003 primarily related to $597,867 of purchases of available-for-sale

Cash provided by financing activities was $105,943 for the nine months ended September 30, 2004, compared to $349,610 for the nine months ended September 30, 2003. Cash provided by financing activities for the nine months ended September 30, 2004 principally related to the net proceeds of $98,115 from the issuance of our Convertible Redeemable Exchangeable Preferred Stock and proceeds of $30,528 primarily related to exercises of employee stock options. Cash provided by financing activities for the nine months ended September 30, 2003 primarily related to $339,125 of net proceeds from the issuance of our 1.75% Convertible Subordinated Notes on June 25, 2003 and July 7, 2003. During the nine months ended September 30, 2004 and 2003, $22,267 and $18,125 was used for repurchases of our common stock.

As of September 30, 2004, we did not have any material commitments for capital expenditures. Our principal commitments at September 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 $163,400, as of September 30, 2004, related to completed acquisitions.

Since December 31, 2003, our contractual obligations, contingencies and commitments for minimum lease payment obligations under non-cancelable operating leases have increased approximately $40,000 as a result of new operating leases related to our Tampa, Florida and New York, New York operations and approximately $13,000 as a result of new operating leases related to our acquisitions completed in 2004. Offsetting these increases was the termination of a remaining obligation of $45,000 relating to an operating lease for a property we leased in 2000, for our then Santa Clara, California operations. We will pay approximately $23,000 during the three months ending December 31, 2004, in connection with the termination of the Santa Clara, California lease.

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 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 may 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. 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.

As described above under “— Introduction — Background Information on Certain Trends and Strategies — WebMD Health IPO,” WebMD plans to take the steps necessary for a sale of approximately 10% of the equity of WebMD Health in an initial public offering in early 2005, following the release of its year-end financial statements, subject to the WebMD Board’s evaluation of market conditions at that time. WebMD does not anticipate making any decisions until after the IPO is completed regarding whether any additional equity will be sold or any other subsequent transaction will occur.

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 Business Services 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 Business Services. In addition, some payers currently offer electronic data transmission services through affiliated clearinghouses that compete with WebMD Business Services. 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 Business Services’ transaction volume and financial results. In addition, any increase in the ability of payers to bypass third party EDI service providers may adversely affect the terms and conditions we are able to negotiate in our agreements with them, which could also have a material adverse impact on WebMD Business Services’ business and financial results.

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 Business Services. 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. 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 Business Services transaction services. WebMD

A portion of WebMD Business Services’ revenues comes from customers that are governmental agencies. The recent acquisition of ViPS has increased that portion and we intend to seek additional government contracts and subcontracts. Government contracts may be subject to some or all of the following:


	•	termination when appropriated funding for the current fiscal year is exhausted;

	•	termination for the governmental customer’s convenience, subject to a negotiated settlement for costs incurred and profit on work completed, along with the right to place contracts out for bid before the full contract term, as well as the right to make unilateral changes in contract requirements, subject to negotiated price adjustments;

	•	“most-favored” pricing requirements to ensure that the government receives the lowest price offered to a specified class of customers and submissions of proprietary cost or pricing data to ensure that pricing is fair and reasonable;

	•	more favorable licensing terms for software than we would ordinarily offer non-governmental customers;

	•	reporting and compliance requirements related to, among other things: equal employment opportunity, affirmative action, and accessibility for the disabled;

	•	broader audit rights than we would usually grant to non-governmental customers;

	•	specialized remedies for breach and default, including setoff rights, retroactive price adjustments, and civil or criminal fraud penalties, as well as mandatory administrative dispute resolution procedures instead of state contract law remedies.

In addition, certain violations of federal law may subject U.S. government contractors to having their contracts terminated and, under certain circumstances, suspension and debarment from future U.S. government contracts. Finally, some of our governmental contracts are priced based on our cost of providing products and services. Those contracts are subject to regulatory cost-allowability standards and a specialized system of cost accounting standards.

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

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 WebMD Health’s 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

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.

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 Business Services 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 Business Services experiences transmission delays or failures or loss of data in its systems. WebMD Business Services’ 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. These problems included: 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 Business Services 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 Business Services 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 Business Services. WebMD Business Services’ 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 Business Services 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. See also “Governmental and private initiatives to support adoption of healthcare information technology may encourage additional companies to enter our markets or result in the development of technology solutions that compete with ours” below.

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.

There are currently numerous federal, state and private initiatives and studies seeking ways to increase the use of information technology in healthcare, including in the physician’s office, as a means of

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 Business Services 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 Business Services 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 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 Business Services, 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. We cannot provide assurance regarding how CMS will regulate clearinghouses in general or WebMD Business Services 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

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 have experienced 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 systems have experienced inefficiencies that have resulted in processing delays. We seek to resolve all such problems when identified, but testing continues with numerous submitters and payers and no assurance can be given that we will identify all problems promptly or that we will not continue to experience problems that delay the full implementation of these enhanced data services. See also “During times when we are making significant changes to our products and services, there are increased risks of performance problems” above.

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 may continue to incur, significant expenses relating to implementation of the Transaction Standards. Implementation of the Transaction Standards has required us, among other things, to make significant changes to the software WebMD Business Services 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 Business Services’ transaction volume and financial results. See also “The financial results of WebMD Business Services could be adversely affected if payers conduct electronic data interchange, or EDI, transactions without using a

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 certain of our portal services may be affected through contractual relationships. This rule provides for civil and criminal liability for its breach and requires us, our customers and our partners to use health information in a highly restricted manner, to establish policies and procedures to safeguard the information, to obtain individual authorizations for some activities, and to provide certain access rights to individuals. This rule may restrict the manner in which we transmit and use certain information. There can be no assurances that we will adequately address the risks created by the Privacy Standards or that we will be able to take advantage of any resulting opportunities. In addition, we are unable to predict what changes to the Privacy Standards might be made in the future or how those changes could affect our business.

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 were required to 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 legal requirements. We are unable to

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. There can be no assurances that we will adequately address any business risks created by the NPI rule and its implementation or that we will be able to take advantage of any resulting business opportunities.

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. In September 2004, ACCME revised its standards for commercial support of CME. The revised standards are intended to ensure that CME activities of ACCME-accredited providers are independent of providers of healthcare goods and services that fund the development of CME. ACCME expects accredited providers to implement these standards by May 2005. Implementation has required additional disclosures to CME participants about those in a position to influence content and other adjustments to the management and operations of our CME programs. Medscape believes it has modified its procedures as appropriate to meet the revised standards. However, we cannot be certain whether these adjustments will ensure that we meet the new standards or predict whether ACCME may impose additional requirements.

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 ensure that we are in compliance with all applicable state and federal laws, these laws are complex and subject to interpretation by courts and other governmental authorities, who may take positions that are inconsistent with our practices.

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

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. We expect that our relationship with MSN will not continue after the end of 2004.

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

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

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 laws and regulations, Porex may be held liable for any environmental damages that result from Porex’s operations. Porex may be required to pay fines, remediation costs and damages, which could have a material adverse effect on its results of operations.

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 accounting improprieties 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. For additional information, see “Legal Proceedings” in Part II, Item 1 of this Quarterly Report.

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 September 30, 2004, we had an accumulated deficit of approximately $10.2 billion. Although we generated net income, determined in accordance with U.S. generally accepted accounting principles, during certain quarterly periods, including the quarterly period ended September 30, 2004, we incurred a net loss for the year ended December 31, 2003. We currently intend to continue to invest in infrastructure

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, $55.6 million, $398.7 million and $85.0 million during the remainder of 2004, 2005, 2006 and 2007, respectively. These include investments totaling $452.6 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 $0.2 million and $(0.1) million, during the three and nine month periods ended September 30, 2004, and $0.1 million and $1.6 million, during the three and nine month periods ended September 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 September 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 third 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 (and as previously updated in Part II, Item 1 of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004 and June 30, 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 (which we refer to as the “California Action”). 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. On September 10, 2004, the Court sustained WebMD’s demurrer to McKesson’s cross-complaint.

On September 13, 2004, McKesson Corp. filed a motion for leave to amend its cross-complaint against WebMD. On September 20, McKesson Corp. filed a motion for reconsideration of the Court’s ruling on WebMD’s demurrer. These motions, along with WebMD’s motion for entry of judgment on the demurrer ruling, are pending before the Court.

On October 6, 2004, the original plaintiffs in the California Action, Merrill Lynch Fundamental Growth Fund, Inc. and Merrill Lynch Global Value Fund, Inc., served WebMD with a new complaint filed in the Superior Court of New Jersey, Middlesex County, alleging fraud, aiding and abetting and conspiracy to commit fraud, and negligent misrepresentation, based on essentially the same allegations that they made in the California Action. WebMD intends to vigorously defend this action.

As more fully described in Part I, Item 3 of our 2003 Annual Report on Form 10-K (and as previously updated in Part II, Item 1 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004), on December 4, 2003, WebMD was served with a complaint in an adversary proceeding in the Bankruptcy Court for the Northern District of California brought by the trustee for the At Home Corporation General Unsecured Creditors Trust alleging, among other things, breach of contract. Although

Investigations by United States Attorney for the District of South Carolina and the SEC

As previously disclosed, the United States Attorney for the District of South Carolina is conducting an investigation of our company, which we first learned about on September 3, 2003. On that date, Federal Bureau of Investigation and Internal Revenue Service agents executed search warrants at our corporate headquarters in Elmwood Park, New Jersey and the offices of Medical Manager Health Systems in Tampa, Florida and Alachua, Florida and delivered subpoenas for documents and financial records. Based on the information available to us, we believe that the investigation relates principally to issues of financial accounting improprieties 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 will continue. Included among the materials removed or subject to subpoena are records relating to a $5.5 million restatement of revenue by Medical Manager Corporation in August 1999 and to acquisitions by our Medical Manager Health Systems subsidiary of other companies, most of which were dealers of Medical Manager products and services. In August 1999, Medical Manager Corporation announced that it would restate previously reported results of Medical Manager Health Systems, which it had acquired in July 1999, for the six months ended immediately prior to the acquisition. Medical Manager Corporation determined at the time that the accounting treatment previously accorded to five transactions involving the bulk sales of software licenses entered into concurrently with business combinations and other related transactions should be restated to reflect the software license revenues as a reduction of the acquisition price of the related transactions. At the time, Medical Manager Corporation also noted that the transactions represented $5,532,000 of revenue and $3,502,000 of net income for the six months ended June 30, 1999.

WebMD has been cooperating and intends to continue to cooperate fully with the U.S. Attorney’s Office. As previously reported, our Board of Directors has formed a special committee consisting solely of independent directors to oversee this matter with the sole authority to direct WebMD’s response to the allegations that have been raised. The Special Committee has retained independent legal counsel to advise it. WebMD has retained counsel to advise it in connection with the investigation and such counsel reports directly to the Special Committee.

In connection with this matter, WebMD has uncovered evidence that, prior to Medical Manager’s acquisition by WebMD Corporation in September 2000, Medical Manager’s dealer acquisition program was improperly used to artificially inflate the revenue, earnings and goodwill of Medical Manager. Also, as we have stated in the past, WebMD has evidence of kickback payments by former dealers to certain former employees of Medical Manager who were responsible for the acquisition program. WebMD has commenced lawsuits against two of those former employees. These kickback payments appear to have continued until sometime in 2002. To date, we have not uncovered information which we believe would require a restatement for any of the years covered by our financial statements. The amount of the kickback payments were immaterial and have already been reflected in our financial statements.

It is our understanding that the investigation by the U.S. Attorney’s Office also relates to allegations of improper revenue recognition practices in connection with system sales in the Medical Manager business. WebMD has identified evidence that some employees had in the past engaged in practices to improperly recognize revenue in connection with system sales. As with the issues relating to the dealer acquisition program, to date we have not uncovered information which would require a restatement for any of the years covered by our financial statements.

As previously disclosed, WebMD understands that the SEC is also conducting a formal investigation into this matter.

While WebMD is not able to estimate, at this time, the amount of the expenses that it will incur in connection with the investigations, it expects that they may continue to be significant. For the three and

(b) The following table provides information about purchases by WebMD during the three months ended September 30, 2004 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act:

(1)

These repurchases were made pursuant to the repurchase program that we announced on March 29, 2001, under which WebMD was originally authorized to use up to $50 million to purchase shares of its common stock from time to time beginning on April 2, 2001. On November 2, 2001, the maximum aggregate amount of purchases under the Program was increased to $100 million; on November 7, 2002, it was increased to $150 million; and on August 19, 2004, it was increased to $200 million.

At our Annual Meeting of Stockholders held on September 23, 2004, our common stockholders voted with respect to the following matters:


	•	Proposal 1 — To elect as Class III directors to serve three-year terms ending in 2007:


	•	Proposal 2 — To approve amendments to WebMD’s Certificate of Incorporation to provide certain voting rights to the holders of Convertible Redeemable Exchange Preferred Stock and to insert a sentence reciting the total number of shares of all capital stock that WebMD is authorized to issue:


	•	Proposal 3 — To approve amendments to WebMD’s Certificate of Incorporation to reduce the number of authorized shares of Convertible Redeemable Exchangeable Preferred Stock from 5,000,000 to 10,000:


	•	Proposal 4 — To approve amendments to WebMD’s Certificate of Incorporation to clarify the authority of WebMD’s Board of Directors to designate and authorize the issuance of new series of preferred stock with voting powers by creating a new class of 4,990,000 shares of preferred stock describing such authority with specificity:

Proposals 2 and 3 were also voted on by our Convertible Redeemable Exchangeable Preferred Stock, all 10,000 shares of which were voted for each of Proposals 2 and 3.

In addition to the directors elected at the Annual Meeting, our Board of Directors consists of: Neil F. Dimick, Roger C. Holstein and Joseph E. Smith, whose terms expire in 2005; Paul A. Brooke, James V. Manning and Martin J. Wygod, whose terms expire in 2006; and Kevin Cameron, whose term expires in 2007.

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

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.


	By:	/s/ ANDREW C. CORBIN



	Andrew C. Corbin
	Executive Vice President and Chief
	Financial Officer

E-1 EX-3.1 2 g91436exv3w1.htm EX-3.1 11TH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION EX-3.1 11TH AMENDED AND RESTATED CERTIFICATE OF IN

WebMD Corporation, a corporation organized and existing under the laws of the State of Delaware, DOES HEREBY CERTIFY AS FOLLOWS:

1. The name of the Corporation is WebMD Corporation and the name under which the corporation was originally incorporated is Healthscape Corporation. The original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on December 26, 1995.

2. This Eleventh Amended and Restated Certificate of Incorporation hereby restates and integrates, but does not further amend, the provisions of the Tenth Amended and Restated Certificate of Incorporation as amended or supplemented heretofore and as so restated and integrated the Certificate of Incorporation reads in its entirety as follows:

The address of the registered office of this corporation in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801. The registered agent at such address is The Corporation Trust Company.

The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.

This corporation is authorized to issue one class of stock to be designated “Common Stock” and another class of stock to be designated “Preferred Stock,” the rights, powers, preferences and privileges of which may from time to time be determined by the Board of Directors, and another class of stock to be designated “New Preferred Stock”. The total number of shares of all capital stock that this corporation is authorized to issue is 905,000,000. The total number of shares of Common Stock that this corporation is authorized to issue is 900,000,000 with a par value of $0.0001 per share. The total number of shares of Preferred Stock that this corporation is authorized to issue is 10,000 with a par value of $0.0001 per share. The total number of shares of New Preferred Stock that this corporation is authorized to issue is 4,990,000 with a par value of $0.0001 per share.

The New Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized to provide for the issuance of shares of New Preferred Stock in one or more series and, by filing a certificate pursuant to the applicable law of the State of Delaware (hereinafter referred to as “New Preferred Stock Designation”), to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following:

(a) the designation of the series, which may be by distinguishing number, letter or title;

(b) the number of shares of the series, which number the Board of Directors may thereafter (except where otherwise provided in the New Preferred Stock Designation) increase or decrease (but not below the number of shares thereof then outstanding);

(c) the amounts payable on, and the preferences, if any, of shares of the series in respect of dividends, and whether such dividends, if any, shall be cumulative or noncumulative;

(e) the redemption rights and price or prices, if any, for shares of the series;

(f) the terms and amount of any sinking fund provided for the purchase or redemption of shares of the series;

(g) the amounts payable on, and the preferences, if any, of shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation;

(h) whether the shares of the series shall be convertible into or exchangeable for shares of any other class or series, or any other security, of the corporation or any other corporation, and, if so, the specification of such other class or series or such other security, the conversion or exchange price or prices or rate or rates, any adjustments thereof, the date or dates at which such shares shall be convertible or exchangeable and all other terms and conditions upon which such conversion or exchange may be made;

(i) restrictions on the issuance of shares of the same series or of any other class or series; and

To the fullest extent permitted by the General Corporation Law as the same exists or as may hereafter be amended, a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director.

The corporation shall indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director or officer of the corporation or any predecessor or the corporation or serves or served at any other enterprise as a director, officer or employee at the request of the corporation or any predecessor to the corporation.

Neither any amendment nor repeal of this Article V, nor the adoption of any provision of this Amended and Restated Certificate of Incorporation inconsistent with this Article V, shall eliminate or reduce the effect of this Article V, in respect of any matter occurring, or any cause of action, suit, claim or proceeding that, but for this Article V, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision.

This corporation reserves the right to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute or this Restated Certificate of Incorporation, and all rights conferred upon stockholders herein are granted subject to this reservation.

In furtherance and not in limitation of powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the corporation.

Section 1. At any time following the closing of the first sale of Common Stock of the Corporation pursuant to a registration statement declared effective by the Securities and Exchange Corporation under the Securities Act of 1933, as amended, stockholders of the Corporation may not take any action by written consent in lieu of a meeting and any action contemplated by stockholders after such time must be taken at a duly called annual or special meeting of stockholders.

Section 2. The number of directors which constitute the whole Board of Directors of the Corporation shall be fixed exclusively by one or more resolution adopted from time to

time by the Board of Directors. The Board of Directors shall be divided into three classes designated as Class I, Class II, and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the date hereof, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the date hereof, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the date hereof, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting.

Section 3. Advance notice of new business and stockholder nominations for the election of directors shall be given in the manner and to the extent provided in the Bylaws of the Corporation.

Elections of directors need not be by written ballot unless the Bylaws of this corporation shall so provide.

Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of this corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of this corporation.

3. This Eleventh Amended and Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF, WebMD Corporation has caused this Eleventh Amended and Restated Certificate of Incorporation to be signed by Charles A. Mele, its authorized officer, this 3rd day of November, 2003.

3 EX-3.2 3 g91436exv3w2.htm EX-3.2 CERTIFICATE OF DESIGNATIONS EX-3.2 CERTIFICATE OF DESIGNATIONS

CONVERTIBLE REDEEMABLE EXCHANGEABLE PREFERRED STOCK
OF
WEBMD CORPORATION
(AS AMENDED)

The undersigned, Andrew C. Corbin, Executive Vice-President and Chief Financial Officer of WebMD Corporation, a Delaware corporation (the “Company”), does hereby certify in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware that, pursuant to authority conferred upon the Board of Directors by the Amended and Restated Certificate of Incorporation of the Company currently in effect (the “Amended and Restated Certificate of Incorporation”), duly delegated to a committee (the “Committee”) of the Board of Directors of the Company with the Board of Directors having approved the voting powers set forth below, the Committee adopted a resolution providing for the issuance of authorized shares of preferred stock of the Company, which resolution is as follows:

WHEREAS, it is the desire of the Board of Directors and the Committee, pursuant to its authority as aforesaid, to authorize for issuance and determine the terms of the preferred stock;

NOW, THEREFORE, BE IT RESOLVED, that there is hereby authorized for issuance such preferred stock on the terms and with the provisions herein set forth:

The shares of preferred stock shall be designated as the “Convertible Redeemable Exchangeable Preferred Stock” (the “Preferred Stock”) and the number of shares constituting such Preferred Stock shall be 10,000, with a par value of $0.0001 per share. The shares of Preferred Stock will be issued in certificated form in Liquidation Preference denominations of $10,000 per share and any positive integral multiple thereof.

As used in this Certificate, the following terms shall have the following meanings, unless the context otherwise requires:

“Acquisition Notice” shall have the meaning assigned to it in Section 9(b) hereof.

“Affiliate” means any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company. For this purpose, “control” shall mean the

power to direct the management and policies of a person through the ownership of securities, by contract or otherwise.

“Amended and Restated Certificate of Incorporation” shall have the meaning assigned to it in the introductory paragraphs of this Certificate.

“Board of Directors” means either the board of directors of the Company or any duly authorized committee of such board.

“Board Resolution” means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by its Board of Directors and to be in full force and effect on the date of such certification.

“Capital Stock” means any and all shares, interests, participations or other equivalents (however designated) of capital stock of the Company and all warrants or options to acquire such capital stock.

“Certificate” means this Certificate of Designations relating to the Preferred Stock.

A “Change in Control” of the Company shall be deemed to have occurred at such time as:

	(a)		any person acquires beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of transactions, of shares of the Company’s capital stock entitling the person to exercise 50% or more of the total voting power of all shares of the Company’s capital stock that are entitled to vote generally in elections of directors, other than an acquisition by the Company, any of its subsidiaries or any of its employee benefit plans; or

	(b)		the conveyance, sale, transfer or lease by the Company of all or substantially all of its assets to another person.

	(a)		the Closing Sale Price for any five Trading Days within the period of ten consecutive Trading Days ending immediately after the later of the Change in Control or the public announcement of the Change in Control, in the case of a Change in Control relating to an acquisition of capital stock, or the period of ten consecutive Trading Days ending immediately before the Change in Control, in the case of a Change in Control relating to a merger, consolidation or asset sale, equals or exceeds 105% of the Conversion Price of the Preferred Stock in effect on each of those five Trading Days; or

	(b)		all or substantially all (but in no event less than 90%) of the consideration,

excluding Cash payments for fractional shares of Common Stock and Cash payments made pursuant to statutory appraisal rights, in a merger or consolidation otherwise constituting a Change in Control in the preceding paragraph consists of shares of common stock, depositary receipts or other certificates representing common equity interests traded on a national securities exchange or quoted on the NASDAQ National Market, or will be so traded or quoted immediately following such merger or consolidation, and as a result of such merger or consolidation the Preferred Stock becomes convertible solely into such common stock, depositary receipts or other certificates representing common equity interests.

	(a)		whether a person is a “beneficial owner” will be determined in accordance with Rule 13d-3 under the Exchange Act as in effect on the date hereof; and

	(b)		a “person” includes any syndicate or group that would be deemed to be a person under Section 13(d)(3) of the Exchange Act as in effect on the date hereof.

“Closing Sale Price” means the price of a share of Common Stock on the relevant date, determined on the basis of the last reported per share sale price (or, if no last sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average ask prices) of the Common Stock on such date as reported on the NASDAQ National Market, or if the Common Stock is not quoted on the NASDAQ National Market, as reported by the principal U.S. exchange or quotation system the Common Stock is then listed or quoted; provided, however, in the absence of such quotations, the Board of Directors will make a good faith determination of the Closing Sale Price.

“Combined Amount” shall have the meaning assigned to it in Section 7(d) hereof.

“Commencement Date” shall have the meaning assigned to it in Section 7(d) hereof.

“Common Stock” means the common stock, par value $0.0001 per share, of the Company, or such other capital stock into which the Company’s common stock is reclassified or changed.

“Company” means the party named as such above until a successor replaces it pursuant to the applicable provision hereof and thereafter means the successor.

“Company Notice” shall have the meaning assigned to it in Section 8(b) hereof.

“Conversion Date” shall have the meaning assigned to it in Section 7(b) hereof.

“Conversion Price” means, on any date, the Liquidation Preference per share of Preferred Stock divided by the Conversion Rate in effect on such date.

“Conversion Rate” means the number of shares of Common Stock issuable upon conversion of one share of Preferred Stock, as determined by dividing the Liquidation Preference

by the Initial Conversion Price, and subject to adjustment in accordance with Section 7 of this certificate.

“Determination Date” shall have the meaning assigned to it in Section 7(d) hereof.

“Distribution Date” shall have the meaning assigned to it in Section 7(d) hereof.

“Distribution Declaration Date” shall have the meaning assigned to it in Section 7(d) hereof.

“Election Notice” shall have the meaning assigned to it in Section 8(b) hereof.

“Exchange Act” shall mean the U.S. Securities Exchange Act of 1934, as amended.

“Exchange Date” shall mean the date on which Subordinated Notes are issued by the Company and authenticated by the Trustee in exchange for shares of Preferred Stock being surrendered for exchange in accordance with Section 8(b) hereof.

“Exchange Right” shall have the meaning assigned to it in Section 8(a) hereof.

“Expiration Time” shall have the meaning assigned to it in Section 7(d) hereof.

“Holder” means a person in whose name the shares of Preferred Stock is registered on the books of the Company.

“Junior Stock” shall have the meaning assigned to it in Section 3(a) hereof.

“Legal Holiday” is a Saturday, a Sunday or a day on which banking institutions are not required to be open in the City of New York, in the State of New York or in the city in which the Registrar or the applicable agent engaged by the Company administers its corporate trust business.

“Liquidation Preference” shall have the meaning assigned to it in Section 5(a) hereof.

“Notice of Conversion” means the notice of conversion substantially in the form attached to this Certificate as Exhibit B.

“Officer” means the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, any Executive Vice President, any Vice President, the Treasurer or the Secretary of the Company.

“Parity Stock” shall have the meaning assigned to it in Section 3(b) hereof.

“Person” or “person” means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof.

“Preferred Stock” shall have the meaning assigned to it in Section 1 hereof.

“Purchase Agreement” means the Purchase Agreement, dated March 4, 2004, as may be amended from time to time, between the Company and the several Investors named therein.

“Purchase Date” shall have the meaning assigned to it in Section 9(d) hereof.

“Purchase Price” shall have the meaning assigned to it in Section 9(a) hereof.

“Purchased Shares” shall have the meaning assigned to it in Section 7(d) hereof.

“Put Option Notice” shall have the meaning assigned to it in Section 9(d) hereof.

“Redemption Date” means a date that is fixed for redemption of the Preferred Stock by the Company, as specified in the Redemption Notice, in accordance with Section 6 hereof.

“Redemption Notice” means the written notice from the Company to the Holders as to the redemption of the Preferred Stock delivered in accordance with Section 6 hereof.

“Redemption Price” means an amount equal to the price per share payable by the Company for any shares of Preferred Stock to be redeemed by the Company calculated in accordance with Section 6 of this Certificate.

“Registrar” means the office or agency where Preferred Stock may be presented for registration of transfer or for exchange.

“Significant Unrelated Business Acquisition” shall mean the acquisition by the Company of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of transactions, of all or substantially all assets of another person, or shares of the capital stock of another person which entitles the Company to exercise 50% or more of the total voting power of all shares of such person’s capital stock that are entitled to vote generally in elections of directors, of an Unrelated Business with a fair market value (as determined in good faith by the Board of Directors) greater than 25% or more of the Company’s total assets on a consolidated basis as of the end of the most recent fiscal quarter for which financial statements of the Company (which may be unaudited) are available.

“Subsidiary” means (i) a corporation a majority of whose capital stock with voting power, under ordinary circumstances, to elect directors is at the time, directly or indirectly, owned by the Company, by one or more subsidiaries of the Company or by the Company and one or more of its subsidiaries or (ii) any other person (other than a corporation) in which the

Company, one or more its subsidiaries or the Company and one or more its subsidiaries, directly or indirectly, at the date of determination thereof, have at least majority ownership interest.

“Subordinated Notes” means the 10% Subordinated Notes due 2010 of the Company issuable pursuant to the indenture of the Company substantially in the form attached hereto as Exhibit C.

“Trading Day” means a day during which trading in securities generally occurs on the NASDAQ National Market or, if the Common Stock is not quoted on the NASDAQ National Market, on the principal other national or regional securities exchange on which the Common Stock is then listed or quoted.

“Triggering Distribution” shall have the meaning assigned to it in Section 7(d) hereof.

“Underlying Shares” shall have the meaning assigned to it in Section 7(a) hereof.

“Unrelated Business” shall mean a business that (i) does not operate in one or more businesses conducted by the Company or any of its subsidiaries or (ii) is not related or complimentary to one or more of such businesses.

	(a)		The Preferred Stock shall, with respect to rights upon liquidation, winding-up or dissolution, rank:

	(i)		senior to the Common Stock and any other class or series of Capital Stock, the terms of which do not expressly provide that such class or series ranks senior to or on a parity with the Preferred Stock as to rights upon liquidation, winding-up or dissolution of the Company (collectively, together with any warrants, rights, calls or options exercisable for or convertible into such Capital Stock, the “Junior Stock”); and

	(ii)		on a parity with any other class or series of Capital Stock, the terms of which expressly provide that such class or series ranks on a parity with the Preferred Stock as to rights upon liquidation, winding-up or dissolution of the Company, that may hereafter be created (collectively, together with any warrants, rights, calls or options exercisable for or convertible into such Capital Stock, the “Parity Stock”).

(b)

The Preferred Stock shall, with respect to dividend rights, rank on a parity with the Common Stock and any other class or series of Capital Stock, the terms of which do not expressly provide that such class or series ranks senior to or junior to the Preferred Stock as to dividend rights.

Holders of Preferred Stock shall be entitled to receive ordinary dividends declared, paid or payable with respect to the Common Stock in an amount equal to such dividends the Holders shall have had the right to receive had such Holder converted such Preferred Stock immediately prior to the record date for such distribution.

	(a)		In the event of any liquidation, winding-up or dissolution of the Company, whether voluntary or involuntary, before any payment or distribution of the Company’s assets (whether capital or surplus) shall be made to or set apart for the holders of Junior Stock, holders of Preferred Stock shall be entitled to receive $10,000 per share of Preferred Stock (the “Liquidation Preference”); holders of Preferred Stock shall not be entitled to any further payment.

	(b)		If, upon any liquidation, winding-up or dissolution of the Company, the Company’s assets, or proceeds thereof, distributable among the holders of Preferred Stock are insufficient to pay in full the preferential amount aforesaid and liquidating payments on any Parity Stock, then such assets, or the proceeds thereof, shall be distributed among the holders of the Preferred Stock and any other Parity Stock ratably in accordance with the respective amounts that would be payable on such shares of Preferred Stock and any such other Parity Stock if all amounts payable thereon were paid in full.

	(c)		Neither the voluntary sale, conveyance, exchange or transfer, for cash, shares of stock, securities or other consideration, of all or substantially all of the Company’s property or assets nor the consolidation, merger or amalgamation of the Company with or into any entity or the consolidation, merger or amalgamation of any entity with or into the Company shall be deemed to be a voluntary or involuntary liquidation, winding-up or dissolution of the Company.

	(d)		Subject to the rights of the holders of any Parity Stock, after payment has been made in full to the holders of the Preferred Stock, as provided in this Section 5, holders of Junior Stock shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of Preferred Stock shall not be entitled to share therein.

The shares of Preferred Stock shall be redeemable by the Company in accordance with this Section 6.

(a)

Optional Redemption. The Company may not redeem any shares of Preferred Stock prior to March 19, 2007. On and after March 19, 2007 and to but excluding March 19, 2008, the Company shall have the option to redeem, out of lawfully available funds, shares of Preferred Stock, in whole or in part, at a Redemption Price in Cash equal to 105% of the Liquidation Preference; provided that the

			average of the Closing Sale Prices for the five consecutive Trading Days preceding the date of the Redemption Notice is greater than or equal to 140% of the then current Conversion Price. On and after March 19, 2008, the Company shall have the option to redeem, out of lawfully available funds, shares of Preferred Stock, in whole or in part, at a Redemption Price in Cash equal to 105% of the Liquidation Preference.

	(b)		*Mandatory Redemption.* The Company shall redeem all, and not less than all, then outstanding shares of Preferred Stock on March 19, 2012, at a Redemption Price equal to 100% of the Liquidation Preference. Such Redemption Price shall be paid in Cash or, at the option of the Company, the Company may, or if funds are not lawfully available for the payment of such Redemption Price, the Company shall, pay all or a specified percentage of the Redemption Price payable pursuant to this Section 6(b) by the issuance of a number of shares of Common Stock available for issuance equal to the aggregate Redemption Price payable divided by an amount equal to 90% of the average of the Closing Sale Prices for the 15 Trading Days preceding the Redemption Date (appropriately adjusted to take into account the occurrence during such period of any event described in Section 7(d)); provided that the Company shall not be permitted to pay all or any portion of the Redemption Price in shares of Common Stock unless (i) the average of the Closing Sale Prices for the 45 Trading Days preceding the Redemption Date shall exceed $2.00 (such amount appropriately adjusted to take into account the occurrence after March 19, 2004 of any event described in Section 7(d)); and (ii) the Company shall have given timely Redemption Notice pursuant to Section 6(c) hereof of its intention to redeem all or a specified percentage of the Preferred Stock with shares of Common Stock as provided herein; and provided further that the maximum number of shares of Common Stock issuable pursuant to this Section 6(b) shall be the aggregate publicly reported trading volume for shares of the Common Stock on The Nasdaq National Market, or any other stock exchange or automated quotation system on which the shares of Common Stock are then traded, for the 45 Trading Days preceding the Redemption Date.

			If the foregoing conditions are not satisfied with respect to any Holder prior to the close of business on the Redemption Date and the Company has elected to purchase the Preferred Stock pursuant to this Section 6 through the issuance of shares of Common Stock, then, notwithstanding any election by the Company to the contrary, the Company shall pay the entire Redemption Price of the Preferred Stock of such Holder or Holders in Cash, subject to the availability of lawful funds therefor.

	(c)		*Redemption Procedures.* In the event the Company elects to redeem shares of Preferred Stock, the Company shall send a written notice by first class mail to each Holder at such Holder’s registered address, not less than 10 days prior to the Redemption Date stating:

(i)

the Redemption Date;

	(ii)		the Redemption Price and, if applicable pursuant to Section 6(b) hereof, whether such Redemption Price will be paid in Cash, shares of Common Stock, or, if a combination thereof, the percentages of the Redemption Price in respect of which the Company will pay in Cash and shares of Common Stock;

	(iii)		the then current Conversion Rate;

	(iv)		that holders who want to convert shares of the Preferred Stock must satisfy the requirements set forth in Section 7 of this Certificate and that the date on which the right to convert the shares of the Preferred Stock called for redemption will terminate shall be at the close of business on the Business Day immediately preceding the Redemption Date (unless the Company shall default in making the payment of the Redemption Price then due, in which case the right of the Holder to convert its whole shares of Preferred Stock shall terminate on the date such default is cured and such Preferred Stock is redeemed);

	(v)		the date on which the right to convert the shares of Preferred Stock called for redemption will terminate and the place or places where such Preferred Stock may be surrendered for conversion;

	(vi)		that certificates representing shares of the Preferred Stock called for redemption must be surrendered to the Company to collect the Redemption Price;

	(vii)		if fewer than all the outstanding shares of the Preferred Stock are to be redeemed by the Company, the number of shares to be redeemed;

	(viii)		the Preferred Stock certificate number or the numbers of the shares of Preferred Stock that are to be redeemed; and

	(ix)		any other information the Company wishes to present.

	(d)		*No Fractional Shares.* The Company shall not issue fractional shares of Common Stock in payment of the Redemption Price. Instead, the Company shall pay Cash based on the Closing Sale Price at the close of business on the last Trading Day prior to the Redemption Date for all fractional shares. The Closing Sale Price of a fractional share shall be determined to the nearest 1/1,000th of a share, by multiplying the applicable Closing Sale Price of a full share by the fractional amount and rounding to the nearest whole cent. It is understood that the number of shares of Common Stock issuable upon redemption of the Preferred Stock, and the Cash payment in lieu of fractional shares, shall be based on the aggregate number of shares of Preferred Stock so redeemed.

	(e)		*Payment of Redemption Price.*

	(i)		If the Company gives a Redemption Notice pursuant to this Section 6, then, by 12:00 p.m., New York City time, on the Redemption Date, to the extent sufficient funds are legally available, the Company shall segregate or cause to be segregated Cash or shares of Common Stock, as applicable, sufficient to pay the Redemption Price and shall pay the Redemption Price to holders of such shares of the Preferred Stock upon surrender of their certificates evidencing their shares of the Preferred Stock. On and after the Redemption Date, all rights of holders of such shares shall terminate, other than the right of such holders to receive the Redemption Price upon delivery of the certificates formerly evidencing such redeemed shares of Preferred Stock, payable in accordance with the terms hereof, unless the Company defaults in making payment of such Redemption Price.

	(ii)		Payment of the Redemption Price for shares of the Preferred Stock is conditioned upon transfer and delivery of certificates representing, immediately prior to the Redemption Date, the shares of Preferred Stock being redeemed, together with necessary endorsements, to the Company at any time after delivery of the Redemption Notice by the Company.

	(iii)		If fewer than all of the outstanding shares of Preferred Stock are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors and the Company shall redeem from each Holder such Holder’s pro rata share of the number of shares of Preferred Stock to be redeemed. If any Holder of shares Preferred Stock selected for partial redemption elects to convert any of such Holder’s shares of Preferred Stock after receipt of the notice required by Section 6(c) with respect to such partial redemption and prior to the applicable Redemption Date, the number of shares of Preferred Stock of such Holder that would have been redeemed pursuant to such partial redemption shall be reduced by the number of shares of Preferred Stock so converted.

	(iv)		Upon surrender of a certificate or certificates representing shares of Preferred Stock that is or are redeemed in part, the Company shall execute and deliver to the Holder of shares redeemed, a new certificate or certificates representing shares of the Preferred Stock in an amount equal to the unredeemed portion of the whole shares of Preferred Stock surrendered for partial redemption.

	(a)		*Conversion Privilege.*

(i)

Prior to any redemption or exchange of the Preferred Stock and subject to the provisions of this Section 7, each Holder may convert any whole shares of its Preferred Stock into Common Stock (the shares of Common Stock issuable upon such conversion, the “Underlying Shares”), at any

			time at the then current Conversion Rate.

	(ii)		If the Preferred Stock is called for redemption pursuant to Section 6 hereof, the date and time the right to convert the shares of the Preferred Stock called for redemption will terminate shall be at the close of business on the Business Day immediately preceding the Redemption Date (unless the Company shall default in making the payment of the Redemption Price then due, in which case the right of the Holder to convert its whole shares of Preferred Stock shall terminate on the date such default is cured and such Preferred Stock is redeemed).

	(iii)		Preferred Stock in respect of which a Holder has delivered an Exchange Notice pursuant to Section 8 hereof or a Put Notice pursuant to Section 9 hereof may be converted only if such notice is properly withdrawn in accordance with the terms of this Certificate.

	(iv)		A Holder is not, solely by virtue of being a Holder of shares of Preferred Stock, entitled to any rights of a holder of Common Stock until such Holder has converted any of its whole shares of Preferred Stock into Common Stock and, upon such conversion, only to the extent and in respect of such shares of Preferred Stock are deemed to have been converted into Common Stock pursuant to this Section 7.

	(b)		*Conversion Procedure.*

	(i)		To convert shares of Preferred Stock, a Holder must (1) complete and sign the Notice of Conversion, with the appropriate signature guarantee, (2) surrender such Notice of Conversion and the certificates representing the shares of Preferred Stock to be converted to the Company and (3) furnish appropriate endorsements and transfer documents if required by the Company. The date on which the Holder satisfies all those requirements is the “Conversion Date.”

	(ii)		As promptly as practicable following the Conversion Date, the Company shall deliver to the Holder a certificate for, or make or cause to be made a book-entry notation of, the number of full shares of Common Stock issuable upon the conversion of such Preferred Stock and Cash in lieu of any fractional share. The person in whose name the certificate representing the Preferred Stock is registered shall be treated as a stockholder of record of such shares of Common Stock on and after the Conversion Date.

	(iii)		The Company shall not issue fractional shares of Common Stock upon conversion of any Preferred Stock. Instead, the Company shall pay Cash based on the Closing Sale Price at the close of business on the last Trading Day prior to the Conversion Date for the fractional shares that would otherwise be issuable as a result of the conversion. The Closing Sale Price

			of a fractional share shall be determined to the nearest 1/1,000^th of a share, by multiplying the applicable Closing Sale Price of a full share by the fractional amount and rounding to the nearest whole cent. It is understood that if a Holder elects to have more than one share converted, the number of shares of Common Stock issuable upon conversion and the Cash payment in lieu of fractional shares shall be based on the aggregate Liquidation Preference of the Preferred Stock converted.

	(iv)		Upon surrender of a certificate or certificates representing shares of the Preferred Stock to be converted in part, the Company shall execute, authenticate and deliver to the Holder, a new certificate or certificates representing shares of the Preferred Stock in an amount equal to the unconverted portion of the whole shares of Preferred Stock surrendered for conversion.

	(v)		If the last day on which the Preferred Stock may be converted is a Legal Holiday in a place where the Company’s headquarters are located, the Preferred Stock may be surrendered to the Company on the next succeeding day that is not a Legal Holiday.

	(vi)		If a Holder converts its shares, the Company shall pay any documentary, stamp or similar issue or transfer tax due on the issue of shares of Common Stock upon the conversion, if any. However, the Holder shall pay any such tax which is due because the shares are issued in a name other than the Holder’s name. The Company may refuse to deliver the certificates representing the Common Stock being issued in a name other than the Holder’s name until it receives a sum sufficient to pay any tax which shall be due because the shares are to be issued in a name other than the Holder’s name. Nothing herein shall preclude any withholding tax required by law.

	(c)		*Company to Deliver Common Stock.*

	(i)		The Company shall reserve out of its authorized but unissued shares of Common Stock or Common Stock held in its treasury enough shares of Common Stock to permit the conversion of all of the shares of Preferred Stock. All shares of Common Stock that may be issued upon conversion of the Preferred Stock shall be validly issued, fully paid and nonassessable.

	(ii)		The Company will endeavor to comply with all securities laws regulating the offer and delivery of shares of Common Stock upon conversion of the shares of Preferred Stock and will endeavor to list such shares on each national securities exchange or automated quotation system on which the Common Stock is listed or quoted.

(d)

Adjustment of Conversion Rate. On and after the date of effectiveness of this

	Certificate, the Conversion Rate shall be subject to adjustment from time to time as follows:

	(i)		In case the Company shall (1) pay a dividend in shares of Common Stock to all holders of Common Stock, (2) make a distribution in shares of Common Stock to all or substantially all holders of Common Stock, (3) subdivide the outstanding shares of Common Stock into a greater number of shares of Common Stock, (4) combine the outstanding shares of Common Stock into a smaller number of shares of Common Stock or (5) reclassify its outstanding Common Stock, the Conversion Rate in effect immediately prior to such action shall be adjusted so that the holder of any Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock which he would have owned immediately following such action had such Preferred Stock been converted immediately prior thereto. Any adjustment made pursuant to this Section 7(d)(i) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination, or reclassification.

	(ii)		In case the Company shall issue rights, options or warrants to all or substantially all holders of Common Stock, as the case may be, entitling them (for a period commencing no earlier than the record date for the determination of Holders of Common Stock entitled to receive such rights, options or warrants and expiring not more than 60 days after such record date) to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock), at a price per share less than the then current market price (as determined pursuant to Section 7(d)(vii) below) per share of Common Stock on such record date, other than rights, options or warrants issued by the Company pursuant to its employee benefits, compensation or stock option plans (including stock option agreements under any stock option plan of the Company), the Conversion Rate shall be increased by multiplying the Conversion Rate in effect immediately prior to such record date by a fraction of which the numerator shall be the number of shares of Common Stock outstanding on such record date, plus the number of shares of Common Stock so offered for subscription or purchase, and the denominator of which shall be the number of shares of Common Stock outstanding at the close of business on such record date plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such current market price. Such adjustments shall become effective immediately after such record date.

	(iii)		In case the Company shall distribute to all or substantially all holders of Common Stock shares of Capital Stock other than Common Stock, evidences of indebtedness, cash or other assets (other than cash dividends

			out of current or retained earnings) or shall distribute to all or substantially all holders of Common Stock rights, options or warrants to subscribe for securities (in each case other than those referred to in Section 7(d)(i) and (ii) above and Section 7(d)(iv) and (v) below), then in each such case the Conversion Rate shall be increased by multiplying the Conversion Rate in effect immediately prior to the close of business on the record date for the determination of stockholders entitled to such distribution by a fraction of which the numerator shall be the current market price per share of Common Stock (determined as provided in Section 7(d)(vii) below) on such date and the denominator shall be such current market price less the fair market value (as determined by the Board of Directors whose determination shall be conclusive and described in a Board Resolution) on such date of the portion of the evidences of indebtedness, shares of capital stock, cash and other assets to be distributed or of such subscription rights, options or warrants applicable to one share of Common Stock, such increase to become effective immediately prior to the opening of business on the day following such record date. Notwithstanding the foregoing, in the event that the Company shall distribute rights, options or warrants (other than those referred to in Section 7(d)(ii) above) (“Rights”) pro rata to holders of Common Stock, the Company may, in lieu of making any adjustment pursuant to this Section 7(d)(iii), and subject to the availability of lawful funds therefor, make proper provision so that each Holder of a Preferred Stock who converts such Preferred Stock (or any portion thereof) after the record date for such distribution and prior to the expiration or redemption of the Rights shall be entitled to receive upon such conversion, in addition to the Underlying Shares, a number of Rights to be determined as follows: (1) if such conversion occurs on or prior to the date for the distribution to the holders of Rights of separate certificates evidencing such Rights (the “Distribution Date”), the same number of Rights to which a holder of a number of shares of Common Stock equal to the number of shares of Underlying Shares is entitled at the time of such conversion in accordance with the terms and provisions of and applicable to the Rights; and (2) if such conversion occurs after the Distribution Date, the same number of Rights to which a holder of the number of shares of Common Stock into which the amount of the Preferred Stock so converted was convertible immediately prior to the Distribution Date would have been entitled on the Distribution Date in accordance with the terms and provisions of and applicable to the Rights.

	(iv)		In case the Company shall make a distribution (the “Triggering Distribution,” and the amount of the Triggering Distribution, together with the sum of (1) and (2) below in this subsection, the “Combined Amount”) consisting exclusively of cash to all or substantially all holders of Common Stock (including any distributions of cash out of current or retained earnings of the Company, but excluding any cash that is distributed as part of a distribution requiring a Conversion Rate adjustment

			pursuant to Section 7(d)(iii) above or Section 7(d)(v) below), in an aggregate amount that, together with the sum of (1) the aggregate amount of any cash and the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive thereof and described in a Board Resolution), as of the expiration of the tender or exchange offer referred to below, of any other consideration payable in respect of any tender or exchange offer by the Company or a subsidiary of the Company for all or any portion of the Common Stock consummated within the 12 months preceding the date of payment of the Triggering Distribution and in respect of which no Conversion Rate adjustment has been made pursuant to this Section 7(d), and (2) the aggregate amount of all other cash distributions to all or substantially all holders of Common Stock made within the 12 months preceding the date of payment of the Triggering Distribution and in respect of which no Conversion Rate adjustment has been made pursuant to this Section 7(d), exceeds 10% of the product of the current market price per share (as determined in accordance with Section 7(d)(vii) below) of the Common Stock on the close of business, New York City time, on the business day (the “Distribution Declaration Date”) immediately preceding the day on which the Triggering Distribution is declared by the Company and the number of shares of Common Stock outstanding on the Distribution Declaration Date (excluding shares held in the treasury of the Company), the Conversion Rate shall be adjusted by multiplying the Conversion Rate in effect immediately prior to the effectiveness of the Conversion Rate adjustment contemplated by this Section 7(d)(iv) by a fraction (y) the numerator of which shall be such current market price per share of Common Stock and (z) the denominator of which shall be (I) such current market price per share of Common Stock less (II) the number obtained by dividing the Combined Amount by such number of shares of Common Stock outstanding. Such adjustment shall become effective immediately prior to the opening of business on the day following the Distribution Declaration Date.

	(v)		In case a repurchase (including by way of tender offer or exchange offer) made by the Company or any of its subsidiaries for all or any portion of the Common Stock shall expire and such repurchase (as amended upon the expiration thereof) shall require the payment to stockholders (based on the acceptance (up to any maximum specified in the terms of the repurchase) of Purchased Shares (as defined below)) of an aggregate consideration having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and set forth in a Board Resolution) that combined together with:

(A)

the aggregate of the cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and set forth in a Board Resolution), as of the expiration of such

			repurchase, of other consideration payable in respect of any other tender offers, exchange offers or other repurchases, by the Company or any of its subsidiaries for all or any portion of the Common Stock expiring within the 12 months preceding the expiration of such repurchase and in respect of which no adjustment pursuant to this Section 7(d) has been made; and

	(B)		the aggregate amount of any distributions to all or substantially all holders of the Company’s Common Stock made exclusively in cash within the 12 months preceding the expiration of such repurchase and in respect of which no adjustment pursuant to Section 7(d) has been made,

	exceeds 10% of the product of (x) the current market price per share (as determined in accordance with Section 7(d)(vii)) as of the last time (the “Expiration Time”) tenders, exchanges or other repurchases could have been made pursuant to such repurchase (as it may be amended) and (y) the number of shares of Common Stock outstanding (including any tendered shares, exchanged shares or repurchased shares) at the Expiration Time, then, and in each such case, immediately prior to the opening of business on the day after the date of the Expiration Time, the Conversion Rate shall be adjusted by multiplying the Conversion Rate in effect immediately prior to the close of business on the date of the Expiration Time by a fraction:

	(A)		the numerator of which shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender offer, exchange offer or other repurchase offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the “Purchased Shares”) and (y) the product of the number of shares of Common Stock outstanding (less any Purchased Shares) at the Expiration Time and the current market price of the Common Stock as of the Expiration Time; and

	(B)		the denominator of which shall be the number of shares of Common Stock outstanding (including any tendered, exchanged or repurchased shares) at the Expiration Time multiplied by the current market price of the Common Stock as of the Expiration Time.

	Such adjustment (if any) shall become effective immediately prior to the opening of business on the day following the Expiration Time. In the event that the Company is obligated to purchase shares pursuant to any such repurchase, but the Company is permanently prevented by applicable

			law from effecting any such repurchase or all such repurchase are rescinded, the Conversion Rate shall again be adjusted to be the Conversion Rate which would then be in effect if such repurchase had not been made. If the application of this Section 7(d)(v) to any repurchase (including by way of tender offer or exchange offer) would result in a decrease in the Conversion Rate, no adjustment shall be made for such repurchase under this Section 7(d)(v).

	(vi)		In addition to the foregoing adjustments in subsections (i), (ii), (iii), (iv) and (v) above, the Company, from time to time and to the extent permitted by law, may increase the Conversion Rate by any amount for at least 20 days or such longer period as may be required by law, if the Board of Directors of the Company has made a determination, which determination shall be conclusive, that such increase would be in the best interests of the Company, provided that the effective Conversion Price is not less than the par value of a share of Common Stock. The Company shall cause notice of such increase to be mailed to each Holder at such Holder’s address as the same appears on the Company’s books, at least 15 days prior to the date on which such increase commences. Any increase, however, will not be taken into account for purposes of determining whether the Closing Sale Price equals or exceeds the Conversion Price by 105% in connection with an event that otherwise would be a Change in Control. Such conversion rate increase shall be irrevocable during such period.

	(vii)		For the purpose of any computation under subsections (i), (ii), (iii), (iv) and (v) above of this Section 7(d), the current market price per share of Common Stock on the date fixed for determination of the stockholders entitled to receive the issuance or distribution requiring such computation (the “Determination Date”) shall be deemed to be the average of the Closing Sale Price for the ten consecutive Trading Days immediately preceding the Determination Date; provided, however, that (1) if the “ex” date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Rate pursuant to subsection (i), (ii), (iii), (iv) or (v) above occurs on or after the tenth Trading Day prior to the Determination Date and prior to the “ex” date for the issuance or distribution requiring such computation, the Closing Sale Price for each Trading Day prior to the “ex” date for such other event shall be adjusted by multiplying such Closing Sale Price by the reciprocal of the fraction by which the Conversion Rate is so required to be adjusted as a result of such other event, (2) if the “ex” date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Rate pursuant to subsection (i), (ii), (iii), (iv) or (v) above occurs on or after the “ex” date for the issuance or distribution requiring such computation and on or prior to the Determination Date, the Closing Sale Price for each Business Day on and

			after the “ex” date for such other event shall be adjusted by multiplying such Closing Sale Price by the same fraction by which the Conversion Rate is so required to be adjusted as a result of such other event, and (iii) if the “ex” date for the issuance or distribution requiring such computation is on or prior to the Determination Date, after taking into account any adjustment required pursuant to clause (1) or (2) of this proviso, the Closing Sale Price for each Trading Day on and after the “ex” date shall be adjusted by adding thereto the amount of any cash and the fair market value (as determined by the Board of Directors in a manner consistent with any determination of such value for the purposes of this Section 7(d), whose determination shall be conclusive and described in a Resolution of the Board of Directors) of the evidences of indebtedness, shares of capital stock or other securities or assets being distributed (in the distribution requiring such computation) applicable to one share of Common Stock as of the close of business on the day before such “ex” date. For the purpose of any computation under subsection (v) of this Section 7(d), the current market price per share of Common Stock at the expiration time for the repurchase requiring such computation shall be deemed to be the average of the Closing Sale Price for the ten consecutive Trading Days commencing on the Business Day immediately following the expiration time of such repurchase (the “Commencement Date”); provided, however, that if the “ex” date for any event (other than the repurchase requiring such computation) that requires an adjustment to the Conversion Rate pursuant to subsection (i), (ii), (iii), (iv) or (v) above occurs on or after the expiration time for the repurchase requiring such computation and prior to the day in question, the Closing Sale Price for each Trading Day on or after the “ex” date for such other event shall be adjusted by multiplying such Closing Sale Price by the same fraction by which the Conversion Rate is so required to be adjusted as a result of such other event.

			For purposes of this subsection, the term “ex” date, (i) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the Closing Sale Price was obtained without the right to receive such issuance or distribution, (ii) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective, and (iii) when used with respect to any repurchase means the first date on which the Common Stock trades regular way on such exchange or in such market after the expiration time of such repurchase (as it may be amended or extended).

	(viii)		No adjustment in the Conversion Rate shall be required until cumulative adjustments amount to 1% or more of the Conversion Rate as last adjusted; provided, however, that any adjustments which by reason of this

			Section 7(d)(viii) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 7(d) shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. No adjustment need be made for rights to purchase Common Stock pursuant to a Company plan for reinvestment of dividends or interest. No adjustment need be made for a change in the par value of the Common Stock.

	(ix)		If any rights, options or warrants issued by the Company as described in Section 7(d) are only exercisable upon the occurrence of certain triggering events, then the Conversion Rate will not be adjusted as provided in Section 7(d) until the earliest of such triggering events occurs. Upon the expiration or termination of any rights, options or warrants without the exercise of such rights, options or warrants, the Conversion Rate then in effect shall be adjusted immediately to the Conversion Rate which would have been in effect at the time of such expiration or termination had such rights, options or warrants, to the extent outstanding immediately prior to such expiration or termination, never been issued.

	(x)		No adjustment need be made for a transaction referred to in this Section 7(d) if Holders are to participate in the transaction without conversion on a basis and with notice that the Board of Directors determines to be fair and appropriate in light of the basis and notice on which holders of Common Stock participate in the transaction.

	(e)		*Other Adjustments.*

	(i)		In the event that, as a result of an adjustment made pursuant to Section 7(d) hereof, the Holder of any Preferred Stock thereafter surrendered for conversion shall become entitled to receive any shares of Capital Stock other than shares of Common Stock, thereafter the Conversion Rate for such other shares so receivable upon conversion of any Preferred Stock shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in this Section 7(d).

	(ii)		The Company may make such increases in the Conversion Rate, in addition to those required by Section 7(d) hereof, as it determines to be advisable in order that any stock dividend, subdivision of shares, distribution or rights to purchase stock or securities or distribution of securities convertible into or exchangeable for stock made by the Company or to its stockholders will not be taxable to the recipients thereof.

(f)

Notice of Conversion Rate Adjustment. Whenever the Conversion Rate is adjusted, the Company shall promptly mail to Holders at the addresses appearing

			on the Registrar’s books a notice of the adjustment briefly stating the facts requiring the adjustment and the manner of computing it. The notice shall be conclusive evidence of the correctness of such adjustment.

	(g)		*Notice of Certain Transactions*. In the event that:

	(i)		the Company takes any action which would require an adjustment in the Conversion Rate;

	(ii)		the Company takes any action pursuant to Section 7(h) below that would require an amendment to this Certificate; or

	(iii)		there is a merger that is reasonably expected to result in a Change in Control, a dissolution or a liquidation of the Company,

	a Holder may wish to convert its Preferred Stock into shares of Common Stock prior to the record date for or the effective date of the transaction so that he may receive the rights, warrants, securities or assets which a holder of shares of Common Stock on that date may receive. Therefore, the Company shall mail to Holders at the addresses appearing on the books of the Registrar a notice stating the proposed record or effective date, as the case may be, of any transaction referred to in clause (i), (ii) or (iii) of this Section 7(g). The Company shall mail such notice at least 15 days before such date; however, failure to mail such notice or any defect therein shall not affect the validity of any transaction referred to in clause (i), (ii) or (iii) of this Section 7(g).

	(h)		*Effect of Reclassifications, Consolidations, Mergers, Binding Share Exchanges or Sales on Conversion Privilege.* If any of the following shall occur, namely:

	(i)		any reclassification or change in the Common Stock issuable upon conversion of the Preferred Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination); or

	(ii)		any consolidation, merger or binding share exchange to which the Company is a party other than a merger in which the Company is the continuing corporation and which does not result in any reclassification of, or change (other than a change in name, or par value, or from par value to no par value, or from no par value to par value or as a result of a subdivision or combination) in, the Common Stock or any consolidation or merger or binding share exchange to which the Company is a party and as a result thereof all or part of the outstanding shares of Common Stock shall be converted into or exchanged for stock or other securities of any person other than the Company or its successor;

	Holders of then shares of Preferred Stock that remain outstanding thereafter, if any, shall thereafter have the right to convert such shares into the kind and

amount of shares of stock and other securities and property (including cash) receivable upon such reclassification, change, consolidation, merger or binding share exchange by a holder of the number of shares of Common Stock deliverable upon conversion of such shares of Preferred Stock immediately prior to such reclassification, change, consolidation, merger or binding share exchange, which kind and amount shall thereafter be subject to adjustment in a manner equivalent to the adjustments of the Conversion Rate provided for in Section 7(d) hereof. The foregoing, however, shall not in any way affect the right a Holder may otherwise have, pursuant to clause (2) of the last sentence of subsection (iii) of Section 7(d) hereof, to receive Rights upon conversion of a Preferred Stock. Notwithstanding the foregoing, if, in the case of any such consolidation, merger or binding share exchange, the stock or other securities and property (including cash) receivable thereupon by a holder of Common Stock includes shares of stock or other securities and property of an entity other than the successor, as the case may be, in such consolidation, merger or binding share exchange, then, as a condition thereto, such other person shall make such adequate provision by board resolution, its organizational documents, or otherwise, to protect the interests of the Holders of Preferred Stock that are to remain outstanding thereafter, if any, as the Board of Directors shall reasonably consider necessary by reason of the foregoing. The Board of Directors expressly reserves the right to cancel all shares of Preferred Stock in exchange for preferred stock of such other person, with similar rights and designation. The provision of this Section 7(h) shall similarly apply to successive consolidations, mergers or binding share exchanges, sales or conveyances. This Section 7(h) shall not apply to any consolidation, merger or binding share exchange, sale or conveyance of all or substantially all of the property or business of the Company as an entirety that does not result in any reclassification, conversion, exchange or cancellation of the Common Stock.

	(a)		Subject to the availability of lawful funds therefor, each Holder shall have the right, at the Holder’s option, to require the Company to exchange for Subordinated Notes (the “Exchange Right”) in accordance with the provisions of this Section 8 all, and not less than all, of such Holder’s shares of Preferred Stock if the average of the Closing Sale Prices for the three-month period ending March 19, 2008 is less than $7.50 per share.

	(b)		If the conditions specified in Section 8(a) are met, the Company shall give written notice of the Exchange Right to the Holders (the “Company Notice”). The Company Notice shall be sent by first-class mail to each Holder by March 23, 2008, shall include a written notice of election to be used by Holders for purposes of exercising such Exchange Right (“Election Notice”), and shall state, among other things:

(i)

a description of the procedures which a Holder must follow to exercise an Exchange Right and a brief description of those rights;

	(ii)		that, in order to exercise the Exchange Right, certificates representing shares of Preferred Stock are to be surrendered to the Company;

	(iii)		that shares of Preferred Stock as to which an Election Notice has been given may be converted only in accordance with Section 7 hereof and only if the applicable Election Notice has been withdrawn in accordance with the terms hereof;

	(iv)		the procedures for withdrawing an Election Notice;

	(v)		the then existing Conversion Rate;

	(vi)		the place or places where such shares of Preferred Stock may be surrendered for conversion;

	(vii)		that all rights of the Holders of such shares of Preferred Stock shall terminate with respect to such shares on the Exchange Date, other than the right to receive the Subordinated Notes issuable upon exchange of the Preferred Stock in accordance with the terms hereof; and

	(viii)		the Preferred Stock certificate number or numbers of the shares of Preferred Stock held by such Holder.

	(c)		To exercise an Exchange Right, a Holder shall:

	(i)		deliver to the Company its Election Notice which Election Notice must be delivered to the Company by the close of business on March 29, 2008 and must specify an Exchange Date of not less than 60 days from the date of the Election Notice; and

	(ii)		deliver to the Company the stock certificates evidencing the number of shares of Preferred Stock with respect to which the Exchange Right is being exercised, duly endorsed for transfer to the Company.

	(d)		In the event an Exchange Right shall be exercised in accordance with the terms hereof, the Company shall on the Exchange Date issue in the name of the Holder exercising such Exchange Right, Subordinated Notes in an aggregate principal amount equal to the aggregate Liquidation Preference of the shares of Preferred Stock being surrendered for exchange pursuant to this Section 8.

	(e)		Notwithstanding anything herein to the contrary, any Holder delivering to the Company an Election Notice contemplated by this Section 8 shall have the right to withdraw such Election Notice at any time prior to the close of business on the second Business Day prior to the Exchange Date by delivery of a written notice of withdrawal to the Company. Shares of Preferred Stock as to which an Election Notice has been given may be converted only in accordance with Section 7 hereof and only if the applicable Election Notice has been so properly withdrawn.

Redemption of Preferred Stock Upon Significant Unrelated Business Acquisition or Change in Control

	(a)		Subject to the availability of lawful funds therefor, upon any Significant Unrelated Business Acquisition or Change in Control, to the extent that any shares of Preferred Stock remain outstanding thereafter, each Holder of such shares of Preferred Stock shall have the right, at the Holder’s option (the “Put Option”), to require the Company to redeem all or a portion of such Holder’s shares of Preferred Stock at a Purchase Price in Cash equal to the Liquidation Preference (“Purchase Price”).

	(b)		If the conditions specified in Section 9(a) are met, within 30 days after the occurrence of a Significant Unrelated Business Acquisition or Change in Control, the Company shall mail to all Holders a notice (the “Acquisition Notice”) of the occurrence of such Significant Unrelated Business Acquisition or Change in Control and the Put Option arising as a result thereof. Such Acquisition Notice shall state:

	(i)		the date of the Significant Unrelated Business Acquisition or Change in Control, as the case may be;

	(ii)		a brief description of the Put Option and the procedures which a Holder must follow to exercise its Put Option;

	(iii)		to the extent that lawful funds are not available for the redemption of all Holders’ shares of Preferred Stock, the percentage of the shares of Preferred Stock then outstanding in respect of which there may be a redemption by the Company pursuant to this Section 9;

	(iv)		the date by which the Put Option must be exercised;

	(v)		the Purchase Price;

	(vi)		that, in exercising the Put Option, the shares of Preferred Stock must be surrendered to the Company for payment of the Purchase Price;

	(vii)		that Preferred Stock as to which a Put Option Notice has been given may be converted only in accordance with Section 7 hereof if the applicable Put Option Notice has been withdrawn in accordance with the terms hereof;

	(viii)		the procedures for withdrawing a Put Option Notice;

	(ix)		the then existing Conversion Rate, and any adjustment to the Conversion Rate that will result from the Significant Unrelated Business Acquisition or Change in Control;

	(x)		the place or places where such Preferred Stock may be surrendered for conversion;

	(xi)		that all rights of the Holders shall terminate with respect to such Preferred Stock on the Purchase Date, other than the right to receive the Purchase Price upon delivery of the certificates formerly evidencing such purchased shares of Preferred Stock, unless the Company defaults in making payment on the Preferred Stock for which a Put Option Notice has been submitted; and

	(xii)		the Preferred Stock certificate number or the numbers of shares of Preferred Stock held by such Holder.

	(c)		No failure of the Company to give the foregoing notice shall limit any such Holder’s right to exercise a Put Option.

	(d)		To exercise the Put Option, such a Holder must deliver on or before the close of business on the 30th day after the date of the Acquisition Notice irrevocable written notice to the Company (the “Put Option Notice”) of the Holder’s election to exercise of such Put Option together with the stock certificates evidencing the shares of Preferred Stock with respect to which the Put Option is being exercised, duly endorsed for transfer to the Company. The date on which the Holder satisfies all such requirements is the “Purchase Date.”

The Company shall be entitled to deduct and withhold in respect of the Preferred Stock such amounts as the Company is required to withhold and deduct under applicable federal, state, local or foreign tax laws. Amounts that are so withheld and deducted shall be treated hereunder as having been paid to the Holder in respect of which the withholding and deduction was made.

	(a)		The shares of Preferred Stock shall be issued in the form of one or more permanent certificated shares substantially in the form attached hereto as *Exhibit A*. The certificates evidencing the Preferred Stock also may have notations, legends or endorsements required by law, stock exchange rules, agreements to which the Company is subject, if any, or usage, in a form acceptable to the Company.

	(b)		An Officer shall sign the certificate representing the Preferred Stock, in accordance with the Company’s bylaws and applicable law, by manual or facsimile signature. If an Officer whose signature is on a certificate no longer holds that office, the certificate representing the Preferred Stock shall be valid nevertheless.

The shares of Preferred Stock and, until the Preferred Stock is converted into shares of Common Stock, the Underlying Shares shall not be transferable by the Holders thereof other than in accordance with the terms and conditions set forth in the Purchase Agreement.

The Company may appoint one or more registrars, paying agents, transfer agents and/or conversion agents in respect of its obligations hereunder.

The headings of the Sections of this Certificate are for convenience of reference only and shall not define, limit or affect any of the provisions hereof.

The Company will not, without the prior approval of holders of 75% of the shares of Preferred Stock then outstanding, voting as a separate class, (i) issue any additional shares of Preferred Stock, (ii) create any other class or series of Capital Stock, the terms of which expressly provide that such class or series ranks senior to the Preferred Stock as to rights upon liquidation, winding-up, dividends or dissolution of the Company or (iii) create any class or series of Parity Stock.

The shares of Preferred Stock shall have the right to vote, on an as-converted basis, on matters that are put to vote of holders of shares of Common Stock with such number of votes as the Holders shall have had the right to receive had such Holder converted its Preferred Stock into Common Stock immediately prior to the event date.

IN WITNESS WHEREOF, WebMD Corporation has caused this Certificate of Designations to be signed by the undersigned this 4th day of March, 2004.

Par Value $0.0001 per share
Liquidation Preference $10,000 per share
OF
WEBMD CORPORATION

THIS SECURITY, THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SECURITY AND THE 10% SUBORDINATED NOTES DUE 2010 THAT ARE ISSUABLE UPON EXCHANGE OF THIS SECURITY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS.

NONE OF THIS SECURITY, THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SECURITY, THE 10% SUBORDINATED NOTES DUE 2010 THAT ARE ISSUABLE UPON EXCHANGE OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS: (1) SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION AND (2) THE COMPANY CONSENTS IN WRITING TO SUCH DISPOSITION.

THIS SECURITY IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER. THE HOLDER OF THIS SECURITY, BY ITS ACCEPTANCE HEREOF, AGREES NOT TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, EXCEPT IN COMPLIANCE WITH THE RESTRICTIONS ON TRANSFER AS SET FORTH IN THE CERTIFICATE OF DESIGNATION PURSUANT TO WHICH THIS SECURITY IS ISSUED AND THE PURCHASE AGREEMENT, DATED MARCH 4, 2004, AS MAY BE AMENDED FROM TIME TO TIME, BETWEEN THE COMPANY AND THE INVESTORS NAMED THEREIN.

WEBMD CORPORATION, a Delaware corporation (the “Company”), hereby certifies that _________________________is the registered owner of fully paid and non-assessable shares of preferred stock of the Company designated the Convertible Redeemable Exchangeable Preferred Stock, par value $0.0001 per share and liquidation preference $10,000 per share (the “Preferred Stock”).

The shares of Preferred Stock are transferable on the books and records of the Company, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Preferred Stock represented hereby are issued and shall in all respects be subject to the provisions of the Certificate of Designations of the Company dated March 19, 2004, as the same may be amended from time to time in accordance with its terms (the “Certificate of Designations”).

Capitalized terms used herein but not defined shall have the respective meanings given them in the Certificate of Designations. The Company will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

Reference is hereby made to select provisions of the Preferred Stock set forth on the reverse hereof, and to the Certificate of Designations, which select provisions and the Certificate of Designations shall for all purposes have the same effect as if set forth at this place.

Upon receipt of this certificate, the Holder is bound by the Certificate of Designations and is entitled to the benefits thereunder.

Unless this certificate has been properly executed, the shares of Preferred Stock evidenced hereby shall not be entitled to any benefit under the Certificate of Designations or be valid or obligatory for any purpose.

IN WITNESS WHEREOF, WebMD Corporation has executed this certificate as of the date set forth below.

The shares of Preferred Stock shall be redeemable as provided in the Certificate of Designations.

The shares of Preferred Stock shall be convertible into the Company’s Common Stock in the manner and according to the terms set forth in the Certificate of Designations.

Subject to the availability of lawful funds therefor, the shares of Preferred Stock shall be exchangeable for the Company’s 10% Subordinated Notes due 2010 in the manner and according to the terms set forth in the Certificate of Designations.

Subject to the availability of lawful funds therefor, upon a Significant Unrelated Business Acquisition, Holders will have the right to require the Company to purchase such shares in the manner and according to the terms set forth in the Certificate of Designations.

NOTICE OF CONVERSION
(To be Executed and Delivered by the Holder in order to Convert the Preferred Stock)

The undersigned hereby irrevocably elects to convert (the “Conversion”) shares of Convertible Redeemable Exchangeable Preferred Stock (the “Preferred Stock”) represented by stock certificate No(s). (the “Preferred Stock Certificates”) into shares of common stock, par value $0.0001 per share (the “Common Stock”), of WebMD Corporation (the “Corporation”) according to the conditions of the Certificate of Designations establishing the terms of the Preferred Stock (the “Certificate of Designations”), as of the date written below.

If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates. No fee will be charged to the holder for any conversion, except for transfer taxes, if any. A copy of each Preferred Stock Certificate is attached hereto (or evidence of loss, theft or destruction thereof).

The Company is not required to issue shares of Common Stock until the original Preferred Stock Certificate(s) (or evidence of loss, theft or destruction thereof) to be converted are received by the Company. The Company shall issue and deliver shares of Common Stock to an overnight courier not later than three Business Days following receipt of the original Preferred Stock Certificate(s) to be converted.

Capitalized terms used but not defined herein shall have the meanings ascribed thereto in or pursuant to the Certificate of Designations.

INDENTURE, dated as of [ ], between WebMD Corporation, a Delaware corporation (the “Company”), and [ ], as trustee (the “Trustee”).

Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the Holders of the Company’s 10% Subordinated Notes due 2010 (the “Securities”).

“Affiliate” means any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company. For this purpose, “control” shall mean the power to direct the management and policies of a person through the ownership of securities, by contract or otherwise.

“Board of Directors” means the board of directors of the Company or any committee thereof authorized to act for it hereunder.

“Common Stock” means the common stock, par value $0.0001 per share, of the Company, or such other capital stock into which the Company’s common stock is reclassified or changed.

“Company” means the party named as such above until a successor replaces it pursuant to the applicable provision hereof and thereafter means the successor.

“Company Request” or “Company Order” means a written request or order signed on behalf of the Company by its Chairman of the Board, its Chief Executive Officer, its President, its Chief Operating Officer, its Chief Financial Officer, any Executive Vice President or any Vice President and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary, and delivered to the Trustee.

“Corporate Trust Office of the Trustee” shall be at the address of the Trustee specified in Section 12.02 or such other address as the Trustee may give notice of to the Company.

“Default” means any event which is, or after notice or passage of time or both would be, an Event of Default.

“Depositary” means The Depository Trust Company, its nominees and successors.

“Holder” or “Securityholder” means a person in whose name a Security is registered on the Registrar’s books.

“Indenture” means this Indenture as amended or supplemented from time to time.

“Non-Recourse Indebtedness” means Indebtedness upon the enforcement of which recourse may be had by the holder(s) thereof only to identified assets of the Company or any Subsidiary and not to the Company or any Subsidiary personally.

“Officers’ Certificate” means a certificate signed by two Officers or by an Officer and an Assistant Treasurer or an Assistant Secretary of the Company.

“Opinion of Counsel” means a written opinion from legal counsel who may be an employee of or counsel for the Company, or other counsel reasonably acceptable to the Trustee.

“person” means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof.

“Redemption Date” means, with respect to Securities to be redeemed by the Company in accordance with Section 3.01, the business day specified for redemption of such Security in accordance with the terms of the Securities and this Indenture, as set forth in a notice of redemption.

“Redemption Price” means, with respect to Securities to be redeemed by the Company in accordance with Section 3.01, a Cash amount equal to 105% of the outstanding principal amount of such Securities.

“Repurchase Price” means, with respect to Securities duly tendered for purchase by the Company in accordance with Section 3.08, 100% of the outstanding principal amount of such Securities so tendered.

“Responsible Officer” shall mean, when used with respect to the Trustee, any officer within the corporate trust department of the Trustee, including any vice president, assistant vice president, assistant secretary, assistant treasurer, trust officer or any other officer of the Trustee who customarily performs functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred

because of such person’s knowledge of and familiarity with the particular subject and who shall have direct responsibility for the administration of this Indenture.

“Sale Price” means the price of a share of Common Stock on the relevant date, determined on the basis of the last reported per share sale price (or, if no last sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average ask prices) of the Common Stock on such date as reported on the NASDAQ National Market, or if the Common Stock is not quoted on the NASDAQ National Market, as reported by the principal U.S. exchange or quotation system the Common Stock is then listed or quoted; provided, however, in the absence of such quotations, the Board of Directors will make a good faith determination of the Sale Price.

“Securities” means the 10% Subordinated Notes due 2010 issued by the Company pursuant to this Indenture.

“Significant Subsidiary” with respect to any person means any subsidiary of such person that, from time to time, constitutes a “significant subsidiary” within the meaning of Rule 1-02 of Regulation S-X under the Securities Act, as such regulation is in effect on the date of this Indenture.

“subsidiary” means (i) a corporation a majority of whose capital stock with voting power, under ordinary circumstances, to elect directors is at the time, directly or indirectly, owned by the Company, by one or more subsidiaries of the Company or by the Company and one or more of its subsidiaries or (ii) any other person (other than a corporation) in which the Company, one or more its subsidiaries or the Company and one or more its subsidiaries, directly or indirectly, at the date of determination thereof, have at least majority ownership interest.

“TIA” means the Trust Indenture Act of 1939 (15 U.S. Code §§ 77aaa-77bbbb) as in effect on the date of this Indenture, except as provided in Section 9.03.

“Trustee” means the party named as such in this Indenture until a successor replaces it in accordance with the provisions hereof and thereafter means the successor.

Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture.

All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA and not otherwise defined herein have the meanings so assigned to them.


	(i) a term has the meaning assigned to it;

	(ii) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles in effect on the date hereof;

	(iii) “or” is not exclusive;


	(iv) words in the singular include the plural and in the plural include the singular;

	(v) provisions apply to successive events and transactions; and

	(vi) “herein,” “hereof” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision.

The Securities and the Trustee’s certificate of authentication shall be substantially in the form set forth in Exhibit A, which is incorporated in and forms a part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Security shall be dated the date of its authentication.

The Securities shall be issued initially in the form of one or more Global Securities, substantially in the form set forth in Exhibit A (each, a “Global Security”), deposited with the Trustee, as custodian for the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided and bearing the legend set forth in Exhibit B. The aggregate principal amount of the Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary, as hereinafter provided; provided that in no event shall the aggregate principal amount of the Global Security or Securities exceed $[ ].

Securities issued in exchange for interests in a Global Security pursuant to Section 2.15 may be issued in the form of permanent certificated Securities in registered form in substantially the form set forth in Exhibit A (the “Physical Securities”) and, if applicable, bearing any legends required by Section 2.16.

One Officer shall sign the Securities for the Company by manual or facsimile signature.

If an Officer whose signature is on a Security no longer holds that office at the time the Security is authenticated, the Security shall nevertheless be valid.

A Security shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture.

Upon a written order of the Company signed by one Officer of the Company, the Trustee shall authenticate Securities for original issue in the aggregate principal amount of $[ ].

The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Securities. An authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company and its Affiliates.

If a written order of the Company pursuant to this Section 2.02 of the Indenture has been, or simultaneously is, delivered, any instructions by the Company to the Trustee with respect to endorsement, delivery or redelivery of a Security issued in global form shall be in writing but need not comply with Section 12.04 hereof and need not be accompanied by an Opinion of Counsel.

The Securities shall be issuable only in registered form without interest coupons and only in denominations of $1,000 principal amount and any positive integral multiple thereof.

The Company shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange (“Registrar”) and an office or agency where Securities may be presented for payment (“Paying Agent”). The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may appoint or change one or more co-registrars and one or more additional paying agents without notice and may act in any such capacity on its own behalf. The term “Registrar” includes any co-registrar; and the term “Paying Agent” includes any additional paying agent.

The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee of the name and address of any Agent not a party to this Indenture. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such.

Each Paying Agent shall hold in trust for the benefit of the Securityholders or the Trustee all moneys held by the Paying Agent for the payment of the Securities, and shall notify the Trustee of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent shall have no further liability for the money. If the Company acts as Paying Agent, it shall segregate and hold as a separate trust fund all money held by it as Paying Agent.

The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders. If the Trustee is

not the Registrar, the Company shall furnish to the Trustee on or before each interest payment date and at such other times as the Trustee may request in writing a list, in such form and as of such date as the Trustee may reasonably require, of the names and addresses of Securityholders.

Subject to Section 2.15 hereof, where Securities are presented to the Registrar with a request to register their transfer or to exchange them for an equal principal amount of Securities of other authorized denominations, the Registrar shall register the transfer or make the exchange if its requirements for such transaction are met. To permit registrations of transfer and exchanges, the Trustee shall authenticate Securities at the Registrar’s request. The Company or the Trustee, as the case may be, shall not be required (a) to issue, authenticate, register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before the mailing of a notice of redemption of the Securities selected for redemption under Section 3.04 and ending at the close of business on the day of such mailing or (b) to register the transfer of or exchange any Security so selected for redemption or repurchase in whole or in part, except the unredeemed or unrepurchased portion of Securities being redeemed or repurchased in part.

No service charge shall be made for any transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any transfer or exchange of Securities, other than exchanges pursuant to Section 2.10, 3.07, 3.08 or 9.05 not involving any transfer.

If the Holder of a Security claims that the Security has been mutilated, lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security if the Trustee’s requirements are met and, in the case of a mutilated Security, such mutilated Security is surrendered to the Trustee. In the case of lost, destroyed or wrongfully taken Securities, if required by the Trustee, an indemnity bond must be provided by the Holder that is sufficient in the judgment of the Trustee to protect the Company, the Trustee or any Agent from any loss which any of them may suffer if a Security is replaced. The Trustee may charge for its expenses in replacing a Security.

In case any such mutilated, lost, destroyed or wrongfully taken Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security when due.

Every replacement Security is an additional obligation of the Company only as provided in Section 2.08.

Securities outstanding at any time are all the Securities authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation and those described in this Section 2.08 as not outstanding. Except to the extent provided in Section 2.09, a Security

does not cease to be outstanding because the Company or one of its subsidiaries or Affiliates holds the Security.

If a Security is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Trustee receives proof satisfactory to it, or a court holds, that the replaced Security is held by a protected purchaser.

If the Paying Agent (other than the Company) holds on a Redemption Date, Change in Control Repurchase Date or maturity date money sufficient to pay Securities payable on that date, then on and after that date, such Securities shall be deemed to be no longer outstanding and interest on them shall cease to accrue, and such Security shall be deemed paid whether or not the Security is delivered to the Paying Agent. Thereafter, all other rights of the Holders of such Securities shall terminate with respect to such Securities, other than the right to receive the Redemption Price, Repurchase Price or principal amount, as applicable.

In determining whether the Holders of the required aggregate principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company or any of its subsidiaries or an Affiliate shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which a Responsible Officer of the Trustee knows are so owned shall be so disregarded.

Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Securities in exchange for temporary Securities.

The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Securities surrendered to them for transfer, exchange or payment. The Trustee shall cancel all Securities surrendered for transfer, exchange, payment or cancellation in accordance with its customary procedures. The Company may not issue new Securities to replace Securities that it has paid or delivered to the Trustee for cancellation.

If and to the extent the Company defaults in a payment of interest on the Securities, the Company shall pay the defaulted interest in any lawful manner plus, to the extent not prohibited by applicable statute or case law, interest payable on the defaulted interest at the rate provided in the Securities. The Company may pay the defaulted interest to the persons who are Securityholders on a subsequent special record date. The Company shall fix such record date

and payment date. At least 15 days before the record date, the Company shall mail to Securityholders a notice that states the record date, payment date and amount of interest to be paid.

The Company in issuing the Securities may use one or more “CUSIP” numbers, and if so, the Trustee shall use the CUSIP numbers in notices of redemption or exchange as a convenience to Holders; provided, however, that no representation is hereby deemed to be made by the Trustee as to the correctness or accuracy of the CUSIP numbers printed in the notice or on the Securities, and that reliance may be placed only on the other identification numbers printed on the Securities. The Company shall promptly notify the Trustee of any change in the CUSIP numbers.

Prior to 11:00 a.m., New York City time, on each interest payment date, Maturity Date, Redemption Date and Change in Control Repurchase Date, the Company shall deposit with the Paying Agent in immediately available funds money sufficient to make Cash payments, if any, due on such interest payment date, Maturity Date, Redemption Date and Change in Control Repurchase Date, as the case may be, in a timely manner which permits the Paying Agent to remit payment to the Holders on such interest payment date, Maturity Date and Redemption Date, as the case may be.


	(A) The Global Securities initially shall (i) be registered in the name of the Depositary or the nominee of such Depositary, (ii) be delivered to the Trustee as custodian for such Depositary and (iii) bear legends as set forth in Section 2.16.

(B) Members of, or participants in, the Depositary (“Participants”) shall have no rights under this Indenture with respect to any Global Security, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of the Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and Participants, the operation of customary practices governing the exercise of the rights of a Holder of any Security.

(C) Transfers of Global Securities shall be limited to transfers in whole, but not in part, to the Depositary, its successors or their respective nominees. In addition, Physical Securities shall be transferred to all beneficial owners in exchange for their beneficial interests in Global Securities only if (i) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for any Global Security and a successor Depositary is not appointed by the Company within 90 days of such notice or (ii) an Event of Default has occurred and is continuing and the Registrar has received a written request from the Depositary to issue Physical Securities.

(D) In connection with the transfer of a Global Security in its entirety to beneficial owners pursuant to Section 2.15 (C), such Global Security shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall upon written instructions from the Company authenticate and deliver, to each beneficial owner identified by the Depositary in exchange for its beneficial interest in such Global Security, an equal aggregate principal amount of Physical Securities of authorized denominations.


	(E) The Holder of any Global Security may grant proxies and otherwise authorize any person, including Participants and persons that may hold interests through Participants, to take any action which a Holder is entitled to take under this Indenture or the Securities.

Each Global Security shall bear the “Global Security Legend” as set forth in Exhibit B.

Redemption of the Securities, as permitted by any provision of this Indenture, shall be made in accordance with Paragraphs 6 and 7 of the Securities and in accordance with this Article III. At any time, from time to time, the Company will have the right to redeem for Cash all or any part of the Securities, subject to the conditions specified in Paragraph 6 of the Securities, at the applicable Redemption Price, plus accrued and unpaid interest thereon to, but not including, the Redemption Date, provided that, if such Redemption Date is on or after an interest record date, but on or prior to the related interest payment date, such interest will be payable to the Holders in whose names the Securities are registered at the close of business on the relevant record date for payment of such interest.

If the Company elects to redeem Securities pursuant to Paragraph 6 of the Securities, it shall notify the Trustee at least 15 days prior to the mailing of the notice of redemption (unless a shorter notice period shall be satisfactory to the Trustee) of the Redemption Date and the aggregate principal amount of Securities to be redeemed.

If the Company elects to redeem Securities pursuant to Paragraph 6 of the Securities and less than all the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed on a pro rata basis. The Trustee shall make the selection from Securities outstanding not previously called for redemption. The Trustee may select for redemption portions of the principal of Securities that have denominations larger than $1,000 principal amount. Securities and portions of them it selects shall be in amounts of $1,000 principal amount or positive integral multiples of $1,000 principal amount. The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and the principal amount thereof to be redeemed.

The Registrar need not transfer or exchange any Securities selected for redemption, except the unredeemed portion of the Securities redeemed in part. Also, the Registrar need not transfer or exchange any Securities for a period of 15 days before selecting Securities to be redeemed.

At least 30 days but not more than 60 days before a Redemption Date, the Company shall mail by first-class mail a notice of redemption to each Holder whose Securities are to be redeemed.

The notice shall identify the Securities and the aggregate principal amount thereof to be redeemed and shall state:


	(i) the Redemption Date;

	(ii) the Redemption Price, plus the amount of accrued and unpaid interest to be paid on the Securities called for redemption;

	(iii) the name and address of the Paying Agent;

	(iv) the Paragraph of the Securities pursuant to which the Securities are to be redeemed;

	(v) that Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price;

	(vi) that unless the Company shall default in the payment of the Redemption Price, interest on Securities called for redemption ceases to accrue on and after the Redemption Date; and

	(vii) the CUSIP number or numbers, as the case may be, of the Securities.

At the Company’s request, upon reasonable prior notice, the Trustee shall give the notice of redemption in the Company’s name and at the Company’s expense; provided that the form and content of such notice shall be prepared by the Company.

Once a notice of redemption is mailed, Securities called for redemption become due and payable on the Redemption Date at the Redemption Price, plus accrued and unpaid interest to the date of redemption, and, on and after such date (unless the Company shall default in the payment of the Redemption Price), such Securities shall cease to bear interest. Upon surrender to the Paying Agent, such Securities shall be paid at the Redemption Price, plus accrued interest to, but excluding, the Redemption Date, subject to the proviso to Section 3.01.

On or before the Redemption Date, the Company shall, in accordance with Section 2.14, deposit with the Paying Agent money in funds immediately available on the Redemption Date sufficient to pay the Redemption Price of and accrued interest on all Securities to be redeemed on that date. The Paying Agent shall return to the Company, as soon as practicable, any money not required for that purpose.

Upon surrender of a Security that is redeemed in part, the Company shall execute and the Trustee shall authenticate for the Holder a new Security or Securities in an aggregate principal amount equal to the unredeemed portion of the Security surrendered.

Upon any Change in Control (as defined below) with respect to the Company, each Holder shall have the right (the “Change in Control Repurchase Right”), at the Holder’s option, subject to the rights of the holders of Senior Indebtedness under Article XI of this Indenture, to require the Company to repurchase all of such Holder’s Securities, or a portion thereof which is $1,000 in principal amount or any positive integral multiple thereof, on the date (the “Change in Control Repurchase Date”) that is 30 business days after the date of the Change in Control Notice (as defined below) at the Repurchase Price, plus accrued and unpaid interest to, but not including, the Change in Control Repurchase Date. Provisions of this Indenture that apply to the repurchase of Securities pursuant to this Section 3.08 of all of a Security also apply to the repurchase of such portion of such Security.

At the option of the Company, all or a specified percentage of the Repurchase Price of Securities in respect of which a Change in Control Notice pursuant to this Section 3.08 has been given may be paid by the Company by the issuance of a number of shares of Common Stock or, in the case of a merger in which the Company is not the surviving corporation, common stock, ordinary shares, American Depositary Shares or analogous securities of the surviving corporation or its direct or indirect parent, equal to the quotient obtained by dividing (i) the amount of Cash to which the Holders would have been entitled had the Company elected to pay all or a specified percentage of the Repurchase Price of such Securities in Cash by (ii) the product of (A) the Market Price of the Common Stock, subject to the next succeeding paragraph, and (B) 0.95.

The Company will not issue fractional shares of Common Stock in payment of the Repurchase Price in connection with the exercise of any Change in Control Repurchase Right. Instead the Company will pay Cash based on the Market Price for all fractional shares. The Market Price of a fractional share shall be determined to the nearest 1/1,000th of a share, by multiplying the applicable Market Price of a full share by the fractional amount and rounding to the nearest whole cent. It is understood that if a Holder elects to have more than one Security repurchased, the number of shares of Common Stock shall be based on the aggregate principal amount of Securities to be repurchased.

In the event that the Company is unable to purchase the Securities of a Holder or Holders for Common Stock because any necessary qualifications or registrations of the Common Stock under applicable state securities laws cannot be obtained, the Company may purchase the Securities of such Holder or Holders for Cash. The Company may not change its election with respect to the consideration to be paid once the Company has given its Change in Control Notice to Securityholders except pursuant to the immediately preceding sentence in the event of a failure to satisfy, prior to the close of business on the Change in Control Repurchase Date, any condition to the payment of the Repurchase Price in shares of Common Stock.

At least three business days before the date of the Change in Control Notice (as defined below), the Company shall deliver an Officers’ Certificate to the Trustee specifying:


	(iii) if the Company elects to pay all or a specified percentage of the Repurchase Price in shares of Common Stock, that the conditions to such manner of payment set forth in this Section 3.08 have been or will be complied with; and


	(iv) whether the Company desires the Trustee to give the Change in Control Notice required by this Section 3.08.

The Company’s right to exercise its election to purchase Securities through the issuance of Common Stock shall be conditioned upon:


	(i) the Company’s giving of timely Change in Control Notice to purchase Securities with Common Stock as provided herein;


	(ii) the registration of such Common Stock under the Securities Act or the Exchange Act, in each case, if required;


	(iii) such Common Stock having been quoted or listed on the NASDAQ National Market or other principal U.S. exchange or quotation system on which the shares of Common Stock are then listed, or if the Common Stock is not so quoted or listed then on the principal other market on which the Common Stock are then traded;


	(iv) any necessary qualification or registration under applicable state securities laws or the availability of an exemption from such qualification and registration; and

(v) the receipt by the Trustee of an Officers’ Certificate and an Opinion of Counsel each stating that (A) the terms of the issuance of the Common Stock are in conformity with this Indenture and (B) the shares of Common Stock to be issued by the Company in payment of all or a specified percentage of the Repurchase Price in respect of Securities have been duly authorized and, when issued and delivered pursuant to the terms of this Indenture in payment of all or a specified percentage of the Repurchase Price in respect of the Securities, will be validly issued, fully paid and nonassessable and, to the best of such counsel’s knowledge, free from preemptive rights, and, (a) in the case of such Officers’ Certificate, stating that the conditions above and the condition set forth in the second succeeding sentence have been satisfied and, (b) in the case of such Opinion of Counsel, stating that the conditions above have been satisfied.

Such Officers’ Certificate shall also set forth (i) the number of shares of Common Stock of to be issued for each $1,000 principal amount at maturity of Securities, (ii) the Sale Price on each Trading Day during the period during which the Market Price is calculated and (iii) the Market Price of the Common Stock. The Company may pay the Repurchase Price in Common Stock only if the information necessary to calculate the Market Price is published in a daily newspaper of national circulation or is otherwise publicly available or obtainable (e.g., by dissemination on the World Wide Web or by other public means). If the foregoing conditions are not satisfied with respect to a Holder or Holders prior to the close of business on the Change in Control Repurchase Date and the Company has elected to purchase the Securities pursuant to this Section 3.08 through the issuance of Common Stock, the Company shall pay the entire Repurchase Price of the Securities of such Holder or Holders in Cash.

All shares of Common Stock delivered upon purchase of the Securities shall be newly issued shares or treasury shares, shall be duly authorized, validly issued, fully paid and nonassessable, and shall be free from preemptive rights and free of any lien or adverse claim.

Within 30 days after the occurrence of a Change in Control of the Company, the Company shall mail to all Holders of record of the Securities a notice (the “Change in Control Notice”) of the occurrence of such Change in Control and the Change in Control Repurchase Right arising as a result thereof. The Company shall deliver a copy of the Change in Control Notice to the Trustee and shall disseminate a copy via a press release through Dow Jones & Company, Inc. or Bloomberg Business News or other similarly broad public medium that is customary for such press releases. To exercise the Change in Control Repurchase Right, a Holder of Securities must deliver on or before the close of business on the 30th day after the date of the Change in Control Notice irrevocable written notice to the Trustee, or to a Paying Agent designated by the Company for such purpose in the Change in Control Notice, in the form of the Option of Holder to Elect Repurchase Notice on the back of the Security, of the Holder’s exercise of such right together with the Securities with respect to which the right is being exercised, duly endorsed for transfer.


	(i) the events causing the Change in Control;

	(ii) the date of such Change in Control;

	(iii) the Change in Control Repurchase Date;

	(iv) the date by which the Change in Control Repurchase Right must be exercised;

	(v) the Repurchase Price, plus the amount of accrued and unpaid interest to be paid on the Securities to be repurchased;

	(vi) the name and address of the Paying Agent;

	(vii) a description of the procedure which a Holder must follow to exercise a Change in Control Repurchase Right and a brief description of those rights;

	(viii) that, in order to exercise the Change in Control Repurchase Right, the Securities are to be surrendered for payment of the Repurchase Price;

	(ix) that the Repurchase Price for, any accrued and unpaid interest on any Security as to which an Option of Holder to Elect Repurchase Notice has been given and not withdrawn, shall be so paid pursuant to this Section 3.08 only if the Security so delivered to the Paying Agent shall conform in all respects to the description thereof in the related Change in Control Notice, as determined by the Company in its sole discretion;


	(x) the procedures for withdrawing an Option of Holder to Elect Repurchase Notice (as specified in Section 3.09);

	(xi) that, unless the Company defaults in making payment on Securities for which a Change in Control repurchase notice has been submitted, interest on such Securities will cease to accrue on the Change in Control Repurchase Date;

	(xii) that all rights of the Holders of such Securities shall terminate with respect to such Securities on the Change in Control Repurchase Date, other than the right to receive the Repurchase Price upon delivery of the Securities to be purchased;

	(xiii) the CUSIP number of the Securities; and

	(xiv) whether the Repurchase Price will be paid in Cash, Common Stock or a combination of both and, if both, the percentage thereof; provided, however, if the Company elects to pay all or a portion of the Repurchase Price in Common Stock, such Change in Control Notice shall also:

	(X)		state that each Holder will receive shares of Common Stock with a Market Price determined as of a specified date prior to the Change in Control Repurchase Date equal to such specified percentage of the Repurchase Price of the Securities held by such Holder (except any Cash amount to be paid in lieu of fractional shares);

	(Y)		describe the method of calculating the Market Price of the Common Stock; and

	(Z)		state that because the Market Price of Common Stock will be determined prior to the Change in Control Repurchase Date, Holders of the Securities will bear the market risk with respect to the value of the Common Stock to be received from the date such Market Price is determined to the Change in Control Repurchase Date.

The “Market Price” means the average of the Sale Prices for the five consecutive Trading Days ending on the third business day prior to the applicable Change in Control Repurchase Date (if the third business day prior to the applicable Change in Control Repurchase Date is a Trading Day, or if not, then on the last Trading Day prior to the third business day).

No failure of the Company to give the foregoing notice shall limit any Holder’s right to exercise a Change in Control Repurchase Right.

To exercise a Change in Control Repurchase Right, a Holder shall deliver to the Trustee, or to a Paying Agent designated by the Company for such purpose in the Change in Control Notice, on or before the close of business on the 30th day after the date of the Change in Control Notice, (i) irrevocable written notice in the form of the Option of Holder to Elect Repurchase Notice on the back of the Securities with respect to which the Change in Control Repurchase Right is being exercised, or any other form of written notice substantially similar to the Option of Holder to Elect Repurchase Notice, in each case, duly completed and signed, with

appropriate signature guarantee, and (ii) such Securities with respect to which the Change in Control Repurchase Right is being exercised, duly endorsed for transfer to the Company, and the Holder of such Securities shall be entitled to receive from the Company (if it is acting as its own Paying Agent), or such Paying Agent a nontransferable receipt of deposit evidencing such deposit.

In the event a Change in Control Repurchase Right shall be exercised in accordance with the terms hereof, the Company shall, on or prior to a Change in Control Repurchase Date, deposit Cash in respect of the Cash portion of a repurchase under this Section 3.08 or for fractional shares of Common Stock, as applicable, plus Cash sufficient to pay accrued an unpaid interest with respect to all Securities to be purchased pursuant to this Section 3.08. On the Trading Day following the Change in Control Repurchase Date, the Company shall deliver to each Holder entitled to receive Common Stock the number of full shares of Common Stock issuable in payment of the Repurchase Price. The person in whose name the certificate for shares of Common Stock is registered shall be treated as a holder of record of Common Stock on the business day following the Change in Control Repurchase Date. No payment or adjustment will be made for dividends on the shares of Common Stock on the record date for which occurred on or prior to the Change in Control Repurchase Date.

If a Holder of a repurchased Security is paid in Common Stock pursuant to this Section 3.08, the Company shall pay all, stamp and other duties, if any, which may be imposed by the United States or any political subdivision thereof or taxing authority thereof or therein with respect to the issuance of shares of Common Stock. However, the Holder shall pay any such tax which is due because the Holder requests the shares of Common Stock to be issued in a name other than the Holder’s name. The Trustee or any Paying Agent may refuse to deliver the certificates representing the Common Stock issued in a name other than the Holder’s name until the Trustee or any such Paying Agent receives a sum sufficient to pay any tax which shall be due because the shares are to be issued in a name other than the Holder’s name. Nothing herein shall preclude any withholding tax required by law.

A “Change in Control” of the Company shall be deemed to have occurred at such time as:

(i) any person acquires beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of transactions, of shares of the Company’s capital stock entitling the person to exercise 50% or more of the total voting power of all shares of the Company’s capital stock that are entitled to vote generally in elections of directors, other than an acquisition by the Company, any of its subsidiaries or any of its employee benefit plans; or

(ii) the conveyance, sale, transfer or lease by the Company of all or substantially all of its assets to another person.

However, a Change in Control will not be deemed to have occurred if all or substantially all (but in no event less than 90%) of the consideration, excluding Cash payments

for fractional shares of Common Stock and Cash payments made pursuant to dissenters’ appraisal rights, in a merger or consolidation otherwise constituting a Change in Control in the preceding paragraph consists of shares of common stock, depositary receipts or other certificates representing common equity interests traded on a national securities exchange or quoted on the NASDAQ National Market, or will be so traded or quoted immediately following such merger or consolidation, and as a result of such merger or consolidation the Securities become convertible solely into such common stock, depositary receipts or other certificates representing common equity interests.


	(1) whether a person is a “beneficial owner” will be determined in accordance with Rule 13d-3 under the Exchange Act as in effect on the date hereof; and


	(2) a “person” includes any syndicate or group that would be deemed to be a person under Section 13(d)(3) of the Exchange Act as in effect on the date hereof.

Upon receipt by the Paying Agent of a Holder’s Option of Holder to Elect Repurchase Notice in accordance with Section 3.08, the Holder of the Security in respect of which such notice, as the case may be, was given shall (unless such notice is withdrawn as specified in the following two paragraphs) thereafter be entitled to receive solely the Repurchase Price, together with all accrued and unpaid interest thereon, to but not including the Change in Control Repurchase Date, with respect to such Security.

With respect any Physical Security which is to be submitted for repurchase only in part pursuant to Section 3.08 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by the Holder thereof or its attorney duly authorized in writing), the Company shall execute, and the Trustee shall authenticate and make available for delivery to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, of the same tenor and in aggregate principal amount equal to the portion of such Security not submitted for repurchase thereunder.

A Holder’s Option of Holder to Elect Repurchase Notice specified in Section 3.08 may be withdrawn by means of a written notice of withdrawal delivered to the office of the Paying Agent at any time prior to close of business on second the business day prior to the Change in Control Repurchase Date specifying:


	(i) the certificate or CUSIP number, as applicable, of the Security in respect of which such notice of withdrawal is being submitted;


	(ii) the aggregate principal amount of the Security with respect to which such notice of withdrawal is being submitted; and


	(iii) the aggregate principal amount, if any, of such Security which remains subject to the original Option of Holder to Elect Repurchase Notice and which has been or will be delivered for purchase by the Company.

The Paying Agent shall promptly notify the Company of the receipt of any repurchase notice specified in Section 3.08 or written notice of withdrawal thereof.

When complying with the provisions of Section 3.08 hereof (provided that such offer or purchase constitutes an “issuer tender offer” for purposes of Rule 13e-4 (which term, as used herein, includes any successor provision thereto) under the Exchange Act at the time of such offer or purchase), the Company shall (i) comply with the applicable provisions of Rule 13e-4 and Rule 14e-1 (or any successor provisions) under the Exchange Act, and any other tender offer rules under the Exchange Act that may then apply, (ii) file the related Schedule TO (or any successor schedule, form or report) under the Exchange Act, and (iii) otherwise comply with any applicable federal and state securities laws so as to permit the rights and obligations under Section 3.08 to be exercised in the time and in the manner specified in Sections 3.08.

The Company shall pay all amounts due with respect to the Securities on the dates and in the manner provided in the Securities. All such amounts shall be considered paid on the date due if the Paying Agent holds (or, if the Company is acting as Paying Agent, if the Company has segregated and holds in trust in accordance with Section 2.04) on that date money sufficient to pay the amount then due with respect to the Securities.

The Company shall pay interest on any overdue amount (including, to the extent permitted by applicable law, overdue interest) at the rate borne by the Securities.

The Company will maintain in the Borough of Manhattan, the City of New York, an office or agency (which may be an office of the Trustee or an affiliate of the Trustee or Registrar) where Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee.

The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and

may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency.

The Company hereby designates the Corporate Trust Office of the Trustee as an agency of the Company in accordance with Section 2.03.

(B) Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee’s receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company’s compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on the Officers’ Certificate).

The Company shall deliver to the Trustee within 90 days after the end of each fiscal year of the Company an Officers’ Certificate stating whether or not the signers know of any Default or Event of Default by the Company in performing any of its obligations under this Indenture or the Securities. If they do know of any such Default or Event of Default, the certificate shall describe the Default or Event of Default and its status.

The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (in each case, to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law has been enacted.

Subject to Article V, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate existence of each of its Significant Subsidiaries in accordance with the respective organizational documents of each Significant Subsidiary and the rights (charter and statutory), licenses and franchises of the Company and its Significant Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate existence of any Significant Subsidiary, if in the judgment of the Board of Directors (i) such preservation or

existence is not material to the conduct of business of the Company and (ii) the loss of such right, license or franchise or the dissolution of such Significant Subsidiary does not have a material adverse impact on the Holders.

In the event that any Default or Event of Default shall occur, the Company will give prompt written notice of such Default or Event of Default to the Trustee.

The Company shall not consolidate with or merge with or into, or convey, transfer or lease all or substantially all of its properties and assets to, another person unless such other person is a corporation organized under the laws of the United States, any State thereof or the District of Columbia or a corporation or comparable legal entity organized under the laws of a foreign jurisdiction and whose equity securities are listed on a national securities exchange in the United States or authorized for quotation on the NASDAQ National Market prior to or upon giving effect to the transaction (provided, however, that in the case of a transaction where the surviving entity is organized under the laws of a foreign jurisdiction, the Company may not consummate the transaction without first (i) making provision for the satisfaction of its obligations to repurchase the Securities following a Change in Control, if any, (ii) amending the terms of the Securities to provide that, in the event the Company is required under the laws of such foreign jurisdiction (or any political subdivision thereof) to withhold or deduct amounts in respect of taxes from payments made to Securityholders on the Securities, the Company will pay, subject to certain standard exceptions, such additional amounts to the holders as may be necessary so that each Securityholder will receive the same amounts it would have received had no such withholding or deduction been required, and (iii) obtaining an opinion of tax counsel experienced in such matters to the effect that, under then existing United States federal income tax laws, there would be no material adverse tax consequences to Securityholders of the Securities resulting from such transaction); such person assumes by supplemental indenture all the obligations of the Company, under the Securities and this Indenture; and immediately after giving effect to the transaction, no Default or Event of Default shall exist under the terms of this Indenture.

The Company shall deliver to the Trustee prior to the consummation of the proposed transaction an Officers’ Certificate to the foregoing effect and an Opinion of Counsel, which may rely upon such Officers’ Certificate as to the absence of Defaults and Events of Default, stating that the proposed transaction and such supplemental indenture will, upon consummation of the proposed transaction, comply with this Indenture.

Upon any consolidation or merger or transfer or lease of all or substantially all of the assets of the Company in accordance with Section 5.01, the successor person formed by such

consolidation or into which the Company is merged or to which such transfer or lease is made shall succeed to, and, except in the case of a lease, be substituted for, and may exercise every right and power of, and shall assume every duty and obligation of, the Company under this Indenture with the same effect as if such successor had been named as the Company herein. When the successor assumes all obligations of the Company hereunder, except in the case of a lease, all obligations of the predecessor shall terminate.


	(i) the Company defaults in the payment of the principal amount or Redemption Price with respect to any Security when the same becomes due and payable, whether on the Maturity Date, Redemption Date, Change in Control Repurchase Date or otherwise, whether or not such payment shall be prohibited by the provisions of Article XI hereof;

	(ii) the Company defaults in the payment of accrued and unpaid interest on any Security when the same becomes due and payable and such default continues for a period of 30 days, whether or not such payment shall be prohibited by the provisions of Article XI hereof;

	(iii) the Company fails to comply with any of its other agreements in the Securities or this Indenture and the default continues for the period and after the notice specified below;

	(iv) the Company fails to provide a Change in Control Notice in accordance with Section 3.08;

	(v) the Company or any of its Significant Subsidiaries defaults in the payment at the final maturity thereof, after the expiration of any applicable grace period, of principal of, or premium, if any, on indebtedness for money borrowed, other than Non-Recourse Indebtedness, in the aggregate principal amount then outstanding of $30,000,000 or more, or the acceleration of indebtedness for money borrowed in such aggregate principal amount so that it becomes due and payable prior to the date on which it would otherwise become due and payable and such acceleration is not rescinded or such default is not cured within 30 business days after notice to the Company in accordance with this Indenture;

	(vi) the Company or any of its Significant Subsidiaries pursuant to or within the meaning of any Bankruptcy Law:

	(A) commences a voluntary case,


	(B) consents to the entry of an order for relief against it in an involuntary case,

	(C) consents to the appointment of a Custodian of it or for all or substantially all of its property, or

	(D) makes a general assignment for the benefit of its creditors; or

	(vii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:

	(A) is for relief against the Company or any of its Significant Subsidiaries in an involuntary case or proceeding, or adjudicates the Company or any Significant Subsidiary insolvent or bankrupt,

	(B) appoints a Custodian of the Company or any of its Significant Subsidiaries for all or substantially all of the property of the Company or any such Significant Subsidiary, as the case may be, or

	(C) orders the winding up or liquidation of the Company or any of its Significant Subsidiaries,

	and the order or decree remains unstayed and in effect for 90 consecutive days.

The term “Bankruptcy Law” means Title 11, U.S. Code or any similar federal or State law for the relief of debtors. The term “Custodian” means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law.

A default under Section 6.01 (iii) above is not an Event of Default until the Trustee or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding notify the Company and the Trustee of the default and the default is not cured within 60 days after receipt of the notice. The notice must specify the default, demand that it be remedied and state that the notice is a “Notice of Default.” If the Holders of 25% in aggregate principal amount of the outstanding Securities request the Trustee to give such notice on their behalf, the Trustee shall do so. When a default is cured, it ceases.

If an Event of Default (other than an Event of Default specified in Section 6.01(v) or (vi) with respect to the Company) as to which the Trustee has received notice pursuant to the provisions of this Indenture occurs and is continuing, the Trustee by notice to the Company or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding by notice to the Company and the Trustee may declare the Securities to be due and payable. Upon such declaration such principal and interest shall be due and payable immediately. If an Event of Default specified in Section 6.01(v) or (vi) with respect to the Company occurs, the principal of and accrued interest on all the Securities shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Securityholder. The Holders of a majority in aggregate principal amount of the Securities then outstanding by written notice to the Trustee may rescind an acceleration and its consequences if the rescission

would not conflict with any order or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration and if all amounts due to the Trustee under Section 7.07 have been paid.

Notwithstanding any other provision of this Indenture, if an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of amounts due with respect to the Securities or to enforce the performance of any provision of the Securities or this Indenture.

The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative.

Subject to Sections 6.07 and 9.02, the Holders of a majority in aggregate principal amount of the Securities then outstanding by notice to the Trustee may waive any past Default or Event of Default and its consequences, except a default in the payment of the principal amount, accrued and unpaid interest, any Redemption Price or any Repurchase Price. When a Default or an Event of Default is waived, it is cured and ceases for every purpose of this Indenture.

The Holders of a majority in aggregate principal amount of the Securities then outstanding may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, is unduly prejudicial to the rights of other Securityholders or would involve the Trustee in personal liability; provided that the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction.

Except as provided in Section 6.07, a Securityholder may pursue a remedy with respect to this Indenture or the Securities only if:


	(i) the Holder gives to the Trustee written notice of a continuing Event of Default;


	(ii) the Holders of at least 25% in aggregate principal amount of the Securities then outstanding make a written request to the Trustee to pursue the remedy;


	(iii) such Holder or Holders offer and, if requested, provide to the Trustee indemnity reasonably satisfactory to the Trustee against any loss, liability or expense;


	(iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and


	(v) during such 60-day period, the Holders of a majority in aggregate principal amount of the Securities then outstanding do not give the Trustee a direction inconsistent with the request.

A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over another Securityholder.

Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of all amounts due with respect to the Securities, on or after the respective due dates expressed in the Securities, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder.

If an Event of Default specified in Section 6.01 (i) or (ii) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount due with respect to the Securities, including any unpaid and accrued interest.

The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee, any predecessor Trustee and the Securityholders allowed in any judicial proceedings relative to the Company or its creditors or properties.

The Trustee may collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same, and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07.

Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding.

If the Trustee collects any money pursuant to this Article VI, it shall pay out the money in the following order:

Third: to Securityholders for all amounts due and unpaid on the Securities, without preference or priority of any kind, according to the amounts due and payable on the Securities; and

The Trustee, upon prior written notice to the Company may fix a record date and payment date for any payment by it to Securityholders pursuant to this Section 6.10.

In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit other than the Trustee of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys’ fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of more than 10% in aggregate principal amount of the outstanding Securities.


	(A) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs.

	(B) Except during the continuance of an Event of Default:

	(i) the Trustee need perform only those duties that are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee; and

	(ii) in the absence of bad faith, willful misconduct or negligence on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein).

	(C) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that:

	(i) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and

	(ii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05.

	(D) Every provision of this Indenture that in any way relates to the Trustee is subject to the provisions of this Section 7.01.

	(E) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law.


	(A) Subject to Section 7.01, the Trustee may conclusively rely on any document believed by it to be genuine and to have been signed or presented by the proper


	person. The Trustee need not investigate any fact or matter stated in the document; if, however, the Trustee shall determine to make such further inquiry or investigation, it shall be entitled during normal business hours to examine the relevant books, records and premises of the Company, personally or by agent or attorney upon reasonable prior notice.


	(B) Before the Trustee acts or refrains from acting, it may require an Officers’ Certificate and/or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers’ Certificate or Opinion of Counsel.

	(C) Any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors shall be sufficiently evidenced by a Board Resolution.

	(D) The Trustee may consult with counsel (such counsel to be reasonably acceptable to the Company) and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon.

	(E) The Trustee may act through agents or attorneys and shall not be responsible for the misconduct or negligence of any agent or attorney appointed with due care.

	(F) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its discretion, rights or powers conferred upon it by this Indenture.

	(G) Except with respect to Section 6.01, the Trustee shall have no duty to inquire as to the performance of the Company with respect to the covenants contained in Article IV. In addition, the Trustee shall not be deemed to have knowledge of an Event of Default except (1) any Default or Event of Default occurring pursuant to Sections 6.01(i) and 6.01(ii) or (2) any Default or Event of Default of which a Responsible Officer of the Trustee shall have received written notification or obtained actual knowledge. Delivery of reports, information and documents to the Trustee under Article IV (other than Sections 4.04 and 4.07) is for informational purposes only and the Trustee’s receipt of the foregoing shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company’s compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers’ Certificates).

	(H) The Trustee shall be under no obligation to exercise any of the rights or powers vested by this Indenture at the request or direction of any of the Holders pursuant to this Indenture unless such Holders shall have offered to the Trustee security or indemnity reasonably satisfactory to the Trustee against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction.


	(I) The rights, privileges, protections, immunities and benefits given to the Trustee, including without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and each agent, custodian and other person employed to act hereunder.

	(J) The Trustee may request that the Company deliver an Officers’ Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Indenture, which Officers’ Certificate may be signed by any person authorized to sign an Officers’ Certificate, including any person specified as so authorized in any such certificate previously delivered and not superseded.

The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or any of its Affiliates with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. The Trustee, however, must comply with Sections 7.10 and 7.11.

The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities; it shall not be accountable for the Company’s use of the proceeds from the Securities; and it shall not be responsible for any statement in the Securities other than its certificate of authentication.

If a Default or Event of Default occurs and is continuing as to which the Trustee has received notice pursuant to the provisions of this Indenture, the Trustee shall mail to each Securityholder a notice of the Default or Event of Default within 30 days after it occurs unless such Default or Event of Default has been cured or waived. Except in the case of a Default or Event of Default in payment of any amounts due with respect to any Security, the Trustee may withhold the notice if and so long as it in good faith determines that withholding the notice is in the interests of Securityholders.

Within 60 days after each May 15 beginning with May 15 after the date hereof, the Trustee shall mail to each Securityholder if required by TIA § 313(a) a brief report dated as of such May 15 that complies with TIA § 313(c). In such event, the Trustee also shall comply with TIA § 313(b).

A copy of each report at the time of its mailing to Securityholders shall be mailed to the Company and filed by the Trustee with the SEC and each stock exchange, if any, on which the Securities are listed. The Company shall promptly notify the Trustee when the Securities are listed on any stock exchange.

The Company shall pay to the Trustee from time to time such compensation for its services as shall be agreed upon in writing. The Trustee’s compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred by it. Such expenses shall include the reasonable compensation and out-of-pocket expenses of the Trustee’s agents and counsel.

The Company shall indemnify the Trustee against any and all loss, liability, damage, claim or expense (including the reasonable fees and expenses of counsel and taxes other than those based upon the income of the Trustee) incurred by it in connection with the acceptance or administration of this trust and the performance of its duties hereunder, including the reasonable costs and expenses of defending itself against any claim (whether asserted by the Company, any Holder or any other person) or liability in connection with the exercise or performance of any of its powers and duties hereunder. The Company need not pay for any settlement made without its consent. The Trustee shall notify the Company promptly of any claim for which it may seek indemnification. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through the Trustee’s negligence, bad faith or willful misconduct.

To secure the Company’s payment obligations in this Section 7.07, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay amounts due on particular Securities.

The indemnity obligations of the Company with respect to the Trustee provided for in this Section 7.07 shall survive any resignation or removal of the Trustee.

When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(v) or (vi) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law.

A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee’s acceptance of appointment as provided in this Section 7.08.

The Trustee may resign by so notifying the Company in writing 30 business days prior to such resignation. The Holders of a majority in aggregate principal amount of the Securities then outstanding may remove the Trustee by so notifying the Trustee and the Company in writing and may appoint a successor Trustee with the Company’s consent. The Company may remove the Trustee if:


	(iii) a receiver or other public officer takes charge of the Trustee or its property; or

If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee.

If a successor Trustee does not take office within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee (at the Company’s expense), the Company or the Holders of at least 10% in aggregate principal amount of the outstanding Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee.

If the Trustee fails to comply with Section 7.10, any Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee.

A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Securityholders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.07.

If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee, if such successor corporation is otherwise eligible hereunder.

There shall at all times be a Trustee hereunder that is a corporation organized and doing business under the laws of the United States of America or of any state thereof that is authorized under such laws to exercise corporate trustee power, that is subject to supervision or examination by federal or state authorities and that has a combined capital and surplus of at least $100 million as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA § 310(b).

The Trustee shall comply with TIA § 311(a), excluding any creditor relationship listed in TIA § 311(b). A Trustee who has resigned or been removed shall be subject to TIA § 311(a) to the extent indicated.

The Company may terminate all of its obligations under this Indenture if all Securities previously authenticated and delivered (other than mutilated, destroyed, lost or stolen Securities which have been replaced or paid as provided in Section 2.07) have been delivered to the Trustee for cancellation or if:


	(i) the Securities mature within one year or all of them are to be called for redemption within one year under arrangements satisfactory to the Trustee for giving the notice of redemption;


	(ii) the Company irrevocably deposits in trust with the Trustee money or U.S. Government Obligations sufficient to pay the principal or Redemption Price of and any unpaid and accrued interest on the Securities to maturity or redemption, as the case may be. Immediately after making the deposit, the Company shall give notice of such event to the Securityholders;


	(iii) the Company has paid or caused to be paid all sums then payable by the Company to the Trustee hereunder as of the date of such deposit; and


	(iv) the Company has delivered to the Trustee an opinion of counsel and an Officers’ Certificate stating that all conditions precedent provided for herein relating to the satisfaction and discharge of this Indenture have been complied with. The Company may make the deposit only during the one-year period and only if Article XI permits it.

However, the Company’s obligations in Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 2.15, 4.01, 4.02, 7.07, 7.08 and Article VIII shall survive until the Securities are no longer outstanding. Thereafter the obligations of the Company in Sections 7.07 and 8.03 shall survive.

After a deposit pursuant to this Section 8.01, the Trustee upon request shall acknowledge in writing the discharge of the obligations of the Company under the Securities and this Indenture, except for those surviving obligations specified above.

In order to have money available on a payment date to pay the principal or Redemption Price of and any unpaid and accrued interest on the Securities, the U.S. Government Obligations shall be payable as to principal and any unpaid and accrued interest on or before such payment date in such amounts as will provide the necessary money.

“U.S. Government Obligations” means direct non-callable obligations of, or non-callable obligations guaranteed by, the United States of America for the payment of which the full faith and credit of the United States of America is pledged.

The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 8.01. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of the principal or Redemption Price of and any unpaid and accrued interest on the Securities. Money and securities so held in trust are not subject to the subordination provisions of Article XI.

The Trustee and the Paying Agent shall promptly notify the Company of, and pay to the Company upon the request of the Company, any excess money or securities held by them at any time. The Trustee and the Paying Agent shall pay to the Company upon the written request of the Company any money held by them for the payment of the principal, Redemption Price or Repurchase Price of and any unpaid and accrued interest that remains unclaimed for two years; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may, at the expense and request of the Company, cause to be published once in a newspaper of general circulation in The City of New York or cause to be mailed to each Holder, notice stating that such money remains and that, after a date specified therein, which shall not be less than 30 days from the date of such publication or mailing, any unclaimed balance of such money then remaining will be repaid to the Company. After repayment to the Company, Securityholders entitled to the money must look to the Company for payment as general creditors unless an applicable abandoned property law designates another person and all liability of the Trustee and the Paying Agent shall cease.

If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Sections 8.01 and 8.02 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the obligations of the Company under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Sections 8.01 and 8.02 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Sections 8.01 and 8.02; provided, however, that if the Company has made any payment of amounts due with respect to any Securities because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent.

The Company, with the consent of the Trustee, may amend or supplement this Indenture or the Securities without notice to or the consent of any Securityholder:


	(i) to evidence a successor to the Company and the assumption by that successor of the Company’s obligations under this Indenture and the Securities;


	(ii) to evidence and provide for the acceptance of the appointment under this Indenture of a successor Trustee;


	(iii) to add to the covenants of the Company described in this Indenture for the benefit of Securityholders or to surrender any right or power conferred upon the Company;

Notwithstanding the foregoing, no supplemental indenture pursuant to the foregoing clauses (iii), (iv) or (v) may be entered into without the consent of the holders of a majority in principal amount of the Securities if such supplemental indenture would materially and adversely affect the interests of the Holders of the Securities.

The Company, with the consent of the Trustee, may amend or supplement this Indenture or the Securities without notice to any Securityholder but with the written consent of the Holders of a majority in aggregate principal amount of the outstanding Securities. Subject to Section 6.07, the Holders of a majority in aggregate principal amount of the outstanding Securities may waive compliance by the Company with any provision of this Indenture or the Securities without notice to any other Securityholder. However, without the consent of each Securityholder affected, an amendment, supplement or waiver, including a waiver pursuant to Section 6.04, may not:


	(i) reduce the rate of or change the time for payment of interest on any Security;


	(ii) make any Security payable in money or securities other than as stated in such Security;


	(iv) reduce the principal amount, Redemption Price or Repurchase Price of any Security;


	(v) make any change that adversely affects the right of a Holder to require the Company to repurchase a Security in accordance with Article III;


	(vi) make any change that adversely affects the right to receive payment with respect to any Security or the right to institute suit for the enforcement of any payment with respect to any Security;


	(vii) modify the provisions of Article XI hereof in a manner adverse to the Holders; or


	(viii) reduce the amount of Securities whose Holders must consent to an amendment, supplement or waiver.

An amendment under this Section 9.02 may not make any change that adversely affects the rights under Article XI of any holder of Senior Indebtedness unless the holders of such Senior Indebtedness pursuant to its terms consent to the change.

Promptly after an amendment under Section 9.01 and this Section 9.02 becomes effective, the Company shall mail to Securityholders a notice briefly describing the amendment. Any failure of the Company to mail such notice shall not in any way impair or affect the validity of such amendment, supplement or waiver.

It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment or supplement, but it shall be sufficient if such consent approves the substance thereof.


	Every amendment, waiver or supplement to this Indenture or the Securities shall comply with the TIA as then in effect.

Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder’s Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to its Security or portion of a Security if the Trustee receives the notice of revocation before the date the amendment, supplement or waiver becomes effective. An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every Securityholder.

After an amendment, supplement or waiver becomes effective with respect to the Securities, it shall bind every Securityholder unless it makes a change described in Section 9.02. In that case, the amendment, supplement or waiver shall bind each Holder of a Security who has

consented to it and, provided that notice of such amendment, supplement or waiver is reflected on a Security that evidences the same debt as the consenting Holder’s Security, every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder’s Security.

If an amendment, supplement or waiver changes the terms of a Security, the Trustee may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security as directed and prepared by the Company about the changed terms and return it to the Holder. Alternatively, if the Company so determines, the Company in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms.

The Trustee need not sign any amendment, supplement or waiver authorized pursuant to this Article IX that adversely affects the Trustee’s rights, duties, liabilities or immunities. The Trustee shall be entitled to receive and conclusively rely upon an Opinion of Counsel and an Officers’ Certificate that any supplemental indenture, amendment or waiver is permitted or authorized pursuant to the Indenture.

10.01 Applicability of Article; Company’s Option to Effect Defeasance or Covenant Defeasance.

The Company may at its option by Board Resolution, at any time, elect to have either Section 10.02 or Section 10.03 hereof be applied to all outstanding Securities upon compliance with the conditions set forth below in this Article X.

Upon the Company’s exercise of the above option applicable to this Section, the Company shall be deemed to have been discharged from its obligations with respect to all outstanding Securities on the date the conditions set forth in Section 10.04 are satisfied (hereinafter, “Legal Defeasance”). For this purpose, such Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding Securities, which shall thereafter be deemed to be “outstanding” only for the purposes of Section 10.05 and the other Sections of this Indenture referred to in clauses (A) and (B) of this Section, and to have satisfied all its other obligations under such Securities and this Indenture (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of outstanding Securities to receive, solely from the trust fund described in Section 10.04 and as more fully set forth in such Section, payments in respect of the principal of and interest, if any, on such Securities when such

payments are due, (B) the Company’s obligations with respect to such Securities under Sections 2.06, 2.07, 4.01 and 4.02, (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (D) this Article X. Subject to compliance with this Article X, the Company may exercise its option under this Section notwithstanding the prior exercise of its option under Section 10.03 with respect to such Securities. Money and securities held in trust pursuant to Section 10.02 shall not be subject to Article XI.

Upon the Company’s exercise under Section 10.01 hereof of the option applicable to this Section 10.03, the Company shall be released from its obligations under any covenant or provision contained or referred to in Article IV and Article V on and after the date the conditions set forth in Section 10.04 are satisfied (hereinafter, “Covenant Defeasance”), and the Securities shall thereafter be deemed to be not “outstanding” for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with any such covenant, but shall continue to be deemed “outstanding” for all other purposes hereunder. For this purpose, such Covenant Defeasance means that, with respect to the outstanding Securities, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Section or such other covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such Section or such other covenant or by reason of reference in any such Section or such other covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.01(iii) or otherwise, as the case may be, but, except as specified above, the remainder of this Indenture and such Securities shall be unaffected thereby.

The following shall be the conditions to application of Section 10.02 or Section 10.03 to the outstanding Securities:

(i) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 11.12 who shall agree to comply with the provisions of this Article X applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities, (1) United States dollars in an amount, (2) U.S. Government Obligations applicable which through the scheduled payment of principal and interest in respect thereof in accordance with their terms and with no further reinvestment will provide, not later than one day before the due date of any payment of principal of and interest, if any, on such Securities, in an amount, or (3) a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, the principal of and interest, if any, on such outstanding Securities on the Maturity Date of such principal or installment of principal or interest.


	(ii) Such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other material agreement or instrument to which the Company is a party or by which it is bound.


	(iii) No Default or Event of Default with respect to such Securities shall have occurred and be continuing on the date of such deposit or, insofar as Sections 6.01(v) and 6.01(vi) are concerned, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period).

(iv) In the case of an election under Section 10.02, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (1) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (2) since the date of execution of this Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of such outstanding Securities will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred.

(v) In the case of an election under Section 10.03, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of such outstanding Securities will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred.

(vi) The Company shall have delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent to the Legal Defeasance under Section 10.02 or the Covenant Defeasance under Section 10.03, as the case may be, have been complied with and an Opinion of Counsel to the effect that either (1) as a result of a deposit pursuant to subsection (i) above and the related exercise of the Company’s option under Section 10.02 or Section 10.03, as the case may be, registration is not required under the Investment Company Act of 1940, as amended, by the Company, with respect to the trust funds representing such deposit or by the trustee for such trust funds or (2) all necessary registrations under said Act have been effected.

10.05 Deposited Money and Government Obligations to Be Held in Trust; Other Miscellaneous Provisions.

Subject to the provisions of Section 8.03, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 10.05, the “Trustee”) pursuant to Section 10.04 in respect of any outstanding Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities of all sums due and to become due

thereon in respect of principal and interest, if any, but such money need not be segregated from other funds except to the extent required by law.

The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 10.04 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of such outstanding Securities.

Anything in this Article X to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations (or other property and any proceeds therefrom) held by it as provided in Section 10.04 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect a Legal Defeasance or Covenant Defeasance, as applicable, in accordance with this Article X.

(A) If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 10.05 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company’s obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit has occurred pursuant to this Article X until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 10.05.


	(B) If the Company’s obligations under this Indenture and the Securities shall be revived and reinstated in accordance with this Section 10.06, the Company shall be permitted, at its discretion to withdraw all or a portion of the deposits made by the Company pursuant to this Article X.

If the Company elects not to withdraw any of the deposits made by the Company pursuant to this Article X, if and when the Trustee or Paying Agent is later permitted to apply all such money or U.S. Government Obligations in accordance with Section 10.05, the rights of the Company shall be subrogated to the rights of the Holders of the Securities to receive payments from the money or U.S. Government Obligations deposited by the Company pursuant to Article X and held by the Trustee or Paying Agent; provided that if the Company shall have made any payment of principal or interest on the Securities because of the revival and reinstatement of its obligations, which payment is not sourced from any amounts deposited by the Company pursuant to Article X (such amount, in the aggregate, being referred to as the “Company Paid Amount”), the Company shall be permitted, at its discretion, to withdraw all or a portion of the deposits made by the Company pursuant to this Article X up to the Company Paid Amount.

The Company agrees, and each Securityholder by accepting a Security agrees, that the payment of all amounts due with respect to the Securities is subordinated in right of payment, to the extent and in the manner provided in this Article XI, to the prior payment in full of all Senior Indebtedness and that the subordination is for the benefit of the holders of Senior Indebtedness.

Money and securities held in trust pursuant to Article VIII are not subject to the subordination provisions of this Article XI.

“Indebtedness” means, with respect to any person, the principal of, and premium, if any, and interest on (a) all indebtedness of such person for borrowed money (including all indebtedness evidenced by notes, bonds, debentures or other securities sold by such person for money), (b) all obligations incurred by such person in the acquisition (whether by way of purchase, merger, consolidation or otherwise and whether by such person or another person) of any business, real property or other assets (except trade payables), (c) guarantees by such person of indebtedness described in clause (a) or (b) of another person, (d) all renewals, extensions, refundings, deferrals, restructurings, amendments and modifications of any such indebtedness, obligation or guarantee, (e) all reimbursement obligations of such person with respect to letters of credit, bankers’ acceptances or similar facilities issued for the account of such person, (f) all capital lease obligations of such person and (g) all net obligations of such person under interest rate swap, currency exchange or similar agreements of such person.

“Representative” means the Trustee or other trustee, agent or representative for an issue of Senior Indebtedness.

“Senior Indebtedness” means all Indebtedness of the Company outstanding at any time, except the Securities, Indebtedness that by its terms provides that it shall not be “senior” in right of payment to the Securities or Indebtedness that by its terms provides that it shall be “pari passu” or “junior” in right of payment to the Securities. Senior Indebtedness does not include Indebtedness of the Company to any of its subsidiaries, the Company’s 3¼% Convertible Subordinated Notes due 2007 or the Company’s 1.75% Convertible Subordinated Notes due 2023.

Upon any distribution of assets to creditors of the Company in a liquidation, winding up or dissolution of the Company, or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property:


	(i) holders of Senior Indebtedness shall be entitled to receive payment in full of the principal of and interest (including interest accruing after the commencement of any such proceeding) to the date of payment on the Senior Indebtedness before Securityholders shall be entitled to receive any payment from the Company of amounts due with respect to the Securities; and

(ii) until the Senior Indebtedness is paid in full, any distribution to which Securityholders would be entitled from the Company but for this Article XI shall be made to holders of Senior Indebtedness, as their interests may appear, except the Securityholders may receive securities that are subordinated to Senior Indebtedness to at least the same extent as the Securities and payments made pursuant to Sections 8.01 and 8.02.

11.04 Company Not to Make Payments with Respect to Securities in Certain Circumstances.

No payment of amounts due may be made by the Company, directly or indirectly, with respect to the Securities or to acquire any of the Securities (including any repurchase right pursuant to the exercise of the Change in Control Repurchase Right) at any time if a default in payment of the principal of or premium, if any, or interest on Senior Indebtedness exists beyond any applicable grace period, unless and until such default shall have been cured or waived or shall have ceased to exist. During the continuance of any default with respect to any Senior Indebtedness pursuant to which any Senior Indebtedness has been issued (other than default in payment of the principal of or premium, if any, or interest on any Senior Indebtedness), permitting the holders thereof to accelerate the maturity thereof, no payment may be made by the Company, directly or indirectly, of any amount due with respect to the Securities (a “Payment Blockage”) until the earlier of (i) the date on which such default has been cured or waived, (ii) 180 days following receipt of written notice (a “Payment Blockage Notice”) to the Company from any holder or holders thereof or its Representative or Representatives or the trustee or trustees under any indenture under which any instrument evidencing any such Senior Indebtedness may have been issued, that such a default has occurred and is continuing, (iii) the date on which such Senior Indebtedness is discharged or paid in full or (iv) the date of which the imposition of such Payment Blockage shall have been terminated by written notice to such trustee or the Company from such trustee or other representative initiating such Payment Blockage. Notwithstanding the foregoing, no new Payment Blockage Notice shall be given until a period of at least 365 consecutive days shall have elapsed since the beginning of the prior Payment Blockage period. No default (other than a default in payment) that existed or was continuing on the date of delivery of any Payment Blockage Notice shall be the basis for any subsequent Payment Blockage Notice, unless such default has been cured or waived for a period of not less than 90 consecutive days. However, if the maturity of such Senior Indebtedness is accelerated, no payment may be made by the Company on the Securities until such Senior Indebtedness that has matured has been paid or such acceleration has been cured or waived.

Regardless of anything to the contrary herein, nothing shall prevent (a) any payment by the Trustee to the Securityholders of amounts deposited with it pursuant to Article VIII or (b) any payment by the Trustee or the Paying Agent as permitted by Section 11.12. Nothing contained in this Article XI will limit the right of the Trustee or the Securityholders to

take any action to accelerate the maturity of the Securities pursuant to Section 6.02 or to pursue any rights or remedies hereunder.

If payment of the Securities is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Indebtedness of the acceleration.

In the event that the Company shall make any payment to the Trustee with respect to the Securities at a time when such payment is prohibited by Section 11.03 or 11.04, such payment shall be held by the Trustee, in trust for the benefit of, and shall be paid forthwith over and delivered to, the holders of Senior Indebtedness (pro rata as to each of such holders on the basis of the respective amounts of Senior Indebtedness held by them) or their Representative or the trustee under the indenture or other agreement (if any) pursuant to which Senior Indebtedness may have been issued, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness.

If a distribution is made to Securityholders, that because of this Article XI should not have been made to them, the Securityholders who receive the distribution shall hold it in trust for holders of Senior Indebtedness and pay it over to them as their interests may appear.

The Company shall promptly notify the Trustee and the Paying Agent in writing of any facts known to the Company that would cause a payment of any amount due with respect to the Securities to violate this Article XI, but failure to give such notice shall not affect the subordination of the Securities to the Senior Indebtedness provided in this Article XI.

After all Senior Indebtedness is paid in full and until the Securities are paid in full, Securityholders shall be subrogated (equally and ratably with all other Indebtedness of the Company ranking pari passu with the Securities) to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to the Securityholders have been applied to the payment of Senior Indebtedness. A distribution made under this Article XI to holders of Senior Indebtedness which otherwise would have been made to Securityholders is not, as between the Company and Securityholders, a payment by the Company on Senior Indebtedness.

This Article XI defines the relative rights of Securityholders and holders of Senior Indebtedness. Nothing in this Indenture shall:


	(i) impair, as between the Company, on the one hand, and Securityholders, on the other hand, the obligation of the Company, which is absolute and unconditional, to pay all amounts due with respect to the Securities in accordance with their terms;


	(ii) affect the relative rights of Securityholders and creditors of the Company other than holders of Senior Indebtedness; or


	(iii) prevent the Trustee or any Securityholder from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders of Senior Indebtedness to receive distributions otherwise payable to Securityholders.

Upon any distribution of assets of the Company referred to in this Article XI, the Trustee, subject to the provisions of Sections 7.01 and 7.02, and the Holders of the Securities shall be entitled to rely upon any order or decree by any court of competent jurisdiction in which such dissolution, winding up, liquidation or reorganization proceedings are pending, or a certificate of the liquidating trustee or agent or other person making any distribution to the Trustee or the Holders of the Securities, for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XI. Nothing contained in this Article XI or elsewhere in this Indenture or in any Security is intended to or shall affect the obligation of the Company to make, or prevent the Company from making, at any time except during the pendency of any dissolution, winding up, liquidation or reorganization proceeding, and except during the continuance of any default specified in Section 11.04 (not cured or waived), payments at any time of all amounts due with respect to the Securities.

No right of any holder of Senior Indebtedness to enforce the subordination of the indebtedness evidenced by the Securities shall be impaired by any act or failure to act by the Company or by the failure of the Company to comply with this Indenture.

Whenever a distribution is to be made or a notice given to holders of Senior Indebtedness, the distribution may be made and the notice given to their Representatives.

The Trustee or Paying Agent may continue to make payments on the Securities until it receives written notice of facts that would cause a payment of amounts due with respect to the Securities to violate this Article XI. Only the Company or a Representative or a holder of an issue of Senior Indebtedness that has no Representative may give the notice.

The Trustee shall be entitled to conclusively rely on the delivery to it of a written notice by a person representing himself to be a holder of Senior Indebtedness (or a Representative on behalf of such holder) to establish that such notice has been given by a holder of Senior Indebtedness or a Representative on behalf of any such holder. In the event that the

Trustee determines in good faith that further evidence is required with respect to the right of any person who is a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article XI, the Trustee may request such person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such person, the extent to which such person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such person under this Article XI, and if such evidence is not furnished the Trustee may defer any payment to such person pending judicial determination as to the right of such person to receive such payment or until such time as the Trustee shall be otherwise satisfied as to the right of such person to receive such payment.

The Trustee in its individual or any other capacity may hold Senior Indebtedness with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights.

The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and shall not be liable to any such holder if it shall mistakenly pay over or distribute to Securityholders or the Company or any other person money or assets to which any holders of Senior Indebtedness shall be entitled by virtue of this Article XI or otherwise.

If there occurs an event referred to in Section 11.03 or 11.04, the Company shall promptly give to the Trustee an Officers’ Certificate (on which the Trustee may conclusively rely) identifying all holders of Senior Indebtedness or their Representatives and the principal amount of Senior Indebtedness then outstanding held by each such holder and stating the reasons why such Officers’ Certificate is being delivered to the Trustee.

The failure to make any payment due with respect to the Securities by reason of any provision of this Article XI shall not be construed as preventing the occurrence of an Event of Default under Section 6.01.

If any provision of this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision of the TIA shall control.

Any notice or communication by the Company or the Trustee to one or both of the others is duly given if in writing and delivered in person, mailed by first-class mail or by express delivery to the other parties’ addresses stated in this Section 12.02. The Company or the Trustee by notice to the others may designate additional or different addresses for subsequent notices or communications.

Any notice or communication to a Securityholder shall be mailed to its address shown on the register kept by the Registrar. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders.

If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it.

If the Company mails a notice or communication to Securityholders, it shall mail a copy to the other and to the Trustee and each Agent at the same time.

WebMD Corporation
669 River Drive, Center 2
Elmwood Park, New Jersey 07407-1361
Facsimile: (201) 703-3401
Attention: Executive Vice President—Chief Financial Officer

Securityholders may communicate pursuant to TIA § 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA § 312(c).

Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee:


	(i) an Officers’ Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and

	(ii) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with.

Each signer of an Officers’ Certificate or an Opinion of Counsel may (if so stated) rely, effectively, upon an Opinion of Counsel as to legal matters and an Officers’ Certificate as to factual matters if such signer reasonably and in good faith believes in the accuracy of the document relied upon.

Each Officers’ Certificate or Opinion of Counsel with respect to compliance with a condition or covenant provided for in this Indenture shall include:


	(i) a statement that the person making such certificate or opinion has read such covenant or condition;

	(ii) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;

	(iii) a statement that, in the opinion of such person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and

	(iv) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with.


	The Trustee may make reasonable rules for action by or at a meeting of Securityholders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for their respective functions.

A “Legal Holiday” is a Saturday, a Sunday or a day on which banking institutions are not required to be open in the City of New York, in the State of New York or in the city in which the Trustee or the applicable agent administers its corporate trust business. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue on that payment for the intervening period.

No past, present or future director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Securities or this Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities.

The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. Delivery of an executed counterpart by facsimile shall be effective as delivery of a manually executed counterpart thereof.

The laws of the State of New York shall govern this Indenture and the Securities.

This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or any of its subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture.

All agreements of the Company in this Indenture and the Securities shall bind their respective successors. All agreements of the Trustee in this Indenture shall bind its successors.

In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and a Holder shall have no claim therefor against any party hereto.

The Table of Contents, Cross-Reference Table and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof.

IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the date first above written.

WEBMD CORPORATION, a Delaware corporation (herein called the “Company”), for value received, hereby promises to pay to Cede & Co. or registered assigns, the principal sum of Dollars ($ ) on [ ], 2010, and to pay interest thereon, as provided on the reverse hereof, until the principal and any unpaid and accrued interest is paid or duly provided for. The right to payment of the principal and all other amounts due with respect hereto is subordinated to the rights of Senior Indebtedness as set forth in the Indenture referred to on the reverse side hereof.

The provisions on the back of this certificate are incorporated as if set forth on the face hereof.

IN WITNESS WHEREOF, WEBMD CORPORATION has caused this instrument to be duly signed.

1. Interest. WebMD Corporation, a Delaware corporation (the “Company”), promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company will pay interest semiannually on [ ] and [ ] of each year, with the first payment to be made on [ ], to the Holders of record on the immediately preceding [ ] and [ ], respectively, whether or not such day is a business day. Interest on the Securities will accrue on the principal amount from the most recent date to which interest has been paid or provided for or, if no interest has been paid, from [ ]. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company will not be required to make any interest payment on the Securities on any day that is not a business day until the next succeeding business day. Such interest payment made on the next succeeding business day will be treated as though it were paid on the original due date and no interest will accrue on the payment for the additional period of time.

3. Method of Payment. The Company will pay interest on the Securities (except defaulted interest) to the persons who are registered Holders of Securities at the close of business on the record date set forth on the face of this Security immediately preceding the applicable interest payment date. Holders must surrender Securities to a Paying Agent to collect the principal, Redemption Price or Repurchase Price of the Securities. The Company will pay all amounts due with respect to the Securities in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay interest, the Redemption Price, the Repurchase Price and the principal amount at maturity, as the case may be, by check or wire payable in such money; provided, however, that a Holder holding Securities with an aggregate principal amount in excess of $2,000,000 will be paid by wire transfer in immediately available funds at the election of such Holder. The Company may mail an interest check to the Holder’s registered address. Notwithstanding the foregoing, so long as this Security is registered in the name of a Depositary or its nominee, all payments hereon shall be made by wire transfer of immediately available funds to the account of the Depositary or its nominee.

4. Paying Agent, Registrar. Initially, [ ] (the “Trustee”) will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice. The Company may act as Paying Agent.

5. Indenture; Ranking. The Company issued the Securities under an Indenture, dated as of [ ], 2008 (the “Indenture”), between the Company and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code §§ 77aaa-77bbbb) (the “Act”) as in effect on the date of the Indenture. The Securities are subject to all such terms, and Securityholders are referred to the Indenture and the Act for a statement of such terms. The

Securities are general unsecured subordinated obligations of the Company limited to $[ ] aggregate principal amount, except as otherwise provided in Section 2.07 of the Indenture. The Securities rank equal in right of payment to the Company’s 31/4% Convertible Subordinated Notes due 2007 and the Company’s 1.75% Convertible Subordinated Notes due 2023. Terms used and not otherwise defined herein that are defined in the Indenture have the meanings assigned to them in the Indenture.

6. Redemption by the Company. The Securities will be redeemable at the option of the Company, in whole or in part, at any time, from time to time, at the Redemption Price, plus accrued and unpaid interest thereon up to, but not including, the Redemption Date for such Securities.

7. Notice of Redemption. Notice of redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder to be redeemed at its registered address. Securities in denominations larger than $1,000 principal amount may be redeemed in part but only in positive integral multiples of $1,000 principal amount. On and after the Redemption Date interest ceases to accrue on Securities or portions of them called for redemption.

8. Repurchase Upon a Change in Control. Upon any Change in Control (as defined below) with respect to the Company, each Holder shall have the right (the “Change in Control Repurchase Right”), at the Holder’s option, subject to the rights of the holders of Senior Indebtedness under Article XI of the Indenture, to require the Company to repurchase all of such Holder’s Securities, or a portion thereof which is $1,000 in principal amount or any positive integral multiple thereof, on the date (the “Change in Control Repurchase Date”) that is 30 business days after the date of the Change in Control Notice (as defined below) at the Repurchase Price plus accrued and unpaid interest to, but not including, the Change in Control Repurchase Date. At the option of the Company, the Repurchase Price for Securities the Company is required to repurchase pursuant to a Change in Control may be paid in Cash, Common Stock or a combination of both, subject to certain conditions as set forth in the Indenture.

A “Change in Control” of the Company shall be deemed to have occurred at such time as:

(ii) the conveyance, sale transfer or lease by the Company of all or substantially all of its assets to another person.

However, a Change in Control will not be deemed to have occurred if all or substantially all (but in no event less than 90%) of the consideration, excluding Cash payments for fractional shares of Common Stock and Cash payments made pursuant to dissenters’ appraisal rights, in a merger or consolidation otherwise constituting a Change in Control in the preceding paragraph consists of shares of common stock, depositary receipts or other certificates representing common equity interests traded on a national securities exchange or quoted on the NASDAQ National Market, or will be so traded or quoted immediately following such merger or consolidation, and as a result of such merger or consolidation the Securities become convertible solely into such common stock, depositary receipts or other certificates representing common equity interests.

(1) whether a person is a “beneficial owner” will be determined in accordance with Rule 13d-3 under the Exchange Act as in effect on the date hereof; and

(2) a “person” includes any syndicate or group that would be deemed to be a person under Section 13(d)(3) of the Exchange Act as in effect on the date hereof.

9. Discharge or Defeasance. Subject to certain conditions, the Company at any time may terminate all of some of its obligations under the Securities and the Indenture if the Company irrevocably deposits with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Securities to the redemption or maturity, as the case may be.

10. Subordination. The Securities are subordinated in right of payment, in the manner and to the extent set forth in Article XI of the Indenture, to the prior payment in full of all Senior Indebtedness. Each Holder by accepting a Security agrees to such subordination and authorizes the Trustee to give it effect.

11. Denominations, Transfer, Exchange. The Securities are in registered form without coupons in denominations of $1,000 principal amount and positive integral multiples of $1,000 principal amount. The transfer of Securities may be registered and Securities may be

exchanged as provided in the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. The Registrar need not exchange or register the transfer of any Security selected for redemption in whole or in part, except the unredeemed portion of Securities to be redeemed in part. Also, it need not exchange or register the transfer of any Securities for a period of 15 days before the mailing of a notice of redemption of the Securities selected to be redeemed and in certain other circumstances provided in the Indenture.

12. Persons Deemed Owners. The registered Holder of a Security may be treated as the owner of such Security for all purposes.

13. Merger or Consolidation. The Company shall not consolidate with or merge with or into, or convey, transfer or lease all or substantially all of its properties and assets to, another person unless such other person is a corporation organized under the laws of the United States, any State thereof or the District of Columbia or a corporation or comparable legal entity organized under the laws of a foreign jurisdiction and whose equity securities are listed on a national securities exchange in the United States or authorized for quotation on the NASDAQ National Market prior to or upon giving effect to the transaction (provided, however, that in the case of a transaction where the surviving entity is organized under the laws of a foreign jurisdiction, the Company may not consummate the transaction without first (i) making provision for the satisfaction of its obligations to repurchase the Securities following a Change in Control, if any, (ii) amending the terms of the Securities to provide that, in the event the Company is required under the laws of such foreign jurisdiction (or any political subdivision thereof) to withhold or deduct amounts in respect of taxes from payments made to Securityholders on the Securities, the Company will pay, subject to certain standard exceptions, such additional amounts to the holders as may be necessary so that each Securityholder will receive the same amounts it would have received had no such withholding or deduction been required, and (iii) obtaining an opinion of tax counsel experienced in such matters to the effect that, under then existing United States federal income tax laws, there would be no material adverse tax consequences to Securityholders of the Securities resulting from such transaction); such person assumes by supplemental indenture all the obligations of the Company, under the Securities and this Indenture; and immediately after giving effect to the transaction, no Default or Event of Default shall exist under the terms of the Indenture.

14. Amendments, Supplements and Waivers. Subject to certain exceptions, the Indenture or the Securities may be amended or supplemented with the consent of the Holders of a majority in aggregate principal amount of the Securities then outstanding, and any existing Default or Event of Default may be waived with the consent of the Holders of a majority in aggregate principal amount of the Securities then outstanding. Without notice to or the consent of any Securityholder, the Indenture or the Securities may be amended or supplemented, with the consent of the Trustee, to cure any ambiguity, inconsistency or other defect in the Indenture; to comply with Section 5.01 of the Indenture; to evidence a successor to the Company and the assumption by that successor of the Company’s obligations under the Indenture and the Securities; to evidence and provide for the acceptance of the appointment under the Indenture of a successor Trustee; to secure the obligations of the Company in respect of the Securities; or to

add to covenants of the Company described in the Indenture for the benefit of Securityholders or to surrender any right or power conferred upon the Company.

15. Defaults and Remedies. An Event of Default includes the occurrence of those events set forth in Section 6.01 of the Indenture. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding may declare all the Securities to be due and payable immediately, except as provided in the Indenture. If an Event of Default specified in Section 6.01 (vi) or (vii) of the Indenture with respect to the Company occurs, the principal of and accrued interest on all the Securities shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Securityholder. The Company must furnish an annual compliance certificate to the Trustee.

16. Registration Rights. The Holders are entitled to registration rights as set forth in Exhibit [ ] to the Purchase Agreement.

17. Trustee Dealings with the Company. The Trustee under the Indenture, or any banking institution serving as successor Trustee thereunder, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates, as if it were not Trustee.

18. No Recourse Against Others. No past, present or future director, officer, employee or stockholder, as such, of the Company shall have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Securityholder by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities.

19. Authentication. This Security shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent.

20. Abbreviations. Customary abbreviations may be used in the name of a Securityholder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entirety), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (Uniform Gifts to Minors Act).

THE COMPANY WILL FURNISH TO ANY SECURITYHOLDER UPON WRITTEN REQUEST AND WITHOUT CHARGE A COPY OF THE INDENTURE. REQUESTS MAY BE MADE TO:

WebMD Corporation
669 River Drive, Center 2
Elmwood Park, New Jersey 07407-1361
Attention: Executive Vice President—Chief Financial Officer

If you want to elect to have this Security purchased by the Company pursuant to Section 3.08 of the Indenture, check the box:o

If you want to elect to have only part of this Security purchased by the Company pursuant to Section 3.08 of the Indenture, state the principal amount:

The following exchanges of a part of this Global Security for an interest in another Global Security or for Securities in certificated form, have been made:

Any Global Security authenticated and delivered hereunder shall bear a legend in substantially the following form:

		THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY OR A SUCCESSOR DEPOSITARY. THIS SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.

		UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

		TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR’S NOMINEE.

B-1 EX-10.1 4 g91436exv10w1.htm EX-10.1 2004 NON-QUALIFIED STOCK OPTION PLAN / DAKOTA IMAGING, INC. EX-10.1 2004 NON-QUALIFIED STOCK OPTION PLAN / DAK

Exhibit 10.1

WEBMD CORPORATION
2004 NON-QUALIFIED STOCK OPTION PLAN
FOR EMPLOYEES OF DAKOTA IMAGING, INC.

ARTICLE 1

Purpose

1.1 General. The purpose of the WebMD Corporation 2004 Non-Qualified Stock Option Plan for Employees of Dakota Imaging, Inc. (the “Plan”) is to induce employees of Dakota Imaging, Inc. (“Dakota”) to remain employees of Dakota following the acquisition by Envoy Corporation, a wholly-owned subsidiary of WebMD Corporation (the “Corporation”), of Dakota pursuant to the Agreement and Plan of Merger dated as of April 5, 2004 (the “Merger Agreement”) and to motivate such employees to promote the success, and enhance the value, of the Corporation, by linking the personal interests of such employees to those of Corporation shareholders and by providing such employees with an incentive for outstanding performance.

ARTICLE 2

Effective Date

2.1 Effective Date. The Plan shall be effective as of April 19, 2004 the date upon which it was approved by the Board (the “Effective Date”); provided, however, that in the event the closing of the transactions contemplated by the Merger Agreement does not occur, this Plan shall be null, void and of no further force and effect.

ARTICLE 3

Definitions

3.1 Definitions. When a word or phrase appears in this Plan with the initial letter capitalized, and the word or phrase does not commence a sentence, the word or phrase shall generally be given the meaning ascribed to it in this Section or in Section 1.1 unless a clearly different meaning is required by the context. The following words and phrases shall have the following meanings:

(a) “Board” means the Board of Directors of the Corporation.

(b) “Cause” as a reason for a Participant’s termination of employment shall have the meaning assigned such term in the employment agreement, if any, between such Participant and the Corporation or an affiliated company, provided, however that if there

is no such employment agreement in which such term is defined, “Cause” shall mean any of the following acts by the Participant, as determined by the Corporation: gross neglect of duty, prolonged absence from duty without the consent of the Corporation, intentionally engaging in any activity that is in conflict with or adverse to the business or other interests of the Corporation, willful misconduct, misfeasance or malfeasance of duty which is reasonably determined to be detrimental to the Corporation or breach of any restrictive covenant set forth in an Option Agreement or any substantially similar provisions in any other agreements with the Corporation or any of its subsidiaries.

(c) “Code” means the Internal Revenue Code of 1986, as amended from time to time.

(d) “Committee” means the committee described in Article 4.

(e) “Corporation” has the meaning specified in Article 1.

(f) “Dakota” has the meaning specified in Article 1.

(g) “Effective Date” has the meaning assigned such term in Section 2.1.

(h) “Eligible Persons” has the meaning assigned to such term in Section 6.1.

(i) “Fair Market Value”, on any date, means (i) if the Stock is listed on a securities exchange or is traded over the NASDAQ National Market, the closing sales price on such exchange or over such system on such date or, in the absence of reported sales on such date, the closing sales price on the immediately preceding date on which sales were reported, or (ii) if the Stock is not listed on a securities exchange or traded over the NASDAQ National Market, the mean between the bid and offered prices as quoted by NASDAQ for such date, provided that if it is determined that the fair market value is not properly reflected by such NASDAQ quotations, Fair Market Value will be determined by such other method as the Committee determines in good faith to be reasonable.

(j) “Merger Agreement” has the meaning specified in Article 1.

(k) “Option” means a right granted to a Participant under Article 7 of the Plan to purchase Stock at a specified price during specified time periods. The Options to be granted hereunder are not intended to qualify as “incentive stock options” within the meaning of Section 422 of the Code or any successor provision.

(l) “Option Agreement” means any written agreement, contract, or other instrument or document evidencing an Option.

(m) “Parent” means a corporation which owns or beneficially owns a majority of the outstanding voting stock or voting power of the Corporation.

(n) “Participant” means a person who, as an employee of the Corporation or any Parent or Subsidiary, has been granted an Option under the Plan.

(o) “Permanent Disability” means Permanent Disability (or equivalent definition) as defined in an employment agreement between Participant and the Corporation or one of its Subsidiaries or in the event that the Participant is not party to an employment agreement that defines “Permanent Disability,” the Participant shall be deemed Permanently Disabled if such person has been deemed “disabled” by the Corporation’s long term disability insurance carrier.

(p) “Plan” means the WebMD Corporation 2004 Non-Qualified Stock Option Plan for Employees of Dakota Imaging, Inc., as amended from time to time.

(q) “Stock” means the $.0001 par value common stock of the Corporation and such other securities of the Corporation as may be substituted for Stock pursuant to Article 9.1.

(r) “Subsidiary” means any corporation, limited liability company, partnership or other entity of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Corporation.

(s) “1933 Act” means the Securities Act of 1933, as amended from time to time.

(t) “1934 Act” means the Securities Exchange Act of 1934, as amended from time to time.

ARTICLE 4

Administration

4.1 Committee. The Plan shall be administered by the Compensation Committee of the Board (the “Committee”) or, at the discretion of the Board from time to time, the Plan may be administered by the Board. It is intended that the directors appointed to serve on the Committee shall be “non-employee directors” (within the meaning of Rule 16b-3 promulgated under the 1934 Act) and “outside directors” (within the meaning of Code Section 162(m) and the regulations thereunder) to the extent that Rule 16b-3 and, if necessary for relief from the limitation under Code Section 162(m) and such relief is sought by the Corporation, Code Section 162(m), respectively, are applicable. However, the mere fact that a Committee member shall fail to qualify under either of the foregoing requirements shall not invalidate any Option made by the Committee which Option is otherwise validly made under the Plan. The members of the Committee shall be appointed by, and may be changed at any time and from time to time in the discretion of, the Board. During any time that the Board is acting as administrator of the Plan, it shall have all the powers of the Committee hereunder, and any reference herein to the Committee (other than in this Section 4.1) shall include the Board.

4.2 Action by the Committee. For purposes of administering the Plan, the following rules of procedure shall govern the Committee. A majority of the Committee shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum

is present, and acts approved unanimously in writing by the members of the Committee in lieu of a meeting, shall be deemed the acts of the Committee. Each member of the Committee is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any officer or other employee of the Corporation or any Parent or Subsidiary, the Corporation’s independent certified public accountants, or any executive compensation consultant or other professional retained by the Corporation to assist in the administration of the Plan.

4.3 Authority of Committee. Except as provided below, the Committee has the exclusive power, authority and discretion to:

(a) Designate Participants;

(b) Determine the number of shares of Stock to which an Option will relate;

(c) Determine the terms and conditions of any Option granted under the Plan, including but not limited to, the exercise price, the term of the Option, any restrictions or limitations on the Option, any schedule for lapse of restrictions on the exercisability of an Option, and accelerations or waivers thereof, based in each case on such considerations as the Committee in its sole discretion determines;

(d) Accelerate the vesting of any outstanding Option, based in each case on such considerations as the Committee in its sole discretion determines;

(e) Prescribe the form of each Option Agreement, which need not be identical for each Participant;

(f) Decide all other matters that must be determined in connection with an Option;

(g) Establish, adopt or revise any rules and regulations as it may deem necessary or advisable to administer the Plan;

(h) Make all other decisions and determinations that may be required under the Plan or as the Committee deems necessary or advisable to administer the Plan; and

(i) Amend the Plan or any Option Agreement as provided herein.

Notwithstanding the above, the Board or the Committee may, subject to applicable law and rules and regulations of NASDAQ, expressly delegate to a special committee consisting of one or more officers of the Corporation some or all of the Committee’s authority set forth above with respect to those eligible Participants, who at the time of grant are not, and are not anticipated to become, either (i) Covered Employees or (ii) persons subject to Section 16 of the 1934 Act, provided that such delegation is in accordance with Section 157 of the Delaware General Corporation Law.

4.4 Decisions Binding. The Committee’s interpretation of the Plan, any Option granted under the Plan, any Option Agreement and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties.

ARTICLE 5

Shares Subject to the Plan

5.1 Number of Shares. Subject to adjustment as provided in Section 9.1, the aggregate number of shares of Stock reserved and available for Options shall be 2.0 million shares.

5.2 Lapsed Options. To the extent that an Option is canceled, terminates, expires, is forfeited or lapses for any reason, any shares of Stock subject to the Option will again be available for the grant of an Option under the Plan to an Eligible Person (as defined in Section 6.1 below).

5.3 Stock Distributed. Any Stock issued pursuant to an Option may consist, in whole or in part, of authorized and unissued Stock, treasury Stock or Stock purchased on the open market.

5.4 Limitation on Options. Notwithstanding any provision in the Plan to the contrary (but subject to adjustment as provided in Section 9.1), the maximum number of shares of Stock with respect to one or more Options that may be granted during any one calendar year under the Plan to any one Participant shall be 500,000.

ARTICLE 6

Eligibility

6.1 General. Options may be granted only to individuals who are employees of Dakota at the time of the closing of the transaction contemplated by the Merger Agreement in order to induce them to remain in the employ of Dakota following such transaction; provided, however, that no person who is subject to Section 16(a) of the Exchange Act shall be eligible for an Option hereunder (“Eligible Persons”).

ARTICLE 7

TERMS OF STOCK OPTION

7.1 General. The Committee is authorized to grant Options to Participants on the following terms and conditions:

(a) Exercise Price. The exercise price per share of Stock under an Option shall be determined by the Committee but shall not be less than 100 percent of the Fair Market Value on the date of grant.

(b) Time and Conditions of Exercise. The Committee shall determine the time or times at which an Option may be exercised in whole or in part, subject to Section 7.1(e). The Committee also shall determine the performance or other conditions, if any, that must be satisfied before all or part of an Option may be exercised. The Committee may waive any exercise provisions at any time in whole or in part based upon factors as the Committee may determine in its sole discretion so that the Option becomes exercisable at an earlier date. Unless the Option Agreement states otherwise, an Option shall vest in the following manner: 25% per year commencing on the first anniversary of the date of grant.

(c) Payment. The Committee shall determine the methods by which the exercise price of an Option may be paid, the form of payment, including, without limitation, cash, shares of Stock, or other property (including “cashless exercise” arrangements through a broker), and the methods by which shares of Stock shall be delivered or deemed to be delivered to Participants; provided, however, that if shares of Stock are used to pay the exercise price of an Option, such shares must have been held by the Participant for at least six months.

(d) Evidence of Grant. All Options shall be evidenced by a written Option Agreement, substantially in a form attached hereto as Exhibit A, between the Corporation and the Participant. Any such Option Agreement may include such other provisions, not inconsistent with the Plan, as may be specified by the Committee.

(e) Exercise Term. In no event may any Option be exercisable for more than ten years from the date of its grant.

(f) Termination of Employment.

(1) In the event that a Participant’s employment with the Corporation or any of its Subsidiaries or Parents terminates for any reason (other than Cause), the Participant (or the Participant’s estate) shall, unless otherwise provided in the applicable Option Agreement, be entitled to exercise the Participant’s Options which have become vested as of the date of termination for a period of 90 days (one year in the event of death or Permanent Disability) following the date of termination.

(2) In the event that a Participant’s employment with the Corporation or any of its Subsidiaries or Parents terminates for any reason, any Options which have not become vested as of the date of termination (the “Date of Termination” ) shall, unless otherwise provided in the applicable Option Agreement, terminate and be cancelled without any consideration being paid therefor. In the event that a Participant’s employment is terminated by the Corporation, or a Subsidiary or Parent for Cause, all of such Participant’s Options (including the vested portion)

shall, unless otherwise provided in the applicable Option Agreement, terminate and be cancelled without any consideration being paid therefor.

ARTICLE 8

Miscellaneous

8.1 Limits on Transfer. No right or interest of a Participant in any unexercised Option may be pledged, encumbered, or hypothecated to or in favor of any party other than the Corporation or a Parent or Subsidiary, or shall be subject to any lien, obligation, or liability of such Participant to any other party other than the Corporation or a Parent or Subsidiary. No unexercised or restricted Option shall be assignable or transferable by a Participant other than by will or the laws of descent and distribution or, pursuant to a domestic relations order that would satisfy Section 414(p)(1)(A) of the Code if such Section applied to an Option under the Plan; provided, however, that the Committee may (but need not) permit other transfers where the Committee concludes that such transferability (i) does not result in accelerated taxation, and (ii) is otherwise appropriate and desirable, taking into account any factors deemed relevant, including without limitation, state or federal tax or securities laws applicable to transferable Options.

8.2 Beneficiaries. A Participant may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the Participant and to receive any distribution with respect to any Option upon the Participant’s death. A beneficiary, legal guardian, legal representative, or other person claiming any rights under the Plan is subject to all terms and conditions of the Plan and any Option Agreement applicable to the Participant, except to the extent the Plan and Option Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee. If no beneficiary has been designated or survives the Participant, payment shall be made to the Participant’s estate. Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is filed with the Committee.

8.3 Stock Certificates. All Stock issuable under the Plan are subject to any stop-transfer orders and other restrictions as the Committee deems necessary or advisable to comply with federal or state securities laws, rules and regulations and the rules of any national securities exchange or automated quotation system on which the Stock is listed, quoted, or traded. The Committee may place legends on any Stock certificate or issue instructions to the transfer agent to reference restrictions applicable to the Stock.

8.4 Termination of Employment. Whether military, government or other service or other leave of absence shall constitute a termination of employment shall be determined in each case by the Committee at its discretion, and any determination by the Committee shall be final and conclusive. A termination of employment shall not occur (i) in a circumstance in which a Participant transfers from the Corporation to one of its Parents or Subsidiaries, transfers from a Parent or Subsidiary to the Corporation, or transfers from one Parent or

Subsidiary to another Parent or Subsidiary, or (ii) in the discretion of the Committee as specified at or prior to such occurrence, in the case of a spin-off, sale or other disposition of the Participant’s employer from the Corporation or any Parent or Subsidiary.

ARTICLE 9

Changes in Capital Structure

9.1 General. In the event of a corporate transaction involving the Corporation (including, without limitation, any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination or exchange of shares), the authorization limits under Section 5.1 and 5.4 shall be adjusted proportionately, and the Committee may adjust Options to preserve the benefits or potential benefits of the Options. Action by the Committee may include: (i) adjustment of the number and kind of shares which may be delivered under the Plan; (ii) adjustment of the number and kind of shares subject to outstanding Options; (iii) adjustment of the exercise price of outstanding Options; and (iv) any other adjustments that the Committee determines to be equitable. Without limiting the foregoing, in the event a stock dividend or stock split is declared upon the Stock, the authorization limits under Section 5.1 and 5.4 shall be increased proportionately, and the shares of Stock then subject to each Option shall be increased proportionately without any change in the aggregate purchase price therefor.

ARTICLE 10

Amendment, Modification and Termination

10.1 Amendment, Modification and Termination. The Board or the Committee may, at any time and from time to time, amend, modify or terminate the Plan without shareholder approval; provided, however, that the Board or Committee may condition any amendment or modification on the approval of shareholders of the Corporation if such approval is necessary or deemed advisable with respect to tax, securities or other applicable laws, policies or regulations.

10.2 Options Previously Granted. At any time and from time to time, the Committee may amend, modify or terminate any outstanding Option without approval of the Participant; provided, however, that, subject to the terms of the applicable Option Agreement, such amendment, modification or termination shall not, without the Participant’s consent, reduce or diminish the value of such Option and provided further that the original term of any Option may not be extended. No termination, amendment, or modification of the Plan shall adversely affect any Option previously granted under the Plan, without the written consent of the Participant.

ARTICLE 11

General Provisions

11.1 No Rights to Options. No Participant or any Eligible Person shall have any claim to be granted any Option under the Plan, and neither the Corporation nor the Committee is obligated to treat Participants or Eligible Persons uniformly.

11.2 No Stockholder Rights. No Option gives the Participant any of the rights of a shareholder of the Corporation unless and until shares of Stock are in fact issued to such person in connection with the exercise of such Option.

11.3 Withholding. The Corporation or any Parent or Subsidiary shall have the authority and the right to deduct or withhold, or require a Participant to remit to the Corporation, an amount sufficient to satisfy federal, state, and local taxes (including the Participant’s FICA obligation) required by law to be withheld with respect to any taxable event arising as a result of the Plan. With respect to withholding required upon any taxable event under the Plan, the Committee may, at the time the Option is granted or thereafter, require or permit that any such withholding requirement be satisfied, in whole or in part, by withholding from the Option shares of Stock having a Fair Market Value on the date of withholding equal to the minimum amount (and not any greater amount) required to be withheld for tax purposes, all in accordance with such procedures as the Committee establishes.

11.4 No Right to Continued Service. Nothing in the Plan or any Option Agreement shall interfere with or limit in any way the right of the Corporation or any Parent or Subsidiary to terminate any Participant’s employment at any time, nor confer upon any Participant any right to continue as an employee of the Corporation or any Parent or Subsidiary.

11.5 Unfunded Status of Options. The Plan is intended to be an “unfunded” plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant pursuant to an Option, nothing contained in the Plan or any Option Agreement shall give the Participant any rights that are greater than those of a general creditor of the Corporation or any Parent or Subsidiary.

11.6 Indemnification. To the extent allowable under applicable law, each member of the Committee shall be indemnified and held harmless by the Corporation from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in connection with or resulting from any claim, action, suit, or proceeding to which such member may be a party or in which he may be involved by reason of any action or failure to act under the Plan and against and from any and all amounts paid by such member in satisfaction of judgment in such action, suit, or proceeding against him provided he gives the Corporation an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Corporation’s

Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Corporation may have to indemnify them or hold them harmless.

11.7 Relationship to Other Benefits. No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, savings, profit sharing, group insurance, welfare or benefit plan of the Corporation or any Parent or Subsidiary unless provided otherwise in such other plan.

11.8 Expenses. The expenses of administering the Plan shall be borne by the Corporation and its Parents or Subsidiaries.

11.9 Titles and Headings. The titles and headings of the Sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.

11.10 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural.

11.11 Fractional Shares. No fractional shares of Stock shall be issued and the Committee shall determine, in its discretion, whether cash shall be given in lieu of fractional shares or whether such fractional shares shall be eliminated by rounding up.

11.12 Government and Other Regulations. The obligation of the Corporation to make payment of Options in Stock or otherwise shall be subject to all applicable laws, rules, and regulations, and to such approvals by government agencies as may be required. The Corporation shall be under no obligation to register under the 1933 Act, or any state securities act, any of the shares of Stock issued in connection with the Plan. The shares issued in connection with the Plan may in certain circumstances be exempt from registration under the 1933 Act, and the Corporation may restrict the transfer of such shares in such manner as it deems advisable to ensure the availability of any such exemption.

11.13 Governing Law. To the extent not governed by federal law, the Plan and all Option Agreements shall be construed in accordance with and governed by the laws of the State of Delaware.

11.14 Additional Provisions. Each Option Agreement may contain such other terms and conditions as the Committee may determine; provided that such other terms and conditions are not inconsistent with the provisions of this Plan.

Exhibit A

[Note: Items in brackets may be omitted if substantially the same provisions are contained in an Employment Agreement.]

WebMD Corporation
Non-Qualified Stock Option Agreement


		Optionee:
[Name]		Grant Date:
[Address]		Grant Number:
		Shares Granted:
		Stock Option Price:

We are pleased to inform you that the Compensation Committee (the “Committee”) of the Board of Directors of WebMD Corporation (the “Company”) or its designee has granted you an option to purchase that number of shares of the Company’s common stock set forth above at the per share exercise price set forth above. Your grant has been made under the Company’s 2004 Non-Qualified Stock Option Plan for Employees of Dakota Imaging, Inc. (as it may be amended from time to time, the “Plan”), which together with the terms contained in this Agreement, sets forth the terms and conditions of your grant and is incorporated herein by reference. In the event any terms set forth herein conflict with the terms as set forth in the Plan, the terms of the Plan shall govern. A copy of the Plan is available on the Company’s intranet site. Please review it carefully. Capitalized terms used herein without definition will have the meanings assigned to them in the Plan.

Vesting/Term:

Subject to the terms of the Plan and this Agreement, shares will vest in four equal annual installments, commencing on the first anniversary of the Grant Date (full vesting on the fourth anniversary of the Grant Date). Subject to earlier expiration in the event of the termination of your employment with the Company for any reason (as more fully described below), this Option will expire on the tenth anniversary of the Grant Date. The date on which this Option expires pursuant to this Agreement is referred to herein as the “Expiration Date”.

Exercise:

You may exercise this Option, in whole or in part, to purchase a whole number of vested shares at any time, by following the exercise procedures set up by the Committee. All exercises must take place before the Expiration Date. The number of shares you may purchase as of any date cannot exceed the total number of shares vested by that date, less any shares you have previously acquired by exercising this Option.

Restrictions on Exercise:

This Option may not be exercised if such exercise would violate any provision of applicable federal or state securities law, or other law or regulation or the Company’s employee trading policy.

Restrictive Covenants:

In the event that you breach any restrictive covenants to which you are bound [(including, without limitation, those set forth on Annex A )], in addition to any other remedy available to the Company, the Option, whether or not vested, will immediately terminate without any notice or consideration being paid therefore. [By signing below, you acknowledge the representations and agree to the covenants set forth on Annex A. The covenants on Annex A do not supersede or replace any other confidentiality, non-competition or non-solicitation agreement entered into between you and the Company (or subsidiary thereof) to the extent that such confidentiality, non-competition and/or non-solicitation agreement is more protective of the business of the Company and/or its subsidiaries.]

Termination Provisions:

In the event of the termination of your employment with the Company and its Subsidiaries for any reason, all further vesting of shares under this Option will stop, and this Option will be cancelled as to any unvested shares without any consideration being paid. If your employment is terminated without Cause or you resign, you will have 90 days to exercise this Option as to any

shares that have vested as of the date of termination, except that in the event of your death or Permanent Disability, you or your estate will have a period of one year to exercise. If your employment is terminated for Cause [(including as a result of a breach of the covenants or representations set forth on Annex A)], this Option will expire immediately as to all vested and unvested shares without any consideration being paid. IF YOU DO NOT EXERCISE THE VESTED PORTION OF THIS OPTION ON OR BEFORE THE EXPIRATION DATE, THIS OPTION WILL EXPIRE WITHOUT ANY CONSIDERATION BEING PAID.

No Rights to Grants or Continued Employment:

You shall not have any claim or right to receive grants of Options under the Plan. Neither the Plan nor this Agreement nor any action taken or omitted to be taken hereunder or thereunder shall be deemed to create or confer on you any right to be retained in the employ or service of the Company or any of its subsidiaries or affiliates, or to interfere with or to limit in any way the right of the Company or any of its subsidiaries or affiliates to terminate your employment at any time. You shall have no rights in the benefits conferred by this Option or in any shares except to the extent the Option is exercised while vested and exercisable and otherwise in accordance with the terms of this Agreement. Termination of the Option by reason of cessation of employment shall not give rise to any claim for damages by you under this Agreement and shall be without prejudice to any rights or remedies which the Company or any of its subsidiaries or affiliates may have against you.

Taxes and Withholding:

This Option is not intended to be an Incentive Stock Option, as defined under Section 422(b) of the Internal Revenue Code of 1986, as amended. Any exercise of this Option is generally a taxable event, and if the Company determines that any federal, state, local or foreign tax or withholding payment is required relating to the exercise or sale of sales arising from this grant, the Company shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company.

Set-off:

If at any time you are indebted to the Company or any subsidiary, the Company may in its discretion (a) withhold (i) shares issuable to you following your exercise of the Option (or portion thereof) having a fair market value on the date of exercise up to the amount of such indebtedness or (ii) amounts due to you in connection with the sale of the shares acquired as a result of the exercise of this Option (or portion thereof) up to the amount of such indebtedness or (b) take any substantially similar action.

Governing Law:

This Option shall be governed by, and interpreted and enforced in accordance with, the laws of the State of Delaware, without regard to the conflicts of law provisions thereof.

WEBMD CORPORATION Agreed and Accepted:

By: Optionee:

Title: Print Name:

Address:

[(ANNEX A TO WEBMD CORPORATION’S
NON-QUALIFIED STOCK OPTION AGREEMENT)

TRADE SECRET AND PROPRIETARY INFORMATION COVENANTS

1. Confidentiality.

(a) Trade Secret and Proprietary Information. I understand and acknowledge that, during the course of my employment with WebMD Corporation and/or its subsidiaries (collectively, the “Company”) and as a result of my having executed this Non-Qualified Stock Option Agreement, I will be granted access to valuable information relating to the Company’s business that provides the Company with a competitive advantage (or that could be used to the Company’s disadvantage by a Competitive Business (as defined herein), which is not generally known by, nor easily learned or determined by, persons outside the Company (collectively “Trade Secret and Proprietary Information”). The term Trade Secret and Proprietary Information shall include, but shall not be limited to: (a) specifications, manuals, software in various stages of development; (b) customer and prospect lists, and details of agreements and communications with customers and prospects; (c) sales plans and projections, product pricing information, acquisition, expansion, marketing, financial and other business information and existing and future products and business plans of the Company; (d) sales proposals, demonstrations systems, sales material; (e) research and development; (f) computer programs; (g) sources of supply; (h) identity of specialized consultants and contractors and Trade Secret and Proprietary Information developed by them for the Company; (i) purchasing, operating and other cost data; (j) special customer needs, cost and pricing data; (k) patient information, including, without limitation, Protected Health Information as defined in 45 C.F.R. 164.501 and (l) employee information (including, but not limited to, personnel, payroll, compensation and benefit data and plans), including all such information recorded in manuals, memoranda, projections, reports, minutes, plans, drawings, sketches, designs, formula books, data, specifications, software programs and records, whether or not legended or otherwise identified by the Company as Trade Secret and Proprietary Information, as well as such information that is the subject of meetings and discussions and not recorded. Trade Secret and Proprietary Information shall not include such information that I can demonstrate (i) is generally available to the public (other than as a result of a disclosure by me), (ii) was disclosed to me by a third party under no obligation to keep such information confidential or (iii) was known by me prior to, and not as a result of, my employment or anticipated employment with the Company.

(b) Duty of Confidentiality. I agree at all times, both during and after my employment with the Company, to hold all of the Company’s Trade Secret and Proprietary Information in a fiduciary capacity for the benefit of the Company and to safeguard all such Trade Secret and Proprietary Information. I also agree that I will not directly or indirectly disclose or use any such Trade Secret and Proprietary Information to any third person or entity outside the Company, except as may be necessary in the good faith performance of my duties for the Company. I further agree that, in addition to enforcing this restriction, the Company may have other rights and remedies under the common law or applicable statutory laws relating to the protection of trade secrets. Notwithstanding anything in this Agreement to the contrary, I understand that I may disclose the Company’s Trade Secret and Proprietary Information to the extent required by applicable laws or governmental regulations or judicial or regulatory process, provided that I give the Company prompt notice of any and all such requests for disclosure so that it has ample opportunity to take all necessary or desired action, to avoid disclosure.

(c) Company Property. I acknowledge that: (i) all Trade Secret and Proprietary Information of the Company, (ii) computers, and computer-related hardware and software, cell phones, beepers and any other equipment provided to me by the Company, and (iii) all documents I create or receive in connection with my employment with the Company, belong to the Company, and not to me personally (collectively, “Company Property”). Such documents include, without limitation and by way of non-exhaustive example only: papers, files, memoranda, notes, correspondence, lists, e-mails, reports, records, data, research, proposals, specifications, models, flow charts, schematics, tapes, printouts, designs, graphics, drawings, photographs, abstracts, summaries, charts, graphs, notebooks, investor lists, customer/client lists, and all other compilations of information, regardless of how such information may be recorded and whether in printed form or on a computer or magnetic disk or in any other medium. I agree to return all Company Property (including all copies) to the Company immediately upon any

termination of my employment, and further agree that, during and after my employment with the Company, I will not, under any circumstances, without the Company’s specific written authorization in each instance, directly or indirectly disclose Company Property or any information contained in Company Property to anyone outside the Company, or otherwise use Company Property for any purpose other than the advancement of the Company’s interests.

(d) Unfair Competition. I acknowledge that the Company has a compelling business interest in preventing unfair competition stemming from the intentional or inadvertent use or disclosure of the Company’s Trade Secret and Proprietary Information and Company Property.

(e) Investors, Other Third-Parties, and Goodwill. I acknowledge that all Third-Parties I service or propose to service while employed by the Company are doing business with the Company and not me personally, and that, in the course of dealing with such Third-Parties, the Company establishes goodwill with respect to each such Third-Party that is created and maintained at the Company’s expense (“Third-Party Goodwill”). I also acknowledge that, by virtue of my employment with the Company, I have gained or will gain knowledge of the business needs of, and other information concerning, Third-Parties, and that I would inevitably have to draw on such information were I to solicit or service any of the Third-Parties on my own behalf or on behalf of a Competitive Business (as defined herein).

(f) Intellectual Property and Inventions. I acknowledge that all developments, including, without limitation, the creation of new products, conferences, training/seminars, publications, programs, methods of organizing information, inventions, discoveries, concepts, ideas, improvements, patents, trademarks, trade names, copyrights, trade secrets, designs, works, reports, computer software, flow charts, diagrams, procedures, data, documentation, and writings and applications thereof relating to the past, present, or future business of the Company that I, alone or jointly with others, may have discovered, conceived, created, made, developed, reduced to practice, or acquired during my employment with the Company (collectively, “Developments”) are works made for hire and shall remain the sole and exclusive property of the Company, and I hereby assign to the Company all of my rights, titles, and interest in and to all such Developments, if any. I agree to disclose to the Company promptly and fully all future Developments and, at any time upon request and at the expense of the Company, to execute, acknowledge, and deliver to the Company all instruments that the Company shall prepare, to give evidence, and to take any and all other actions that are necessary or desirable in the reasonable opinion of the Company to enable the Company to file and prosecute applications for, and to acquire, maintain, and enforce, all letters patent, trademark registrations, or copyrights covering the Developments in all countries in which the same are deemed necessary by the Company. All data, memoranda, notes, lists, drawings, records, files, investor and client/customer lists, supplier lists, and other documentation (and all copies thereof) made or compiled by me or made available to me concerning the Developments or otherwise concerning the past, present, or planned business of the Company are the property of the Company, and will be delivered to the Company immediately upon the termination of my employment with the Company.

2. Covenant Not to Compete with the Company.

(a) I acknowledge that the business of the Company is national in scope, that its products and services are marketed throughout the entire United States, that the Company competes in nearly all of its business activities with other individuals or entities that are, or could be, located in nearly any part of the United States and that the nature of my services, position, and expertise are such that I am capable of competing with the Company from nearly any location in the United States.

(b) Accordingly, in order to protect the Company’s Trade Secret and Proprietary Information and Third-Party Goodwill, I acknowledge and agree that during the term of my employment with the Company and for a period of one year after the date my employment with the Company is terminated for any reason (the “Restricted Period”), I will not, without the Company’s express written permission, directly or indirectly (including through the Internet), own, control, manage, operate, participate in, be employed by, or act for or on behalf of, any “Competitive Business” (as defined herein) located anywhere within the geographic boundaries of the United States.

(c) For purposes of this Agreement, a “Competitive Business” shall mean: (i) any enterprise engaged in the business of Dakota Imaging, Inc. (“Dakota”) as presently conducted and as conducted during my employment with Dakota; (ii) any enterprise engaged in establishing electronic linkages between individual healthcare providers,

patients, and payors (including, without limitation, insurance companies, HMO’s, pharmacy benefits management companies, and/or self-insured employer groups) for the purpose of facilitating or conducting financial, administrative and clinical communication and/or transactions; (iii) any enterprise engaged in developing, selling or providing a consumer or physician Internet healthcare portal; (iv) any enterprise engaged in developing, marketing or providing healthcare information and/or management systems (including, without limitation, electronic medical and/or dental records software; physician practice management, dental practice management and/or other healthcare practice management software systems; and other financial, administrative and/or clinical systems for use in the healthcare industry) and/or services related thereto (including, without limitation, software support and maintenance services, hardware support and maintenance services and training services) and (v) any enterprise engaged in any other type of business in which the Company is also engaged, or plans to be engaged, so long as I am directly involved in such business or planned business on behalf of the Company or one of its affiliates.

3. Non-Solicitation of Employees, Customers. In order to protect the Company’s Trade Secret and Proprietary Information and Third-Party Goodwill, during the Restricted Period, I will not, without the Company’s express written permission, directly or indirectly:

(a) solicit, induce, hire, engage, or attempt to hire or engage any employee or independent contractor of the Company, or in any other way interfere with the Company’s employment or contractual relations with any of its employees or independent contractors, nor will I solicit, induce, hire, engage or attempt to hire or engage any individual who was an employee of the Company at any time during the one (1) year period immediately prior to the termination of my employment with the Company;

(b) contact, call upon or solicit, on behalf of a Competitive Business, any existing or prospective client, or customer of the Company who I serviced, or otherwise developed a relationship with, as a result of my employment with the Company, nor will I attempt to divert or take away from the Company the business of any such client or customer;

4. Injunctive Remedies. I acknowledge and agree that the restrictions contained in this Agreement are reasonably necessary to protect the legitimate business interests of the Company, and that any violation of any of the restrictions will result in immediate and irreparable injury to the Company for which monetary damages will not be an adequate remedy. I further acknowledge and agree that if any such restriction is violated, the Company will be entitled to immediate relief enjoining such violation (including, without limitation, temporary and permanent injunctions, a decree for specific performance, and an equitable accounting of earnings, profits, and other benefits arising from such violation) in any court having jurisdiction over such claim, without the necessity of showing any actual damage or posting any bond or furnishing any other security, and that the specific enforcement of the provisions of this Agreement will not diminish my ability to earn a livelihood or create or impose upon me any undue hardship. I also agree that any request for such relief by the Company shall be in addition to, and without prejudice to, any claim for monetary damages that the Company may elect to assert.

5. Severability Provision. I acknowledge and agree that the restrictions imposed upon me by the terms, conditions, and provisions of this Agreement are fair, reasonable, and reasonably required for the protection of the Company. In the event that any part of this Agreement is deemed invalid, illegal, or unenforceable, all other terms, conditions, and provisions of this Agreement shall nevertheless remain in full force and effect. In the event that the provisions of any of Sections 1, 2, or 3 of this Agreement relating to the geographic area of restriction, the length of restriction or the scope of restriction shall be deemed to exceed the maximum area, length or scope that a court of competent jurisdiction would deem enforceable, said area, length or scope shall, for purposes of this Agreement, be deemed to be the maximum area, length of time or scope that such court would deem valid and enforceable, and that such court has the authority under this Agreement to rewrite (or “blue-pencil”) the restriction(s) at-issue to achieve this intent.

6. Non-Waiver. Any waiver by the Company of my breach of any term, condition, or provision of this Agreement shall not operate or be construed as a waiver of the Company’s rights upon any subsequent breach.

7. Waiver of Jury Trial. TO THE MAXIMUM EXTENT PERMITTED BY LAW, I HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN CONNECTION WITH ANY LITIGATION ARISING OUT OF, UNDER, IN CONNECTION WITH, OR IN ANY


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 September 30, 2004 (unaudited) and December 31, 2003		4
	Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003		5
	Unaudited Consolidated Statements of Cash Flows for the nine months ended September 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		23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		56
Item 4.	Controls and Procedures		56
Part II	Other Information
Item 1.	Legal Proceedings		57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		59
Item 4.	Submission of Matters to a Vote of Security Holders		59
Item 6.	Exhibits		60
Signatures			61
Exhibit Index			E-1
EX-3.1 11TH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
EX-3.2 CERTIFICATE OF DESIGNATIONS
EX-10.1 2004 NON-QUALIFIED STOCK OPTION PLAN / DAKOTA IMAGING, INC.
EX-10.2 2004 NON-QUALIFIED STOCK OPTION PLAN / VIPS, INC.
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


			September 30,			December 31,
			2004			2003

			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	108,204		$	63,298
	Short-term investments			25,784			207,383
	Accounts receivable, net			203,288			181,173
	Inventory			12,579			12,158
	Current portion of prepaid content and distribution services			16,221			18,116
	Other current assets			24,978			25,973

		Total current assets		391,054			508,101

Marketable debt securities				515,096			451,290
Marketable equity securities				3,373			4,744
Property and equipment, net				83,071			77,278
Prepaid content and distribution services				19,020			31,992
Goodwill				959,799			844,448
Intangible assets, net				270,426			184,130
Other assets				35,800			33,323

			$	2,277,639		$	2,135,306


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	10,777		$	10,390
	Accrued expenses			207,271			208,430
	Deferred revenue			104,794			86,708

		Total current liabilities		322,842			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				974			1,182

Commitments and contingencies

Convertible redeemable exchangeable preferred stock, $0.0001 par value; 10,000 shares authorized, issued and outstanding at September 30, 2004				98,240			—
Stockholders’ equity:
	Preferred stock, $0.0001 par value; 4,990,000 shares authorized; no shares issued			—			—
	Common stock, $0.0001 par value; 900,000,000 shares authorized; 391,879,504 shares issued at September 30, 2004; 384,751,705 shares issued at December 31, 2003			39			38
	Additional paid-in capital			11,767,066			11,726,734
	Deferred stock compensation			(7,232	)		(4,683	)
	Treasury stock, at cost; 79,394,471 shares at September 30, 2004; 76,576,865 shares at December 31, 2003			(370,125	)		(347,858	)
	Accumulated deficit			(10,192,534	)		(10,212,054	)
	Accumulated other comprehensive income			8,370			16,420

		Total stockholders’ equity		1,205,584			1,178,597

			$	2,277,639		$	2,135,306



					Nine Months Ended
					September 30,

					2004			2003

Cash flows from operating activities:
	Net income (loss)				$	19,645		$	(27,539	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Loss from discontinued operations				—			33,611
		Depreciation, amortization and other				40,922			52,961
		Amortization of debt issuance costs				2,255			1,505
		Non-cash content and distribution services				14,893			18,224
		Non-cash stock-based compensation				7,241			10,948
		Gain on investments				(457	)		(3,222	)
		Gain on sale of property and equipment				(121	)		—
		Changes in operating assets and liabilities:
			Accounts receivable			(8,001	)		3,580
			Inventory			(417	)		(1,144	)
			Prepaid content and distribution services			(26	)		(537	)
			Accounts payable			(874	)		(775	)
			Accrued expenses			(8,189	)		(12,174	)
			Deferred revenue			9,284			(2,228	)
			Other, net			3,045			5,685

				Net cash provided by continuing operations		79,200			78,895
				Net cash provided by discontinued operations		—			5,130

				Net cash provided by operating activities		79,200			84,025
Cash flows from investing activities:
	Proceeds from maturities and sales of available-for-sale securities					384,238			11,322
	Proceeds from maturities and redemptions of held-to-maturity securities					—			157,919
	Purchases of available-for-sale securities					(274,600	)		(7,754	)
	Purchases of held-to-maturity securities					—			(590,113	)
	Proceeds received from sale of property and equipment					417			—
	Purchases of property and equipment					(24,889	)		(13,643	)
	Proceeds received from sale of discontinued operations					—			46,500
	Cash paid in business combinations, net of cash acquired					(225,375	)		(133,471	)
	Other changes in equity of discontinued operations					—			1,754

				Net cash used in continuing operations		(140,209	)		(527,486	)
				Net cash used in discontinued operations		—			(2,529	)

				Net cash used in investing activities		(140,209	)		(530,015	)
Cash flows from financing activities:
	Proceeds from issuance of common stock					30,528			35,367
	Payments of notes payable and other					(433	)		(211	)
	Net proceeds from issuance of convertible debt					—			339,125
	Net proceeds from issuance of preferred stock					98,115			—
	Purchases of treasury shares					(22,267	)		(18,125	)

				Net cash provided by continuing operations		105,943			356,156
				Net cash used in discontinued operations		—			(6,546	)

				Net cash provided by financing activities		105,943			349,610
Effect of exchange rates on cash						(28	)		711

Net increase (decrease) in cash and cash equivalents						44,906			(95,669	)
Changes in cash attributable to discontinued operations						—			3,945
Cash and cash equivalents at beginning of period						63,298			175,596

Cash and cash equivalents at end of period					$	108,204		$	83,872


	September 30,		December 31,
	2004		2003

Raw materials and supplies	$	3,767	$	3,142
Work-in-process		1,423		1,394
Finished goods and other		7,389		7,622

	$	12,579	$	12,158



		Three Months Ended					Nine Months Ended
		September 30,					September 30,

		2004		2003			2004		2003

Revenue		$	299,615	$	250,635		$	852,710	$	705,584
Costs and expenses:
	Cost of operations		168,571		149,270			495,174		410,556
	Development and engineering		14,392		11,334			38,479		32,654
	Sales, marketing, general and administrative		84,762		72,450			245,054		209,917
	Depreciation, amortization and other		15,189		11,097			40,922		52,961
	Legal expense		2,325		493			6,577		493
	Restructuring and integration charge		4,535		—			4,535		—
	Interest income		4,512		6,401			14,506		16,434
	Interest expense		4,843		4,703			14,429		10,444
	Other income, net		94		3,039			578		4,340

Income from continuing operations before income tax provision			9,604		10,728			22,624		9,333
	Income tax provision		1,435		1,273			2,979		3,261

	Income from continuing operations		8,169		9,455			19,645		6,072
	Loss from discontinued operations, net of income taxes		—		3,366			—		33,611

Net income (loss)		$	8,169	$	6,089		$	19,645	$	(27,539	)

Basic income (loss) per common share:
	Income from continuing operations	$	0.03	$	0.03		$	0.06	$	0.02
	Loss from discontinued operations		—		(0.01	)		—		(0.11	)

Net income (loss)		$	0.03	$	0.02		$	0.06	$	(0.09	)

Diluted income (loss) per common share:
	Income from continuing operations	$	0.02	$	0.03		$	0.06	$	0.02
	Loss from discontinued operations		—		(0.01	)		—		(0.10	)

Net income (loss)		$	0.02	$	0.02		$	0.06	$	(0.08	)

Weighted-average shares outstanding used in computing income (loss) per common share:
	Basic		312,366		305,471			311,379		304,121

	Diluted		333,978		328,463			333,048		326,396



	Three Months				Nine Months
	Ended				Ended
	September 30,				September 30,

	2004		2003		2004		2003

Options, warrants and restricted stock		90,397		81,973		87,357		83,133
Convertible notes		55,129		55,129		55,129		55,129

		145,526		137,102		142,486		138,262


	For the Period			For the Period
	July 1, 2003			January 1, 2003
	through			through
	August 1, 2003			August 1, 2003

Revenue	$	4,739		$	31,004

Income (loss) from operations	$	125		$	(30,120	)
Loss on disposal	$	(3,491	)	$	(3,491	)

Loss from discontinued operations	$	(3,366	)	$	(33,611	)



	September 30, 2004				December 31, 2003

	Cost Basis		Fair Value		Cost Basis		Fair Value

Short-term investments	$	25,901	$	25,784	$	205,962	$	207,383
Marketable debt securities — long-term		514,922		515,096		445,810		451,290
Marketable equity securities — long-term		1,492		3,373		1,773		4,744


		Cost or
		Amortized Cost		Fair Value

Due in one year or less		$	25,901	$	25,784
Due after one year through five years			514,922		515,096

	Total	$	540,823	$	540,880


		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		112,177			50			1,500			2,024		115,751
	Adjustments to finalize purchase price allocations		(321	)		—			(116	)		—		(437	)
	Effects of exchange rates		—			—			—			37		37

Balance as of September 30, 2004		$	697,844		$	182,859		$	38,227		$	40,869	$	959,799



		September 30, 2004							December 31, 2003

		Gross							Gross
		Carrying		Accumulated					Carrying		Accumulated
		Amount		Amortization			Net		Amount		Amortization			Net

Customer lists		$	386,004	$	(214,785	)	$	171,219	$	325,160	$	(206,163	)	$	118,997
Trade names			30,716		(24,902	)		5,814		30,316		(19,756	)		10,560
Technology and patents			235,918		(152,332	)		83,586		191,318		(146,905	)		44,413
Non-compete agreements			11,560		(1,753	)		9,807		11,019		(859	)		10,160

	Total	$	664,198	$	(393,772	)	$	270,426	$	557,813	$	(373,683	)	$	184,130


Year ending December 31, 2004 (October 1st to December 31st)			9,354
2005			32,896
2006			29,670
2007			28,859
2008			28,372
Thereafter			141,275


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



		Three Months Ended September 30,										Nine Months Ended September 30,


		2004				2003						2004				2003

		$		%		$			%			$		%		$			%

Revenue			299,615		100.0		250,635			100.0			852,710		100.0		705,584			100.0
Cost and expenses:
	Cost of operations		168,571		56.3		149,270			59.6			495,174		58.1		410,556			58.2
	Development and engineering		14,392		4.8		11,334			4.5			38,479		4.5		32,654			4.6
	Sales, marketing, general and administrative		84,762		28.3		72,450			28.9			245,054		28.7		209,917			29.8
	Depreciation, amortization and other		15,189		5.1		11,097			4.4			40,922		4.8		52,961			7.5
	Legal expense		2,325		0.8		493			0.2			6,577		0.8		493			0.1
	Restructuring and integration charge		4,535		1.5		—			—			4,535		0.5		—			—
	Interest income		4,512		1.5		6,401			2.6			14,506		1.7		16,434			2.3
	Interest expense		4,843		1.6		4,703			1.9			14,429		1.7		10,444			1.5
	Other income, net		94		0.1		3,039			1.2			578		0.1		4,340			0.7

Income from continuing operations before income tax provision			9,604		3.2		10,728			4.3			22,624		2.7		9,333			1.3
	Income tax provision		1,435		0.5		1,273			0.5			2,979		0.4		3,261			0.4

	Income from continuing operations		8,169		2.7		9,455			3.8			19,645		2.3		6,072			0.9
	Loss from discontinued operations		—		—		(3,366	)		(1.4	)		—		—		(33,611	)		(4.8	)

Net income (loss)			8,169		2.7		6,089			2.4			19,645		2.3		(27,539	)		(3.9	)


ITEM 1.	*Financial Statements*


1.	Summary of Significant Accounting Policies


2.	Business Combinations and Significant Transactions


3.	Discontinued Operations


	The financial results of WebMD Business Services 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


	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 Business Services’ 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


	Contractual relationships with governmental customers may impose special burdens on us and provide special benefits to those customers, including the right to change or terminate the contract in response to budgetary constraints or policy changes


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


	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 Business Services’ 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 Business Services’ ability to provide transaction services depends on services provided by telecommunications companies


	Developments in the healthcare industry could adversely affect our business


	Governmental and private initiatives to support adoption of healthcare information technology may encourage additional companies to enter our markets or result in the development of technology solutions that compete with ours


	The HIPAA Transaction and Code Sets Standards creates risks and challenges with respect to our compliance efforts, business strategies and customer relationships