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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number 0-16376

TIMBERLINE SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)

15195 N.W. Greenbrier Parkway, Beaverton, Oregon 97006-5701
(Address of principal executive offices) (Zip code)

(503) 690-6775
(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 [x] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No[x]

At May 12, 2003, 11,809,670 common stock of the registrant were outstanding.

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TIMBERLINE SOFTWARE CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

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TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 and 2002 (Unaudited)
(Amounts in thousands)

1. Condensed consolidated financial statements

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TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 and 2002 (Unaudited) (Continued)
(Amounts in thousands except per share data)

2. Recent accounting pronouncements

TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 and 2002 (Unaudited) (Continued)
(Amounts in thousands)

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TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 and 2002 (Unaudited) (Continued)
(Amounts in thousands)

3. Earnings (loss) per share

4. Comprehensive income (loss)

5. Operating segment information

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TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 and 2002 (Unaudited) (Continued)
(Amounts in thousands)

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

TIMBERLINE SOFTWARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts in thousands, except percentages and per share data)

This Report includes forward-looking statements. The words or phrases "anticipates," "believes," "expects," "intends," "will continue," "estimates," "plans," "projects," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.

Our forward-looking statements are subject to certain risks, trends, and uncertainties that could cause actual results to vary materially from anticipated results, including, without limitation, delays in new product releases, delays in acceptance of our products in the marketplace, failures by our outside vendors to perform as promised, changes in the software operating systems for which our products are written, increased competition, and changes in general market conditions. These factors are discussed in further detail below under "Risks and Uncertainties." Should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those discussed herein as expected, believed, estimated, intended or anticipated. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.

Our results of operations for the three months ended March 31, 2003 and 2002 and the changes on a year-over-year comparison are set forth below:

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The following table presents our operating statement data expressed as a percentage of net revenue for the three months ended March 31, 2003 and 2002:

Net Revenue. Net revenue for the three months ended March 31, 2003 increased compared to the same period in 2002 due to an increase in service revenue. Software license revenue declined slightly from a year ago, as we continued to feel the effect of the economic uncertainty in the United States, which we believe caused many prospective buyers to delay their software purchasing decisions. However, we believe the most significant factor affecting our software revenue for the quarter was the beginning of the war in Iraq, which began about two weeks before the end of the first quarter this year. Historically, the month of March is a strong month for us for receiving software orders, with the last two weeks of the month being an especially strong period for the receipt of such orders. However, once the war started, we did not see the quantity of orders that we typically would receive during the last two weeks of the quarter as we believe our prospects and current customers held off their purchasing deci sions until they could assess the impact that the war would have on the overall economy and their business activity.

Although we believe our software license revenue was depressed due to the external factors mentioned above, our software license revenue was positively impacted by other factors. We received additional software revenue in the first quarter as a result of a software licensing arrangement we entered into last year with a large general contractor. Also, we had software license revenue from new software applications released in the latter part of 2002, such as Project Management, Buyout and Residential Management. Those three applications generated over $400 in software license revenue for the three months ended March 31, 2003.

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Service fee revenue increased to a new quarterly record, primarily due to a 14 percent increase in revenue from our maintenance and support service plans and a 34 percent increase in consulting revenue. The revenue from our service plans, which is a recurring source of revenue from our users accounted for 86 percent and 87 percent of our service fee revenue for the three months ended March 31, 2003 and 2002, respectively. The increase in our service plan revenue was due to an increase in service plan pricing that we implemented over the past twelve months and, to a lesser extent, an increase in the number of our users on service plans. Consulting revenue increased primarily due to additional consulting from national accounts and an increase in consulting from new users purchasing software from our direct sales group.

Cost of Revenue. Cost of revenue increased primarily due to an increase in amortization of capitalized software costs and royalty costs. For the three months ended March 31, 2003, amortization of capitalized software costs, including amortization of purchased software costs, increased $382 over the same period in 2002 primarily due to amortization related to the release of our Project Management and Buyout applications in August 2002 and amortization related to our purchase of the Purchase Order and Inventory applications in December 2002. Royalty costs increased $215 over the same period in 2002, primarily because of increased royalties related to the SQL database engine embedded into our software products. Cost of revenue also increased as a result of costs associated with consulting revenue. Costs associated with the generation of consulting revenue increased $134 primarily due to a 34 percent increase in consulting revenue.

Operating Expenses. Operating expenses increased $963, or 8 percent, to $13,319 for the three months ended March 31, 2003 from $12,356 for the comparable period in 2002. Excluding the amount of software development costs capitalized during the three months ended March 31, 2002, our gross operating expenses for the first quarter of 2003 increased less than 1 percent, or $115, compared to the same period last year. Capitalized software development costs, which reduce our gross operating expenses, amounted to $848 in the first three months of 2002 compared to none in 2003. The increase in our gross operating expenses was primarily due to higher commission expenses of $252, severance costs of $51, a $193 increase in outside services, a $66 increase in insurance and employee benefit costs, and an accrual of $101 related to a matching contribution to our 401(k) plan, which is the first time since 2000 that we have committed to making a contribution to the plan. These increases were partially offset by lo wer personnel costs associated with the reduction in our workforce that took place in August 2002.

For the three months ended March 31, 2003, Client Services expenses increased compared to the same period in 2002, but as a percentage of service fee revenue, decline to 34 percent in 2003 from 37 percent in the first quarter of 2002. About one-half of the increase in Client Services expenses was due to an increase in expenses within the professional services group, which handles our consulting practice. We have increased our staff in this area by four since March 2002 to handle the increased volume in our consulting practice. Consulting revenue in the first quarter of 2003 increased 34 percent over the first quarter of 2002. The remainder of the increase in Client Services expenses was in the technical support area, which handles the calls from our customers concerning the functionality of our software. Most of this increase was due to an increase in outside services for additional personnel to handle the peaks in our call volume during the quarter and an increase in personnel costs.

Product Development expenses in the first quarter of 2003 increased $469 over the first quarter of 2002. Most of this increase was due to a reduction in the amount of software development costs capitalized, as mentioned above. Excluding the amount of software development costs capitalized, our gross Product Development expenses in the first quarter of 2003 decreased $379 from the first quarter of 2002. This reduction was primarily due to a $500 reduction in personnel costs, as we have reduced our personnel headcount in this area by 22 percent since March 2002. This was partially offset by a $155 increase in outside services, primarily for contract developers working on short-term development projects.

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Sales and Marketing expenses for the three months ended March 31, 2003 increased over the comparable period in 2002, but declined as a percentage of net revenue. Most of the increase was due to a $205 increase in commission expense on software orders. Software revenue from our direct sales staff for the first quarter of 2003 increased 52 percent over the same quarter in 2002. This increase was partially offset by lower personnel and trade show costs in the Marketing area.

General and administrative expenses for the three months ended March 31, 2003 increased, but as a percentage of net revenue, declined slightly compared to the same period in 2002. Most of the increase was due to severance costs and additional expenses related to our initiative to improve internal business processes throughout the company. During the past several years, we have improved our processes within Client Services and Product Development and are now planning on improving our interdepartmental processes to increase our overall organizational efficiency.

Provision for Income Taxes. The provision for income taxes is based on our best estimate of the effective tax rate for the year. The effective tax rate utilized for the three months ended March 31, 2003 and 2002 was 33 percent. The effective tax rate is dependent on many factors, including an estimate of the amount of our earnings for the remainder of the year and the amount of research tax credits. This rate may change during the year if the estimates used in developing our tax rate vary significantly from our actual operating results for the remainder of the year.

We meet our liquidity needs through cash generated from operations. For the three months ended March 31, 2003, net cash provided by operations was $2,198 compared to $2,059 for the same period in 2002. Our cash and temporary investments at March 31, 2003 increased $1,443 to $11,782, compared to $10,339 at December 31, 2002. Primary uses of cash and temporary investments during first quarter of 2003 were the purchase of property and equipment amounting to $342 and the payment of cash dividends amounting to $472. Accounts receivable at March 31, 2003 decreased $842 compared to December 31, 2002, primarily due to a decrease in billings for software in the month of March as compared to last December. DSO (Days Sales Outstanding) at March 31, 2003 was 32, the same as it was at December 31, 2002. Capitalized software costs and purchased software decreased $673 since the end of 2002 due to current amortization of these costs during the quarter. There were no software developments costs capitalized during the qua rter.

Deferred revenues at March 31, 2003 increased $1,200 to $19,588 from $18,388 at December 31, 2002, primarily due to an increase in billings for annual maintenance and support service plans. Revenue from these service plan billings will be recognized ratably over the service plan period. Additionally, we had about $232 in software billings for which we have deferred revenue recognition. We expect to recognize most of those billings as revenue in the second quarter this year. Income taxes payable also decreased $284 since the end of 2002 primarily due to payment of taxes owed for 2002. Other current liabilities decreased $374 since December 31, 2002 primarily due to the payment of 2002 service plan commissions accrued to our solution provider channel at year-end.

In January 2003, we declared our regular quarterly cash dividend of $.04 per share, amounting to $472. We plan to continue to pay quarterly cash dividends consistent with our capital needs and income levels.

Our discussion on recent accounting pronouncements and the effect on our financial statements can be found in the Notes to the Condensed Consolidated Financial Statements.

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This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires us to select appropriate accounting policies and to continually evaluate such policies to ensure they remain appropriate based on changing conditions and circumstances. Our significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements of our Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2002. We continue to believe our significant accounting policies are reasonable and appropriate. The preparation of our financial statements also requires us to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenue, cost and expenses and disclosures related to contingencies. We believe our estim ates and assumptions, which are based on historical experience, current conditions and other matters of judgment, are reasonable and appropriate. However, actual results may differ from our estimates.

We believe the following are the critical accounting policies used in the preparation of our consolidated financial statements:

Revenue recognition. We recognize software license revenue and service plan revenue in accordance with the provisions of Statement of Position 97-2 (SOP 97-2), "Software Revenue Recognition," issued by the American Institute of Certified Public Accountants and as amended in subsequent accounting pronouncements. Our revenue recognition policy also complies with Staff Accounting Bulletin No. 101 issued by the U.S. Securities and Exchange Commission. Software license revenue is generally recognized upon shipment, provided that we have a signed license agreement, the license fee is determinable, collection is probable, and we have no significant future obligations to the customer related to the software. Service plans for maintenance and support of the software generally cover a one-year period and are billed in advance. Billings for service plans are initially included in deferred revenues and the revenue from these billings is recognized ratably over the service plan period. Other service-related rev enue is generally recognized when the services are performed. We also estimate the amount of sales returns and record that amount as a reduction in revenue.

Capitalized software development costs and purchased software. At March 31, 2003, unamortized capitalized software costs and purchased software amounted to $11,870, representing 22 percent of our total assets. Purchased software primarily represents the cost of software applications that were purchased for resale. Capitalized software costs represent software development costs incurred on new software products after technological feasibility has been established. Both purchased software and capitalized software development costs are amortized to cost of revenue when the products are released. Judgment is involved in determining when technological feasibility has occurred and in determining whether our estimate of the net realizable value associated with each software product exceeds its unamortized costs. The net realizable value is primarily based on our estimate of future revenue to be generated from the new products released. Estimating the amount of future revenue involves the consideration of many subjective factors and making judgment as to the effect those factors will have on future revenue. Such factors include the degree to which the product is accepted in the market, how quickly the revenue will be realized, and technological changes that may shorten the useful life of the pr oduct or render it obsolete. At March 31, 2003, we believe the net realizable value associated with each product exceeds its unamortized cost. However, should we experience changes in the marketplace and new technological advances that adversely affect our products, a write-down of unamortized capitalized software development costs may be required.

Income taxes. Our provision for income taxes includes the benefit to be realized from research tax credits, including the benefit of research tax credit carryforwards. While we believe the amount of the research tax credit is proper, the credit is subject to challenge by the taxing authorities. If the credit we have recognized is more than what the taxing authorities allow, additional income tax expense may be recognized in subsequent years. We also believe the tax credit carryforward benefit will be realized in subsequent years; however, the extent to which the benefit will be realized depends on the level of our future profitability and our ability to use such credits prior to their expiration. If we are not able to realize the full benefit of the tax credit, additional income tax expense may be required in subsequent years.

From time to time, we may make forward-looking statements as such term is defined in the Federal securities laws. The following risks and uncertainties, among others, should be considered in evaluating our forward-looking statements. Factors that may cause actual results to differ materially from those contained in such forward-looking statements are as follows:

Competition. The computer software market is highly competitive and subject to change because of the rapid technological changes in the computer industry. The number of software vendors with which we compete varies from product to product and from region to region within the United States. Although we believe that we are a major supplier of financial and operations software for the construction and real estate industries, and that there are economical and technological barriers to discourage new specialty software vendors from entering into our segment of the software market, there can be no assurance that larger, well-known software developers will not target this segment of the market. Such competitors are considerably larger, more diversified, have greater financial and other resources, and may have greater brand recognition for their products than we currently have.

We must also compete with other larger, well-known software developers for the hiring and retention of highly qualified technical personnel. As a result, we may have to expend additional financial resources to hire and retain qualified technical personnel. If we are not able to secure the services of employees with the level of technical expertise we require, the development of new products would likely be delayed and may result in a decrease in the quality of new software products and enhancements to our existing software products. A delay in the development, or failure to maintain the quality of our new software products would likely have a material adverse effect on our financial position, results of operations and cash flows.

Dependence on Microsoft Operating System: Obsolescence and Technological Changes. We are a specialty software developer, an industry characterized by rapid technological change. Our software is designed to work with specific operating systems developed by Microsoft Corporation. If substantial changes are made to those operating systems or if new operating systems are adopted, our software products may not function properly, necessitating that we invest additional resources to adapt our software to those changes. Also, other operating systems may be introduced on which our software may not function, which may also cause additional resources to be expended which would otherwise be devoted to improving our software or developing new software.

To remain competitive, we must continue to make substantial expenditures for product development. Although we plan to continue to enhance our existing products and to develop new products, our competitors may develop products with superior capabilities and/or market their products more effectively at lower prices, by "bundling" their software with other software or through other methods. We believe our existing software products are widely accepted in our segment of the marketplace. However, a delay in the release of new products or modifications to existing products, or a delay in the acceptance by the marketplace of any new products or modifications to existing products, could similarly delay the recognition of revenue, or have an adverse effect on our revenue and earnings.

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Substantial Dependence on a Single Industry. Because we sell a large majority of our software products and services to the construction industry, adverse economic conditions in that industry could have a material adverse effect on our revenue and earnings. The construction industry is particularly sensitive to a significant increase in interest rates, which in the past has resulted in substantial financial distress across the industry. In addition, a downturn in general economic conditions in the United States could adversely affect the construction industry.

Product Protection. We regard our software as proprietary and attempt to protect it by relying upon copyrights, trade secrets, internal nondisclosure agreements and transferability restrictions incorporated into our software license agreements. We believe the risk of unauthorized transfers of our proprietary information is reduced because program source listings are not released to third parties. Despite these restrictions, it may be possible for competitors or users to copy aspects of our products or to obtain information which we regard as proprietary. Our competitive position could be adversely affected by unauthorized use of our proprietary information. Third parties may also assert infringement or other claims against us with respect to any existing or future products. Litigation to protect our proprietary information or to determine the validity of any third-party claims could result in significant expense to us and, whether or not such litigation is determined in our favor, divert the effort s of our technical and management personnel from further development and support of our software products.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our exposure to market risk for changes in interest rates is primarily related to our cash and temporary investment balances. Additionally, we have a subsidiary company in Australia, which exposes us to foreign currency fluctuations. We believe that our exposure to changes in interest rates on our cash and temporary investment balances and foreign currency fluctuations are not material to our operating results or cash flows. There has not been any material change in the market risk disclosures contained in our Annual Report on Form 10-K for the year ended December 31, 2002.

Item 4. Controls and Procedures

1. Evaluation of disclosure controls and procedures

   Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) as of a date within 90 days prior to the filing of this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission's rules and forms.

    

2. Changes in internal controls

Since the evaluation date, there have been no changes to our internal controls or in other factors that could significantly affect those controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

1. Exhibits

   Exhibit 99.1 Certification of the Chief Executive Officer

   Exhibit 99.2 Certification of the Chief Financial Officer

    

2. Reports on Form 8-K

On January 29, 2003, we filed a Form 8-K pursuant to Item 9. Regulation FD Disclosure, attaching our press release regarding summary financial results for the quarter ended December 31, 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

I, Curtis L. Peltz, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Timberline Software Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

I, Carl C. Asai, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Timberline Software Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

In connection with the Quarterly Report of Timberline Software Corporation (the "Company") on Form 10-Q for the period ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Curtis L. Peltz, President, Chief Executive Officer and Director of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

May 19, 2003

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.