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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2003

OR

For the transition period from         to        .

Commission File Number 000-26934

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

As of May 9, 2003, there were 36,456,155 shares of the Registrant’s common stock, $0.001 par value, outstanding.

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Hyperion Solutions Corporation

Form 10-Q

Hyperion, the Hyperion “H” logo, Essbase, Hyperion Essbase XTD, Hyperion Planning, Hyperion Financial Management, Hyperion Performance Scorecard, Hyperion Business Modeling, Hyperion Pillar, and Hyperion Enterprise are registered trademarks or trademarks of Hyperion Solutions Corporation. All other trademarks and company names mentioned are the property of their respective owners. All rights reserved.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HYPERION SOLUTIONS CORPORATION

See accompanying notes to condensed consolidated financial statements.

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HYPERION SOLUTIONS CORPORATION

See accompanying notes to condensed consolidated financial statements.

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HYPERION SOLUTIONS CORPORATION

See accompanying notes to condensed consolidated financial statements.

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HYPERION SOLUTIONS CORPORATION

1.     Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to these rules and regulations. However, management believes that the disclosures are adequate to ensure the information presented is not misleading. The balance sheet at June 30, 2002 has been derived from the audited financial statements, but does not include all disclosures required by generally accepted accounting principles. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended June 30, 2002.

In the opinion of management, all adjustments, consisting only of normal recurring items, considered necessary for a fair presentation have been included in the accompanying unaudited financial statements. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year ending June 30, 2003. Certain prior period balances have been reclassified to conform to the current period presentation.

2.     Significant Accounting Policies

Revenue Recognition

Hyperion derives revenues from licensing its software products and providing maintenance and professional services. Hyperion’s standard software license agreement is a perpetual license to use its products on an end user, concurrent user or central processing unit basis. Hyperion records revenue from licensing of software products to end users provided there is persuasive evidence of an arrangement, the fee is fixed or determinable, collection is reasonably assured and delivery of the product has occurred, as prescribed by Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition,” issued by the American Institute of Certified Public Accountants. For arrangements with multiple elements, and for which vendor specific objective evidence (“VSOE”) of fair value exists for the undelivered elements, revenue is recognized for the delivered elements based upon the residual method in accordance with SOP No. 98-9, “Modifications of SOP 97-2 with Respect to Certain Transactions.” VSOE of fair value for all elements of an arrangement is based upon the normal pricing and discounting practices for those products and services. VSOE of fair value for services is based upon the standard hourly rate Hyperion charges for such services when sold separately. VSOE of fair value for maintenance is measured by the stated renewal rates included in the contracts. If the fair value of any undelivered element included in a multiple-element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered, services have been performed or until fair value can be objectively determined. License revenue from resellers or distributors is recognized upon sell-through to the end customer. Amounts billed or payments received in advance of revenue recognition are recorded as deferred revenue.

Maintenance agreements are generally a twelve-month prepaid contract that is recognized ratably over the period. Customers may also enter into professional services arrangements that are typically on a time and materials basis and include consulting and training services. Consulting and training revenues are typically recognized as earned. Consulting revenues are generated primarily from implementation services related to the installation of Hyperion’s products. These arrangements are generally accounted for separately from the license revenue because the arrangements qualify as “service transactions” as defined in SOP No. 97-2. Hyperion’s services are generally not essential to the functionality of the software. Hyperion’s products are fully functional upon delivery of the product and implementation does not require any significant modification or alteration. Hyperion’s services often include assistance with product adoption. Other significant factors considered in determining whether the revenue should be accounted for separately include degree of risk, availability of services from other vendors, timing of payments and impact of milestones or acceptance criteria on the realizability of the software license fee. Customers generally purchase these services to facilitate the adoption of Hyperion’s products and obtain dedicated personnel to participate in the services being performed, but they may also decide to use their own internal resources or appoint other professional service organizations to provide these services. Payments related to the software product to which the services relate are typically billed independently from the services and, therefore, are not coincident with performance of such services. License agreements generally do not include acceptance provisions. If an arrangement does not qualify for separate accounting of the license and service elements, license revenue is generally recognized together with the consulting services using the percentage-of-completion method of contract accounting in accordance with SOP No. 81-1, “Accounting for Performance of Construction-Type and Certain Product-Type Contracts” and Accounting Research Bulletin No. 45, “Long-Term Construction-Type Contracts.”

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Allowance for Doubtful Accounts

Hyperion makes judgments as to its ability to collect outstanding receivables and provides allowances for a portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are made at differing rates, based upon the age of the receivable. In determining these percentages, Hyperion analyzes its historical collection experience, customer concentrations, customer credit-worthiness and current economic trends. If the historical data used to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed.

Comprehensive Income

Comprehensive income includes foreign currency translation gains and losses and unrealized gains and losses on available-for-sale securities. The net unrealized gains and losses on available-for-sale securities for the three and nine months ended March 31, 2003 and 2002 were not material.

Earnings Per Share

Earnings per share (“EPS”) is computed in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share.” Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding and potentially dilutive securities outstanding during the period. Potentially dilutive securities include stock options and shares issuable upon conversion of Hyperion’s convertible subordinated notes. Potentially dilutive securities are excluded from the computation of diluted EPS if their effect would be antidilutive.

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

For the three months ended March 31, 2003 and 2002, stock option rights totaling 2.3 million shares and 2.6 million shares, respectively, have been excluded from the diluted EPS calculations because their effect would have been antidilutive. For the nine months ended March 31, 2003 and 2002, stock option rights totaling 2.6 million shares and 5.6 million shares, respectively, have been excluded from the diluted EPS calculations because their effect would have been antidilutive.

For the three months ended March 31, 2003 and 2002, 0.9 million and 1.6 million shares of common stock, respectively, issuable upon conversion of the convertible subordinated notes have been excluded from the diluted EPS calculations because their effect would have been antidilutive. For the nine months ended March 31, 2003 and 2002, 1.2 million and 1.6 million shares of common stock, respectively, issuable upon conversion of the convertible subordinated notes have been excluded from the diluted EPS calculations because their effect would have been antidilutive.

Stock-Based Compensation

Hyperion has adopted the disclosure requirements of SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” during the quarter ended March 31, 2003. SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation and also amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the methods of accounting for stock-based employee compensation and the effect of the method used on reported results. As permitted by SFAS 148 and SFAS 123, Hyperion continues to apply the accounting provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Hyperion generally grants its stock options at exercise prices equal to the fair market value of the underlying stock on the date of grant and, therefore, under APB Opinion No. 25, no compensation expense is recognized in the statements of income. Had Hyperion

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recorded compensation expense based on the estimated grant date fair value, as defined by SFAS No. 123, for awards granted under its stock option plans and stock purchase plan, Hyperion’s net income and earnings per share would have been reduced to the pro forma amounts below (in thousands, except per share amounts):

These pro forma amounts may not be representative of the effects for future years as options vest over several years and additional awards are generally granted each year.

Recent Accounting Pronouncements

In July 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF No. 94-3 had required recognition of the liability as of the commitment date of an exit plan. This statement is effective for exit or disposal activities initiated after December 31, 2002. Hyperion adopted SFAS No. 146 on January 1, 2003, and the adoption did not have a material impact on its financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. Hyperion adopted FIN 46 on February 1, 2003, and the adoption did not have a material impact on its financial position or results of operations.

3.     Commitments and Contingencies

Guarantees and Indemnifications

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee or indemnification. FIN 45 also requires additional disclosure by a guarantor in its interim and annual financial statements about its obligations under certain guarantees and indemnifications. The initial recognition and measurement provisions of FIN 45 are applicable for guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. Hyperion adopted the recognition and measurement provisions of FIN 45 prospectively to guarantees issued or modified after December 31, 2002, and the adoption did not have a material impact on its financial position or results of operations. The following is a summary of the agreements that Hyperion has determined are within the scope of FIN 45:

As permitted under Delaware law, Hyperion has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is or was serving at Hyperion’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments Hyperion could be required to make under these indemnification agreements is unlimited; however, Hyperion has a director and officer insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of the

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insurance policy coverage, Hyperion believes the estimated fair value of these indemnification agreements is minimal. Hyperion has no liabilities recorded for these agreements as of March 31, 2003.

Hyperion includes standard intellectual property indemnification clauses in its software license agreements. Pursuant to these clauses, Hyperion holds harmless and agrees to defend the indemnified party, generally Hyperion’s business partners and customers, in connection with certain patent, copyright or trade secret infringement claims by third parties with respect to Hyperion’s products. The term of the indemnification clauses is generally perpetual any time after execution of the software license agreement. In the event an infringement claim against Hyperion or an indemnified party is successful, Hyperion, at its sole option, agrees to do one of the following: (i) procure for the indemnified party the right to continue use of the software; (ii) provide a modification to the software so that its use becomes non-infringing; (iii) replace the software with software which is substantially similar in functionality and performance; or (iv) refund the residual value of the software license fees paid by the indemnified party for the infringing software. Hyperion believes the estimated fair value of these agreements is minimal. Hyperion has no liabilities recorded for these agreements as of March 31, 2003.

Hyperion generally warrants that its software products will perform in all material respects in accordance with its standard published specifications in effect at the time of delivery of the licensed products to the customer for a period of ninety days following delivery. If necessary, Hyperion would provide for the estimated cost of product warranties based on specific warranty claims and claim history. Hyperion has not incurred significant expense under its product warranties to date and, as a result, Hyperion believes the estimated fair value of these warranties is minimal. Hyperion has no liabilities recorded for these warranties as of March 31, 2003.

Contingencies

On July 11, 1997, Gentia Software filed a request for reexamination of Hyperion’s U.S. Patent No. 5,359,724 (“'724 patent”) with the United States Patent and Trademark Office (“PTO”) arguing that the '724 patent was anticipated and obvious in light of certain prior art references. On September 11, 1997, the PTO granted the request for reexamination. On February 27, 1998, Gentia Software filed with the PTO a request for a second reexamination of the '724 patent based on additional prior art references. On May 22, 1998, the PTO granted that request for reexamination, which was later consolidated with the first reexamination. On March 31, 1999, the PTO issued a non-final office action rejecting the claims of the '724 patent. Hyperion filed its response to the office action on May 31, 1999. No final office action has been issued by the PTO. Hyperion believes that the outcome of such action will not have a material adverse effect on its financial position, results of operations or cash flows.

From time to time, in the normal course of business, various claims are made against Hyperion. At this time, in the opinion of management, there are no pending claims the outcome of which is expected to result in a material adverse effect on the financial position, results of operations or cash flows of Hyperion.

4.     Restricted Stock

In February 2003, Hyperion issued a total of 125,000 shares of restricted stock to some of its executive officers for nominal consideration. The restricted shares vest in full on the fourth anniversary of the date of issuance, but can vest earlier based on the achievement of performance-based objectives as set by the board of directors. Hyperion recorded deferred stock-based compensation totaling $3.2 million related to the issuance of these restricted shares, which is being amortized over the vesting period of the shares. In accordance with FASB Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25,” the deferred stock-based compensation relating to the restricted shares will be re-measured on the date the performance objectives are defined or determined to have been earned by the board of directors. In the event a holder of these restricted shares leaves Hyperion prior to the fourth anniversary of the date of issuance and retains vested shares that would have been forfeited absent the achievement of the performance objectives, the re-measured deferred stock-based compensation will be recorded in the statement of income.

5.     Segment and Geographic Information

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” established standards for reporting information about operating segments in a company’s financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Hyperion has identified one industry segment: the development and marketing of business performance management software and related services. This segment operates in three geographic regions: the Americas (United States, Canada and Latin America), EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific). Hyperion’s products are marketed internationally through Hyperion’s direct sales force, independent distributors and application resellers.

Enterprise-wide information is provided in accordance with SFAS No. 131. Geographic revenue information is primarily based on the ordering location of the customer, and long-lived asset information is based on the physical location of the assets.

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The following table presents revenues and long-lived assets by geographic region (in thousands):

The following table presents revenues for groups of similar products and services (in thousands):

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain information contained in this report on Form 10-Q is forward-looking in nature. All statements included in this report on Form 10-Q or made by management of Hyperion Solutions Corporation and its subsidiaries, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding Hyperion’s future financial results, operating results, business strategies, projected costs, products, competitive positions and plans and objectives of management for future operations. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section entitled “Factors That May Affect Future Results.” These and many other factors could affect Hyperion’s future financial and operating results, and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Hyperion or on its behalf. Hyperion does not undertake an obligation to update its forward-looking statements to reflect future events or circumstances.

OVERVIEW

Hyperion delivers business performance management software solutions that enable companies to continually measure performance, anticipate results and drive profitability across key business activities. Our customers use our products to help them collaborate enterprise-wide, focus resources, improve operational efficiencies and leverage opportunities for growth.

Our business performance management solutions provide comprehensive support for the entire process of goal setting, business modeling, planning, budgeting, performance monitoring, analyzing and reporting throughout organizations. Our products complement existing enterprise resource planning, customer relationship management, supply chain management and transaction systems by integrating data from multiple sources, providing a common view across the enterprise and enabling an integrated business performance management process that aligns individual goals with corporate objectives.

We provide applications along with a development and deployment platform to enable business performance management across a wide variety of functional and business activity areas. We use our online analytical processing technology, Hyperion Essbase, as the foundation for our platform, Hyperion Essbase XTD. Components within Hyperion Essbase XTD can be used individually to create tailored applications or in conjunction with our packaged applications to support the entire business performance management process. In addition, we offer support and services from offices in 20 countries and work with over 330 partners to provide solutions to more than 6,000 customer organizations worldwide. Hyperion was formed in August 1998 when Arbor Software, founded in 1991, acquired Hyperion Software, founded in 1981.

RESULTS OF OPERATIONS

REVENUES

Software licenses. Software license revenues increased 1% in the three months ended March 31, 2003 compared to the three months ended March 31, 2002 and increased 8% in the nine months ended March 31, 2003 compared to the nine months ended March 31, 2002. The increase in license revenue in the third quarter and first nine months of fiscal 2003 was primarily due to increased revenues from two of our newer suite-based application products, Hyperion Planning and Hyperion Financial Management. These two products were still in the very early stages of their product life cycles during most of fiscal 2002, but they began making significant contributions to total license revenue in the fourth quarter of fiscal 2002 and into fiscal 2003. These increases in suite-based application product sales were offset to some extent by declines in revenue from our older, standalone application products, Hyperion Pillar and Hyperion Enterprise, and our platform products.

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We separate license revenue into two main components- application license revenue and platform license revenue. Application license revenue is generated from our packaged business performance management applications, and platform license revenue is generated from our Hyperion Essbase XTD platform and its component products. In the third quarter of fiscal 2003, application revenue represented 58% of total license revenue and platform revenue represented 42% of total license revenue, compared to 43% application revenue and 57% platform revenue in the third quarter of fiscal 2002. A 98% increase in suite-based application sales, which include Hyperion Planning and Hyperion Financial Management, combined with a 47% decrease in standalone application sales, which include Hyperion Pillar and Hyperion Enterprise, resulted in an overall 36% increase in total application license revenue in the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002. However, platform sales decreased 26% in the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002. The increase in application license revenue combined with the decrease in platform license revenue resulted in the increase in the ratio of application license revenue to platform license revenue in the third quarter of fiscal 2003.

For the first nine months of fiscal 2003, license revenue was comprised of 52% application revenue and 48% platform revenue, compared to 45% application revenue and 55% platform revenue for the first nine months of fiscal 2002. A 101% increase in suite-based application sales, partially offset by a 51% decrease in standalone application sales, resulted in an overall 25% increase in total application license revenue in the first nine months of fiscal 2003 compared to the first nine months of fiscal 2002. This increase in application license revenue combined with a 6% decrease in platform license revenue, resulted in the increase in the ratio of application license revenue to platform license revenue in the first nine months of fiscal 2003.

We market our products through our direct sales force and through channel partners. To date, we have generated the majority of our license revenue through our direct sales force, but we continue to focus on complementing our direct sales force with channel partners, which include original equipment manufacturers, value added resellers, system integrators, independent distributors and sales agents. License revenue from channel partners comprised 30% of total license revenue in the third quarter of fiscal 2003 compared to 26% in the third quarter of fiscal 2002. In the first nine months of fiscal 2003 license revenue from channel partners comprised 28% of total license revenue compared to 26% in the first nine months of fiscal 2002. Effectively leveraging our channel partners continues to be one of our key strategies, and our goal is to move towards deriving 33% of our license revenue through our channel partners. Consistent with fiscal 2002, no single channel partner represented more than 10% of total revenue during the third quarter or first nine months of fiscal 2003.

Maintenance and services. Maintenance and services revenue increased 9% in the three months ended March 31, 2003 compared to the three months ended March 31, 2002. This increase was due to a 14% increase in maintenance revenue, which was primarily due to improvements in our invoicing and collecting procedures for maintenance renewals. Partially offsetting this increase in maintenance revenue was a 1% decrease in consulting and training revenue. In the nine months ended March 31, 2003, maintenance and services revenue increased 2% compared to the nine months ended March 31, 2002. The slight increase in maintenance and services revenue was due to a 16% increase in maintenance revenue, which was substantially offset by a 19% decrease in consulting and training revenue, which resulted from our increased use of channel partners to provide consulting services to our customers.

COST OF REVENUES

Cost of software license revenue. Cost of software license revenue consists primarily of royalty expenses, amortization of capitalized software development costs, amortization of acquired technologies, and the cost of product packaging and documentation materials. Cost of software license revenue in the three months ended March 31, 2003 decreased 3% compared to the three months ended March 31, 2002 despite the 1% increase in software license revenue. This decrease was primarily attributable to a $0.7 million decrease in royalty expenses due to a different mix of product sales in the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002, and a $0.4 million decrease in product packaging and documentation material costs due to the increased use of electronic product distribution. These decreases were partially offset by a $0.5 million increase in amortization of capitalized software development costs and a $0.3 million increase in amortization of acquired technologies. Cost of software license revenue in the nine months ended March 31, 2003 remained relatively flat compared to the nine months ended March 31, 2002 despite the 8% increase in software license revenue. This was primarily due to a $1.1 million decrease in royalty expenses and a $0.7 million decrease in product packaging and documentation material costs. These decreases were partially offset by a $0.8 million increase in amortization of capitalized software development costs and a $0.9 million increase in amortization of acquired technologies.

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In the first nine months of fiscal 2003 and 2002, we capitalized $1.4 million and $0.6 million of software development costs, respectively, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” The amounts capitalized relate to localization costs for our software products. Capitalized software product development costs are amortized over the estimated economic life of the products, which is generally three years. The amortization of capitalized software development costs begins upon the general release of the software to customers.

Cost of maintenance and services revenue. Cost of maintenance and services revenue consists largely of compensation and benefits for consulting, training and support personnel. Cost of maintenance and services revenue increased 5% in the three months ended March 31, 2003 compared to the three months ended March 31, 2002. The increase in cost of maintenance and services revenue is primarily attributable to a $1.5 million increase in variable compensation expenses. Cost of maintenance and services revenue decreased 4% for the nine months ended March 31, 2003 compared to the nine months ended March 31, 2002. The decrease in cost of maintenance and services revenue is primarily attributable to our continued focus on leveraging our channel partners to perform consulting services for our customers. As a result of this effort, we reduced headcount in our North American consulting organization by approximately 75 employees in the fourth quarter of fiscal 2002. This reduction in headcount contributed to a $2.4 million decrease in employee expenses for maintenance and services personnel in the first nine months of fiscal 2003 compared to the first nine months of fiscal 2002. Further, independent contractor and temporary staffing expenses decreased $1.4 million nine months ended March 31, 2003 compared to nine months ended March 31, 2002 due to our decreased use of external personnel for product implementations.

Gross margin on maintenance and services revenue increased to 55% in the third quarter of fiscal 2003 from 54% in the third quarter of fiscal 2002 and increased to 56% in the first nine months of fiscal 2003 from 53% in the first nine months of fiscal 2002. These increases in gross margin are primarily due to the increases in maintenance revenue as a percentage of total maintenance and services revenue, as margins on the maintenance revenue stream are higher than margins on the services revenue stream.

OPERATING EXPENSES