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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

OR

COMMISSION FILE NUMBER 0-27501

          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.

          As of October 31, 2002, 45,856,030 shares, $0.001 par value per share, of the registrant’s common stock were outstanding.

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FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

INDEX

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PART I—FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

THE TRIZETTO GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

See Notes to Unaudited Condensed Consolidated Financial Statements

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THE TRIZETTO GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

See Notes to Unaudited Condensed Consolidated Financial Statements

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THE TRIZETTO GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

See Notes to Unaudited Condensed Consolidated Financial Statements

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THE TRIZETTO GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  BASIS OF PREPARATION

          The accompanying unaudited condensed consolidated financial statements have been prepared by The TriZetto Group, Inc. and subsidiaries (the “Company”) in accordance with generally accepted accounting principles for interim financial information that are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 and pursuant to the instructions to Form 10-Q and Article 10 promulgated by Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes to financial statements required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002, or for any future period. The financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K as filed with the SEC on February 19, 2002.

2.  RECLASSIFICATIONS

          Certain reclassifications, none of which affected net loss, have been made to prior year amounts to conform to current year presentation.

3.  ACCOUNTS RECEIVABLE

          As of December 31, 2001, the Company had a $3.5 million receivable from Maxicare, a customer that filed for bankruptcy. In March 2002, the Company and Maxicare agreed that the Company would provide services for Maxicare through December 31, 2002, and Maxicare would pay the Company $3.9 million, of which $1.0 million relates to post bankruptcy services performed in 2001 and $2.9 million relates to post bankruptcy services either already performed or to be performed in 2002. The Company believes its allowance for doubtful accounts is adequate should the remaining Maxicare receivable become fully uncollectible.

4.  COMPUTATION OF NET LOSS PER SHARE

          Basic earnings per share (“EPS”) is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Common shares issued in connection with business combinations, that are held in escrow, are excluded from the computations of basic EPS until the shares are released from escrow. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants, shares held in escrow, and other convertible securities. The following is a reconciliation of the numerator (net loss) and the denominator (number of shares) used in the basic and diluted EPS calculations (in thousands, except per share data):

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5.  SUPPLEMENTAL CASH FLOW DISCLOSURES

6.  SECURED TERM NOTE AND REVOLVING CREDIT NOTE AND LOAN AND SECURITY AGREEMENT

          SECURED TERM NOTE

          In September 2001, the Company executed a Secured Term Note facility with a lending institution for $6.0 million. Monthly principal payments of $200,000 are due on the first of each month. Additionally, the note bears interest at Prime plus 1% and is payable monthly in arrears. The note contains certain covenants that the Company must adhere to during the terms of the agreement, including a minimum tangible net worth and cash balance. As of September 30, 2002, there was approximately $3.6 million of principal balance remaining on the note. The note matures in March 2004.

REVOLVING CREDIT NOTE AND LOAN AND SECURITY AGREEMENT

          In September 2001, the Revolving Credit Note and the Loan and Security Agreement were amended to provide for a maximum principal amount of $14.0 million and an expiration date of March 2004. As of September 30, 2002, the Company had no funds available to draw on the revolving credit note.

          Borrowings under the revolving credit note are limited to and shall not exceed 80% of qualified accounts as defined in the Loan and Security Agreement. Interest on the revolving credit note is prime plus 1%. In addition, there is a monthly 0.0333% usage fee and a monthly 0.042% loan management fee. Interest is payable monthly in arrears on the first business day of the month. The revolving credit note contains certain covenants that the Company must adhere to during the term of the agreement, including a tangible net worth, as defined, of at least $12.0 million, a minimum cash balance of $6.0 million and restrictions prohibiting the Company from paying any cash dividends without prior approval, as defined in the Loan and Security Agreement. As of September 30, 2002, the Company had outstanding borrowings on the revolving credit note of $14.0 million.

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7.  RECENT ACCOUNTING PRONOUNCEMENTS

          In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 141, Business Combinations (“Statement 141”) and No. 142, Goodwill and Other Intangible Assets (“Statement No. 142”), effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but, instead, will be subject to annual impairment tests in accordance with Statements Nos. 141 and 142. Other intangible assets will continue to be amortized over their useful lives. The Company has adopted the rules set forth in Statement No. 142 on accounting for goodwill and other intangibles effective as of January 1, 2002. The Company has completed its initial assessment and concluded that there is no impairment of the Company’s unidentified goodwill and acquired workforce.

          The Company’s net loss and net loss per share for the three and nine months ended September 30, 2002 and 2001 adjusted to exclude goodwill amortization was as follows (in thousands, expect per share amounts):

        In October 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“Statement No. 144”), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes Statement 121, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a Disposal of a Segment of a Business. There was no effect on the Company’s financial statements resulting from the adoption of Statement No. 144 on its consolidated financial position and results of operations.

8.  RESTRUCTURING AND RELATED IMPAIRMENT CHARGES

          In December 2001, the Company initiated a number of restructuring actions focused on eliminating redundancies, streamlining operations and improving overall financial results. These initiatives include workforce reductions, office closures, discontinuation of certain business lines and related asset write-offs.

          In December 2001, the Company announced a planned workforce reduction in Los Angeles, California; Novato, California; Baltimore, Maryland; Little Rock, Arkansas; Provo, Utah; Salt Lake City, Utah; Westmont, Illinois; Albany, New York; Glastonbury, Connecticut; and Trivandrum, India. Severance and other costs related to this workforce reduction totaled $1.7 million of which $1.0 million was included in restructuring and related impairment charges in 2001 and $745,000 will be charged to restructuring and related impairment charges in 2002. Severance and other costs of $79,000, $165,000 and $235,000 were charged to expense in the first, second and third quarters of 2002, respectively, and approximately $266,000 is anticipated to be charged in the fourth quarter of 2002. Such workforce reductions will be completed by the end of the fourth quarter of 2002. These reductions are expected to affect 168 employees.

          Facility closures include the closure of the Novato, California; Birmingham, Alabama; Provo, Utah; Salt Lake City, Utah; Westmont, Illinois; Naperville, Illinois; Louisville, Kentucky; and Trivandrum, India. These closures were completed during the first quarter of 2002.

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          The following table summarizes the activities in the Company’s restructuring reserves as of September 30, 2002 (amounts in thousands):

          In addition to the workforce reductions and facility closures described above, the Company has discontinued certain business lines and has written off related assets. Specifically, the Company has discontinued certain website and software development activities and its hospital billing and accounts receivable business line and written off the assets associated with these activities. The Company has also written off assets in December 2001 associated with the closure of facilities. The following table summarizes the Company’s write-off of assets in December 2001 (amounts in thousands):

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          THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS “MAY”, “WILL”, “SHOULD”, “FORECASTS”, “EXPECTS”, “PLANS”, “ANTICIPATES”, “BELIEVES”, “ESTIMATES”, “PREDICTS”, “POTENTIAL”, OR “CONTINUE” OR THE NEGATIVE OF SUCH TERMS AND OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING THESE STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS, INCLUDING THE RISKS OUTLINED IN OUR
FORM 10-K UNDER THE HEADING “RISK FACTORS”. THESE FACTORS MAY CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS. WE DO NOT UPDATE ANY FORWARD-LOOKING STATEMENTS.

OVERVIEW

          We offer a broad portfolio of healthcare information technology (“IT”) products and services that can be delivered individually or combined to create a comprehensive solution. We provide:

We are focused on three healthcare markets: payers, benefits administrators and physician groups. At September 30, 2002, we had 540 customers and over 110 million lives in production on our systems.

          We recognize revenue when persuasive evidence of an arrangement exists, the product or service has been delivered, fees are fixed and determinable, collectibility is probable and all other significant obligations have been fulfilled. Our revenue is classified into two categories: recurring and non-recurring.  For the nine months ended September 30, 2002, approximately 62% of our total revenue was recurring and 38% was non-recurring.

          We generate recurring revenue from several sources, including the provision of outsourcing services, such as software hosting and other business services, and the sale of maintenance and support for our proprietary software products.  Recurring revenue is billed and recognized monthly over the contract term, typically three to seven years. Many of our outsourcing services agreements contain performance standards that require us to maintain a certain level of operating performance. Recurring software maintenance revenue is typically based on one-year renewable contracts. Software maintenance and support revenues are recognized ratably over the contract period.  Cash for software maintenance received in advance is recorded on the balance sheet as deferred revenue.

          We generate non-recurring revenue from the licensing of our software. We follow the provisions of AICPA Statements of Position (“SOP”) 97-2 “Software Revenue Recognition,” SOP 98-4 “Deferral of the Effective Date of Certain Provisions of SOP 97-2”, and SOP 98-9 “Modification of SOP 97-2, Software Revenue Recognition, With Respect of Certain Transactions” as well as the tentative conclusions of EITF Issue 00-21, “Multiple Element Arrangements”. Software license revenue is recognized upon the execution of a license agreement, upon delivery of the software, when fees are fixed and determinable, when collectibility is probable and when all other significant obligations have been fulfilled. For software license agreements in which customer acceptance is a condition of earning the license fees, revenue is not recognized until acceptance occurs. For arrangements containing multiple elements, such as software license fees, consulting services and maintenance, and where vendor-specific objective evidence (“VSOE”) of fair value exists for all undelivered elements, we account for the delivered elements in accordance with the “residual method” prescribed by SOP 98-9. For arrangements in which VSOE does not exist for each element, including specified upgrades, revenue is deferred and not recognized until delivery of the element without VSOE has occurred. We also generate non-recurring revenue from consulting fees for implementation, installation, data conversion, and training related to the use of our proprietary and third-party licensed products. We recognize revenues for these services as they are performed, if contracted for on a time and material basis, or using the percentage of completion method, if contracted for on a fixed fee basis.

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          We may pay certain up-front fees in connection with the establishment of our hosting and outsourcing services contracts. The costs are capitalized and amortized over the life of the contract, provided that such amounts are recoverable from future revenue under the contract. If an up-front fee is not recoverable from future revenue, or it cannot be offset by contract cancellation penalties paid by the customer, the fee will be written off as an expense in the period it is deemed unrecoverable.  Total up-front fees outstanding as of September 30, 2002 were $1.9 million.

          In July 2002, we renegotiated one of our contracts with a hosting and outsourcing services customer, resulting in a reimbursement to us of $5.1 million in cash.  We had previously paid $6.0 million as an up-front fee when the contract was signed and had amortized $0.9 million of the amount at the time it was renegotiated.  In return for the payment of $5.1 million, we agreed to lower our monthly service fees and to issue a $5.0 million letter of credit to the customer to maintain the customer’s regulatory capital requirement.  The letter of credit is secured by $5.0 million of our cash, which is included in restricted cash. The face amount of the letter of credit may be reduced over time if the customer’s regulatory capital increases to certain prescribed levels and other conditions exist.  We recorded no revenue or expense as a result of this transaction.

          Cost of revenue includes costs related to the products and services we provide to our customers and costs associated with the operation and maintenance of our customer connectivity centers. These costs include salaries and related expenses for consulting personnel, customer connectivity centers personnel, customer support personnel, application software license fees, amortization of capitalized software development costs, telecommunications costs and maintenance costs.

          Research and development (“R&D”) expenses are salaries and related expenses associated with the development of software applications prior to establishing technological feasibility.   Such expenses include compensation paid to engineering personnel and fees to outside contractors and consultants. Costs incurred internally in the development of our software products are expensed as incurred as R&D expenses until technological feasibility has been established, at which time any future production costs are properly capitalized and amortized to the cost of revenue based on current and future revenue over the remaining estimated economic life of the product. To the extent that amounts capitalized for R&D become impaired due to the introduction of new technology, such amounts will be written-off.

          Selling, general and administrative expenses consist primarily of salaries and related expenses for sales, sales commissions, account management, marketing, administrative, finance, legal, human resources and executive personnel, and fees for professional services.

          In accordance with Financial Accounting Standards Board Statement No. 141, “Business Combinations”, and Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 141 and 142”), unidentified goodwill and acquired workforce deemed to have indefinite lives will no longer be amortized. Instead, effective January 1, 2002, such amounts are subject to annual impairment tests, and the amount of any impairment will be written-off as an expense in the period such impairment is determined. We completed our annual assessment as of March 31, 2002 and concluded that there was no impairment of our goodwill as of that date. The analysis that we perform in order to test for impairment is tied to the market price of our common stock and our market capitalization.  If the market price of our common stock falls below a certain price for a certain amount of time, we would have an impairment of our goodwill as of that date and a write-down of the asset would be made.

RESULTS OF OPERATIONS

QUARTER ENDED SEPTEMBER 30, 2002 COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2001

          REVENUE.  Total revenue in the third quarter of 2002 increased $11.4 million, or 20%, to $68.6 million from $57.2 million for the same period in 2001. The increase primarily resulted from organic growth in software maintenance revenue and consulting revenue.

          Recurring revenue in the third quarter of 2002 increased $884,000, or 2%, to $40.3 million from $39.4 million for the same period in 2001. The increase primarily resulted from organic growth of $3.9 million in our software maintenance revenue offset by a decrease of $3.0 million in our hosting and services business. The decrease was primarily the result of one customer filing for bankruptcy in late 2001.  Recurring revenue in the third quarter of 2002 includes $250,000 from IMS Health Incorporated, a related party.

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          Non-recurring revenue in the third quarter of 2002 increased $10.5 million, or 59%, to $28.3 million from $17.8 million for the same period in 2001. The increase included $10.9 million in consulting revenue, of which $4.8 million is related to software support services for UnitedHealth Group, Inc. (“UnitedHealth”) under a contract executed in April 2002 and $6.1 million is related to software implementation services for our payer customers. This increase was offset by a decrease of $367,000 in one-time software license revenue. We anticipate a decrease in consulting revenue over the next several months as a result of declining minimum contractual revenue amounts over the term of the UnitedHealth contract.  This anticipated decline in consulting revenue is not expected to adversely impact our overall revenue growth.  Revenue by customer segment and revenue mix are as follows (amounts in thousands):