e10vq

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2010
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission File Number: 0-51547

WEBMD HEALTH CORP.

(Exact name of registrant as specified in its charter)


Delaware (State of incorporation)		20-2783228 (I.R.S. Employer Identification No.)
111 Eighth Avenue New York, New York (Address of principal executive office)		10011 (Zip code)

(212) 624-3700
(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o

(Do not check if a smaller reporting company)

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

Yes o No þ

As of November 4, 2010, the Registrant had 58,407,562 shares of Common Stock outstanding (including unvested shares of restricted Common Stock).

FORWARD-LOOKING STATEMENTS

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, forward-looking statements. For example, statements concerning projections, predictions, expectations, estimates or forecasts and statements that describe our objectives, future performance, plans or goals are, or may be, forward-looking statements. These forward-looking statements reflect management’s current expectations concerning future results and events and can generally be identified by the use of expressions such as “may,” “will,” “should,” “could,” “would,” “likely,” “predict,” “potential,” “continue,” “future,” “estimate,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” and other similar words or phrases, as well as statements in the future tense.

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. The following important risks and uncertainties could affect our future results, causing those results to differ materially from those expressed in our forward-looking statements:


	•	failure to achieve sufficient levels of usage of our public and private portals and mobile applications;

	•	the inability to successfully deploy new or updated applications or services;

	•	competition in attracting consumers and healthcare professionals to our public portals and mobile applications;

	•	competition for advertisers and sponsors for our public portals and mobile applications;

	•	events or conditions that have a negative effect on promotional or educational spending by pharmaceutical and biotechnology companies or on the portion of that spending used for Internet-based services like ours;

	•	the inability to attract and retain qualified personnel;

	•	adverse economic conditions and disruptions in the capital markets;

	•	adverse changes in general business or regulatory conditions affecting the healthcare, information technology and Internet industries; and

	•	the other risks and uncertainties described in this Quarterly Report on Form 10-Q under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Our Future Financial Condition or Results of Operations.”

These factors 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. Except as required by law or regulation, we do not undertake any obligation to update any forward-looking statements to reflect subsequent events or circumstances.

PART I
FINANCIAL INFORMATION


ITEM 1.	*Financial Statements*

WEBMD HEALTH CORP.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)


	September 30,			December 31,
	2010			2009
	(Unaudited)

ASSETS
Current assets:
Cash and cash equivalents	$	352,199		$	459,766
Accounts receivable, net of allowance for doubtful accounts of $1,266 at September 30, 2010 and $1,511 at December 31, 2009		120,361			118,155
Prepaid expenses and other current assets		17,055			11,419
Investments		—			9,932
Deferred tax assets		27,346			—

Total current assets		516,961			599,272
Investments		—			338,446
Property and equipment, net		62,221			52,194
Goodwill		202,104			202,104
Intangible assets, net		23,388			26,020
Deferred tax assets		78,631			50,789
Other assets		17,407			19,723

TOTAL ASSETS	$	900,712		$	1,288,548


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accrued expenses	$	63,832		$	63,721
Deferred revenue		101,887			98,474
1.75% convertible subordinated notes due 2023		—			264,583
Deferred tax liabilities		—			12,955
Liabilities of discontinued operations		20,574			34,197

Total current liabilities		186,293			473,930
31/8% convertible notes due 2025, net of discount of $5,693 at September 30, 2010 and $22,641 at December 31, 2009		79,634			227,659
Other long-term liabilities		24,263			22,191
Commitments and contingencies
Stockholders’ equity:
Preferred stock, 50,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $0.01 par value per share, 650,000,000 shares authorized; 62,396,582 shares issued at September 30, 2010 and 57,243,710 shares issued at December 31, 2009		624			572
Additional paid-in capital		9,489,668			9,469,857
Treasury stock, at cost; 5,270,847 shares at September 30, 2010 and 6,296,944 shares at December 31, 2009		(262,669	)		(233,651	)
Accumulated deficit		(8,617,101	)		(8,634,585	)
Accumulated other comprehensive loss		—			(37,425	)

Stockholders’ equity		610,522			564,768

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	900,712		$	1,288,548

See accompanying notes.

WEBMD HEALTH CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Revenue	$	135,305		$	111,568		$	366,042		$	300,463
Cost of operations		47,610			41,965			135,972			117,759
Sales and marketing		28,957			26,265			86,789			80,623
General and administrative		22,964			21,967			62,350			65,818
Depreciation and amortization		6,935			7,134			20,268			21,193
Interest income		21			1,840			3,850			6,060
Interest expense		1,797			5,541			10,106			17,858
(Loss) gain on convertible notes		(2,232	)		—			(16,970	)		10,120
Loss on investments		131			—			22,977			—
Other income (expense), net		107			(123	)		(92	)		(944	)

Income from continuing operations before income tax provision (benefit)		24,807			10,413			14,368			12,448
Income tax provision (benefit)		10,193			5,389			(4,140	)		4,922

Consolidated income from continuing operations		14,614			5,024			18,508			7,526
Consolidated (loss) income from discontinued operations, net of a tax benefit of $1,476 for the three and nine months ended September 30, 2010 and net of a tax provision of $15,811 and $9,975 for the three and nine months ended September 30, 2009		(1,024	)		27,462			(1,024	)		14,695

Consolidated net income inclusive of noncontrolling interest		13,590			32,486			17,484			22,221
Income attributable to noncontrolling interest		—			(2,184	)		—			(3,181	)

Net income attributable to Company stockholders	$	13,590		$	30,302		$	17,484		$	19,040

Amounts attributable to Company stockholders:
Income from continuing operations	$	14,614		$	2,872		$	18,508		$	3,381
(Loss) income from discontinued operations		(1,024	)		27,430			(1,024	)		15,659

Net income attributable to Company stockholders	$	13,590		$	30,302		$	17,484		$	19,040

Basic income (loss) per common share:
Income from continuing operations	$	0.25		$	0.06		$	0.33		$	0.07
(Loss) income from discontinued operations		(0.02	)		0.59			(0.01	)		0.34

Net income attributable to Company stockholders	$	0.23		$	0.65		$	0.32		$	0.41

Diluted income (loss) per common share:
Income from continuing operations	$	0.24		$	0.05		$	0.31		$	0.06
(Loss) income from discontinued operations		(0.02	)		0.56			(0.02	)		0.33

Net income attributable to Company stockholders	$	0.22		$	0.61		$	0.29		$	0.39

Weighted-average shares outstanding used in computing per share amounts:
Basic		58,095			46,096			54,602			45,637

Diluted		61,435			48,609			58,660			47,167

See accompanying notes.

WEBMD HEALTH CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)


	Nine Months Ended
	September 30,
	2010			2009

Cash flows from operating activities:
Consolidated net income inclusive of noncontrolling interest	$	17,484		$	22,221
Adjustments to reconcile consolidated net income inclusive of noncontrolling interest to net cash provided by operating activities:
Consolidated loss (income) from discontinued operations, net of tax		1,024			(14,695	)
Depreciation and amortization		20,268			21,193
Non-cash interest, net		4,862			7,737
Non-cash advertising		—			1,753
Non-cash stock-based compensation		23,605			27,783
Deferred income taxes		(17,260	)		7,563
Loss (gain) on convertible notes		16,970			(10,120	)
Loss on investments		22,977			—
Changes in operating assets and liabilities:
Accounts receivable		(2,206	)		6,010
Prepaid expenses and other, net		(3,006	)		(8,394	)
Accrued expenses and other long-term liabilities		1,695			(7,740	)
Deferred revenue		3,413			4,248

Net cash provided by continuing operations		89,826			57,559
Net cash (used in) provided by discontinued operations		(17,082	)		9,273

Net cash provided by operating activities		72,744			66,832
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities		362,259			2,200
Purchases of property and equipment		(20,329	)		(14,248	)
Finalization of sale price of discontinued operations		(1,430	)		2,840

Net cash provided by (used in) continuing operations		340,500			(9,208	)
Net cash used in discontinued operations		—			(3,315	)

Net cash provided by (used in) investing activities		340,500			(12,523	)
Cash flows from financing activities:
Proceeds from exercise of stock options		57,168			30,004
Cash used for withholding taxes due on stock-based awards		(76,559	)		(1,234	)
Repurchases of convertible notes		(94,475	)		(123,857	)
Purchase of treasury stock under repurchase program		(14,914	)		—
Payment for shares tendered in 2009, delivered in 2010		(6,818	)		—
Purchase of treasury stock in tender offer		(399,216	)		—
Excess tax benefit on stock-based awards		14,003			63

Net cash used in financing activities		(520,811	)		(95,024	)
Effect of exchange rates on cash		—			420

Net decrease in cash and cash equivalents		(107,567	)		(40,295	)
Cash and cash equivalents at beginning of period		459,766			629,848

Cash and cash equivalents at end of period	$	352,199		$	589,553

See accompanying notes.

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data, unaudited)


1.	Summary of Significant Accounting Policies

Background and Basis of Presentation

WebMD Health Corp. (the “Company” or “WebMD”) is a Delaware corporation that was incorporated on May 3, 2005. The Company completed an initial public offering on September 28, 2005. The Company’s common stock trades under the symbol “WBMD” on the Nasdaq Global Select Market.

The Company provides health information services to consumers, physicians and other healthcare professionals, employers and health plans through its public and private online portals, mobile applications and health-focused publications. The Company’s public portals for consumers enable them to obtain health and wellness information (including information on specific diseases or conditions), check symptoms, locate physicians, store individual healthcare information, receive periodic e-newsletters on topics of individual interest and participate in online communities with peers and experts. The Company’s public portals for physicians and healthcare professionals make it easier for them to access clinical reference sources, stay abreast of the latest clinical information, learn about new treatment options, earn continuing medical education (“CME”) credit and communicate with peers. The Company’s public portals generate revenue primarily through the sale of advertising and sponsorship products, including CME services. The Company also provides mobile health information applications for use by consumers and physicians. The Company also provides e-detailing promotion and physician recruitment services, information services and provides print services including the publication of WebMD the Magazine, a consumer magazine distributed to physician office waiting rooms. The public portals’ sponsors and advertisers include pharmaceutical, biotechnology, medical device and consumer products companies. The Company’s private portals enable employers and health plans to provide their employees and members with access to personalized health and benefit information and decision-support technology that helps them to make more informed benefit, treatment and provider decisions. In addition, the Company offers clients of its private portals telephonic health coaching services on a per participant basis across an employee or plan population. The Company generates revenue from its private portals through the licensing of these portals and related services to employers and health plans either directly or through distributors.

From the completion of the initial public offering through the completion of the merger with HLTH Corporation (“HLTH”) on October 23, 2009 (the “Merger”), the Company was more than 80% owned by HLTH. On October 23, 2009, stockholders of HLTH and WebMD approved the Merger and the transaction was completed later that day, with HLTH merging into WebMD and WebMD continuing as the surviving corporation. WebMD automatically succeeded to all of HLTH’s assets, liabilities and commitments upon completion of the Merger (other than the shares of WebMD Class B common stock owned by HLTH which were cancelled in the Merger). In the Merger, each share of HLTH common stock was converted into 0.4444 shares of WebMD common stock. The shares of WebMD’s Class A common stock were unchanged in the Merger and continue to trade on the Nasdaq Global Select Market under the symbol “WBMD”; however, they are no longer referred to as “Class A” because the Merger eliminated both WebMD’s Class B common stock and the dual-class stock structure that had existed at WebMD. WebMD was the only operating business of HLTH at the time the Merger closed. Accordingly, the completion of the Merger did not have a significant effect on the operations of WebMD since there were no HLTH business operations to combine with WebMD’s business operations and, while HLTH had previously been providing certain corporate services to WebMD under a services agreement and had certain other agreements with WebMD, those agreements ceased when WebMD acquired HLTH. The employees and resources of HLTH used to provide services to WebMD under the services agreement became employees and resources of WebMD upon completion of the Merger.

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

adjusted as described in the next paragraph. Accordingly, in these consolidated financial statements, the defined term “Company” refers not only to WebMD but also, where the context requires, to HLTH. The specific names of HLTH and WebMD are used only where there is a need to distinguish between the legal entities. In addition, all references in these consolidated financial statements to amounts of shares of HLTH common stock and to market prices or purchase prices for HLTH common stock have been adjusted to reflect the 0.4444 exchange ratio in the Merger (the “Exchange Ratio”), and expressed as the number of shares of WebMD common stock into which the HLTH common stock would be converted in the Merger and the equivalent price per share of WebMD common stock. Similarly, the exercise price of options and warrants to purchase HLTH common stock and the number of shares subject to those options and warrants have been adjusted to reflect the Exchange Ratio.

In the Company’s financial statements for the three and nine months ended September 30, 2009 included in this Quarterly Report: the weighted-average shares outstanding used in computing income (loss) per common share for the three and nine months ended September 30, 2009 have been adjusted by multiplying the historical weighted-average shares outstanding for HLTH by the Exchange Ratio; and basic and diluted income (loss) per common share have been recalculated to reflect the adjusted weighted-average shares.

Interim Financial Statements

The unaudited consolidated financial statements of 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, 2010 are not necessarily indicative of the operating results to be expected for any subsequent period or for the entire year ending December 31, 2010. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) 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, 2009, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Seasonality

The timing of the Company’s revenue is affected by seasonal factors. The Company’s public portal advertising and sponsorship revenue is seasonal, primarily due to the annual spending patterns of the advertising and sponsorship clients of the Company’s public portals. This portion of the Company’s revenue is usually the lowest in the first quarter of each calendar year, and increases during each consecutive quarter throughout the year. The timing of revenue in relation to the Company’s expenses, much of which do not vary directly with revenue, has an impact on cost of operations, sales and marketing and general and administrative expenses as a percentage of revenue in each calendar quarter.

Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, and various other assumptions that the Company believes are necessary to consider to form a basis for making judgments about the carrying values of assets and liabilities, the recorded amounts of revenue and expenses, and the disclosure of contingent assets and liabilities. The Company is subject to uncertainties such as the impact of future events, economic and political factors, and changes in the Company’s business environment;

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 long-lived assets (including goodwill and intangible assets), the amortization period of long-lived assets (excluding goodwill and indefinite lived intangible assets), the carrying value, capitalization and amortization of software and Website development costs, the carrying value of investments, the provision for income taxes and related deferred tax accounts, certain accrued liabilities, revenue recognition, contingencies, litigation and related legal accruals and the value attributed to employee stock options and other stock-based awards.

Net Income (Loss) Per Common Share

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 give effect to potentially dilutive securities and assumes that any dilutive convertible notes were converted, only in the periods in which such effect is dilutive:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009

Numerator:
Income from continuing operations	$	14,614		$	2,872		$	18,508		$	3,381
Effect of participating non-vested restricted stock		(152	)		(31	)		(222	)		(37	)

Income from continuing operations — Basic		14,462			2,841			18,286			3,344
Effect of dilutive securities of subsidiary		—			(188	)		—			(285	)

Income from continuing operations — Diluted	$	14,462		$	2,653		$	18,286		$	3,059

(Loss) income from discontinued operations	$	(1,024	)	$	27,430		$	(1,024	)	$	15,659
Effect of participating non-vested restricted stock		12			(293	)		12			(171	)

(Loss) income from discontinued operations, net of tax — Basic		(1,012	)		27,137			(1,012	)		15,488
Effect of dilutive securities of subsidiary		—			(3	)		—			53

(Loss) income from discontinued operations, net of tax — Diluted	$	(1,012	)	$	27,134		$	(1,012	)	$	15,541

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2010			2009		2010			2009

Denominator:
Weighted-average shares — Basic		58,095			46,096		54,602			45,637
Employee stock options and restricted stock		3,340			2,513		4,058			1,530

Adjusted weighted-average shares after assumed conversions — Diluted		61,435			48,609		58,660			47,167

Basic income (loss) per common share:
Income from continuing operations	$	0.25		$	0.06	$	0.33		$	0.07
(Loss) income from discontinued operations		(0.02	)		0.59		(0.01	)		0.34

Net income attributable to Company stockholders	$	0.23		$	0.65	$	0.32		$	0.41

Diluted income (loss) per common share:
Income from continuing operations	$	0.24		$	0.05	$	0.31		$	0.06
(Loss) income from discontinued operations		(0.02	)		0.56		(0.02	)		0.33

Net income attributable to Company stockholders	$	0.22		$	0.61	$	0.29		$	0.39

The Company has excluded convertible subordinated notes and convertible notes, as well as stock options and restricted stock, from the calculation of diluted income (loss) per common share during the periods in which such securities were anti-dilutive. The following table presents the total weighted-average number of potentially dilutive common shares that were excluded from the computation of diluted income (loss) per common share during the periods presented (shares in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009

Options and restricted stock		1,798		5,785		1,812		11,000
Convertible notes		3,017		14,786		8,570		15,174

		4,815		20,571		10,382		26,174

Recent Accounting Pronouncements

Accounting Pronouncements to be Adopted in the Future

In October 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on revenue recognition that will become effective for the Company beginning January 1, 2011, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables. In addition, revenue under multiple element arrangements will be allocated using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company has not yet determined the impact that this new guidance will have on its results of operations and financial position.

Reclassifications

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


2.	Discontinued Operations

Porex

On October 19, 2009, the Company completed the sale of its Porex business. In connection with the sale of Porex, the Company received $74,378 in cash at closing, received $67,500 in senior secured notes (“Senior Secured Notes”) and incurred approximately $4,900 of transaction expenses. During the three months ended March 31, 2010, the Company paid $1,430 to Porex related to the finalization of a customary working capital adjustment. The Senior Secured Notes were secured by certain assets of the acquirer and accrued interest at a rate of 8.75% per annum, payable quarterly. The Senior Secured Notes were issued in four series: the Senior Secured Notes of the first, second and third series had an aggregate principal amount of $10,000 each and were scheduled to mature on the first, second and third anniversaries of the closing, respectively; and the Senior Secured Notes of the fourth series had an aggregate principal amount of $37,500 and were scheduled to mature on the fourth anniversary of the closing. The Company estimated that the fair value of the Senior Secured Notes was $63,598 as of October 19, 2009. On April 1, 2010, the Company sold the Senior Secured Notes for $65,475 plus accrued interest.

In addition, the Company agreed to indemnify Porex for certain tax matters, which were estimated by the Company to be approximately $4,800. An accrual for these tax matters is included within liabilities of discontinued operations, within the accompanying consolidated balance sheets as of December 31, 2009 and September 30, 2010. In connection with the sale of Porex, the Company recognized a pre-tax gain of $25,790 during the three months ended December 31, 2009. Summarized operating results for the discontinued operations of Porex are as follows:


	Three Months Ended		Nine Months Ended
	September 30, 2009		September 30, 2009

Revenue	$	22,355	$	62,532
Earnings before taxes		4,535		12,293

Little Blue Book Print Directory Business

In March 2009, the Company decided to divest its Little Blue Book print directory business (“LBB”). As a result, the historical financial information for LBB has been reflected as discontinued operations in the accompanying consolidated financial statements. During the three months ended June 30, 2009, the Company recorded an impairment charge of $8,300 to reduce the carrying value of LBB to its then estimated fair value. On September 30, 2009, the Company completed the sale of LBB in which it received cash proceeds of $2,590. Summarized operating results for the discontinued operations of LBB are as follows:


	Three Months Ended		Nine Months Ended
	September 30, 2009		September 30, 2009

Revenue	$	1,875	$	4,066
Earnings (losses) before taxes		348		(8,432	)
Gain on disposal before taxes		27		27

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Emdeon Practice Services

On September 14, 2006, the Company completed the sale of Emdeon Practice Services, Inc. (together with its subsidiaries, “EPS”) to Sage Software, Inc. (“Sage Software”), an indirect wholly owned subsidiary of The Sage Group plc (the “EPS Sale”). The Company has certain indemnity obligations to advance amounts for reasonable defense costs for initially ten, and now four, former officers and directors of EPS, who were indicted in connection with the previously disclosed investigation by the United States Attorney for the District of South Carolina (the “Investigation”), which is more fully described in Note 10. In connection with the EPS Sale, the Company agreed to indemnify Sage Software relating to these indemnity obligations. During the year ended December 31, 2007, based on information available at that time, the Company determined a reasonable estimate of the range of probable costs with respect to its indemnification obligation and, accordingly, recorded an aggregate pre-tax charge of $73,347, which represented the Company’s estimate of the low end of the probable range of costs related to this matter. The Company had reserved the low end of the probable range of costs because no estimate within the range was a better estimate than any other amount. That estimate included assumptions as to the duration of the trial and pre-trial periods, and the defense costs to be incurred during these periods. The Company updated the estimated range of its indemnification obligation based on new information received during the year ended December 31, 2008 and again during the three months ended June 30, 2009, and as a result, recorded additional pre-tax charges of $29,078 and $28,800, respectively. As described in more detail in Note 10, two of the former officers and directors of EPS were found guilty; however the Court set the verdict aside on May 27, 2010 and entered a judgment of acquittal. The government entered a notice of appeal with respect to the Court’s order and such appeal is pending. Two other former officers of EPS are awaiting trial in Tampa, Florida, which was scheduled to begin on October 4, 2010; however, on July 9, 2010 the Court in Tampa placed the case against those defendants on hold pending resolution of the appeal of the South Carolina ruling. As of September 30, 2010, and December 31, 2009, the remaining accrual with respect to the costs for these matters was $8,270 and $25,437, respectively, and is included within liabilities of discontinued operations on the accompanying consolidated balance sheets. The ultimate outcome of this matter is still uncertain and, accordingly, the amount of cost the Company may ultimately incur could be substantially more than the reserve the Company has currently provided. If the recorded reserves are insufficient to cover the ultimate cost of this matter, the Company will need to record additional charges to its consolidated statement of operations in future periods.

Also included within liabilities of discontinued operations related to this matter is $5,000 and $3,957, as of September 30, 2010 and December 31, 2009, respectively, which represents certain reimbursements received from the Company’s insurance carriers between July 31, 2008 and September 30, 2010. The Company deferred recognizing these insurance reimbursements within the consolidated statement of operations given the pending Coverage Litigation, which is described below in Note 10. During the three and nine months ended September 30, 2009, the Company received reimbursements from its insurance carriers in the amount of $38,253 and $49,253 which are not subject to the pending Coverage Litigation. Accordingly, the Company recognized these amounts within consolidated (loss) income from discontinued operations during the three and nine months ended September 30, 2009. During the three and nine months ended September 30, 2010, (loss) income from discontinued operations primarily related to additional adjustments for certain of the Company’s directors and officers liability insurance policies.


3.	Repurchase and Conversion of Convertible Notes

During the nine months ended September 30, 2009, the Company repurchased $85,417 principal amount of its 1.75% Convertible Subordinated Notes Due 2023 (“1.75% Notes”) for $80,123 in cash. Also during the nine months ended September 30, 2009, the Company repurchased $49,700 principal amount of its 31/8% Convertible Notes Due 2025 (“31/8% Notes”) for $43,734 in cash. The Company recognized an aggregate pre-tax gain of $10,120 related to the repurchases of the 1.75% Notes and 31/8% Notes during the nine months ended September 30, 2009, which is reflected within (loss) gain on convertible notes in the accompanying

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

consolidated statement of operations. The gain includes the expensing of remaining deferred issuance costs outstanding related to the repurchased notes.

During the nine months ended September 30, 2010, the Company repurchased $32,446 principal amount of its 1.75% Notes for $42,107 in cash and the holders of the 1.75% Notes converted $232,137 principal amount into 6,703,129 shares of WebMD common stock. The majority of these conversions occurred following a Notice of Redemption that was delivered in May 2010. Also during the three and nine months ended September 30, 2010, the Company repurchased $9,942 and $42,118 principal amount of its 31/8% Notes for $13,113 and $52,368 in cash, respectively, and holders of the 31/8% Notes converted $26,228 and $122,855 principal amount into 748,812 and 3,507,527 shares of WebMD common stock, respectively. The Company recognized an aggregate pre-tax loss of $2,232 and $16,970 related to the repurchase of the 1.75% Notes and the repurchase and conversions of the 31/8% Notes, which is reflected within (loss) gain on convertible notes in the accompanying consolidated statement of operations during the three and nine months ended September 30, 2010, respectively. The loss includes the expensing of remaining deferred issuance costs outstanding related to the repurchased and converted notes.

As a result of the conversion and repurchase activity described above, as of September 30, 2010, the only convertibles notes that remained outstanding were $85,327 principal amount of the 31/8% Notes, which were convertible into approximately 2.4 million shares of WebMD common stock.


4.	Related Party Transaction

Fidelity Human Resources Services Company LLC

The Company and Fidelity Employer Services Company LLC (“FESCO”) are parties to an agreement pursuant to which WebMD integrates its private portals product into the services FESCO provides to its clients. FESCO provides human resources administration and benefit administration services to employers. The Company recorded revenue of $1,421 and $4,317 during the three and nine months ended September 30, 2010 and $1,989 and $6,326 during the three and nine months ended September 30, 2009, respectively. Included in accounts receivable as of September 30, 2010 and December 31, 2009 was $1,887 and $2,250, respectively, related to the FESCO agreement. FESCO is an affiliate of FMR LLC, which is deemed to be a related party of the Company due to its publicly reported ownership of shares of the Company’s common stock. Affiliates of FMR LLC also provide services to the Company in connection with the Company’s 401(k) plan and the Company’s stock-based compensation plans.


5.	Fair Value of Financial Instruments and Non-Recourse Credit Facilities

The Company accounts for certain assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, the Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:


	Level 1:	Observable inputs such as quoted market prices in active markets for identical assets or liabilities.

	Level 2:	Observable market-based inputs or unobservable inputs that are corroborated by market data.

	Level 3:	Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company did not have any Level 2 assets as of September 30, 2010 and December 31, 2009. The following table sets forth the Company’s Level 1 and Level 3 financial assets that were measured and recorded at fair value on a recurring basis as of September 30, 2010 and December 31, 2009:


			September 30, 2010						December 31, 2009
	Fair Value		Amortized				Gross		Amortized				Gross
	Estimate		Cost		Fair		Unrealized		Cost		Fair		Unrealized
	Using:		Basis		Value		Gains		Basis		Value		Gains (Losses)

Cash and cash equivalents		Level 1	$	352,199	$	352,199	$	—	$	459,766	$	459,766	$	—
Equity securities		Level 1		—		—		—		1,470		4,851		3,381
Repurchase right		Level 3		845		845		—		—		—		—
Auction rate securities⁽¹⁾		Level 3		—		—		—		320,507		279,701		(40,806	)⁽²⁾
Senior secured notes⁽³⁾		Level 3		—		—		—		63,826		63,826		—


(1)		The face (par) value of the auction rate securities was $352,700 as of December 31, 2009.

(2)		Amounts reflect cumulative effect of adoption of new authoritative guidance as discussed below.

(3)		The face value of the senior secured notes was $67,500 as of December 31, 2009.

The following table reconciles the beginning and ending balances of the Company’s Level 3 assets, which consist of the auction rate securities, the senior secured notes and the repurchase right:


	Nine Months Ended September 30,
	2010									2009
	Auction Rate			Repurchase			Senior			Auction Rate
	Securities			Right			Secured Notes			Securities

Fair value as of the beginning of the period	$	279,701		$	—		$	63,826		$	286,552
Redemptions		(290,999	)		(407	)		(65,475	)		(2,200	)
(Loss) gain included in earnings		(29,508	)		1,252			1,362			—
Interest income accretion included in earnings		—			—			287			—
Changes in unrealized gains/losses included in other comprehensive income		40,806			—			—			(12,350	)

Fair value as of the end of the period	$	—		$	845		$	—		$	272,002

Through April 20, 2010, the Company held investments in auction rate securities (“ARS”) which had been classified as Level 3 assets as described above. The types of ARS holdings the Company owned were backed by student loans, 97% guaranteed under the Federal Family Education Loan Program (FFELP), and had credit ratings of AAA or Aaa when purchased. Historically, the fair value of the Company’s ARS holdings approximated par value due to the frequent auction periods, generally every 7 to 28 days, which provided liquidity to these investments. However, since February 2008, all auctions involving these securities have been unsuccessful. The result of an unsuccessful auction is that these ARS holdings will continue to pay interest in accordance with their terms at each respective auction date; however, liquidity of the securities will be limited until there is a successful auction, the issuer redeems the securities, the securities mature or until such time as other markets for these ARS holdings develop. Additionally, during 2009, approximately one-half of the auction rate securities the Company held were either downgraded below AAA or placed on “watch” status by one or more of the major credit rating agencies. As of March 31, 2008, the Company concluded that the estimated fair value of its ARS no longer approximated the face value. The Company concluded the fair value of its ARS holdings was $302,842 compared to a face value of $362,950. The impairment in value, of $60,108, was considered to be other-than-temporary and, accordingly, was recorded as an impairment charge within the statement of operations during the three months ended March 31, 2008.

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Effective April 1, 2009, the Company was required to adopt new authoritative guidance which amended the recognition guidance for other-than-temporary impairments of debt securities and changed the presentation of other-than-temporary impairments in the financial statements. In accordance with this new guidance, if an entity intends to sell or if it is more likely than not that it will be required to sell an impaired security prior to recovery of its cost basis, the security is to be considered other-than-temporarily impaired and the full amount of impairment must be charged to earnings. Otherwise, losses on securities which are other-than-temporarily impaired are separated into two categories, the portion of loss which is considered credit loss and the portion of loss which is due to other factors. The credit loss portion is charged to earnings while the loss due to other factors is charged to other comprehensive income. This new guidance requires a cumulative effect adjustment to be reported as of the beginning of the period of adoption to reclassify the non-credit component of previously recognized other-than-temporary impairments on debt securities held at that date, from retained earnings to accumulated other comprehensive income, if the entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before recovery of its amortized cost basis.

Since the Company had no current intent to sell the auction rate securities that it held as of April 1, 2009, and it was not more likely than not that the Company would be required to sell the securities prior to recovery of the amortized cost basis, the Company estimated the present value of the cash flows expected to be collected related to the auction rate securities it held. The difference between the present value of the estimated cash flows expected to be collected and the amortized cost basis as of April 1, 2009, the date this new guidance was adopted, was $26,848, or $24,697 net of the effect of noncontrolling interest. This represented the cumulative effect of initially adopting this new guidance and has been reflected as an increase to the cost basis of its investment and an increase to accumulated other comprehensive loss and an increase to retained earnings in the Company’s balance sheet effective as of April 1, 2009.

Historically, the Company estimated the fair value of its ARS holdings using an income approach valuation technique. Using this approach, expected future cash flows are calculated over the expected life of each security and are discounted to a single present value using a market required rate of return. Some of the more significant assumptions made in the present value calculations were (i) the estimated weighted average lives for the loan portfolios underlying each individual ARS, which ranged from 4 to 14 years as of March 31, 2008 and (ii) the required rates of return used to discount the estimated future cash flows over the estimated life of each security, which consider both the credit quality for each individual ARS and the market liquidity for these investments. Additionally, as discussed above, during 2009, certain of the auction rate securities the Company holds were downgraded below AAA by one or more of the major credit rating agencies. These revised credit ratings were a significant consideration in determining the cash flows expected to be collected. Substantial judgment and estimation factors are necessary in connection with making fair value estimates of Level 3 securities, including estimates related to expected credit losses as these factors are not currently observable in the market due to the lack of trading in the securities.

Effective April 20, 2010, the Company entered into an agreement pursuant to which the Company sold all of its holdings of ARS for an aggregate of $286,399. Under the terms of the agreement, the Company retained a right (the “Repurchase Right”), for a period of two years from the date of the agreement: (a) to repurchase from the purchaser the same principal amount of any or all of the various series of ARS sold, at the agreed upon purchase prices received on April 20, 2010; and (b) to receive additional proceeds from the purchaser upon certain redemptions of the various series of ARS sold.

As described above, while the Company originally recorded a loss of $60,108 relating to its holdings of ARS in the March 2008 quarter, the Company was required to reclassify $26,848 of that charge as an unrealized loss through stockholders’ equity when WebMD was required to adopt new authoritative guidance related to other-than-temporary impairments effective April 1, 2009, which had the effect of increasing the cost basis of the ARS by that amount. As a result, during the three months ended March 31, 2010, the

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company recorded an additional charge of $28,848, representing the difference between the cost basis of its ARS holdings and the proceeds received on April 20, 2010, which includes an offsetting amount of $660 related to the initial value of the Repurchase Right. The Company is required to reassess the value of this Repurchase Right at each reporting period, and any changes in value will be recorded within the statement of operations in future periods. During the three and nine months ended September 30, 2010, the Company updated the value of the Repurchase Right, resulting in a (loss) gain of $(184) and $185, and the Company received cash of $53 and $407, respectively, related to the receipt of additional proceeds of certain redemptions of the ARS that were sold in connection with the Repurchase Right. In connection with the sale of the ARS, the Company recorded a deferred income tax benefit of approximately $22,000 primarily related to the reversal of income tax valuation allowance attributable to its ARS.

The Company’s other Level 3 asset was $67,500 principal amount of Senior Secured Notes that the Company received in connection with its sale of Porex on October 19, 2009. The Senior Secured Notes were secured by certain assets of the acquirer of Porex and accrued interest at a rate of 8.75% per annum, payable quarterly. The Senior Secured Notes were issued in four series: the Senior Secured Notes of the first, second and third series had an aggregate principal amount of $10,000 each and were scheduled to mature on the first, second and third anniversaries of the closing, respectively; and the Senior Secured Notes of the fourth series had an aggregate principal amount of $37,500 and was scheduled to mature on the fourth anniversary of the closing. The Company estimated that the fair value of the Senior Secured Notes was $63,826 as of December 31, 2009, of which $9,932 and $53,894 were classified as current investments and long-term investments, respectively, within the accompanying consolidated balance sheet as of December 31, 2009. On April 1, 2010, the Company sold the Senior Secured Notes for $65,475 plus accrued interest and recorded a gain of $1,362 representing the excess of this amount over the adjusted cost basis of the Senior Secured Notes, which is reflected in loss on investments in the accompanying consolidated statement of operations during the nine months ended September 30, 2010.

During the nine months ended September 30, 2010, the Company also sold its other remaining equity securities for $5,379 and recorded a gain of $3,917 representing the excess of the cash received over the cost basis, which is reflected in loss on investments in the accompanying consolidated statement of operations during the nine months ended September 30, 2010.

The Company also holds an investment in a privately held company which is carried at cost and is not subject to fair value measurements. However, if events or circumstances indicate that its carrying amount may not be recoverable, it would be reviewed for impairment. The amount of this investment is $6,471 and it is included in other assets on the accompanying consolidated balance sheets.

The following table presents the carrying value and estimated fair value of the Company’s convertible notes that are carried at historical cost:


	September 30, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Financial Assets:
1.75% Notes^(a)	$	—	$	—	$	264,583	$	296,002
31/8% Notes^(a)		79,634		120,311		227,659		284,716


(a)		Fair value estimate incorporates bid price quotes.

Non-Recourse Credit Facilities

On May 6, 2008, the Company entered into two substantially similar non-recourse credit facilities (the “2008 Credit Facilities”) secured by its ARS holdings (including, in some circumstances, interest payable on the ARS holdings) that would have allowed the Company to borrow up to 75% of the face amount of the ARS holdings pledged as collateral under the 2008 Credit Facilities. No borrowings were made under the 2008

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Credit Facilities. On April 28, 2009, the Company entered into amended and restated credit facilities (the “2009 Credit Facilities”), replacing the 2008 Credit Facilities. Effective April 20, 2010, the 2009 Credit Facilities were terminated.


6.	Equity

The following is a summary of the changes in equity of the Company and of the noncontrolling interest for the nine months ended September 30, 2009. No comparable table is presented for the nine months ended September 30, 2010 as the Company’s noncontrolling interest was eliminated in connection with the Merger that occurred in October 2009.


	Nine Months Ended September 30, 2009
	Stockholders’			Noncontrolling			Total
	Equity			Interest			Equity

Balance as of the beginning of period	$	496,698		$	134,223		$	630,921
Comprehensive income:
Net income		19,040			3,181			22,221
Net change in unrealized losses on securities		(9,776	)		(856	)		(10,632	)
Foreign currency translation adjustment		1,274			—			1,274

Total comprehensive income		10,538			2,325			12,863

Issuance of stock for option exercises and other issuances		23,946			4,824			28,770
Stock-based compensation expense		11,038			17,207			28,245
Repurchases of 31/8% convertible notes, net of tax		(3,544	)		—			(3,544	)

Balance as of the end of period	$	538,676		$	158,579		$	697,255


7.	Comprehensive Income

Comprehensive income is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss) includes foreign currency translation adjustments and certain changes in equity that are excluded from net income, such as changes in unrealized losses on securities. The following table presents the components of comprehensive income:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009

Foreign currency translation gains	$	—	$	1,091	$	—	$	1,274
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)		—		2,984		13,177		(9,776	)
Unrealized losses recognized in earnings		—		—		24,248		—

Other comprehensive income (loss)		—		4,075		37,425		(8,502	)
Net income		13,590		30,302		17,484		19,040

Comprehensive income	$	13,590	$	34,377	$	54,909	$	10,538


8.	Stock Repurchase Program and 2010 Tender Offers

On December 4, 2008, the Company announced the authorization of a stock repurchase program (the “Program”), at which time the Company was authorized to use up to $30,000 to purchase shares of WebMD common stock, from time to time, in the open market, through block trades or in private transactions,

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

depending on market conditions and other factors. During the nine months ended September 30, 2010, the Company repurchased 352,572 shares at an aggregate cost of $14,914 under the Program. As of September 30, 2010, a total of $15,086 remained available for repurchases under the Program. Repurchased shares are recorded under the cost method and are reflected as treasury stock in the accompanying consolidated balance sheets.

On September 8, 2010, the Company completed a tender offer through which it repurchased 3,000,000 shares of WebMD common stock at a price of $52.00 per share for total consideration of $156,421, which includes $421 of costs directly attributable to the purchase. On April 8, 2010, the Company completed a tender offer through which it repurchased 5,172,204 shares of WebMD common stock at a price of $46.80 per share for total consideration of $242,795, which includes $736 of costs directly attributable to the purchase.


9.	Intangible Assets

Intangible assets subject to amortization consist of the following:


	September 30, 2010									December 31, 2009
								Weighted									Weighted
	Gross							Average		Gross							Average
	Carrying		Accumulated					Remaining		Carrying		Accumulated					Remaining
	Amount		Amortization			Net		Useful Life^(a)		Amount		Amortization			Net		Useful Life^(a)

Content	$	15,954	$	(15,849	)	$	105		0.3	$	15,954	$	(15,482	)	$	472		1.0
Customer relationships		34,057		(18,237	)		15,820		7.7		34,057		(16,374	)		17,683		8.3
Technology and patents		14,700		(14,700	)		—		—		14,700		(14,700	)		—		—
Trade names-definite lives		6,030		(3,031	)		2,999		5.7		6,030		(2,629	)		3,401		6.4
Trade names-indefinite lives		4,464		—			4,464		n/a		4,464		—			4,464		n/a

Total	$	75,205	$	(51,817	)	$	23,388			$	75,205	$	(49,185	)	$	26,020


(a)		The calculation of the weighted average remaining useful life is based on the net book value and the remaining amortization period of each respective intangible asset.

Amortization expense was $778 and $2,632 during the three and nine months ended September 30, 2010, respectively and $1,503 and $4,943 during the three and nine months ended September 30, 2009, respectively. Aggregate amortization expense for intangible assets is estimated to be:


Year Ending December 31:
2010 (October 1^st to December 31^st)	$	762
2011		2,627
2012		2,627
2013		2,627
2014		2,627
Thereafter		7,654


10.	Commitments and Contingencies

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 has been conducting an investigation of HLTH, which HLTH first learned about on September 3, 2003. Based on the information available to the Company, it believes that the investigation relates principally to issues of financial accounting improprieties relating to Medical Manager Corporation, a predecessor of HLTH (by its merger into HLTH in September 2000), and, more specifically, HLTH’s former Medical Manager Health Systems, Inc. subsidiary.

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Medical Manager Health Systems was a predecessor to Emdeon Practice Services, Inc. (“EPS”), a subsidiary that HLTH sold to Sage Software in September 2006 (the “EPS Sale”). HLTH and the Company have been fully cooperating and the Company intends to continue to cooperate fully with the U.S. Attorney’s Office. As previously reported, the Board of Directors of HLTH formed a special committee consisting solely of independent directors to oversee this matter with the sole authority to direct HLTH’s response to the allegations that have been raised and that special committee has been continued as a committee of the Board of Directors of the Company following the Merger. As previously disclosed, the Company understands that the SEC is also conducting a formal investigation into this matter. In connection with the EPS Sale, HLTH agreed to indemnify Sage Software with respect to this matter and the Company assumed that obligation in the Merger.

The United States Attorney for the District of South Carolina announced on January 10, 2005 that three former employees of Medical Manager Health Systems each had agreed to plead guilty to one count of mail fraud and that one such employee had agreed to plead guilty to one count of tax evasion for acts committed while they were employed by Medical Manager Health Systems. According to the Informations, Plea Agreements and Factual Summaries filed by the United States Attorney in, and available from, the District Court of the United States for the District of South Carolina — Beaufort Division, on January 7, 2005, the three former employees and other then unnamed co-schemers were engaged in schemes between 1997 and 2002 that included causing companies acquired by Medical Manager Health Systems to pay the former vice president in charge of acquisitions and co-schemers kickbacks which were funded through increases in the purchase price paid by Medical Manager Health Systems to the acquired companies and that included fraudulent accounting practices to artificially inflate the quarterly revenues and earnings of Medical Manager Health Systems when it was an independent public company called Medical Manager Corporation from 1997 through 1999, when and after it was acquired by Synetic, Inc. in July 1999, and when and after it became a subsidiary of HLTH in September 2000. A fourth former officer of Medical Manager Health Systems pled guilty to similar activities later in 2005.

On December 15, 2005, the United States Attorney announced indictments of ten former officers and employees of Medical Manager Health Systems including Michael A. Singer, a former Chief Executive Officer of Medical Manager Health Systems and a former director of HLTH, who was last employed by HLTH as its Executive Vice President, Physician Software Strategies until February 2005, John H. Kang, a former President of Medical Manager Health Systems, who was employed until May 2001, and John P. Sessions, a former President and Chief Operating Officer of Medical Manager Health Systems, who was employed until September 2003. The indictment initially charged the defendants with conspiracy to commit mail, wire and securities fraud, a violation of Title 18, United States Code, Section 371 and conspiracy to commit money laundering, a violation of Title 18, United States Code, Section 1956(h) but the second count was dismissed in 2009. The allegations set forth in the indictment describe activities that are substantially similar to those described above with respect to the January 2005 plea agreements. One of the defendants passed away in 2008 and was dismissed from the indictment. Four of the defendants have been dismissed from the case and two defendants were severed from the case and their cases were transferred to Tampa, Florida. In addition, Mr. Singer has entered into a Deferred Prosecution Agreement with the United States pursuant to which all charges were dismissed against Mr. Singer on July 26, 2010. The trial of John Kang and John Sessions, former officers of Medical Manager Health Systems, began on January 19, 2010 and on March 1, 2010 both men were found guilty by the jury; however, the Court set the verdict aside on May 27, 2010 and entered a judgment of acquittal. The government entered a notice of appeal with respect to the Court’s order and such appeal is pending. The trial of the remaining two defendants was scheduled to begin on October 4, 2010; however, on July 9, 2010 the Court in Tampa placed the case against those defendants on hold pending resolution of the appeal of the South Carolina ruling.

Based on the information it has obtained to date, including that contained in the court documents filed by the United States Attorney in South Carolina, the Company does not believe that any member of HLTH’s

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

senior management whose duties were not primarily related to the operations of Medical Manager Health Systems during the relevant time periods engaged in any of the violations or improprieties described in those court documents. The Company understands, however, that in light of the nature of the allegations involved, the U.S. Attorney’s office has been investigating all levels of HLTH’s management. The Company has not uncovered information that it believes would require a restatement for any of the years covered by HLTH’s financial statements. In addition, the Company believes that the amounts of the kickback payments referred to in the court documents have already been reflected in the financial statements of HLTH to the extent required.

HLTH had (and the Company has assumed in the Merger) certain indemnity obligations to advance amounts for reasonable defense costs for the former officers and directors of EPS. For the years ended December 31, 2009, 2008 and 2007, the Company recorded pre-tax charges of $14,367, $29,078 and $73,347, respectively, related to its estimated liability with respect to these indemnity obligations. See Note 2 for a more detailed discussion regarding these charges.

Directors & Officers Liability Insurance Coverage Litigation

On July 23, 2007, HLTH commenced litigation (the “Coverage Litigation”) in the Court of Chancery of the State of Delaware in and for New Castle County against ten insurance companies in which HLTH was seeking to compel the defendant companies (collectively, the “Defendants”) to honor their obligations under certain directors and officers liability insurance policies (the “Policies”). WebMD succeeded to HLTH as plaintiff in this action as a result of the Merger. HLTH was seeking an order requiring the Defendants to advance and/or reimburse expenses that HLTH had incurred and expected to continue to incur for the advancement of the reasonable defense costs of initially ten, and now four, former officers and directors of HLTH’s former EPS subsidiary who were indicted in connection with the Investigation described above in this Note 10 (the “Investigation”).

Pursuant to a stipulation among the parties, the Coverage Litigation was transferred on September 13, 2007 to the Superior Court of the State of Delaware in and for New Castle County. The Policies were issued to HLTH and to EPS, which is a co-plaintiff with the Company in the Coverage Litigation (collectively, the “Plaintiffs”). EPS was sold in September 2006 to Sage Software and has changed its name to Sage Software Healthcare, Inc. (“SSHI”). In connection with HLTH’s sale of EPS to Sage Software, HLTH retained certain obligations relating to the Investigation and agreed to indemnify Sage Software and SSHI with respect to certain expenses in connection with the Investigation and the Company assumed those obligations as a result of the Merger. HLTH retained (and the Company succeeded to as a result of the Merger) the right to assert claims and recover proceeds under the Policies on behalf of SSHI.

Prior to the filing of the Second Amended Complaint which is discussed below, the Policies at issue in the Coverage Litigation consisted of two separate groups of insurance policies. Each group of policies consists of several layers of coverage, with different insurers having agreed to provide specified amounts of coverage at various levels. The first group of policies was issued to EPS in the amount of $20,000 (the “EPS Policies”) and the second group of policies was issued to Synetic, Inc. (the former parent of EPS, which merged into HLTH) in the amount of $100,000, of which approximately $3,600 was paid by the primary carrier with respect to another unrelated matter (the “Synetic Policies”).

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

payment of the defense costs that the Company is obligated to pay while the Coverage Litigation is pending. On July 31, 2008, the Superior Court for the State of Delaware denied the motion filed by the carriers seeking allocation and granted HLTH’s motion for partial summary judgment to enforce the duty of such carriers to advance and reimburse these costs. Pursuant to the Court’s order, the issuers of the Synetic Policies began reimbursing the Company for its costs as described below.

On September 9, 2008 and February 4, 2009, respectively, the eighth and ninth level carriers of the Synetic Policies notified HLTH that they believe that they were not bound by the Court’s July 31, 2008 order regarding the duty of the Synetic carriers to advance and reimburse defense costs. This resulted in HLTH making a motion to the Court on February 23, 2009 to require such eighth and ninth level carriers to advance and reimburse defense costs. HLTH later settled with the eighth level carrier. Under the terms of the settlement such carrier has paid, in full and final settlement, an agreed-upon percentage of the policy amount against each payment of defense costs made by the Company as such policy was implicated. On April 15, 2009, the ninth level carrier made a cross-motion for summary judgment claiming that, in light of a policy endorsement applicable only to the ninth level carrier, because of the time period during which the conspiracy charged in the Second Superseding Indictment is alleged to have taken place, the Synetic Policy issued by such carrier does not cover HLTH’s indemnification obligations. HLTH believed that such carrier’s motion was without merit and responded to the motion. On July 15, 2009, the Court granted summary judgment in favor of the ninth level carrier and unless and until the Company successfully appeals such decision, the ninth level carrier is not liable to pay any portion of the $10,000 total coverage of its policy with respect to the Company’s indemnification obligations. As of September 30, 2010, $84,200 has been paid by insurance companies representing the EPS Policies and the Synetic Policies through a combination of payment under the terms of the Policies, payment under reservation of rights or through settlement. Of this amount, $62,800 represents the portion received through settlement.

On November 17, 2008, HLTH filed a Second Amended Complaint which added four new insurance companies as defendants in the Coverage Action. These carriers are the issuers of a third set of policies (the “Emdeon Policies”) that provide coverage with respect to HLTH’s indemnification obligations to the former officers and directors of HLTH’s former EPS subsidiary who were indicted in connection with the Investigation. All but one of the carriers who issued the Emdeon Policies moved for summary judgment asserting that exclusions in the Emdeon Policies preclude coverage for HLTH’s indemnification obligations and HLTH filed motions seeking to compel such carriers to advance defense costs that HLTH was obligated to indemnify. On August 31, 2009, the Court issued two opinions. In the first opinion, the Court granted summary judgment in favor of HLTH with respect to one of the exclusions asserted by the carriers who issued the Emdeon Policies. In the second opinion, the Court granted summary judgment in favor of the carriers with respect to the other exclusion asserted by such carriers. The Company and the carriers who issued the Emdeon Policies (with the exception of the second level carrier with whom the Company has settled) each appealed the trial Court’s August 31, 2009 rulings to the Supreme Court of Delaware and, on April 22, 2010, the Supreme Court decided both appeals in favor of the carriers who issued the Emdeon Policies. The implication of this decision is that the Company has effectively exhausted its insurance with respect to its obligation to indemnify the indicted individuals.

The insurance carriers assert that the Company’s insurance policies provide that under certain circumstances, amounts advanced by the insurance companies in connection with the defense costs of the indicted individuals may have to be repaid by the Company, although the amounts that the Company has received in settlement from certain carriers is not subject to being repaid. The Company has obtained an undertaking from each indicted individual pursuant to which, under certain circumstances, such individual has agreed to repay defense costs advanced on such individual’s behalf.

In addition to the Coverage Litigation, on December 22, 2009, TIG Specialty Insurance Company (“TIG”), the second level issuer of the EPS Policies, commenced an action against the Company to recover

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the $5,000 that TIG advanced to the Company in 2006. The Company and TIG have agreed on terms to settle the matter and are in the process of documenting the settlement.

The Company intends to continue to satisfy its legal obligations to the indicted individuals with respect to advancement of amounts for their defense costs.

Roger H. Kaye and Roger H. Kaye, MD PC v. WebMD, LLC, et al.

In December 2009, a lawsuit was filed by Dr. Roger H. Kaye (and Roger H. Kaye MD PC) individually, and as an alleged class action, under the Telephone Consumer Protection Act (the “TCPA”) and under a similar Connecticut statute, in the U.S. District Court for the District of Connecticut against subsidiaries of the Company. The lawsuit claims that faxes allegedly sent during the period August 1, 2006 to the present by subsidiaries of the Company and by The Little Blue Book business that the Company sold in September 2009 were sent in violation of the TCPA and the Connecticut statute. With respect to the TCPA claims, the lawsuit seeks statutory damages in excess of $5,000 for each of two classes of plaintiffs, and a trebling of those damages. With respect to the claims under the Connecticut statute, under which trebling is unavailable, the lawsuit additionally seeks an undetermined amount of damages. In April 2010, Plaintiffs filed an amended complaint making substantially the same claims as were asserted in the original complaint. The Company’s subsidiaries have filed their answer as well as a motion to dismiss the action with prejudice on the grounds that the Court lacks subject matter jurisdiction and also filed a motion to stay discovery, which was granted pending resolution of the motion to dismiss. On July 8, 2010, the Court denied the motion to dismiss and ordered that class-related discovery should proceed, while continuing a stay of full merits discovery. The parties have agreed on terms to settle the matter, subject to approval by the Court. The Company believes that any costs related to this litigation are covered by insurance, subject to the Company’s deductible.

Other Legal Proceedings

In the normal course of business, the Company and its subsidiaries are involved in various claims and legal proceedings. While the ultimate resolution of these matters, including those discussed in Note 11 to the Consolidated Financial Statements included in the Company’s 2009 Annual Report on Form 10-K, has yet to be determined, the Company does not believe that their outcomes will have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.


11.	Stock-Based Compensation

Prior to the Merger on October 23, 2009, HLTH had various stock-based compensation plans (collectively, the “HLTH Plans”) under which directors, officers and other eligible employees received awards of options to purchase HLTH common stock and restricted shares of HLTH common stock. WebMD also had similar stock-based compensation plans (the “WebMD Plans”) that provide for the grant of stock options, restricted stock awards, and other awards based on WebMD common stock. In connection with the Merger, all outstanding stock options and restricted stock awards under the HLTH Plans were converted into outstanding stock options and restricted stock awards of WebMD based on the Merger exchange ratio of 0.4444. The HLTH Plans and the WebMD Plans are referred to collectively as the “Plans” below.

The 2005 Long-Term Incentive Plan (as amended, the “2005 Plan”) is the only plan under which future grants can be made. The maximum number of shares of the Company’s common stock that may be subject to awards under the 2005 Plan was 15,600,000 as of September 30, 2010, subject to adjustment in accordance with the terms of the 2005 Plan. The Company had an aggregate of 1,380,336 shares of common stock available for future grants under the 2005 Plan at September 30, 2010.

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock Options

Generally, options under the Plans vest and become exercisable ratably over periods ranging from four to five years based on their individual grant dates, subject to continued employment on the applicable vesting dates, and generally expire within ten years from the date of grant. Options are granted at prices not less than the fair market value of the Company’s common stock on the date of grant. The following table summarizes stock option activity for the Plans:


						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise Price		Contractual Life		Intrinsic
	Shares			per Share		(In Years)		Value⁽¹⁾

Outstanding at January 1, 2010		22,428,953		$	29.67
Granted		1,830,450			45.73
Exercised		(11,654,611	)		27.30
Cancelled		(1,909,366	)		58.87

Outstanding at September 30, 2010		10,695,426		$	29.78		7.5	$	215,964

Vested and exercisable at the end of the period		3,598,827		$	27.81		5.6	$	80,243


(1)		The aggregate intrinsic value is based on the market price of the Company’s common stock on September 30, 2010, which was $49.87, less the applicable exercise price of the underlying option. This aggregate intrinsic value represents the amount that would have been realized if all the option holders had exercised their options on September 30, 2010.

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model considering the weighted average assumptions noted in the following table. Expected volatility is based on implied volatility from traded options of the Company’s common stock combined with historical volatility of the Company’s common stock. The expected term represents the period of time that options are expected to be outstanding following their grant date, and was determined using historical exercise data combined with assumptions for future exercise activity. The risk-free rate is based on the U.S. Treasury yield curve for periods equal to the expected term of the options on the grant date.


	Nine Months Ended
	September 30,
	2010	2009

Expected dividend yield	0.0%	0.0%
Expected volatility	0.33	0.38-0.56
Risk-free interest rate	2.04%	1.48%
Expected term (years)	4.8	3.4
Weighted average fair value of options granted during the period	$14.53	$10.31

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Restricted Stock Awards

The Company’s Restricted Stock consists of shares of the Company’s common stock which have been awarded to employees with restrictions that cause them to be subject to substantial risk of forfeiture and restrict their sale or other transfer by the employee until they vest. Generally, the Company’s Restricted Stock awards vest ratably over periods ranging from three to five years from their individual award dates subject to continued employment on the applicable vesting dates. The following table summarizes the activity of the Company’s Restricted Stock:


				Weighted
				Average
				Grant Date
	Shares			Fair Value

Balance as of January 1, 2010		1,106,124		$	27.51
Granted		279,775			46.55
Vested		(145,776	)		25.64
Forfeited		(16,106	)		24.48

Balance as of September 30, 2010		1,224,017		$	32.12

Proceeds received from the exercise of stock options were $9,054 and $57,168 for the three and nine months ended September 30, 2010, respectively, and $11,413 and $30,004 for the three and nine months ended September 30, 2009, respectively. Additionally, the Company made payments of $36,831 and $76,559 for the three and nine months ended September 30, 2010, respectively, and $837 and $1,234 for the three and nine months ended September 30, 2009, respectively, related to employee withholding taxes that were satisfied by withholding shares of common stock of equal value, in connection with the exercise of certain stock options and the vesting of restricted stock. The proceeds and payments described above are reflected within cash flows from financing activities within the accompanying consolidated statements of cash flows.

The intrinsic value related to stock options that were exercised, combined with the fair value of shares of restricted stock that vested, was $93,637 and $226,338 for the three and nine months ended September 30, 2010, respectively, and $7,894 and $15,786 for the three and nine months ended September 30, 2009, respectively.

Other

The Company issues shares of its common stock to each WebMD non-employee director with a value equal to their annual board and committee retainers. During 2009, the Company issued the shares on the date of the Merger, October 23, 2009. The Company recorded stock-based compensation expense of $94 and $280 for the three and nine months ended September 30, 2010, respectively and $85 and $255 for the three and nine months ended September 30, 2009, respectively, in connection with these issuances.

WEBMD HEALTH CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Summary of Stock-Based Compensation Expense

The following table summarizes the components and classification of stock-based compensation expense:


	Three Months Ended
	September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009

Plans:
Stock options	$	5,821	$	6,821	$	16,335	$	20,369
Restricted stock		2,714		2,377		6,694		7,745
Other		269		131		576		323

Total stock-based compensation expense	$	8,804	$	9,329	$	23,605	$	28,437

Included in:
Cost of operations	$	1,889	$	1,743	$	5,153	$	4,921
Sales and marketing		1,867		1,948		5,749		5,499
General and administrative		5,048		5,526		12,703		17,363

Consolidated income from continuing operations		8,804		9,217		23,605		27,783
Consolidated income from discontinued operations		—		112		—		654

Total stock-based compensation expense	$	8,804	$	9,329	$	23,605	$	28,437

As of September 30, 2010, approximately $75,900 of unrecognized stock-based compensation expense related to unvested awards (net of estimated forfeitures) is expected to be recognized over a weighted-average period of approximately 3.0 years, related to the Plans.

Tax benefits attributable to stock-based compensation represented approximately 39% of stock-based compensation expense for all periods presented.


12.	Other Income (Expense), Net

Other income (expense), net consists of the following items:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009

Transition service fees^(a)	$	—		$	(24	)	$	—		$	47
Reduction of tax contingencies^(b)		177			245			533			734
Legal expense^(c)		(70	)		(344	)		(625	)		(1,725	)

Other income (expense), net	$	107		$	(123	)	$	(92	)	$	(944	)


(a)		Represents the net fees received from (paid to) ViPS and EBSCo (businesses previously sold by the Company) in relation to their respective transition services agreements.

(b)		Represents the reduction of certain sales and use tax contingencies resulting from the expiration of various statutes.

(c)		Represents the costs and expenses incurred by the Company related to the investigation by the United States Attorney for the District of South Carolina and the SEC and the related Coverage Litigation.


ITEM 2.	*Management’s Discussion and Analysis of Financial Condition and 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 “Forward-Looking Statements” on page 3.

Overview

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 is intended 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 our company, background information on certain trends, transactions and other developments affecting our company and a discussion of how seasonal factors may impact the timing of our revenue.

	•	Critical Accounting Policies and Estimates. This section discusses those accounting policies that are considered important to the evaluation and reporting of our financial condition and results of operations, and whose application requires us to exercise subjective and often complex judgments in making estimates and assumptions. In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Note 2 to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (which we refer to as the SEC).

	•	Recent Accounting Pronouncements. This section provides a summary of the most recent authoritative accounting standards and guidance that have either been recently adopted by our company or may be adopted in the future.

	•	Results of Operations and Supplemental Financial and Operating Information. These sections provide our analysis and outlook for the significant line items on our statements of operations, as well as other information that we deem meaningful to understand our results of operations on a consolidated basis.

	•	Liquidity and Capital Resources. This section provides an analysis of our liquidity and cash flows, as well as a discussion of our commitments that existed as of September 30, 2010.

	•	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.

In this MD&A, dollar amounts are in thousands, unless otherwise noted.

Introduction

Our Company

We are a leading provider of health information services to consumers, physicians and other healthcare professionals, employers and health plans through our public and private online portals, mobile applications and health-focused publications. Our public portals for consumers enable them to obtain health and wellness information (including information on specific diseases or conditions), check symptoms, locate physicians, store individual healthcare information, receive periodic e-newsletters on topics of individual interest and participate in online communities with peers and experts. Our public portals for physicians and healthcare professionals make it easier for them to access clinical reference sources, stay abreast of the latest clinical information, learn about new treatment options, earn continuing medical education (which we refer to as CME) credit and communicate with peers. We generate revenue from our public portals primarily through the sale of advertising and sponsorship products, including CME services. We also provide mobile health

information applications for use by consumers and physicians. We also provide e-detailing promotion and physician recruitment services, information services and provide print services including the publication of WebMD the Magazine, a consumer magazine distributed to physician office waiting rooms. The sponsors and advertisers of our public portals include pharmaceutical, biotechnology, medical device and consumer products companies. Our private portals enable employers and health plans to provide their employees and members with access to personalized health and benefit information and decision-support technology that helps them to make more informed benefit, treatment and provider decisions. In addition, we offer clients of our private portals telephonic health coaching services on a per participant basis across an employee or plan population. We generate revenue from our private portals through the licensing of these portals and related services to employers and health plans either directly or through distributors.

Background Information on Certain Trends Influencing the Use of Our Services

Several key trends in the healthcare and Internet industries are influencing the use of healthcare information services of the types we provide or are developing. Those trends are described briefly below:


	•	Use of the Internet by Consumers and Physicians. The Internet has emerged as a major communications medium and has already fundamentally changed many sectors of the economy, including the marketing and sales of financial services, travel, and entertainment, among others. The Internet is also changing the healthcare industry and has transformed how consumers and physicians find and utilize healthcare information.


	—	Healthcare consumers increasingly seek to educate themselves online about their healthcare related issues, motivated in part by the continued availability of new treatment options and in part by the larger share of healthcare costs they are being asked to bear due to changes in the benefit designs being offered by health plans and employers. The Internet has fundamentally changed the way consumers obtain health and wellness information, enabling them to have immediate access to searchable information and dynamic interactive content to check symptoms, assess risks, understand diseases, find providers and evaluate treatment options. According to a study of health information technology by the National Center for Health Statistics of the Centers for Disease Control and Prevention (or CDC), approximately 51% of United States adults aged 18-64 had used the Internet to look up health information during the prior 12 months, based on a survey conducted in the first half of 2009. According to a June 2009 study by the Pew Internet & American Life Project, 61% of U.S. adults have searched for health information on the Internet (compared to 25% in a similar study in 2000) and approximately 37% of U.S. adults have accessed social media related to health.

	—	The Internet has also become a primary source of information for physicians seeking to improve clinical practice and is growing relative to traditional information sources, such as conferences, meetings and offline journals.


	•	Increased Online Marketing and Education Spending for Healthcare Products. Pharmaceutical, biotechnology and medical device companies spend large amounts each year marketing their products and educating consumers and physicians about them; however, only a small portion is currently spent on online services. We believe that these companies, which comprise the majority of the advertisers and sponsors of our public portals, are becoming increasingly aware of the effectiveness of the Internet relative to traditional media in providing health, clinical and product-related information to consumers and physicians, and this increasing awareness will result in increasing demand for our services. However, notwithstanding our general expectation for increased demand, our advertising and sponsorship revenue may vary significantly from quarter to quarter due to a number of factors, including general economic and regulatory conditions and the following:


	—	The majority of our advertising and sponsorship contracts are for terms of approximately four to twelve months. We have relatively few longer term advertising and sponsorship contracts.

	—	The time between the date of initial contact with a potential advertiser or sponsor regarding a specific program and the execution of a contract with the advertiser or sponsor for that program


		may be subject to delays over which we have little or no control, including as a result of budgetary constraints of the advertiser or sponsor or their need for internal approvals.

Other factors that may affect the timing of contracting for specific programs with advertisers and sponsors, or receipt of revenue under such contracts, include: the timing of FDA approval for new products or for new approved uses for existing products; the timing of FDA approval of generic products that compete with existing brand name products; the timing of withdrawals of products from the market; the timing of roll-outs of new or enhanced services on our public portals; seasonal factors relating to the prevalence of specific health conditions and other seasonal factors that may affect the timing of promotional campaigns for specific products; and the scheduling of conferences for physicians and other healthcare professionals.


	•	Use of Health and Benefits Management Applications. In a healthcare market where a greater share of the responsibility for healthcare costs and decision-making has been shifting to consumers, use of information technology (including personal health records) to assist consumers in making informed decisions about healthcare has also increased. We believe that through our WebMD Health and Benefits Manager tools, including our personal health record application, we are well positioned to play a role in this environment. However, our strategy depends, in part, on increasing usage of our private portal services by our employer and health plan clients’ employees and members and being able to demonstrate a sufficient return on investment and other benefits for our private portals clients from those services. Increasing usage of our private portal services requires us to continue to develop new and updated applications, features and services. In addition, we face competition in the area of healthcare decision-support tools and online health management applications and health information services. Many of our competitors have greater financial, technical, product development, marketing and other resources than we do, and may be better known than we are. We also expect that, for clients and potential clients that have been adversely affected by general economic conditions, we may continue to experience some reductions in initial contracts, contract expansions and contract renewals for our private portal services, as well as reductions in the size of existing contracts.

	•	Developments in Social Media and Other Internet Applications. In the past several years, video and multimedia applications have become an increasingly important part of what users expect from Internet sites. In addition, consumers are increasingly using the Internet to access social media as a means to communicate and exchange information, including regarding health and wellness. Similarly, physicians and other healthcare professionals are increasingly participating in condition or topic specific community groups and other interactive applications. Consumers and healthcare professionals are also increasingly using handheld devices to access the Internet, with physicians increasingly using handheld devices in diagnosis and treatment at the point of care. We have invested and intend to continue to invest in software and systems that allow us to meet the demands of our users and sponsors, including customized content management and publishing technology to deliver interactive content, multimedia programming and personalized health applications that engage our users. The following are some of our recent and current initiatives to improve the user experience on our Websites, expand our services and increase our user base:


	—	Physician Connect, our social networking platform for physicians, allows them to exchange information online on a range of topics, including patient care, drug information, healthcare-related legislation and practice management. Physicians can also create polls to assess the opinions of their colleagues on a range of topics. We also offer third parties the opportunity to sponsor Physician Connect discussions and polls so that they can gain insights into physicians’ attitudes and opinions of interest. By September 30, 2010, Physician Connect had attracted more than 135,000 physician members, a subset of Medscape’s physician membership. Medscape from WebMD also offers a variety of sponsored and unsponsored blogs where healthcare professionals can share their thoughts and opinions with the Medscape from WebMD community.

	—	In March 2010, we launched The WebMD Community, a social networking initiative that gives consumers the ability to connect with health experts and with other WebMD members to exchange


		information, experiences and support. The WebMD Community is being integrated throughout each of the core content areas of WebMD.com, giving members the ability to safely and easily connect with others on topics that are most relevant to them. In addition to expert-led communities, members are empowered to create their own communities and to exchange information with other users. The WebMD Community also enables third party sponsors to create branded experiences and to host consumer discussions on specific health and wellness topics most important to them.


	—	Medscape Mobile is a free medical application for physicians that includes Medscape’s specialty-specific news, comprehensive drug information and clinical reference tools. Medscape Mobile also includes CME activities organized by specialty and designed for use on a mobile device. Medscape Mobile was launched for iPhone^® and iPod touch^® users in 2009. In April 2010, Medscape Mobile was launched on the Blackberry^® platform. Medscape Mobile has attracted over 600,000 registered users since launch.

	—	WebMD Mobile is a free consumer application that allows consumers to access certain WebMD tools on an iPhone or iPad, including Symptom Checker, First Aid, and Pill Identifier applications, as well as other health information. It has been downloaded nearly three million times since launch.

	—	We are pursuing opportunities to expand the reach of our brands outside the United States. In October 2009, we launched our first major consumer portal outside the United States in partnership with Boots, the UK’s leading pharmacy-led health and beauty retailer.


	•	Healthcare Reform Legislation. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (which we refer to as the Reform Legislation), was signed into law in March 2010. The Reform Legislation makes extensive changes to the current system of healthcare insurance and benefits. In general, the Reform Legislation seeks to reduce healthcare costs and decrease the number of uninsured legal U.S. residents by, among other things, requiring individuals to carry, and certain employers to offer health insurance or be subject to penalties. The Reform Legislation also imposes new regulations on health insurers, including guaranteed coverage requirements, prohibitions on certain annual and all lifetime limits on amounts paid on behalf of or to plan members, increased restrictions on rescinding coverage, establishment of minimum medical loss ratio requirements, a requirement to cover preventive services on a first dollar basis, the establishment of state insurance exchanges and essential benefit packages, and greater limitations on how health insurers price certain of their products. The Reform Legislation also contains provisions that will affect the revenues and profits of pharmaceutical and medical device companies, including new taxes on certain sales of their products. Many of the provisions of the Reform Legislation that expand insurance coverage will not become effective until 2014 and many provisions require implementing regulations and interpretive guidance to be issued before they will be fully implemented. In addition, it is difficult to foresee how individuals and businesses will respond to the choices available to them under the Reform Legislation. Furthermore, the Reform Legislation will result in future state legislative and regulatory changes, which we are unable to predict at this time, in order for states to comply with certain provisions of the Reform Legislation and to participate in grants and other incentive opportunities. In addition, several states have filed lawsuits challenging the constitutionality of certain provisions of the Reform Legislation. Accordingly, while we do not currently anticipate any significant adverse effects on WebMD as a direct result of application of the Reform Legislation to our businesses or on our company in its capacity as an employer, we are unable to predict what the indirect impacts of the Reform Legislation will be on WebMD’s businesses through its effects on other healthcare industry participants, including pharmaceutical and medical device companies that are advertisers and sponsors of our public portals and employers and health plans that are clients of our private portals. However, we believe that certain aspects of the Reform Legislation and future implementing regulations that seek to reduce healthcare costs may create opportunities for WebMD, including with respect to our personal health record applications and health and benefits decision-support tools and, more generally, with respect to our capabilities in providing health and wellness information and education. We cannot yet determine the scope of any such opportunities or what competition we may face in our efforts to pursue such opportunities.

The healthcare industry in the United States and relationships among healthcare payers, providers and consumers are very complicated. In addition, the Internet and the market for online services are relatively new and still evolving. Accordingly, there can be no assurance that the trends identified above will continue or that the expected benefits to our businesses from our responses to those trends will be achieved. In addition, the market for healthcare information services is highly competitive and not only are our existing competitors seeking to benefit from these same trends, but the trends may also attract additional competitors.

Background Information on Certain Transactions and Other Significant Developments

Merger with HLTH. From the completion of our initial public offering until the completion of our merger with HLTH Corporation (which we refer to as HLTH) on October 23, 2009 (which we refer to as the Merger), WebMD was more than 80% owned by HLTH. On October 23, 2009, stockholders of HLTH and WebMD approved the Merger and the transaction was completed later that day, with HLTH merging into WebMD and WebMD continuing as the surviving corporation. WebMD automatically succeeded to all of HLTH’s assets, liabilities and commitments upon completion of the Merger (other than the shares of WebMD Class B common stock owned by HLTH which were cancelled in the Merger). In the Merger, each share of HLTH common stock was converted into 0.4444 shares of WebMD common stock. The shares of WebMD’s Class A common stock were unchanged in the Merger and continue to trade on the Nasdaq Global Select Market under the symbol “WBMD”; however, they are no longer referred to as “Class A” because the Merger eliminated both WebMD’s Class B common stock and the dual-class stock structure that had existed at WebMD. The key reasons for the Merger included allowing HLTH’s stockholders to participate directly in the ownership of WebMD, while eliminating HLTH’s controlling interest in WebMD and the inefficiencies associated with having two separate public companies, increasing the ability of WebMD to raise capital and to obtain financing, and improving the liquidity of WebMD common stock by significantly increasing the number of shares held by public stockholders.

WebMD was the only operating business of HLTH at the time the Merger closed. Accordingly, the completion of the Merger did not have a significant effect on the operations of WebMD since there were no HLTH business operations to combine with WebMD’s business operations and, while HLTH had previously been providing certain corporate services to WebMD under a services agreement and had certain other agreements with WebMD, those agreements ceased when WebMD acquired HLTH. The employees and resources of HLTH used to provide services to WebMD under the services agreement became employees and resources of WebMD upon completion of the Merger.

The applicable accounting treatment for the Merger resulted in HLTH being considered the acquiring entity of the WebMD non-controlling interest. Accordingly, the pre-acquisition consolidated financial statements of HLTH became the historical financial statements of WebMD following the completion of the Merger, adjusted as described in the next paragraph. Accordingly, in this MD&A, “WebMD” (or the use of “we,” “our,” or similar words) refers not only to WebMD itself but also, where the context requires, to HLTH. The specific names of HLTH and WebMD are used only where there is a need to distinguish between the legal entities. In addition, all references in this MD&A to amounts of shares of HLTH common stock and to market prices or purchase prices for HLTH common stock have been adjusted to reflect the 0.4444 exchange ratio in the Merger (which we refer to as the Exchange Ratio) and are expressed as the number of shares of WebMD common stock into which the HLTH common stock would be converted in the Merger and the equivalent price per share of WebMD common stock. Similarly, the exercise price of options and warrants to purchase HLTH common stock and the number of shares subject to those options and warrants have been adjusted to reflect the Exchange Ratio.

In our financial statements for the three and nine months ended September 30, 2009 included in this Quarterly Report: the weighted-average shares outstanding used in computing income (loss) per common share for the three and nine months ended September 30, 2009 have been adjusted by multiplying the historical weighted-average shares outstanding for HLTH by the Exchange Ratio; and basic and diluted income (loss) per common share have been recalculated to reflect the adjusted weighted-average shares.

Repurchase and Conversion of Convertible Notes. During the nine months ended September 30, 2010, we repurchased $32,446 principal amount of our 1.75% Convertible Subordinated Notes Due 2023 (which we refer to as the 1.75% Notes) for $42,107 in cash and the holders of the 1.75% Notes converted $232,137 principal amount into 6,703,129 shares of WebMD common stock. The majority of these conversions occurred following a Notice of Redemption that we delivered in May 2010. Also during the three and nine months ended September 30, 2010, we repurchased $9,942 and $42,118 principal amount of our 31/8% Convertible Notes due 2025 (which we refer to as the 31/8% Notes) for $13,113 and $52,368 in cash, respectively, and the holders of the 31/8% Notes converted $26,228 and $122,855 principal amount into 748,812 and 3,507,527 shares of WebMD common stock, respectively. We recognized an aggregate pre-tax loss of $2,232 and $16,970 related to the repurchase of the 1.75% Notes and the repurchase and conversions of the 31/8% Notes during the three and nine months ended September 30, 2010, respectively. The loss includes the expensing of remaining deferred issuance costs outstanding related to the repurchased and converted notes.

As a result of the conversion and repurchase activity described above, as of September 30, 2010, the only convertible notes that remained outstanding were $85,327 principal amount of the 31/8% Notes, which were convertible into approximately 2.4 million shares of WebMD common stock.

Tender Offers. On September 8, 2010, we completed a tender offer for our common stock and repurchased 3,000,000 shares at a price of $52.00 per share. In this MD&A, we refer to this tender offer as the September Tender Offer. The total cost of the September Tender Offer was $156,421, which includes $421 of costs directly attributable to the purchase. On April 8, 2010, we completed a tender offer for our common stock and repurchased 5,172,204 shares at a price of $46.80 per share. In this MD&A, we refer to this tender offer as the April Tender Offer. The total cost of the April Tender Offer was $242,795, which includes $736 of costs directly attributable to the purchase. On December 10, 2009, we completed a tender offer for our common stock and repurchased 6,339,227 shares at a price of $37.00 per share. In this MD&A, we refer to this tender offer as the 2009 Tender Offer (and, together with the September and April Tender Offers, as the Tender Offers). The total cost of the 2009 Tender Offer was $235,220, which includes $670 of costs directly attributable to the purchase. The Tender Offers represented an opportunity for WebMD to return capital to stockholders who elected to tender their shares of WebMD common stock, while stockholders who chose not to participate in the Tender Offers automatically increased their relative percentage interest in our company at no additional cost to them.

Sale of Porex; Senior Secured Notes. SNTC Holding, Inc., a wholly-owned subsidiary of our company, entered into a stock purchase agreement, dated as of September 17, 2009, for the sale of our Porex business (which we refer to as Porex) for which we received $74,378 in cash at closing, received $67,500 in senior secured notes (which we refer to as the Senior Secured Notes) and incurred approximately $4,900 of transaction expenses. The sale was completed on October 19, 2009. During the three months ended March 31, 2010, we also paid $1,430 to Porex related to the finalization of a customary working capital adjustment. On April 1, 2010, we sold the Senior Secured Notes to their issuer for $65,475 (which represented 97% of the aggregate principal amount) plus accrued interest through that date. We recognized a pre-tax gain of $1,362 related to the sale of the Senior Secured Notes during the nine months ended September 30, 2010.

Auction Rate Securities. Effective April 20, 2010, we entered into an agreement pursuant to which we sold our holdings of auction rate securities (which we refer to as ARS), for an aggregate of $286,399. Under the terms of the agreement, we retained the right (which we refer to as the Repurchase Right), for a period of two years from the date of the agreement: (a) to repurchase from the purchaser the same principal amount of any or all of the various series of ARS sold at the agreed upon purchase prices received on April 20, 2010; and (b) to receive from the purchaser additional proceeds upon certain redemptions of the various series of ARS sold. As a result, during the three months ended March 31, 2010, we recorded a charge of $28,848, representing the difference between the adjusted cost basis of our ARS holdings and the proceeds received on April 20, 2010, which includes an offsetting amount of $660 related to the initial value of the Repurchase Right. Additionally, during the three and nine months ended September 30, 2010, we recorded an additional (loss) gain of $(184) and $185 related to an increase in the value of the Repurchase Right and received cash of $53 and $407 related to the receipt of additional proceeds of certain redemptions of the ARS we sold in connection with the Repurchase Right.

Directors & Officers Liability Insurance Coverage Litigation. Directors & Officers Liability Insurance Coverage Litigation. On July 23, 2007, HLTH commenced litigation (which we refer to as the Coverage Litigation) in the Court of Chancery of the State of Delaware in and for New Castle County against ten insurance companies in which HLTH was seeking to compel the defendant companies (which we refer to collectively as the Defendants) to honor their obligations under certain directors and officers liability insurance policies (which we refer to as the Policies). WebMD succeeded to HLTH as plaintiff in this action as a result of the Merger. HLTH was seeking an order requiring the Defendants to advance and/or reimburse expenses that HLTH has incurred and expected to continue to incur for the advancement of the reasonable defense costs of initially ten, and now four, former officers and directors of HLTH’s former Emdeon Practice Services subsidiary (which we refer to as EPS) who were indicted in connection with the investigation by United States Attorney for the District of South Carolina (which we refer to as the Investigation) described in Note 10, “Commitments and Contingencies” located in the Notes to the consolidated financial statements included in this Quarterly Report.

Pursuant to a stipulation among the parties, the Coverage Litigation was transferred on September 13, 2007 to the Superior Court of the State of Delaware in and for New Castle County. The Policies were issued to HLTH and to EPS, which is a co-plaintiff with WebMD in the Coverage Litigation (which we refer to collectively as the Plaintiffs). EPS was sold in September 2006 to Sage Software and has changed its name to Sage Software Healthcare, Inc. (which we refer to as SSHI). In connection with HLTH’s sale of EPS to Sage Software, HLTH retained certain obligations relating to the Investigation and agreed to indemnify Sage Software and SSHI with respect to certain expenses in connection with the Investigation and we assumed those obligations as a result of the Merger. HLTH retained (and we succeeded to as a result of the Merger) the right to assert claims and recover proceeds under the Policies on behalf of SSHI.

Prior to the filing of the Second Amended Complaint which is discussed below, the Policies at issue in the Coverage Litigation consisted of two separate groups of insurance policies. Each group of policies consists of several layers of coverage, with different insurers having agreed to provide specified amounts of coverage at various levels. The first group of policies was issued to EPS in the amount of $20,000 (which we refer to as the EPS Policies) and the second group of policies was issued to Synetic, Inc. (the former parent of EPS, which merged into HLTH) in the amount of $100,000, of which approximately $3,600 was paid by the primary carrier with respect to another unrelated matter (which we refer to as the Synetic Policies).

The carrier with the third level of coverage in the Synetic Policies filed a motion for summary judgment in the Coverage Litigation, which most of the carriers who have issued the Synetic Policies joined, which sought summary judgment that any liability to pay defense costs should be allocated among the three sets of policies available to us (including the policies with respect to which the Coverage Litigation relates and a third set of policies the issuers of which had not yet been named by us) such that the Synetic Policies would only be liable to pay about $23,000 of the $96,400 total coverage available under such policies. HLTH filed its opposition to the motion together with its motion for summary judgment against such carrier and several other carriers who have issued the Synetic Policies seeking to require such carriers to advance payment of the defense costs that we are obligated to pay while the Coverage Litigation is pending. On July 31, 2008, the Superior Court for the State of Delaware denied the motion filed by the carriers seeking allocation and granted HLTH’s motion for partial summary judgment to enforce the duty of such carriers to advance and reimburse these costs. Pursuant to the Court’s order, the issuers of the Synetic Policies began reimbursing us for our costs as described below.

Superseding Indictment is alleged to have taken place, the Synetic Policy issued by such carrier does not cover HLTH’s indemnification obligations. HLTH believed that such carrier’s motion was without merit and responded to the motion. On July 15, 2009, the Court granted summary judgment in favor of the ninth level carrier and unless and until we successfully appeal such decision, the ninth level carrier is not liable to pay any portion of the $10,000 total coverage of its policy with respect to our indemnification obligations. As of September 30, 2010, $84,200 has been paid by insurance companies representing the EPS Policies and the Synetic Policies through a combination of payment under the terms of the Policies, payment under reservation of rights or through settlement. Of this amount, $62,800 represents the portion received through settlement.

On November 17, 2008, HLTH filed a Second Amended Complaint which added four new insurance companies as defendants in the Coverage Action. These carriers are the issuers of a third set of policies (which we refer to as the Emdeon Policies) that provide coverage with respect to HLTH’s indemnification obligations to the former officers and directors of HLTH’s former EPS subsidiary who were indicted in connection with the Investigation. All but one of the carriers who issued the Emdeon Policies moved for summary judgment asserting that exclusions in the Emdeon Policies preclude coverage for HLTH’s indemnification obligations and HLTH filed motions seeking to compel such carriers to advance defense costs that HLTH was obligated to indemnify. On August 31, 2009, the Court issued two opinions. In the first opinion, the Court granted summary judgment in favor of HLTH with respect to one of the exclusions asserted by the carriers who issued the Emdeon Policies. In the second opinion, the Court granted summary judgment in favor of the carriers with respect to the other exclusion asserted by such carriers. We and the carriers who issued the Emdeon Policies (with the exception of the second level carrier with whom we have settled) each appealed the trial Court’s August 31, 2009 rulings to the Supreme Court of Delaware and, on April 22, 2010, the Supreme Court decided both appeals in favor of the carriers who issued the Emdeon Policies. The implication of this decision is that we have effectively exhausted our insurance with respect to our obligation to indemnify the indicted individuals.

The insurance carriers assert that our insurance policies provide that under certain circumstances, amounts advanced by the insurance companies in connection with the defense costs of the indicted individuals may have to be repaid by us, although the amounts that we have received in settlement from certain carriers is not subject to being repaid. We have obtained an undertaking from each indicted individual pursuant to which, under certain circumstances, such individual has agreed to repay defense costs advanced on such individual’s behalf.

In addition to the Coverage Litigation, on December 22, 2009, TIG Specialty Insurance Company (which we refer to as TIG), the second level issuer of the EPS Policies, commenced an action against us to recover the $5,000 that TIG advanced to us in 2006. Our company and TIG have agreed on terms to settle the matter and are in the process of documenting the settlement.

We intend to continue to satisfy our legal obligation to the indicted individuals with respect to advancement of amounts for their defense costs.

Indemnification Obligations to Former Officers and Directors of EPS. HLTH had certain indemnity obligations to advance amounts for reasonable defense costs for initially ten, and now four, former officers and directors of EPS, who were indicted in connection with the Investigation. In connection with the sale of EPS, HLTH agreed to indemnify Sage Software relating to these indemnity obligations and we also assumed that obligation in the Merger. During 2007, based on information available at that time, we determined a reasonable estimate of the range of probable costs with respect to our indemnification obligation and accordingly, recorded an aggregate pre-tax charge of $73,347, which represented our estimate of the low end of the probable range of costs related to this matter. We reserved the low end of the probable range of costs because no estimate within the range was a better estimate than any other amount. That estimate included assumptions as to the duration of the trial and pre-trial periods, and the defense costs to be incurred during these periods. During 2008 and 2009, we updated the estimated range of our indemnification obligation based on new information received during those periods, and as a result, recorded additional pre-tax charges of $29,078 and $14,367, respectively. As described in more detail above, two of the former officers and directors of EPS were found guilty; however, the Court set the verdict aside on May 27, 2010 and entered a judgment

of acquittal. The government entered a notice of appeal with respect to the Court’s order and such appeal is pending. Two other former officers of EPS are awaiting trial in Tampa, Florida, which was scheduled to begin on October 4, 2010; however, on July 9, 2010 the Court in Tampa placed the case against those defendants on hold pending resolution of the appeal of the South Carolina ruling. As of September 30, 2010, the remaining accrual with respect to the costs for these matters was $8,270 and is included within liabilities of discontinued operations on the accompanying consolidated balance sheet. The ultimate outcome of this matter is still uncertain and, accordingly, the amount of cost we may ultimately incur could be substantially more than the reserve we have currently provided. If the recorded reserves are insufficient to cover the ultimate cost of this matter, we will need to record additional charges to our results of operations in future periods.

Seasonality

The timing of our revenue is affected by seasonal factors. Our public portal advertising and sponsorship revenue is seasonal, primarily due to the annual spending patterns of the advertising and sponsorship clients of our public portals. This portion of our revenue is usually the lowest in the first quarter of each calendar year, and increases during each consecutive quarter throughout the year. The timing of revenue in relation to our expenses, much of which do not vary directly with revenue, has an impact on cost of operations, sales and marketing and general and administrative expenses as a percentage of revenue in each calendar quarter.

Critical Accounting Policies and Estimates

Our MD&A is 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 consider to form a basis for making judgments about the carrying values of assets and liabilities, the recorded amounts of revenue and expenses and the disclosure of contingent assets and liabilities. We are subject to uncertainties such as the impact of future events, economic and political factors, and changes in our business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparation of our financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in reported results of operations; if material, the effects of changes in estimates are disclosed in the notes to our consolidated financial statements.

We evaluate our estimates on an ongoing basis, including those related to revenue recognition, the allowance for doubtful accounts, the carrying value of long-lived assets (including goodwill and indefinite lived intangible assets), the amortization period of long-lived assets (excluding goodwill and indefinite lived intangible assets), the carrying value, capitalization and amortization of software and Website development costs, the carrying value of investments, the provision for income taxes and related deferred tax accounts, certain accrued liabilities, contingencies, litigation and related legal accruals and the value attributed to employee stock options and other stock-based awards.

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 Recognition. Revenue from advertising is recognized as advertisements are delivered or as publications are distributed. Revenue from sponsorship arrangements, information services and licenses of healthcare management tools and private portals as well as related health coaching services, are recognized ratably over the term of the applicable agreement. Revenue from the sponsorship of CME is recognized over the period we substantially complete our contractual deliverables as determined by the applicable agreements. When contractual arrangements contain multiple elements, revenue is allocated to each element based on its relative fair value determined using prices charged when elements are sold separately. In certain instances where fair value does not exist for all the elements, the amount of


		revenue allocated to the delivered elements equals the total consideration less the fair value of the undelivered elements. In instances where fair value does not exist for the undelivered elements, revenue is recognized when the last element is delivered.


	•	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 fair value using exit price and market participant view, such as discounted cash flow and replacement cost models. Our long-lived assets, excluding goodwill and indefinite lived intangible assets, are amortized over their estimated useful lives, which we determine 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 and indefinite lived intangible assets, whenever indicators of impairment are present. We evaluate the carrying value of goodwill and indefinite lived intangible assets annually, or whenever indicators of impairment are present. We use a discounted cash flow approach to determine the fair value of goodwill and indefinite lived intangible assets. Long-lived assets held for sale are reported at the lower of cost or fair value less cost to sell. There was no impairment of goodwill or indefinite lived intangible assets noted as a result of our impairment testing in 2009 for any of our continuing operations.

	•	Fair Value of Investments. Through April 20, 2010, we held investments in ARS which were backed by student loans, 97% guaranteed under the Federal Family Education Loan Program (FFELP), and had credit ratings of AAA or Aaa when purchased. Historically, the fair value of our ARS holdings approximated par value due to the frequent auction periods, generally every 7 to 28 days, which provided liquidity to these investments. However, since February 2008, all auctions involving these securities have failed. The result of a failed auction is that these ARS holdings will continue to pay interest in accordance with their terms at each respective auction date; however, liquidity of the securities will be limited until there is a successful auction, the issuer redeems the securities, the securities mature or until such time as other markets for our ARS holdings develop.

We estimated the fair value of our ARS holdings using an income approach valuation technique. Using this approach, expected future cash flows are calculated over the expected life of each security and are discounted to a single present value using a market required rate of return. Some of the more significant assumptions made in the present value calculations include (i) the estimated weighted average lives for the loan portfolios underlying each individual ARS and (ii) the required rates of return used to discount the estimated future cash flows over the estimated life of each security, which consider both the credit quality for each individual ARS and the market liquidity for these investments. Additionally, effective April 1, 2009, we adopted new authoritative guidance which required us to separate losses associated with our ARS into two categories, the portion of the loss which is considered credit loss and the portion of the loss which is due to other factors.

Our ARS had been classified as Level 3 assets as their valuation, including the portion of their valuation attributable to credit losses, requires substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in the securities. If different assumptions had been used for the various inputs to the valuation approach including, but not limited to, assumptions involving the estimated lives of the ARS holdings, the estimated cash flows over those estimated lives, and the estimated discount rates applied to those cash flows, the estimated fair value of these investments in prior periods could have been significantly higher or lower than the fair value we determined.


	•	Stock-Based Compensation. Effective January 1, 2006, we adopted authoritative guidance which requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in this model are expected dividend yield, expected volatility, risk-free interest rate and expected term.


		Unvested stock options and restricted stock awards that were granted prior to January 1, 2006 continued to be accounted for using the same grant date fair value and same expense attribution method used under previously issued authoritative guidance, except that all awards are recognized in the results of operations over the remaining vesting periods. As of September 30, 2010, there was approximately $75.9 million of unrecognized stock-based compensation expense (net of estimated forfeitures) related to unvested stock options and restricted stock awards held by employees, which is expected to be recognized over a weighted-average period of approximately 3.0 years, related to our stock-based compensation plans.


	•	Deferred Tax Assets. Our deferred tax assets are comprised primarily of net operating loss carryforwards. These net operating loss carryforwards may be used to offset taxable income in future periods, reducing the amount of taxes we might otherwise be required to pay. A significant portion of our net deferred tax assets, including the portion related to excess tax benefits of stock-based awards, are reserved for by a valuation allowance as required by relevant accounting literature. The remaining portion of our net deferred tax assets are no longer reserved for by a valuation allowance. Management determines the need for a valuation allowance by assessing the probability of realizing deferred tax assets, taking into consideration factors including historical operating results, expectations of future earnings and taxable income. Management will continue to evaluate the need for a valuation allowance in the future.

	•	Tax Contingencies. Our tax contingencies are recorded to address potential exposures involving tax positions we have taken that could be challenged by tax authorities. These potential exposures result from applications of various statutes, rules, regulations and interpretations. Our estimates of tax contingencies reflect assumptions and judgments about potential actions by taxing jurisdictions. We believe that these assumptions and judgments are reasonable. However, our accruals may change in the future due to new developments in each matter and the ultimate resolution of these matters may be greater or less than the amount that we have accrued. Consistent with our historical financial reporting, we have elected to reflect interest and penalties related to uncertain tax positions as part of the income tax provision.

Recent Accounting Pronouncements

Accounting Pronouncements to be Adopted in the Future

In October 2009, the Financial Accounting Standards Board (which we refer to as the FASB) issued authoritative guidance on revenue recognition that will become effective for us beginning January 1, 2011, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables. In addition, revenue under multiple element arrangements will be allocated using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. We are currently evaluating the impact that this new guidance will have on our results of operations and financial position.

Results of Operations

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


	Three Months Ended September 30,												Nine Months Ended September 30,
	2010						2009						2010						2009
	$			%^(a)			$			%^(a)			$			%^(a)			$			%^(a)

Revenue	$	135,305			100.0		$	111,568			100.0		$	366,042			100.0		$	300,463			100.0
Cost of operations		47,610			35.2			41,965			37.6			135,972			37.1			117,759			39.2
Sales and marketing		28,957			21.4			26,265			23.5			86,789			23.7			80,623			26.8
General and administrative		22,964			17.0			21,967			19.7			62,350			17.0			65,818			21.9
Depreciation and amortization		6,935			5.1			7,134			6.4			20,268			5.5			21,193			7.1
Interest income		21			—			1,840			1.6			3,850			1.1			6,060			2.0
Interest expense		1,797			1.3			5,541			5.0			10,106			2.8			17,858			5.9
(Loss) gain on convertible notes		(2,232	)		(1.6	)		—			—			(16,970	)		(4.6	)		10,120			3.4
Loss on investments		131			0.1			—			—			22,977			6.3			—			—
Other income (expense), net		107			0.1			(123	)		(0.1	)		(92	)		—			(944	)		(0.3	)

Income from continuing operations before income tax provision (benefit)		24,807			18.3			10,413			9.3			14,368			3.9			12,448			4.1
Income tax provision (benefit)		10,193			7.5			5,389			4.8			(4,140	)		(1.1	)		4,922			1.6

Consolidated income from continuing operations		14,614			10.8			5,024			4.5			18,508			5.1			7,526			2.5
Consolidated (loss) income from discontinued operations		(1,024	)		(0.8	)		27,462			24.6			(1,024	)		(0.3	)		14,695			4.9

Consolidated net income inclusive of noncontrolling interest		13,590			10.0			32,486			29.1			17,484			4.8			22,221			7.4
Income attributable to noncontrolling interest		—			—			(2,184	)		(2.0	)		—			—			(3,181	)		(1.1	)

Net income attributable to Company stockholders	$	13,590			10.0		$	30,302			27.2		$	17,484			4.8		$	19,040			6.3


(a)		Amounts may not add due to rounding.

Revenue from our public portal advertising and sponsorship is derived from online advertising, sponsorship (including online CME services), e-detailing promotion and physician recruitment services, content syndication and distribution, information services and other print services (including advertisements in WebMD the Magazine). Revenue from our private portal services is derived from licensing our private online portals to employers, healthcare payers and others, along with related services including lifestyle education and personalized telephonic coaching. Our customers include pharmaceutical, biotechnology, medical device and consumer products companies, as well as employers and health plans.

Cost of operations consists of salaries and related expenses, and non-cash stock-based compensation expense related to providing and distributing services and products we provide to customers and costs associated with the operation and maintenance of our public and private portals. Cost of operations also consists of editorial and production costs, Website operations costs, non-capitalized Website development costs, costs we pay to our distribution partners, costs associated with our lifestyle education and personalized telephonic coaching services, and costs related to the production and distribution of our publications, including costs related to creating and licensing content, telecommunications, leased properties and printing and distribution.

Sales and marketing expense consists primarily of advertising, product and brand promotion, as well as selling expenses including salaries and related expenses, and non-cash stock-based compensation for account executives and account management. These expenses include items related to salaries and related expenses of marketing personnel, costs and expenses for marketing programs, and fees for professional marketing and advertising services. Also included in sales and marketing expense are the non-cash advertising expenses discussed below.

General and administrative expense consists primarily of salaries, non-cash stock-based compensation and other salary-related expenses of administrative, finance, legal, information technology, human resources and executive personnel. Also included in general and administrative expense are general insurance and costs of accounting and internal control systems to support our operations.

Our discussions throughout MD&A make references to certain non-cash expenses. The following is a summary of our principal non-cash expenses:


	•	Non-cash advertising expense. Expense related to the use of our prepaid advertising inventory that we received from News Corporation in exchange for equity instruments that we issued in connection with an agreement we entered into with News Corporation in 1999 and subsequently amended in 2000. This non-cash advertising expense is included in sales and marketing expense as we use the asset for promotion of our brand.

	•	Non-cash stock-based compensation expense. Expense related to the awards of all share-based payments to employees and non-employee directors, such as grants of employee stock options and restricted stock. Non-cash stock-based compensation expense is reflected in the same expense captions as the related salary cost of the respective employee.

The following table is a summary of our non-cash expenses included in the respective statements of operations captions.


	Three Months Ended
	September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009

Advertising expense included in:
Sales and marketing	$	—	$	—	$	—	$	1,753

Stock-based compensation expense included in:
Cost of operations	$	1,889	$	1,743	$	5,153	$	4,921
Sales and marketing		1,867		1,948		5,749		5,499
General and administrative		5,048		5,526		12,703		17,363

Income from continuing operations	$	8,804	$	9,217	$	23,605	$	27,783

The following discussion is a comparison of our results of operations on a consolidated basis for the three and nine months ended September 30, 2010 and 2009.

Revenue

Our total revenue increased 21.3% and 21.8% to $135,305 and $366,042 in the three and nine months ended September 30, 2010, respectively, from $111,568 and $300,463 during the same periods last year. This increase is due to higher revenue from our public portals. A more detailed discussion regarding changes in revenue is included below under “— Supplemental Financial and Operating Information.”

Costs and Expenses

Cost of Operations. Cost of operations increased to $47,610 and $135,972 in the three and nine months ended September 30, 2010, respectively, from $41,965 and $117,759 during the same periods last year. As a percentage of revenue, cost of operations was 35.2% and 37.1% in the three and nine months ended September 30, 2010, compared to 37.6% and 39.2% in the same periods last year. Included in cost of

operations was non-cash expense related to stock-based compensation of $1,889 and $5,153 during the three and nine months ended September 30, 2010, respectively, compared to $1,743 and $4,921 during the same periods last year. Cost of operations excluding such non-cash expense was $45,721 and $130,819 in the three and nine months ended September 30, 2010, respectively, or 33.8% and 35.7% of revenue, compared to $40,222 and $112,838, or 36.1% and 37.6% of revenue, during the same periods last year. The increase in absolute dollars during the three and nine months ended September 30, 2010 compared to the prior year periods was primarily attributable to an increase of approximately $3,000 and $11,100, respectively, of Website operations expense associated with the delivery of our advertising and sponsorship arrangements and increased traffic to our Websites, and an increase of approximately $2,000 and $5,300, respectively, in development and distribution expense.

Sales and Marketing. Sales and marketing expense increased to $28,957 and $86,789 in the three and nine months ended September 30, 2010, respectively, from $26,265 and $80,623 during the same periods last year. As a percentage of revenue, sales and marketing expense was 21.4% and 23.7% in the three and nine months ended September 30, 2010, compared to 23.5% and 26.8% in the same periods last year. Included in sales and marketing expense were non-cash expenses related to advertising of $1,753 in the nine months ended September 30, 2009, and stock-based compensation of $1,867 and $5,749 during the three and nine months ended September 30, 2010, respectively, compared to $1,948 and $5,499 during the same periods last year. Sales and marketing expense, excluding such non-cash expenses, was $27,090 and $81,040 in the three and nine months ended September 30, 2010, respectively, or 20.0% and 22.1% of revenue, compared to $24,317 and $73,371, or 21.8% and 24.4% of revenue, during the same periods last year. The increase in absolute dollars was primarily attributable to an increase in compensation related costs due to increased staffing.

General and Administrative. General and administrative expense was $22,964 and $62,350 in the three and nine months ended September 30, 2010, respectively, compared to $21,967 and $65,818 during the same periods last year. As a percentage of revenue, general and administrative expense was 17.0% for both the three and nine months ended September 30, 2010, compared to 19.7% and 21.9% in the same periods last year. Included in general and administrative expense was non-cash stock-based compensation expense of $5,048 and $12,703 during the three and nine months ended September 30, 2010, respectively, compared to $5,526 and $17,363 during the same periods last year. The decrease in non-cash stock-based compensation expense was primarily due to certain stock-based awards becoming fully vested during 2009, for which there was no comparable expense in 2010. General and administrative expense, excluding such non-cash expense, was $17,916 and $49,647 in the three and nine months ended September 30, 2010, respectively, or 13.2% and 13.6% of revenue, compared to $16,441 and $48,455, or 14.7% and 16.1% of revenue, during the same periods last year. General and administrative expenses excluding non-cash expenses as a percentage of revenue was lower for the three and nine months ended September 30, 2010 compared to the prior year periods as we were able to increase our revenue without incurring a proportional increase in general and administrative expense.

Depreciation and Amortization. Depreciation and amortization expense was $6,935 and $20,268 in the three and nine months ended September 30, 2010, respectively, compared to $7,134 and $21,193 during the same period last year. The decrease over the prior year period was due to lower amortization expense of $725 and $2,311 during the three and nine months ended September 30, 2010, respectively, resulting from certain intangible assets becoming fully amortized, which was partially offset by an increase in depreciation expense of $526 and $1,386 during the three and nine months ended September 30, 2010, respectively, relating to capital expenditures in 2010 and 2009.

Interest Income. Interest income decreased to $21 and $3,850 in the three and nine months ended September 30, 2010, respectively, from $1,840 and $6,060 in the same periods last year. The decrease resulted from the sale of our investments in auction rate securities in April 2010 and a decrease in the average interest rate of our investments partially offset by the interest on the Senior Secured Notes that we received during the three months ended March 31, 2010 for which there was no prior year comparable amount. As described above under “Introduction — Background Information on Certain Transactions and Other Significant Developments — Sale of Porex; Senior Secured Notes,” the Senior Secured Notes were repurchased from us by the issuer on April 1, 2010.

Interest Expense. Interest expense was $1,797 and $10,106 in the three and nine months ended September 30, 2010, respectively, compared to $5,541 and $17,858 in the same periods last year. Interest expense in the three and nine months ended September 30, 2010 included non-cash interest expense of $977 and $5,149, respectively, and $2,427 and $7,737 in the prior year periods related to the amortization of the debt discount for our 31/8% Notes and the amortization of the debt issuance costs for both our 31/8% Notes and our 1.75% Notes. The decrease in interest expense is a result of lower debt outstanding during 2010 when compared to 2009 due to the repurchases and conversions of our convertible debt over these periods.

(Loss) Gain on Convertible Notes. During the nine months ended September 30, 2010, we repurchased $32,446 principal amount of our 1.75% Notes. Additionally, during the three and nine months ended September 30, 2010, we repurchased $9,942 and $42,118 principal amount of our 31/8% Notes and the holders of the 31/8% Notes converted $26,228 and $122,855 principal amount into shares of our common stock, respectively. As a result of these repurchases and conversions, we recognized a net loss of $2,232 and $16,970 during the three and nine months ended September 30, 2010, respectively.

During the nine months ended September 30, 2009, we repurchased $85,417 principal amount of our 1.75% Convertible Notes for $80,123 and we repurchased $49,700 principal amount of our 31/8% Convertible Notes for $43,734. We recognized a net gain on the repurchase of these notes of $10,120 during the nine months ended September 30, 2009, respectively.

Loss on Investments. On April 20, 2010, we sold our holdings of ARS for an aggregate of $286,399. See “Introduction — Background Information on Certain Transactions and Other Significant Developments — Auction Rate Securities” for additional information. As a result, during the three months ended March 31, 2010, we recorded a charge of $28,848, representing the difference between the adjusted cost basis of our ARS holdings and the proceeds received on April 20, 2010, which includes an offsetting amount of $660 related to the initial value of the Repurchase Right. During the nine months ended September 30, 2010, we recorded gains of $5,871 related to the sale of our remaining equity investments, the sale of our Senior Secured Notes and adjustments in the value of our Repurchase Right. There were no comparable amounts in the prior year periods.

Other Income (Expense), Net. Other income (expense), net was $107 and $(92) in the three and nine months ended September 30, 2010, respectively, compared to $(123) and $(944) in the prior periods. Included in other income (expense), net was $70 and $625 for the three and nine months ended September 30, 2010 compared to $344 and $1,725 in the prior periods of external legal costs and expenses we incurred related to the investigation by the United States Attorney for the District of South Carolina and the SEC and the related Coverage Litigation. Also included in other income (expense), net for the three and nine months ended September 30, 2010 was $177 and $533 compared to $245 and $734 in the prior year periods related to the reversal of certain sales and use tax contingencies resulting from the expiration of various statutes of limitations.

Income Tax Provision (Benefit). The income tax provision of $10,193 and benefit of $4,140 for the three and nine months ended September 30, 2010, respectively, and income tax provision of $5,389 and $4,922 in the prior year periods represents taxes related to federal, state and other jurisdictions. Included in the income tax benefit during the nine months ended September 30, 2010 is a deferred tax benefit of approximately $22,000 primarily related to the reversal of income tax valuation allowance attributable to the sale of our ARS holdings. Additionally, the income tax provision (benefit) during the three and nine months ended September 30, 2010 includes a deferred tax benefit of approximately $882 and $6,725, respectively, and the income tax provision during the nine months ended September 30, 2009 includes a deferred tax provision of approximately $3,692 related to the repurchases and conversions of our convertible notes.

Consolidated (Loss) Income from Discontinued Operations, Net of Tax. Loss from discontinued operations was $1,024 for the three and nine months ended September 30, 2010, which represents a charge related to additional adjustments for certain of our directors and officers liability insurance policies. Income from discontinued operations was $27,462 and $14,695 for the three and nine months ended September 30, 2009. Included in income from discontinued operations was $38,253 and $49,253 during the three and nine months ended September 30, 2009 related to settlements with certain insurance carriers related to their

coverage of the defense costs being incurred by the former officer and directors of HLTH’s former EPS subsidiary. In addition, income from discontinued operations for the nine months ended September 30, 2009 includes a pre-tax charge of $28,800 related to our indemnity obligations to advance amounts for reasonable defense costs for the former officers and directors of HLTH’s former EPS subsidiary who were indicted in connection with the investigation by the United States Attorney for the District of South Carolina and the SEC. For additional information, see “Introduction — Background Information on Certain Transactions and Other Significant Developments — Directors & Officers Liability Insurance Coverage Litigation” and “— Indemnification Obligations to Former Officers and Directors of EPS.” For the respective periods in 2009, the net operating results of our Porex business and the Little Blue Book print directory business were also included through the dates of their respective sales.

Income Attributable to Noncontrolling Interest. Income attributable to noncontrolling interest of $2,184 and $3,181 for the three and nine months ended September 30, 2009 represents the interest of the former WebMD minority shareholders.

Supplemental Financial and Operating Information

The following table and the discussion that follows presents information for groups of revenue based on similar services we provide, as well as information related to a non-GAAP performance measure that we use to monitor the performance of our business which we refer to as “Earnings before interest, taxes, non-cash and other items” or “Adjusted EBITDA.” Due to the fact that Adjusted EBITDA is a non-GAAP measure, we have also included a reconciliation from Adjusted EBITDA to net income.


	Three Months Ended
	September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009

Revenue
Public portal advertising and sponsorship	$	113,078		$	89,414		$	299,927		$	232,695
Private portal services		22,227			22,154			66,115			67,768

	$	135,305		$	111,568		$	366,042		$	300,463

Earnings before interest, taxes, non-cash and other items (Adjusted EBITDA)	$	44,578		$	30,564		$	104,536		$	65,846
Interest, taxes, non-cash and other items
Interest income		21			1,840			3,850			6,060
Interest expense		(1,797	)		(5,541	)		(10,106	)		(17,858	)
Income tax benefit (provision)		(10,193	)		(5,389	)		4,140			(4,922	)
Depreciation and amortization		(6,935	)		(7,134	)		(20,268	)		(21,193	)
Non-cash stock-based compensation		(8,804	)		(9,217	)		(23,605	)		(27,783	)
Non-cash advertising		—			—			—			(1,753	)
(Loss) gain on convertible notes		(2,232	)		—			(16,970	)		10,120
Gain (loss) on investment		(131	)		—			(22,977	)		—
Other income (expense), net		107			(99	)		(92	)		(991	)

Consolidated income from continuing operations		14,614			5,024			18,508			7,526
Consolidated (loss) income from discontinued operations, net of tax		(1,024	)		27,462			(1,024	)		14,695

Consolidated net income inclusive of noncontrolling interest		13,590			32,486			17,484			22,221
Income attributable to noncontrolling interest		—			(2,184	)		—			(3,181	)

Net income attributable to Company stockholders	$	13,590		$	30,302		$	17,484		$	19,040

The following discussion is a comparison of the results of operations for our two groups of revenue and our Adjusted EBITDA for the three and nine months ended September 30, 2010 and 2009.

Public Portal Advertising and Sponsorship. Public portal advertising and sponsorship revenue was $113,078 and $299,927 in the three and nine months ended September 30, 2010, respectively, an increase of $23,664 and $67,232 or 26.5% and 28.9% from the prior year periods. The increase in public portal advertising and sponsorship revenue was primarily attributable to an increase in the average size and number of sponsored programs on our sites, including both brand sponsorship and educational programs. In general, pricing remained relatively stable for our advertising and sponsorship programs and was not a significant source of the revenue increase.

Private Portal Services. Private portal services revenue was $22,227 and $66,115 in the three and nine months ended September 30, 2010, respectively, from $22,154 and $67,768 in the prior year periods. While revenue for the three months ended September 30, 2010 was relatively flat compared to the same period last year, revenue during the nine months ended September 30, 2010 declined by $1,653 from the same period last year. The decline in revenue during the nine months ended September 30, 2010 was primarily due to a decline in the number of employees and health plan members of our customers and a reduction in the overall number of customers. In general, pricing remained relatively stable for our private portal services and was not a significant source of the revenue decrease. The number of companies using our private portal platform was 124 as of September 30, 2010, compared to 135 in the prior year period. We also have approximately 130 additional customers who purchase stand-alone decision support services from us.

Adjusted EBITDA. Adjusted EBITDA increased to $44,578 and $104,536 in the three and nine months ended September 30, 2010, respectively from $30,564 and $65,846 in the prior year periods. As a percentage of revenue, Adjusted EBITDA was 32.9% and 28.6% for the three and nine months ended September 30, 2010, respectively, compared to 27.4% and 21.9% in the prior year periods. This increase as a percentage of revenue was primarily due to higher revenue, specifically related to the increase in the average size and number of brands and sponsored programs in our public portals, without incurring a proportionate increase in overall expenses.

Explanatory Note Regarding Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure and should be viewed as supplemental to, and not as an alternative for, “income (loss) from continuing operations” or “net income (loss)” calculated in accordance with GAAP. Our management uses Adjusted EBITDA as an additional measure of performance for purposes of business decision-making, including developing budgets, managing expenditures, and evaluating potential acquisitions or divestitures. Period-to-period comparisons of Adjusted EBITDA help our management identify additional trends in financial results that may not be shown solely by period-to-period comparisons of income (loss) from continuing operations or net income (loss). In addition, we use Adjusted EBITDA in the incentive compensation programs applicable to many of our employees in order to evaluate our performance. We believe that the presentation of Adjusted EBITDA is useful to investors in their analysis of our results for reasons similar to the reasons why our management finds it useful and because it helps facilitate investor understanding of decisions made by our management in light of the performance metrics used in making those decisions. In addition, we believe that providing Adjusted EBITDA, together with a reconciliation of Adjusted EBITDA to income (loss) from continuing operations or to net income (loss), helps investors make comparisons between us and other companies that may have different capital structures, different effective income tax rates and tax attributes, different capitalized asset values and/or different forms of employee compensation. Please see the “Explanation of Non-GAAP Financial Information” filed as Exhibit 99.1 to this Quarterly Report for additional background information regarding our use of Adjusted EBITDA. Exhibit 99.1 is incorporated in this MD&A by this reference.

Liquidity and Capital Resources

As of September 30, 2010, we had $352,199 of cash and cash equivalents. Our working capital as of September 30, 2010 was $330,668. Our working capital is affected by the timing of each period end in relation to items such as payments received from customers, payments made to vendors, and internal

compensation cycles, as well as the seasonality within our business. Accordingly, our working capital, and its impact on cash flow from operations, can fluctuate materially from period to period.

Cash provided by operating activities from our continuing operations during the nine months ended September 30, 2010 was $89,826, which related to consolidated net income of $17,484, adjusted for a loss from discontinued operations of $1,024, for the losses on investments and convertible notes aggregating $39,947, for the non-cash deferred income tax benefit of $17,260, and for other non-cash expenses of $48,735, which include depreciation and amortization expense, non-cash interest expense and non-cash stock-based compensation expense. Additionally, changes in operating assets and liabilities used cash flow of $104, primarily due to cash provided by an increase in deferred revenue of $3,413 and an increase in accrued liabilities and other long-term liabilities of $1,695 offset by cash used as a result of an increase in prepaid expenses of $3,006 and an increase in accounts receivable of $2,206.

Cash provided by operating activities from our continuing operations during the nine months ended September 30, 2009 was $57,559, which related to a consolidated net income of $22,221, adjusted for income from discontinued operations of $14,695, for the gains on repurchases of convertible notes of $10,120, and for non-cash expenses of $66,029, which include depreciation and amortization expense, non-cash interest expense, non-cash advertising expense, non-cash stock-based compensation expense and deferred income taxes. Additionally, changes in operating assets and liabilities used cash flow of $5,876, primarily due to an increase in prepaid expenses and a decrease in accrued liabilities and other long-term liabilities partially offset by a decrease in accounts receivable and an increase in deferred revenue.

Cash provided by investing activities from our continuing operations was $340,500 during the nine months ended September 30, 2010, compared to cash used by investing activities from our continuing operations of $9,208 in the prior year period. During the nine months ended September 30, 2010, we received $362,259 related to sales of available for sale securities compared to $2,200 in the prior year period. The proceeds received during the nine months ended September 30, 2010 primarily related to $291,406 from the sale of our ARS holdings and $65,475 related to the sale of the Senior Secured Notes. We used $20,329 in connection with purchases of property and equipment in the nine months ended September 30, 2010 compared to $14,248 of purchases of property and equipment in the prior year period. The increase in purchases of property and equipment during the current year period is primarily attributable to leasehold improvements for new office facilities that we entered into during 2010. In the 2010 period, we also used $1,430 to finalize the sale price of our discontinued operations related to our Porex business.

Cash used in financing activities from our continuing operations was $520,811 during the nine months ended September 30, 2010, compared to cash used in financing activities from our continuing operations of $95,024 in the prior year period. Cash used in financing activities in the 2010 period principally related to the repurchase of 8.2 million shares of our common stock through two tender offers that used an aggregate of $399,216, $94,475 used for the repurchase of our 1.75% Notes and 31/8% Notes, the cash used for withholding taxes due on stock-based awards of $76,559, the purchase of $14,914 of treasury stock under our repurchase program and $6,818 used for payment of shares that were tendered in the 2009 Tender Offer but were not delivered and paid for until 2010. These uses of cash were offset by proceeds of $57,168 from the exercise of stock options and a related excess tax benefit on stock-based awards of $14,003. Cash used in financing activities during the nine months ended September 30, 2009 principally related to the repurchases of our 1.75% Notes and our 31/8% Notes in the aggregate of $123,857. This use of cash was partially offset by proceeds of $30,004 from the exercise of stock options.

Also included in our consolidated statements of cash flows for the nine months ended September 30, 2009 were cash flows (used in) provided by discontinued operations. Included in cash flows from discontinued operations during the nine months ended September 30, 2010 and 2009 is the receipt of $1,043 and $25,295, respectively, of reimbursements from our Director & Officer insurance carriers, offset by $17,166 and $29,456 in payments made in the 2010 and 2009 periods, respectively, in connection with the defense costs of the former officers and directors of our former EPS subsidiary in connection with the investigation by the United States Attorney for the District of South Carolina and the SEC. For additional information, see “Introduction — Background Information on Certain Transactions and other Significant Developments —

Directors & Officers Liability Insurance Coverage Litigation” and “— Indemnification Obligations to Former Officers and Directors of EPS.” Also included within the cash flows from our discontinued operations during the nine months ended September 30, 2009 is an aggregate $13,434 related to our Porex and LBB operations, through the date when the discontinued operations were divested.

Potential future uses of cash include redemptions or additional repurchases of our convertible notes, additional repurchases of our common stock and our anticipated 2010 capital expenditure requirements for the full year which we currently estimate to be up to $35,000. Our anticipated capital expenditures relate to expansion of our facilities and improvements that will be deployed across our public and private portal Websites in order to enable us to service future growth in unique users and page views, as well as to create new sponsorship areas for our customers, and to improve the systems used to provide our private portal applications.

Based on our plans and expectations as of the date of this Quarterly Report, we believe that our available cash resources and future cash flow from operations will provide sufficient cash resources to meet the commitments described above and to fund our currently anticipated working capital and capital expenditure requirements for at least the next twenty-four months. 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, and potential future acquisitions. In addition, our ability to generate cash flow is subject to numerous factors beyond our control, including general economic, regulatory and other matters affecting us and our customers. We plan to continue to enhance the relevance of our online services to our audience and sponsors and will continue to invest in acquisitions, strategic relationships, facilities and technological infrastructure and product development. We intend to grow each of our existing businesses and enter into complementary ones through both internal investments and acquisitions. 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. We cannot assure you that such financing will be available on acceptable terms, if at all, or that such financing will not be dilutive to our stockholders. Future indebtedness may impose various restrictions and covenants on us that could limit our ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities.

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 or securities we may issue in the future. The risks and uncertainties described in this Quarterly Report are not the only ones facing us. 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.

Risks Related to Our Operations and the Healthcare Content We Provide

If we are unable to provide content and services that attract and retain users to The WebMD Health Network on a consistent basis, our advertising and sponsorship revenue could be reduced

Users of The WebMD Health Network have numerous other online and offline sources of healthcare information services. Our ability to compete for user traffic on our public portals depends upon our ability to make available a variety of health and medical content, decision-support applications and other services that

meet the needs of a variety of types of users, including consumers, physicians and other healthcare professionals, with a variety of reasons for seeking information. Our ability to do so depends, in turn, on:


	•	our ability to hire and retain qualified authors, journalists and independent writers;

	•	our ability to license quality content from third parties; and

	•	our ability to monitor and respond to increases and decreases in user interest in specific topics.

We cannot assure you that we will be able to continue to develop or acquire needed content, applications and tools at a reasonable cost. In addition, since consumer users of our public portals may be attracted to The WebMD Health Network as a result of a specific condition or for a specific purpose, it is difficult for us to predict the rate at which they will return to the public portals. Because we generate revenue by, among other things, selling sponsorships of specific pages, sections or events on The WebMD Health Network, a decline in user traffic levels or a reduction in the number of pages viewed by users could cause our revenue to decrease and could have a material adverse effect on our results of operations.

Developing and implementing new and updated features and services for our public and private portals and our mobile applications may be more difficult than expected, may take longer and cost more than expected, and may not result in sufficient increases in revenue to justify the costs

Attracting and retaining users of our public portals and our mobile applications and clients for our private portals requires us to continue to improve the technology underlying those portals and applications and to continue to develop new and updated features and services for those portals and applications. If we are unable to do so on a timely basis or if we are unable to implement new features and services without disruption to our existing ones, we may lose potential users and clients.

We rely on a combination of internal development, strategic relationships, licensing and acquisitions to develop our portals, mobile applications and related features and services. Our development and/or implementation of new technologies, features and services may cost more than expected, may take longer than originally expected, may require more testing than originally anticipated and may require the acquisition of additional personnel and other resources. There can be no assurance that the revenue opportunities from any new or updated technologies, applications, features or services will justify the amounts spent.

We face significant competition for our healthcare information products and services

The markets for healthcare information products and services are intensely competitive, continually evolving and, in some cases, subject to rapid change.


	•	Our public portals and mobile applications face competition from numerous other companies, both in attracting users and in generating revenue from advertisers and sponsors. We compete for users with online services and Websites that provide health-related information, including both commercial sites and not-for-profit sites. We compete for advertisers and sponsors with: health-related Websites; general purpose consumer Websites that offer specialized health sub-channels; other high-traffic Websites that include both healthcare-related and non-healthcare-related content and services; search engines that provide specialized health search; and advertising networks that aggregate traffic from multiple sites. Our public portals also face competition from offline publications and information services.

	•	Our private portals compete with: providers of healthcare decision-support tools and online health management applications, including personal health records; wellness and disease management vendors; and health information services and health management offerings of healthcare benefits companies and their affiliates.

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 or users 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. In addition, we expect that competitors will continue to enter these markets.

Failure to maintain and enhance the “WebMD” brand could have a material adverse effect on our business

We believe that the “WebMD” brand identity that we have developed has contributed to the success of our business and has helped us achieve recognition as a trusted source of health and wellness information. We also believe that maintaining and enhancing that brand is important to expanding the user base for our public portals, to our relationships with sponsors and advertisers, and to our ability to gain additional employer and healthcare payer clients for our private portals. We have expended considerable resources on establishing and enhancing the “WebMD” brand and our other brands, and we have developed policies and procedures designed to preserve and enhance our brands, including editorial procedures designed to provide quality control of the information we publish. We expect to continue to devote resources and efforts to maintain and enhance our brands. However, we may not be able to successfully maintain or enhance our brands, and events outside of our control may have a negative effect on our brands. If we are unable to maintain or enhance our brands, and do so in a cost-effective manner, our business could be adversely affected.

Our online businesses have a limited operating history

Our online businesses have a limited operating history and participate in relatively new markets. These markets, and our online businesses, have undergone significant changes during their short history and can be expected to continue to change. Many companies with business plans based on providing healthcare information and related services through the Internet have failed to be profitable and some have filed for bankruptcy or ceased operations. Even if demand from users exists, we cannot assure you that our businesses will continue to be profitable.

Our failure to attract and retain qualified executives and employees may have a material adverse effect on our business

Our business depends largely on the skills, experience and performance of key members of our management team. We also depend, in part, on our ability to attract and retain qualified writers and editors, software developers and other technical personnel and sales and marketing personnel. Competition for qualified personnel in the healthcare information services and Internet industries is intense. We cannot assure you that we will be able to hire or retain a sufficient number of qualified personnel to meet our requirements, or that we will be able to do so at costs that are acceptable to us. Failure to do so may have an adverse effect on our business.

The timing of our advertising and sponsorship revenue may vary significantly from quarter to quarter and is subject to factors beyond our control, including regulatory changes affecting advertising and promotion of drugs and medical devices and general economic conditions

Our advertising and sponsorship revenue may vary significantly from quarter to quarter due to a number of factors, many of which are not within our control, and some of which may be difficult to forecast accurately, including potential effects on demand for our services as a result of regulatory changes affecting advertising and promotion of drugs and medical devices and general economic conditions. The majority of our advertising and sponsorship programs are for terms of approximately four to twelve months. We have relatively few longer term advertising and sponsorship programs. We cannot assure you that our current advertisers and sponsors will continue to use our services beyond the terms of their existing contracts or that they will enter into any additional contracts.

The time between the date of initial contact with a potential advertiser or sponsor regarding a specific program and the execution of a contract with the advertiser or sponsor for that program may be lengthy, especially for larger contracts, and may be subject to delays over which we have little or no control, including as a result of budgetary constraints of the advertiser or sponsor or their need for internal approvals. Other factors that could affect the timing of contracting for specific programs with advertisers and sponsors, or receipt of revenue under such contracts, include:


	•	the timing of FDA approval for new products or for new approved uses for existing products;

	•	the timing of FDA approval of generic products that compete with existing brand name products;


	•	the timing of withdrawals of products from the market;

	•	the timing of rollouts of new or enhanced services on our public portals;

	•	seasonal factors relating to the prevalence of specific health conditions and other seasonal factors that may affect the timing of promotional campaigns for specific products; and

	•	the scheduling of conferences for physicians and other healthcare professionals.

We may be unsuccessful in our efforts to increase advertising and sponsorship revenue from consumer products companies

Most of our advertising and sponsorship revenue has, in the past, come from pharmaceutical, biotechnology and medical device companies. We have been focusing on increasing sponsorship revenue from consumer products companies that are interested in communicating health-related or safety-related information about their products to our audience. However, while many consumer products companies are increasing the portion of their promotional spending used on the Internet, we cannot assure you that these advertisers and sponsors will find our consumer Websites to be as effective as other Websites or traditional media for promoting their products and services. If we encounter difficulties in competing with the other alternatives available to consumer products companies, this portion of our business may develop more slowly than we expect or may fail to develop. In addition, revenues from consumer products companies are more likely to reflect general economic conditions, and to be reduced to a greater extent during economic downturns or recessions, than revenues from pharmaceutical, biotechnology and medical device companies.

Lengthy sales and implementation cycles for our private online portals make it difficult to forecast our revenues from these applications and may have an adverse impact on our business

The period from our initial contact with a potential client for a private online portal and the first purchase of our solution by the client is difficult to predict. In the past, this period has generally ranged from six to twelve months, but in some cases has been longer. Potential sales may be subject to delays or cancellations due to a client’s internal procedures for approving large expenditures and other factors beyond our control, including the effect of general economic conditions on the willingness of potential clients to commit to licensing our private portals. The time it takes to implement a private online portal is also difficult to predict and has lasted as long as six months from contract execution to the commencement of live operation. Implementation may be subject to delays based on the availability of the internal resources of the client that are needed and other factors outside of our control. As a result, we have limited ability to forecast the timing of revenue from new clients. This, in turn, makes it more difficult to predict our financial performance from quarter to quarter.

During the sales cycle and the implementation period, we may expend substantial time, effort and money preparing contract proposals, negotiating contracts and implementing the private online portal without receiving any related revenue. In addition, many of the expenses related to providing private online portals are relatively fixed in the short term, including personnel costs and technology and infrastructure costs. Even if our private portal revenue is lower than expected, we may not be able to reduce related short-term spending in response. Any shortfall in such revenue would have a direct impact on our results of operations.

Our ability to provide comparative information on hospital cost and quality depends on our ability to obtain the required data on a timely basis and, if we are unable to do so, our private portal services would be less attractive to clients

We provide, in connection with our private portal services, comparative information about hospital cost and quality. Our ability to provide this information depends on our ability to obtain comprehensive, reliable data. We currently obtain this data from a number of public and private sources, including the Centers for Medicare and Medicaid Services (CMS), many individual states and the Leapfrog Group. We cannot provide assurance that we would be able to find alternative sources for this data on acceptable terms and conditions. Accordingly, our business could be negatively impacted if CMS or our other data sources cease to make such

information available or impose terms and conditions for making it available that are not consistent with our planned usage. In addition, the quality of the comparative information services we provide depends on the reliability of the information that we are able to obtain. If the information we use to provide these services contains errors or is otherwise unreliable, we could lose clients and our reputation could be damaged.

Our ability to renew existing agreements with employers and health plans will depend, in part, on our ability to continue to increase usage of our private portal services by their employees and plan members

In a healthcare market where a greater share of the responsibility for healthcare costs and decision-making has been shifting to consumers, use of information technology (including personal health records) to assist consumers in making informed decisions about healthcare has also increased. We believe that through our WebMD Health and Benefits Manager platform, including our personal health record application, we are well positioned to play a role in this environment. However, our strategy depends, in part, on increasing usage of our private portal services by our employer and health plan clients’ employees and members and being able to demonstrate a sufficient return on investment and other benefits for our private portals clients from those services. Increasing usage of our private portal services requires us to continue to develop new and updated applications, features and services. In addition, we face competition in the area of healthcare decision-support tools and online health management applications and health information services. Many of our competitors have greater financial, technical, product development, marketing and other resources than we do, and may be better known than we are. We cannot provide assurance that we will be able to meet our development and implementation goals or that we will be able to compete successfully against other vendors offering competitive services and, if we are unable to do so, we may experience static or diminished usage for our private portal services and possible non-renewals of our customer agreements.

We may be subject to claims brought against us as a result of content we provide

Consumers access health-related information through our online services, including information regarding particular medical conditions and possible adverse reactions or side effects from medications. If our content, or content we obtain from third parties, contains inaccuracies, it is possible that consumers, employees, health plan members or others may sue us for various causes of action. Although our Websites and mobile applications contain terms and conditions, including disclaimers of liability, that are intended to reduce or eliminate our liability, 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 public or private portals or mobile applications are unenforceable. A finding by a court that these agreements are invalid and that we are subject to liability could harm our business and require costly changes to our business.

We have editorial procedures in place to provide quality control of the information that we publish or provide. However, we cannot assure you that our editorial and other quality control procedures will be sufficient to ensure that there are no errors or omissions in particular content. Even if potential 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. In addition, our business is based on establishing the reputation of our portals as trustworthy and dependable sources of healthcare information. Allegations of impropriety or inaccuracy, even if unfounded, could harm our reputation and business.

Expansion to markets outside the United States will subject us to additional risks

One element of our growth strategy is to seek to expand our online services to markets outside the United States. Generally, we expect that we would accomplish this through partnerships or joint ventures with other companies having expertise in the specific country or region. However, our participation in international markets will still be subject to certain risks beyond those applicable to our operations in the United States, such as:


	•	challenges caused by language and cultural differences;

	•	difficulties in staffing and managing operations from a distance;


	•	uncertainty regarding liability for services and content;

	•	burdens of complying with a wide variety of legal, regulatory and market requirements;

	•	variability of economic and political conditions, including the extent of the impact of adverse economic conditions in markets outside the United States;

	•	tariffs or other trade barriers;

	•	fluctuations in currency exchange rates;

	•	potentially adverse tax consequences, including restrictions on repatriation of earnings; and

	•	difficulties in protecting intellectual property.

Risks Related to the Internet and Our Technological Infrastructure

Any service interruption or failure in the systems that we use to provide online services could harm our business

Our online services are designed to operate 24 hours a day, seven days a week, without interruption. However, we have experienced and expect that we will in the future experience interruptions and delays in services and availability from time to time. We rely on internal systems as well as third-party vendors, including data center providers, bandwidth providers and mobile carriers, to provide our online services. We may not maintain redundant systems or facilities for some of these services. In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could negatively impact our relationship with users. In addition, system failures may result in loss of data, including user registration data, content, and other data critical to the operation of our online services, which could cause significant harm to our business and our reputation.

To operate without interruption or loss of data, 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 and crashes;

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

	•	other potential service interruptions.

Any disruption in the network access or co-location services provided by third-party providers to us or any failure by these third-party providers or our own systems to handle current or higher volume of use could significantly harm our business. We exercise little control over these third-party vendors, which increases our vulnerability to problems with services they provide.

Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and information services or our own systems could negatively impact our relationships with users and adversely affect our brand and our business and could expose us to liabilities to third parties. Although we maintain insurance for our business, the coverage under our policies may not be adequate to compensate us for all losses that may occur. In addition, we cannot provide assurance that we will continue to be able to obtain adequate insurance coverage at an acceptable cost.

Implementation of additions to or changes in hardware and software platforms used to deliver our online services may result in performance problems and may not provide the additional functionality that was expected

From time to time, we implement additions to or changes in the hardware and software platforms we use for providing our online services. During and after the implementation of additions or changes, a platform

may not perform as expected, which could result in interruptions in operations, an increase in response time or an inability to track performance metrics. In addition, in connection with integrating acquired businesses, we may move their operations to our hardware and software platforms or make other changes, any of which could result in interruptions in those operations. Any significant interruption in our ability to operate any of our online services could have an adverse effect on our relationships with users and clients and, as a result, on our financial results. We rely on a combination of purchasing, licensing, internal development, and acquisitions to develop our hardware and software platforms. Our implementation of additions to or changes in these platforms may cost more than originally expected, may take longer than originally expected, and may require more testing than originally anticipated. In addition, we cannot provide assurance that additions to or changes in these platforms will provide the additional functionality and other benefits that were originally expected.

If the systems we use to provide online portals experience security breaches or are otherwise perceived to be insecure, our business could suffer

We retain and transmit confidential information, including personal health records, in the processing centers and other facilities we use to provide online services. It is critical that these facilities and infrastructure remain secure and be perceived by the marketplace as secure. A security breach could damage our reputation or result in liability. 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, denial-of-service attacks or other attacks by third parties or similar disruptive problems. Any compromise of our security, whether as a result of our own systems or the systems that they interface with, could reduce demand for our services and could subject us to legal claims from our clients and users, including for breach of contract or breach of warranty.

Our online services are dependent on the development and maintenance of the Internet infrastructure

Our ability to deliver our online services is dependent on the development and maintenance of the infrastructure of the Internet by third parties. 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. The Internet has also 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 reliability and performance of the Internet may be harmed by increased usage or by denial-of-service attacks. Any resulting interruptions in our services or increases in response time could, if significant, result in a loss of potential or existing users of and advertisers and sponsors on our Websites and, if sustained or repeated, could reduce the attractiveness of our services.

Customers who utilize our online services depend on Internet service providers and other Website operators for access to our Websites. 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 such outages or other failures on their part could reduce traffic to our Websites.

Third parties may challenge the enforceability of our online agreements

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 the online terms and conditions for use of our Websites, including disclaimers or limitations of liability, are unenforceable. A finding by a court that these terms and conditions or other online agreements are invalid could harm our business.

We could be subject to breach of warranty or other claims by clients of our online portals if the software and systems we use to provide them contain errors or experience failures

Errors in the software and systems we use could cause serious problems for clients of our online portals. We may fail to meet contractual performance standards or client expectations. Clients of our online portals 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. In addition, we could face breach of warranty or other claims by clients or additional development costs. Our software and systems are inherently complex and, despite testing and quality control, we cannot be certain that they will perform as planned.

We attempt to limit, by contract, our liability to our clients for damages arising from our 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, if any, 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 would 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 or hinder market acceptance of our services, including unrelated services.

Risks Related to the Healthcare Industry, Healthcare Regulation and Internet Regulation

Developments in the healthcare industry could adversely affect our business

Most of our revenue is derived from the healthcare industry and could be affected by changes affecting healthcare spending. We are particularly dependent on pharmaceutical, biotechnology and medical device companies for our advertising and sponsorship revenue. 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;

	•	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, biotechnology or medical device companies or other healthcare industry participants.

Federal and state legislatures and agencies periodically consider reforming aspects of the United States healthcare system and significant federal healthcare reform legislation was enacted in March 2010, as discussed in the next risk factor.

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


	•	changes in the design of health insurance plans;

	•	a decrease in the number of new drugs or medical devices coming to market; and

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

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

The healthcare industry has changed significantly in recent years, and we expect that significant changes will continue to occur. However, the timing and impact of developments in the healthcare industry are difficult to predict. We cannot assure you 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.

Recently enacted federal health care reform legislation could adversely affect our healthcare industry customers and clients, causing them to reduce expenditures, including expenditures for our services

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (which we refer to as the Reform Legislation), was signed into law in March 2010. The Reform Legislation makes extensive changes to the system of healthcare insurance and benefits in the U.S. In general, the Reform Legislation seeks to reduce healthcare costs and decrease the number of uninsured legal U.S. residents by, among other things, requiring individuals to carry, and certain employers to offer health insurance or be subject to penalties. The Reform Legislation also imposes new regulations on health insurers, including guaranteed coverage requirements, prohibitions on certain annual and all lifetime limits on amounts paid on behalf of or to plan members, increased restrictions on rescinding coverage, establishment of minimum medical loss ratio requirements, a requirement to cover preventive services on a first dollar basis, the establishment of state insurance exchanges and essential benefit packages, and greater limitations on how health insurers price certain of their products. The Reform Legislation also contains provisions that will affect the revenues and profits of pharmaceutical and medical device companies, including new taxes on certain sales of their products.

Many of the provisions of the Reform Legislation that expand insurance coverage will not become effective until 2014 and many provisions require implementing regulations and interpretive guidance to be issued before they will be fully implemented. In addition, it is difficult to foresee how individuals and businesses will respond to the choices available to them under the Reform Legislation. Furthermore, the Reform Legislation will result in future state legislative and regulatory changes, which we are unable to predict at this time, in order for states to comply with certain provisions of the Reform Legislation and to participate in grants and other incentive opportunities. In addition, several states have filed lawsuits challenging the constitutionality of certain provisions of the Reform Legislation. Accordingly, while we do not currently anticipate any significant adverse effects on WebMD as a direct result of application of the Reform Legislation to our businesses or on our company in its capacity as an employer, we are unable to predict what the indirect impacts of the Reform Legislation will be on WebMD’s businesses through its effects on other healthcare industry participants, including pharmaceutical and medical device companies that are advertisers and sponsors of our public portals and employers and health plans that are clients of our private portals. Healthcare industry participants may respond to the Reform Legislation or to uncertainties created by the Reform Legislation by reducing their expenditures or postponing expenditure decisions, including expenditures for our services, which could have a material adverse effect on our business.

Government regulation of healthcare creates risks and challenges with respect to our compliance efforts and our business strategies

The healthcare industry is highly regulated and is subject to changing political, legislative, regulatory and other influences. Existing and new laws and regulations affecting the healthcare industry could create unexpected liabilities for us, could cause us to incur additional costs and could restrict our operations. Many healthcare laws are complex, and their application to specific products and services may not be clear. In particular, many existing healthcare laws and regulations, when enacted, did not anticipate the healthcare information services that we provide. However, these laws and regulations may nonetheless be applied to our products and services. Our failure to accurately anticipate the application of these laws and regulations, or other failure to comply, could create liability for us, result in adverse publicity and negatively affect our businesses. Some of the risks we face from healthcare regulation are as follows:


	•	Regulation of Drug and Medical Device Advertising and Promotion. The WebMD Health Network provides services involving advertising and promotion of prescription and over-the-counter drugs and


		medical devices. If the Food and Drug Administration (FDA) or the Federal Trade Commission (FTC) finds that any information on The WebMD Health Network, in our mobile applications, or in WebMD the Magazine violates applicable regulations, they may take regulatory or judicial action against us and/or the advertiser or sponsor of that information. State attorneys general may also take similar action based on their state’s consumer protection statutes. Any increase or change in regulation of drug or medical device advertising and promotion could make it more difficult for us to contract for sponsorships and advertising. We cannot predict what actions the FDA or industry participants may take in the future. It is also possible that new laws would be enacted that impose restrictions on such advertising. In addition, recent private industry initiatives have resulted in voluntary restrictions, which advertisers and sponsors have agreed to follow. Our advertising and sponsorship revenue could be materially reduced by additional restrictions on the advertising of prescription drugs and medical devices to consumers, whether imposed by law or regulation or required under policies adopted by industry members.


	•	Anti-kickback Laws. There are federal and state laws that govern patient referrals, physician financial relationships and inducements to healthcare providers and patients. The federal healthcare programs’ anti-kickback law prohibits any person or entity from offering, paying, soliciting or receiving anything of value, directly or indirectly, for the referral of patients covered by Medicare, Medicaid and other federal healthcare programs or the leasing, purchasing, ordering or arranging for or recommending the lease, purchase or order of any item, good, facility or service covered by these programs. Many states also have similar anti-kickback laws that are not necessarily limited to items or services for which payment is made by a federal healthcare program. These laws are applicable to manufacturers and distributors and, therefore, may restrict how we and some of our customers market products to healthcare providers, including e-details. Any determination by a state or federal regulatory agency that any of our practices violate any of these laws could subject us to civil or criminal penalties and require us to change or terminate some portions of our business and could have an adverse effect on our business. Even an unsuccessful challenge by regulatory authorities of our practices could result in adverse publicity and be costly for us to respond to.

	•	False Claims Laws. The Federal False Claims Act imposes liability on any person or entity who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a Federal healthcare program. In addition, various states have enacted false claim laws analogous to the Federal False Claims Act, and many of these states laws apply where a claim is submitted to any third-party payor and not merely a federal healthcare program. When an entity is determined to have violated the Federal False Claims Act, it may be required to pay up to three times the actual damages sustained by the government plus civil penalties. In recent years an increasing number of Federal False Claims Act cases have been brought against drug manufacturers and resulted in significant monetary settlements and imposition of federally supervised corporate integrity agreements in circumstances that include allegations that company-sponsored CME was unlawful off-label promotion. Any action against us for violation of these laws could cause us to incur significant legal expenses and may adversely affect our ability to operate our business.

	•	Medical Professional Regulation. The practice of most healthcare professions requires licensing under applicable state law. In addition, the laws in some states prohibit business entities from practicing medicine. If a state determines that some portion of our business violates these laws, it may seek to have us discontinue those portions or subject us to penalties or licensure requirements. Any determination that we are a healthcare provider and have acted improperly as a healthcare provider may result in liability to us.

	•	GINA. The Genetic Information Nondiscrimination Act (GINA) prohibits discrimination based on genetic information in employment and in health insurance coverage. The law applies to our private portal customers, including both employers and group health plans. WebMD’s Health Risk Assessment (or HRA), HealthQuotient, is typically offered to employees as a voluntary component of their employer-sponsored wellness program. Title I of GINA can have significant implications for wellness programs offered by group health plans in that it prohibits the collection of genetic information, which


		includes an individual’s family medical history, prior to or in connection with enrollment or for underwriting purposes. Underwriting purposes includes providing incentives or rewards for completion of an HRA that requests genetic information. Title II of GINA prohibits employment discrimination based on genetic information as well as the request or purchase of genetic information of employees or their family members with limited exceptions, including a limited exception for voluntary wellness programs. WebMD may face challenges as a result of varying interpretations of the law by the multiple enforcing agencies including the U.S. Departments of Health and Human Services (“HHS”), Labor and Treasury and the Equal Employment Opportunity Commission. It is possible that the final regulations may require modifications to our HealthQuotient product to either eliminate or revise the family history section. Interpretations of the law may increase operational costs or decrease demand for our product.

Government regulation of the Internet could adversely affect our business

The Internet and its associated technologies are subject to government regulation. However, whether and how existing laws and regulations in various jurisdictions, including privacy and consumer protection laws, apply to the Internet is still uncertain. Our failure, or the failure of our business partners or third-party service providers, to accurately anticipate the application of these laws and regulations to our products and services and the manner in which we deliver them, or any other failure to comply with such laws and regulations, could create liability for us, result in adverse publicity and 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 and online services, including in areas such as: user privacy, confidentiality, consumer protection, marketing, pricing, content, copyrights and patents, and characteristics and quality of products and services. We cannot predict how these laws or regulations will affect our business.

Internet user privacy, personal data security and the use of consumer information to track online activities are major issues both in the United States and abroad. For example, in February 2009, the FTC published Self-Regulatory Principles to govern the tracking of consumers’ activities online in order to deliver advertising targeted to the interests of individual consumers (sometimes referred to as behavioral advertising). These principles serve as guidelines to industry. In addition, there is the possibility, supported by certain public statements, that the FTC may revise or eliminate the principles in favor of a more restrictive approach for companies that utilize behavioral advertising. In addition, there is a possibility of legislation, regulations and increased enforcement activities relating to privacy and behavioral advertising. A number of bills have been introduced in Congress in recent months that, if passed in their current or modified forms, could impose substantial new regulations on online behavioral advertising activities. We have privacy policies posted on our Websites that we believe comply with existing applicable laws requiring notice to users about our information collection, use and disclosure practices. We also notify users about our information collection, use and disclosure practices relating to data we receive through offline means such as paper health risk assessments. Moreover, we take steps to reasonably protect certain sensitive personal information we hold. We cannot assure you that the privacy policies and other statements we provide to users of our products and services, or our practices will be found sufficient to protect us from liability or adverse publicity in this area. A determination by a state or federal agency or court that any of our practices do not meet applicable standards, or the implementation of new standards or requirements, could adversely affect our business.

Failure to comply with laws relating to privacy and security of personal information, including personal health information, could result in liability to us and concerns about privacy-related issues could damage our reputation and our business

Privacy and security of personal information stored or transmitted electronically, including personal health information, is a major issue in the United States. While we strive to comply with all applicable privacy and security laws and regulations, as well as our own posted privacy policies, any failure or perceived failure to comply may result in proceedings or actions against us by government entities or others, or could cause us to lose users and customers, which could have a material adverse effect on our business. In addition, we are unable to predict what additional legislation or regulation in the area of privacy of personal information, including personal health information, could be enacted and what effect that could have on our operations and business. Concerns about our practices with regard to the collection, use, disclosure, or security of personal

information or other privacy-related matters, even if unfounded and even if we are in compliance with applicable laws, could damage our reputation and harm our business.

The Privacy Standards and Security Standards under the Health Insurance Portability and Accountability Act of 1996 (or HIPAA) establish a set of national privacy and security standards for the protection of individually identifiable health information by health plans, healthcare clearinghouses and healthcare providers (referred to as covered entities) and their business associates. Previously, only covered entities were directly subject to potential civil and criminal liability under these Standards. However, the Health Information Technology for Economic and Clinical Health (HITECH) Act, which was enacted as part of the American Recovery and Reinvestment Act of 2009 (ARRA) amended the HIPAA Privacy and Security Standards and made certain provisions applicable to those portions of our business, such as those managing employee or plan member health information for employers or health plans, that are business associates of covered entities. Currently, we are bound by certain contracts and agreements to use and disclose protected health information in a manner consistent with the Privacy Standards and Security Standards. Beginning on February 17, 2010, some provisions of the HIPAA Privacy and Security Standards began to apply directly to us. For periods prior to that, depending on the facts and circumstances, we could potentially be subject to criminal liability for aiding and abetting or conspiring with a covered entity to violate the Privacy Standards or Security Standards. As of February 17, 2010, we became directly subject to HIPAA’s criminal and civil penalties. HITECH increased civil penalty amounts for violations of HIPAA and significantly strengthens enforcement by requiring HHS to conduct periodic audits to confirm compliance and authorizing state attorneys general to bring civil actions seeking either injunctions or damages in response to violations of HIPAA Privacy and Security Standards that threaten the privacy of state residents. It is expected that HHS will issue additional regulations to implement many of the HITECH amendments. We cannot assure you that we will adequately address the risks created by these amended HIPAA Privacy and Security Standards. In addition, we are unable to predict what changes to these Standards might be made in the future or how those changes, or other changes in applicable laws and regulations, could affect our business.

Failure to maintain CME accreditation could adversely affect Medscape, LLC’s ability to provide online CME offerings

Medscape, LLC’s continuing medical education (or CME) activities are planned and implemented in accordance with the current Essential Areas and Elements and the Policies of the Accreditation Council for Continuing Medical Education, or ACCME, which oversees providers of CME credit, and other applicable accreditation standards. ACCME’s standards for commercial support of CME are intended to assure, among other things, that CME activities of ACCME-accredited providers, such as Medscape, LLC, are independent of “commercial interests,” which are defined as entities that produce, market, re-sell or distribute healthcare goods and services, excluding certain organizations. “Commercial interests,” and entities owned or controlled by “commercial interests,” are ineligible for accreditation by the ACCME.

From time to time, the ACCME revises its standards for commercial support of CME. As a result of certain past ACCME revisions, we adjusted our corporate structure and made changes to our management and operations intended to allow Medscape, LLC to provide CME activities that are developed independently from programs developed by its sister companies, which may not be independent of “commercial interests.” We believe that these changes allow Medscape, LLC to satisfy the applicable standards.

Medscape, LLC’s current ACCME accreditation expires in 2016. In order for Medscape, LLC to renew its accreditation, it will be required to demonstrate to the ACCME that it continues to meet ACCME requirements. If Medscape, LLC fails to maintain its status as an accredited ACCME provider (whether at the time of such renewal or at an earlier time as a result of a failure to comply with existing or additional ACCME standards), it would not be permitted to accredit CME activities for physicians and other healthcare professionals. Instead, Medscape, LLC would be required to use third parties to provide such CME-related services. That, in turn, could discourage potential supporters from engaging Medscape, LLC to develop CME or education-related activities, which could have a material adverse effect on our business.

Government regulation and industry initiatives could adversely affect the volume of sponsored online CME programs implemented through our Websites or require changes to how Medscape, LLC offers CME

CME activities may be subject to government oversight or regulation by Congress, the FDA, HHS, and state regulatory agencies. Medscape, LLC and/or the sponsors of the CME activities that Medscape, LLC accredits may be subject to enforcement actions if any of these CME activities are deemed improperly promotional, potentially leading to the termination of sponsorships.

During the past several years, educational activities, including CME, directed at physicians have been subject to increased governmental scrutiny to ensure that sponsors do not influence or control the content of the activities. In response, pharmaceutical and medical device companies have developed and implemented internal controls and procedures that promote adherence to applicable regulations and requirements. In implementing these controls and procedures, supporters of CME may interpret the regulations and requirements differently and may implement varying procedures or requirements. These controls and procedures:


	•	may discourage pharmaceutical companies from providing grants for independent educational activities;

	•	may slow their internal approval for such grants;

	•	may reduce the volume of sponsored educational programs that Medscape, LLC produces to levels that are lower than in the past, thereby reducing revenue; and

	•	may require Medscape, LLC to make changes to how it offers or provides educational programs, including CME.

In addition, future changes to laws, regulations or accreditation standards, or to the internal compliance programs of supporters or potential supporters, may further discourage, significantly limit, or prohibit supporters or potential supporters from engaging in educational activities with Medscape, LLC, or may require Medscape, LLC to make further changes in the way it offers or provides educational activities.

Other Risks Applicable to Our Company and to Ownership of Our Securities

Provisions in our organizational documents and Delaware law may inhibit a takeover, which could adversely affect the value of our Common Stock

Our Restated Certificate of Incorporation and Bylaws, as well as Delaware corporate law, contain provisions that could delay or prevent a change of control or changes in our management and Board of Directors that holders of our Common Stock might consider favorable and may prevent them from receiving a takeover premium for their shares. These provisions include, for example, our classified board structure and the authorization of our Board of Directors to issue up to 50 million shares of preferred stock without a stockholder vote. In addition, our Restated Certificate of Incorporation provides that stockholders may not act by written consent and may not call special meetings. These provisions apply even if an offer to purchase our company may be considered beneficial by some of our stockholders. If a change of control or change in management is delayed or prevented, the market price of our Common Stock could decline.

If certain transactions occur with respect to our capital stock, limitations may be imposed on our ability to utilize net operating loss carryforwards and tax credits to reduce our income taxes

WebMD has substantial accumulated net operating loss (NOL) carryforwards and tax credits available to offset taxable income in future tax periods. If certain transactions occur with respect to WebMD’s capital stock (including issuances, redemptions, recapitalizations, exercises of options, conversions of convertible debt, purchases or sales by 5%-or-greater shareholders and similar transactions) that result in a cumulative change of more than 50% of the ownership of capital stock over a three-year period (as determined under rules prescribed by the U.S. Internal Revenue Code and applicable Treasury regulations), an annual limitation would be imposed with respect to the ability to utilize WebMD’s NOL carryforwards and federal tax credits.

In November 2008, HLTH repurchased shares of its common stock in a tender offer. The tender offer resulted in a cumulative change of more than 50% of the ownership of HLTH’s capital, as determined under the applicable rules and regulations. As a result of this ownership change, there is an annual limitation imposed on the ability to utilize our NOL carryforwards and federal tax credits.

Because substantially all of WebMD’s NOL carryforwards have already been reduced by a valuation allowance for financial accounting purposes, we would not expect an annual limitation on the utilization of the NOL carryforwards to significantly reduce the net deferred tax asset, although the timing of cash flows may be impacted to the extent any such annual limitation deferred the utilization of NOL carryforwards to future tax years.

We may not be successful in protecting our intellectual property and proprietary rights

Our intellectual property and proprietary rights are important to our businesses. 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. 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 cannot assure you 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, we cannot assure you 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.

Third parties may claim that we are infringing their intellectual property, and we could suffer significant litigation or licensing expenses or be prevented from providing certain services, which may harm our business

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.

Acquisitions, business combinations and other transactions may be difficult to complete and, if completed, may have negative consequences for our business and our security holders

WebMD has been built, in part, through acquisitions. We intend to continue 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, and to obtain adequate 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 common stock, preferred stock, convertible debt or of other securities.

The issuance of additional equity or debt securities could:


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

	•	cause substantial dilution of our earnings per share;

	•	subject us to the risks associated with increased leverage, including a reduction in our ability to obtain financing or an increase in the cost of any financing we obtain;


	•	subject us to restrictive covenants that could limit our flexibility in conducting future business activities; and

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

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

Our business will suffer if we fail to successfully integrate acquired businesses and technologies or to assess the risks in particular transactions

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 our company 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 retain or replace key personnel of the acquired business;

	•	potential conflicts in sponsor or advertising relationships or in relationships with strategic partners;

	•	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, that we are able to obtain from the sellers.

We may not be able to raise additional funds when needed for our business or to exploit opportunities

Our future liquidity and capital requirements will depend upon numerous factors, including the success of our service offerings, market developments, and 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.

As widely reported, financial markets experienced extreme disruption during portions of 2008 and 2009, including volatility in the prices of securities and severely diminished liquidity and availability of credit. Financing may continue to be difficult to obtain on acceptable terms, and we could be forced to cancel or delay investments or transactions that we would otherwise have made.


ITEM 3.	*Quantitative and Qualitative Disclosures About Market Risk*

Interest Rate Sensitivity

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.

Changes in prevailing interest rates have historically caused the fair value of certain of our investments to fluctuate, such as our investments in auction rate securities that generally bear interest at rates indexed to LIBOR. However, as our investments in auction rate securities were sold for cash in April 2010, future changes in interest rates will not impact the value of these investments. The fair values of our cash and money market investments, which approximate $352.2 million at September 30, 2010, are not subject to changes in interest rates.

The 31/8% Notes that we have issued have fixed interest rates; changes in interest rates will not impact our financial condition or results of operations.


ITEM 4.	*Controls and Procedures*

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, 2010. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that WebMD’s disclosure controls and procedures were effective as of September 30, 2010.

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 2010 that have materially affected, or are reasonably likely to materially affect, WebMD’s internal control over financial reporting, except that as a result of a change to a new third-party provider of recordkeeping and administrative services for its equity compensation plans in July 2010, certain processes and procedures of WebMD relating to equity compensation matters have changed. These changes were made because of the change in third-party provider and were not in response to any identified deficiency or weakness in WebMD’s internal control over financial reporting.

PART II
OTHER INFORMATION


ITEM 1.	*Legal Proceedings*

The information relating to legal proceedings contained in Note 10 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report is incorporated herein by this reference.


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

(c) The following table provides information about purchases by WebMD during the three months ended September 30, 2010 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act:

Issuer Purchases of Equity Securities


	Total Number					Total Number of Shares		Approximate Dollar Value of Shares
	of Shares			Average Price		Purchased as Part of Publicly		that May Yet Be Purchased Under
Period	Purchased⁽¹⁾			Paid per Share		Announced Plans or Programs⁽²⁾		the Plans or Programs⁽³⁾

07/01/10 - 07/31/10		—		$	—		—	$	15,085,946
08/01/10 - 08/31/10		395		$	50.94		—	$	171,085,946
09/01/10 - 09/30/10		3,000,097	⁽²⁾	$	52.00		3,000,000	$	15,085,946

Total		3,000,492		$	52.00		3,000,000


(1)		Includes the following number of shares withheld from WebMD Restricted Common Stock that vested during the respective periods in order to satisfy withholding tax requirements related to the vesting of the awards: 395 in August and 97 in September. The value of these shares was determined based on the closing price of WebMD Common Stock on the date of vesting.

(2)		WebMD purchased 3,000,000 shares of WebMD Common Stock at $52.00 per share pursuant to a tender offer announced in August 2010 and completed in September 2010. For additional information see Note 8 to the Consolidated Financial Statements included in Item 1 of this Quarterly Report.

(3)		In each period, $15,085,946 relates to the repurchase program that WebMD announced in December 2008, at which time WebMD was authorized to use up to $30 million to purchase shares of its common stock from time to time. For additional information see Note 8 to the Consolidated Financial Statements included in Item 1 of this Quarterly Report. The remainder in August relates to the authorization to purchase, at $52.00 per share, 3,000,000 shares of WebMD Common Stock pursuant to the tender offer referred to above in footnote 2 to this table, for a total purchase price of $156,000,000.


ITEM 6.	*Exhibits*

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

EXHIBIT INDEX


Exhibit No.			Description

	3	.1	Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-8 filed on October 23, 2009 (Reg. No. 333-162651))
	3	.2	Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-8 filed on October 23, 2009 (Reg. No. 333-162651))
	4	.1	WebMD Health Corp. Amended and Restated 2005 Long-Term Incentive Plan (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on October 27, 2010)*
	31	.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Registrant
	31	.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Registrant
	32	.1	Section 1350 Certification of Chief Executive Officer of Registrant
	32	.2	Section 1350 Certification of Chief Financial Officer of Registrant
	99	.1	Explanation of Non-GAAP Financial Measures


*		Agreement relates to executive compensation.

E-1


		Page
		Number

Forward-Looking Statements			3

PART I	Financial Information		4
Item 1.	Financial Statements:		4
	Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009		4
	Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009 (unaudited)		5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited)		6
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		59
Item 4.	Controls and Procedures		59

PART II	Other Information		60
Item 1.	Legal Proceedings		60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		60
Item 6.	Exhibits		60
Signatures			61
Exhibit Index			E-1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-99.1