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

FORM 10-Q

Commission file number: 0-25137

CONCUR TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)

6222 185th Avenue NE
Redmond, Washington 98052
(Address of principal executive offices)

(425) 702-8808
(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  o

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

Yes  o     No  x

     As of April 30, 2003, there were 31,208,428 shares of the Registrant’s Common Stock outstanding.

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CONCUR TECHNOLOGIES, INC.

FORM 10-Q
MARCH 31, 2003

INDEX

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PART I.       FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS

Concur Technologies, Inc.

Consolidated Balance Sheets
(In thousands, except share and per share data)
(Unaudited)

(1)      Includes amounts due from related parties of $265,000 and $226,000 at March 31, 2003 and September 30, 2002, respectively.

(2)      Includes amounts due to related parties of $0 and $145,000 at March 31, 2003 and September 30, 2002, respectively.

See accompanying notes.

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Concur Technologies, Inc.

Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

(1)     Includes sales to related parties of $133,000 and $383,000 in the three months ended March 31, 2003 and 2002, and $439,000 and $967,000 in the six months ended March 31, 2003 and 2002, respectively.

(2)     Includes payments to related parties of $0 and $264,000 in the three months ended March 31, 2003 and 2002, and $386,000 and $499,000 in the six months ended March 31, 2003 and 2002, respectively.

See accompanying notes.

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Concur Technologies, Inc.

Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

See accompanying notes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2003
(Unaudited)

NOTE 1.      DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of the Company

     Concur Technologies, Inc. (“Concur” or the “Company”) is a leading provider of Web-based Corporate Expense Management software and services that are designed to improve operational efficiency and reduce cost in businesses by automating and streamlining business processes. The Company’s products include Concur Expense™ and Captura Expense™ software for automating travel and entertainment expense management, Concur Payment™ software for automating employee requests for vendor payments, and value-added products and services including Concur Imaging Service™, Concur Voice Access Service™, and Concur Business Intelligence™.

     These software products and services are designed to meet the needs of businesses of all sizes worldwide and to accommodate a wide range of customer business needs, technical requirements, and budget objectives through flexible delivery models, including the Company’s license, large-market hosted, and application service provider (“ASP”) models.

     The Company offers its products through a direct sales organization as well as through indirect channels.

Unaudited Interim Financial Information

     The financial information as of March 31, 2003, and for the three and six months ended March 31, 2003 and 2002, is unaudited, but includes all adjustments (consisting of normal recurring adjustments) that the Company considers necessary for a fair presentation of its financial position at such dates and its operations and cash flows for the periods then ended. The financial statements should be read in conjunction with the financial statements and notes thereto for the fiscal year ended September 30, 2002, included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (“SEC”). Operating results for the three and six months ended March 31, 2003 are not necessarily indicative of results that may be expected for the entire fiscal year.

     The balance sheet at September 30, 2002 has been derived from the audited financial statements at that date but, in accordance with the rules and regulations of the SEC, does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Principles of Consolidation

     The consolidated financial statements include the accounts of Concur and its wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.

Revenue Recognition Policy

     The Company recognizes revenue in accordance with accounting standards for software and service companies including American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, Software Revenue Recognition (“SOP 97-2”), as amended by SOP 98-9, the consensus reached in Emerging Issues Task Force (“EITF”) Issue No. 00-3, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware (“EITF 00-3”), the SEC Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements (“SAB 101”), and related interpretations including AICPA Technical Practice Aids.

     The Company derives its revenues from the license of its software products, the provision of its software products and services on a subscription basis under its large-market hosted and ASP delivery models, and the provision of software maintenance services, consulting services, and training services.

     Revenues resulting from license fees are recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed or determinable, collectability is probable, and vendor-specific objective evidence of fair value exists for any undelivered products or services (“elements”) of the arrangement. The Company’s software license contracts include a standard software performance warranty provision. The Company accounts for potential warranty claims in accordance with the guidance prescribed by the Financial Accounting Standards Board (“FASB”) in its Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies. To date, the Company has experienced minimal warranty claims. The Company’s standard software license contracts do not include contingencies such as rights of return or conditions of acceptance.

     In arrangements that include rights to multiple software products and/or services, the total arrangement fee is allocated among each of the deliverables using the residual method, under which revenue is allocated to undelivered elements based on vendor-specific objective evidence of fair value of such undelivered elements and the residual amounts of revenue are allocated to delivered elements. Elements included in multiple-element arrangements could consist of software products, maintenance (which includes customer support services and unspecified upgrades), consulting, or hosting services. Vendor-specific objective evidence is based on the price charged when sold separately or, in the case of an element not yet sold separately, the price established by authorized management, if it is probable that the price, once established, will not change prior to separate market introduction.

     Fees from licenses sold together with consulting services are generally recognized upon shipment of the software, provided that the above criteria are met, payment of the license fees is not dependent upon the performance of the services, and the consulting services are not essential to the functionality of the licensed software. If the services are essential to the functionality of the software, or payment of the license fees is dependent upon the performance of the services, both the software license and the consulting fees are recognized under the percentage of completion method of contract accounting. If collectability is not considered probable, revenue is recognized when the fee is collected. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. If a nonstandard acceptance period or nonstandard performance criteria are required, revenues are recognized upon the earlier of satisfaction of the acceptance/performance criteria or the expiration of the period, if applicable.

     In software arrangements where the Company provides hosting services in combination with licensed software products, the company follows EITF 00-3, which states that a software element covered by SOP 97-2 is only present in a hosting arrangement if the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty, and it is feasible for the customer to either run the software on its own hardware, or contract with another party unrelated to the vendor to host the software. The Company’s hosted license arrangements typically meet these criteria. Accordingly, the Company accounts for the corresponding license of its software products as described above for multiple-element software license arrangements. If the arrangement does not meet the criteria of EITF 00-3, all revenues under the arrangement are recognized in accordance with SAB 101 over the expected lives of the customer relationships, which range from two to five years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

     Subscription revenues include the monthly fees for services provided under the Company’s ASP and large-market hosted delivery models, as well as the associated set-up revenues. The set-up fees related to ASP services, hosted subscription services, and related value-added services, as well as associated direct and incremental costs, such as labor and commissions, are deferred and recognized over the expected lives of the customer relationships, which are typically two to five years based on the particular service offering. When a subscription service offering has been commercially available for only a short period of time, the contractual lives of the related agreements are used to approximate the expected lives of the customer relationships. The Company will continue to evaluate and adjust these amortization periods as it gains more experience with customer contract renewals and contract cancellations. Based on that experience, it is possible that in the future the period over which such set-up fees are amortized will be extended. The set-up fees related to hosted license services, as well as associated direct and incremental costs, such as labor and commissions, are deferred and recognized in full upon commencement of such hosting services. Subscription set-up fees, net of set-up costs and other amounts that are billed in excess of the amounts currently recognizable, are recorded as deferred revenue. Subscription usage fees are recognized monthly as the service is provided to the customer.

     Service revenues result from maintenance agreements and consulting services. Maintenance agreements provide for technical support and include the right to receive unspecified upgrades and enhancements on a when-and-if available basis. Revenues from maintenance agreements are recognized ratably over the lives of the related agreements, which are typically one year. Consulting services consist of system implementation and integration, planning, data conversion, training and development, and documentation of procedures. Consulting services are primarily performed on a time-and-materials basis. When software licenses and services are sold together, the Company evaluates the services to determine whether they are essential to the functionality of the software. The Company’s services are typically not considered essential to the functionality of the software and, therefore, revenues related to software licenses are typically recognized immediately and revenues related to such services are recognized as the services are performed. In some instances, consulting services are performed under milestone or fixed-fee contracts, and in such cases, consulting revenues are recognized on a percentage-of-completion basis. In addition, the Company maintains estimated allowances on consulting revenues based on historical experience.

     Portions of the Company’s revenues are derived from arrangements with strategic reseller partners. When the Company assumes the related business risks, such as performance and credit risk, these revenues are recorded on a gross basis, with the amounts paid to the strategic partners recognized as cost of sales. The Company’s assumption of such business risks is evidenced when, among other things, the Company takes responsibility for delivery of the product or service, establishes pricing of the arrangement, and is the primary obligor in the arrangement. When the strategic partner assumes a majority of these business risks, the associated revenues are recorded net of the amounts paid to the reseller partner.

Stock-Based Compensation

     The Company issues stock options to its employees and outside directors and provides employees the right to purchase stock pursuant to stock option and employee stock purchase programs. The Company accounts for all its employee stock-based compensation arrangements under the intrinsic value method of accounting as defined by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretations. Under this method, no stock-based employee compensation cost has been reflected in the Company’s net income for the three and six months ended March 31, 2003 and 2002, as all options granted under these plans had an exercise price equal to the fair market value of the underlying common stock on the date of grant.

     SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) requires companies that continue to follow APB 25 to provide pro forma disclosure of the impact of accounting for stock-based compensation using the fair value method of SFAS 123. For purposes of these pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods. The estimated fair value of the stock purchases under the employee stock purchase plan is amortized over the related purchase periods, ranging from 6 to 24 months. The following table illustrates the effect on net loss and loss per share if the Company had accounted for its stock option and employee stock purchase plans under the fair value method of accounting of SFAS 123, as amended (in thousands, except per share data):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

     The Company has estimated the fair value of its options, including employee stock purchase plan shares, using the Black-Scholes option valuation model, which is one of several methods that can be used to estimate option values. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect this estimate, management believes the Black-Scholes model alone does not necessarily provide a reliable measure of the fair value of Concur’s employee stock options and stock purchase plan shares. The fair value of options granted and employee stock purchase plan shares were estimated at the date of grant using the Black-Scholes model with the following weighted-average assumptions:

Impairment of Long-Lived Assets

     The Company tests goodwill for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 142 requires that goodwill be tested for impairment at the reporting unit level at least annually and more frequently upon the occurrence of certain events, as defined by SFAS 142. The Company has determined that it has only one reporting unit. Goodwill is tested for impairment annually in a two-step process. First, the Company determines if the carrying value of the reporting unit exceeds its fair value, which would indicate that goodwill may be impaired. If the Company determines that goodwill may be impaired, the Company compares the implied fair value of the goodwill, as defined by SFAS 142, to its carrying amount to determine if there is an impairment loss. The Company performed its initial test for impairment as of October 1, 2002, the date of adoption of SFAS 142, and its required annual test, which it performed on March 1, 2003, and determined that goodwill was not impaired.

     The Company accounts for the impairment of long-lived assets other than goodwill in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). In accordance with SFAS 144, the Company evaluates long-lived assets, including intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset or group of assets. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. The Company does not have any long-lived assets, including intangible assets other than goodwill, which it considers to be impaired.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Liquidity

     The Company continues to incur losses from operating results and had total stockholders’ equity of $21.5 million at March 31, 2003, including an accumulated deficit of $213.2 million. As a result of its significant product development, customer support, and sales and marketing efforts, the Company has required substantial working capital to fund its operations. To date, equity offerings have been the Company’s principal external source of liquidity. The Company’s most recent equity offering was in March 2000. Management believes that the Company has sufficient working capital available under its operating plan to fund its operations and anticipated capital expenditures for at least the next 12 months. Any significant failure to achieve the current operating plan could have a material adverse impact on the Company’s business, financial position, liquidity, or results of operations and could require the Company to reduce expenditures or seek additional debt or equity financing to enable it to continue operations through at least the next 12 months. If no such debt or equity financing were available, management believes that it would be able to reduce expenditures sufficiently to sustain operations for at least the next 12 months.

Net Loss Per Share

     Basic and diluted net loss per share is calculated using the weighted-average number of shares of common stock outstanding. Shares relating to the acquisition of Captura Software, Inc. (“Captura”) have been included in the computation of weighted average shares outstanding for the three and six months ended March 31, 2003. Other common stock equivalents, including preferred stock, stock options, and warrants, if any, are excluded from the computation in all periods, as their effect is anti-dilutive.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Changes in these estimates and assumptions may have a material impact on the Company’s financial statements. The Company has used estimates in determining certain provisions, including allowances for doubtful accounts and sales returns, useful lives of property and equipment, valuation and useful lives of intangible assets, valuation of deferred revenues acquired from Captura, expected lives of customer relationships, and tax reserves.

Reclassification

     Certain prior period amounts have been reclassified to conform to the current period presentation.

Recently Issued Accounting Standards

     In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS 142. SFAS 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS 142 also requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. The Company adopted SFAS 142 beginning October 1, 2002. The adoption of SFAS 142 did not have a material impact on the Company’s financial position, results of operations, or cash flows.

     In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”). This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. The Company adopted SFAS 143 on October 1, 2002. The adoption of SFAS 143 did not have a material impact on the Company’s financial position, results of operations or cash flows.

     In August 2001, the FASB issued SFAS 144, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (“SFAS 121”), and provides a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of SFAS 121, SFAS 144 significantly changes the criteria that would have to be met to classify an asset as held-for-sale. SFAS 144 also supersedes the provisions of APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, with regard to reporting the effects of a disposal of a segment of a business, and will require expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred. In addition, more dispositions will qualify for discontinued operations treatment in the statement of operations. The Company adopted SFAS 144 on October 1, 2002. The adoption of SFAS 144 did not have a material impact on the Company’s financial position, results of operations or cash flows.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

     In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit and Disposal Activities (“SFAS 146”). SFAS 146 revises the accounting for exit and disposal activities as prescribed by the consensus reached in EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. Commitment to a plan to exit an activity or dispose of long-lived assets will no longer be sufficient to record a one-time charge for most anticipated costs. Instead, SFAS 146 requires exit or disposal costs be recorded when they are “incurred” and can be measured at fair value. The provisions of SFAS 146 were effective prospectively for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 did not have a material effect on the Company’s financial position or results of operations.

     In December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123 (“SFAS 148”). This statement amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted SFAS 148 effective January 1, 2003.

     In November 2002, the EITF published its consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). EITF 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company is still evaluating the effect, if any, that the application of the consensus reached in EITF 00-21 may have on its consolidated financial position or results of operations.

     In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. FIN 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. In addition, FIN 45 also requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. In general, FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying obligation that is related to an asset, liability or an equity security of the guaranteed party. The initial recognition and measurement provisions of FIN 45 are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company’s financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

     In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (“FIN 46”). FIN 46 establishes accounting guidance for consolidation of variable interest entities that function to support the activities of the primary beneficiary. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements of FIN 46 apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Disclosure requirements apply to any financial statements issued after January 31, 2003. FIN 46 applies to any business enterprise, public or private, that has a controlling interest, contractual relationship or other business relationship with a variable interest entity. The Company has no contractual relationship or other business relationship with a variable interest entity; therefore, the adoption of FIN 46 is not anticipated to have any effect on its consolidated financial position or results of operations.

NOTE 2.     ACQUISITION OF CAPTURA SOFTWARE, INC.

     On July 31, 2002, the Company announced and completed its acquisition of Captura (the “Acquisition”). Concur accounted for the Acquisition under the purchase method of accounting, in accordance with SFAS 141. Results of Captura’s operations are included in the combined enterprise’s statement of operations beginning August 1, 2002. On December 16, 2002, the Company entered into an amendment to the agreement governing the Acquisition, which memorialized the resolution of all outstanding post-closing contingencies and escrow items with

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

respect to the consideration under such agreement. The total consideration in the Acquisition was 4,695,304 shares of Concur’s common stock, representing approximately 15.2% ownership of the combined enterprise as of December 16, 2002. The final shares issuable in December 2002 were valued as of that date, resulting in an increase in stockholders’ equity of $1.9 million. The increase in equity related to such shares, which was offset by the reduction of the cash consideration payable under the escrow agreement, resulted in an increase in goodwill of $0.8 million.

     During the quarter ended March 31, 2003, in accordance with SFAS 141, certain adjustments related to determining fair values of the assets and liabilities acquired and totaling approximately $0.3 million were recorded to increase goodwill. These adjustments were primarily the result of greater than anticipated collections of acquired accounts receivable, and higher than anticipated acquired liabilities.

     The adjusted purchase consideration and preliminary purchase price allocation is as follows:

     The purchase price allocation set forth above is subject to additional adjustments related to the ultimate determination of the fair values of any acquired assets, liabilities and transaction costs. All such adjustments identified during the allocation period, expected to expire on July 31, 2003, would change the carrying amount of the goodwill generated as a result of the Acquisition. As of March 31, 2003, the remaining unpaid balance of acquired liabilities and transaction costs totaled approximately $0.4 million.

     The expected life of the acquired customer base intangible was assumed to be approximately five years, which is consistent with the expected cash flows from the customer contracts, and therefore the Company is amortizing this intangible over a five year period. In accordance with SFAS 142, goodwill will not be amortizatized, but will instead be tested for impairment annually (see Note 1).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

     The following table summarizes the timing and amounts of amortization of the acquired customer base intangible asset:

NOTE 3.     STOCK REPURCHASE PROGRAM

     In January 2003, the Company’s Board of Directors authorized a stock repurchase program under which the Company may repurchase up to one million shares of its outstanding stock over a two-year period. Stock purchases under the stock repurchase program are expected to be made from time to time in the open market based on market conditions. Purchases will be made at the then-current market prices, and repurchased shares will be retired. No purchases had been made as of March 31, 2003.

NOTE 4.     CONTINGENCIES

Litigation

     In July 2001, the Company and several of its current and former officers were named as defendants in two securities class-action lawsuits filed in the United States District Court for the Southern District of New York. The complaints generally allege claims against the underwriters of the Company’s initial public offering in December 1998, the Company, and several of its current and former executives, based on alleged errors and omissions concerning underwriting terms in the prospectus for the Company’s initial public offering. The plaintiffs in these lawsuits seek damages in unspecified amounts, which could be substantial. In April 2002, these lawsuits were consolidated. In October 2002, the court dismissed the individual defendants from the consolidated lawsuit, without prejudice, pursuant to a stipulated agreement between the parties. The Company believes the consolidated lawsuit is without merit and intends to defend itself vigorously.

Product Warranty and Indemnification Obligations

     The Company provides its software products and related services to its customers under sales contracts, which usually include a limited warranty regarding product and service performance and a limited indemnification of customers against losses, expenses, and liabilities from damages that may be awarded against customers in the event the Company’s software or services are found to infringe upon a patent, copyright, trademark, or other proprietary right of a third party. The contracts generally limit the scope of and remedies for such indemnification obligations in a variety of industry-standard respects, including but not limited to certain time- and geography-based scope limitations and a right for the Company to replace an infringing product. The Company also enters into similar limited indemnification terms in agreements with certain strategic business partners and vendors. The Company accrues for known warranty and indemnification issues if a loss is probable and can be reasonably estimated, and accrues for estimated incurred but unidentified issues based on historical activity. To date, the Company has experienced minimal warranty claims and has not had to reimburse any of its customers for any losses related to the limited indemnification described above.

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     The following discussion and analysis provides information which we believe is relevant to an assessment and understanding of our results of operations and financial condition. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto.

Special Note Regarding Forward-Looking Statements

     This document contains forward-looking statements regarding our plans, objectives, expectations, intentions, future financial performance, future financial condition, and other statements that are not historical facts. For example, statements throughout this section regarding our expected earnings, costs of revenues, operating expenditures, cash flows and other future financial results are forward looking statements. You can identify forward-looking statements by our use of the future tense, or by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate,” “continue,” and other similar words and phrases. These forward-looking statements involve substantial risks and uncertainties. Examples of such risks and uncertainties are described in this report under “Factors That May Affect Results Of Operations And Financial Condition” and elsewhere in this report, as well as in our other filings with the Securities and Exchange Commission. You should be aware that the occurrence of any of these risks and uncertainties may cause our actual results to differ materially from those anticipated in our forward-looking statements, which could have a material adverse effect on our business, results of operations, and financial condition. All forward-looking statements included in this report are based on information available to us as of the date of this report. We assume no obligation or duty to update any of such forward-looking statements.

Overview

     Concur Technologies, Inc. is a leading provider of Web-based Corporate Expense Management software and services that are designed to improve operational efficiency and reduce cost in businesses by automating and streamlining business processes. Our products include Concur Expense™ and Captura Expense™ software for automating travel and entertainment expense management, Concur Payment™ software for automating employee requests for vendor payments, and value-added products and services including Concur Imaging Service™, Concur Voice Access Service™, and Concur Business Intelligence™.

     Our software products and services are designed to meet the needs of businesses of all sizes worldwide. Our solutions are designed to accommodate a wide range of customer business needs, technical requirements, and budget objectives through flexible delivery models, including our license, large-market hosted, and application service provider (“ASP”) models. We offer our products on a license basis, which we primarily market to large companies (more than 3,000 employees) that want a highly configurable solution that is managed in-house and delivered over a corporate intranet. We also offer our products on a hosted license and hosted subscription basis, which we primarily market to large companies that want a highly configurable solution provided on an outsourced basis. We further offer our Concur Expense product on an ASP basis, which we primarily market to mid-size companies (100 to 3,000 employees) that want a standardized solution provided on an outsourced basis over the Internet. We market our products through a direct sales organization as well as through indirect channels.

     We were incorporated in 1993 and began selling travel and entertainment expense management software in fiscal 1995. In fiscal 1996, we released Concur Expense, a client-server based Corporate Expense Management software product. In fiscal 1998, we released a browser-based version of Concur Expense, which utilizes corporate intranets to reach employees in an enterprise. This product has accounted for a majority of Concur Expense license revenues since its release.

     In October 1999, we began offering Concur Expense as a service on an ASP basis. In December 1999, we introduced additional outsourced offerings under our large-market hosted models.

     In July 2002, we completed our acquisition of Captura Software, Inc. (“Captura”). Prior to the acquisition, Captura was a privately-held corporation that provided hosted Corporate Expense Management solutions under license, hosted license, and hosted subscription models. Following the acquisition, Captura’s operations were consolidated into our operations at our headquarters in Redmond, Washington. Our integration plan included eliminating redundancies in personnel, equipment, and services to reduce costs for the combined operation.

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Critical Accounting Policies and Estimates

     Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. “Critical accounting policies and estimates” are defined as those most important to the financial statement presentation and that require the most difficult, subjective, or complex judgments. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Under different assumptions and/or conditions, actual results of operations may materially differ. We periodically re-evaluate our critical accounting policies and estimates, and we presently believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements.

     Revenue Recognition.     Revenue recognition rules for software companies are complex. We follow specific and detailed guidelines in measuring revenue; however, our judgments affect the application of our revenue recognition policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and could result in future losses.

     We recognize revenue in accordance with accounting standards for software and service companies including American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, Software Revenue Recognition (“SOP 97-2”), as amended by SOP 98-9, the consensus reached in Emerging Issues Task Force Issue No. 00-3, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware (“EITF 00-3”), the Securities Exchange Commission (“SEC”) Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements (“SAB 101”), and related interpretations including AICPA Technical Practice Aids.

     We derive our revenues from the license of our software products, the provision of our software products on a subscription basis under our large-market hosted and ASP delivery models, and the provision of software maintenance services, consulting services, and training services.

     We recognize license revenues when we obtain a signed contract from our customer, we have delivered the software, the amount of the transaction is fixed or determinable, collectability is probable, and vendor-specific objective evidence of fair value exists for any undelivered products or services (“elements”) of the arrangement. Our software license contracts typically include an industry-standard software performance warranty, for which we provide a reserve based on historical experience. To date, we have experienced minimal warranty claims. Our software license contracts typically do not include contingencies such as rights of return or conditions of acceptance.

     In arrangements that include rights to multiple software products and/or services, we allocate the total arrangement fee among each of the deliverables using the residual method, under which revenue is allocated to undelivered elements based on vendor-specific objective evidence of their fair value and the residual amounts of revenue are allocated to delivered elements. Elements included in multiple-element arrangements could consist of software products, maintenance (which includes customer support services and unspecified upgrades), consulting, or hosting services. Vendor-specific objective evidence is based on the price charged when an element is sold separately or, in the case of an element not yet sold separately, the price established by authorized management, if it is probable that the price, once established, will not change prior to separate market introduction. We are required to exercise judgments in deciding how to interpret the evidence of fair value to determine the fair value to allocate to a given element, and in determining whether an established price is likely to change prior to separate market introduction. These judgments may materially affect the timing of our revenue recognition and results of operations.

     Fees from licenses sold together with consulting services are generally recognized upon shipment of the software, provided that the above criteria are met, payment of the license fees are not dependent upon the performance of the services, and the consulting services are not essential to the functionality of the licensed software. If we determine the services are essential to the functionality of the software, or payment of the license fees is dependent upon the performance of the services, both the software license and the consulting fees are recognized under the percentage of completion method of contract accounting. If collectability is not considered probable, revenue is recognized when the fee is collected. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. Accordingly, our judgments as to whether services should be considered essential to the functionality of licensed software, and the probability of collection and determinability of fees, may materially affect the timing of our revenues and results of operations. If a non-standard acceptance period or non-standard performance criteria are required, revenues are recognized upon the earlier of satisfaction of the acceptance/performance criteria or the expiration of the period, if applicable.

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     In software arrangements where we provide hosting services for the licensed software products, revenues related to all elements of the arrangement are recognized as described above for multiple-element software license arrangements, so long as the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty and it is feasible for the customer to either run the software on its own hardware, or contract with another party unrelated to the vendor to host the software. We believe that in such arrangements, our hosting services typically meet these criteria. If our hosting services do not meet these criteria, all revenues related to the arrangement are recognized over the expected lives of the customer relationships, which range from two to five years. As a result, our judgment as to whether our hosting services meet the criteria above could have a material affect on the timing of our revenue recognition and results of operations.

     Subscription revenues include the monthly fees for services provided under our ASP and large-market hosted delivery models, as well as the associated set-up revenues. The set-up fees related to ASP services and hosted subscription services, as well as costs incurred directly for this one-time set-up, such as labor and commissions, are deferred and recognized over the expected lives of the customer relationships, which range from two to five years, based on the particular service offering. When a subscription service offering has been commercially available for only a short period of time, the contractual lives of the related agreements approximate the expected lives of the customer relationships. We will continue to evaluate and adjust these amortization periods as we gain more experience with customer contract renewals and contract cancellations. It is possible, based on that experience, that in the future we will extend the periods over which we amortize such set-up fees, and therefore, such changes in estimates may affect our results of operations. Set-up fees related to hosted license services, as well as costs incurred directly for the one-time set-up, such as labor and commissions, are deferred and then recognized in full upon commencement of such hosting services. Set-up fees, net of set-up costs and other amounts that are billed to our customers in excess of the amounts currently recognizable, are recorded as deferred revenue on our balance sheet. We recognize subscription usage fees monthly as the service is provided to the customer.

     Service revenues consist of fees from software maintenance agreements and consulting services. Maintenance agreements provide for technical support and include the right to receive unspecified upgrades and enhancements to our software products on a when-and-if available basis. Fees received in advance for maintenance agreements are recorded as deferred revenue on the balance sheet, and recognized ratably over the lives of the related agreements, which are typically one year. Consulting services consist of initial systems implementation and integration of our software products, implementation and integration of upgrades and enhancements to our software products, and other services, such as planning, data conversion, training, and documentation of procedures. Our consulting services are primarily performed on a time-and-materials basis. When we sell our software and consulting services together, we evaluate the consulting services to determine whether they are essential to the functionality of the software. In our judgment, our services typically are not essential to the functionality of the software; therefore, we recognize license revenues as described above, and we recognize consulting service revenues as the services are performed. Accordingly, our judgment as to whether services are essential to the functionality of licensed software, may materially affect the timing of our revenues and our results of operations. In some instances, we have sold our consulting services under milestone or fixed-fee contracts, and in such cases, consulting revenues are recognized on a percentage-of-completion basis. In addition, we maintain estimated allowances on consulting revenues based on historical collection experience.

     Portions of our revenues are generated from sales made through our reseller partners, such as ADP, Inc. (“ADP”) and Microsoft Business Solutions. Where we assume the majority of the business risks associated with performance of the contractual obligations, we record the associated revenues on a gross basis, with amounts paid to our reseller partners being recognized as cost of sales. Our assumption of such business risks is evidenced when, among other things, we take responsibility for delivery of the product or service, we establish pricing of the arrangement, and we are the primary obligor in the arrangement. Where our reseller partner assumes the majority of these business risks, we record associated revenues net of the amounts paid to our reseller partner. Therefore, our judgment as to whether we have assumed the majority of the business risks associated with performance of the contractual obligations materially affects how we report revenues and cost of revenues.

     Allowances for Doubtful Accounts and Sales Returns.     We make judgments as to our ability to collect outstanding receivables and provide allowances (included in general and administrative expenses) for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of significant outstanding invoices. For those invoices not specifically reviewed, provisions are made based on an analysis of our

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historical collection experience and current economic trends. If the data used to estimate the allowance provided for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and future results of operations could be materially affected.

     We also record a provision for estimated sales returns and allowances on product- and service-related sales in the same period the related revenues are recorded in accordance with Statement of Financial Accounting Standards No. 48. These estimates are based on historical sales returns, analysis of credits granted, and other known factors. If the data used to estimate the provision for sales returns and allowances does not properly reflect future sales returns, then a change in the allowances would be made in the period in which such a determination is made, and revenues in that period could be affected.

     Valuation of Intangible Assets.     Our acquisition of Captura resulted in the recording of $3.3 million in goodwill, which represents the excess of the purchase price over the sum of the fair value of net assets acquired, $1.3 million in acquired in-process research and development, and the acquired customer base intangible of $5.7 million. We engaged a third party appraiser to perform the valuation of the in-process research and development and intangible assets we acquired.

     The value of the acquired customer base intangible was based on all Captura customer contracts signed as of September 30, 2002, ranging in term from 2 to 5 years, and having an average remaining term of 2 years. Due to Captura’s limited historical experience, most of the acquired contracts were assumed to renew for one 3-year term. Therefore, the average expected remaining life of all acquired contracts was estimated to be 5 years. The future cash flows provided by these contracts are almost entirely subscription based, and as a result, will generate an equal and ratable stream of monthly cash flows. In the valuation process, an income-based approach, commonly referred to as the excess-earnings method, was used to estimate the value of the acquired customer base. The excess-earnings method captures the value of an intangible asset by discounting to present value the earnings generated by the asset that remain after deduction of a return on other contributory assets. These other assets normally include working capital, fixed assets, and other intangible assets. Based on the excess-earnings method, the estimated value of the acquired Captura customer base was $5.7 million. The valuation of these items may materially differ from our estimates under different assumptions or conditions, which would affect our financial position and operating results.

     Impairment of Goodwill and Certain Other Intangible Assets.      Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. We have determined that we have only one reporting unit, and that our goodwill is not impared. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit.

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RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2003 AND 2002

Selected Financial Data

     The following table sets forth financial data derived from our unaudited statements of operations, as a percentage of total revenues, for the periods indicated. The operating results for the three and six months ended March 31, 2003 and 2002, are not necessarily indicative of the results that may be expected for any future period.

Revenues

     We derive our revenues from the license of our software products, the provision of our software products on a subscription basis under our hosted license, hosted subscription, and ASP delivery models, and the provision of software maintenance services, consulting services, and training services.

     License Revenues.      License revenues consist of software license fees. The decrease in license revenues for the three and six months ended March 31, 2003, as compared to the corresponding periods of the prior year, was primarily attributable to customers delaying or limiting their technology capital spending as a result of continued weak economic conditions, which were exacerbated by the general uncertainty created by the unstable geopolitical environment. These weakened economic conditions have resulted in more customers restricting their total capital expenditures including software purchases, including a decline in purchases to accommodate future customer growth. Because of the volatility in sales of licensed products, the related revenues are more difficult to predict and are therefore subject to greater volatility on a quarter over quarter basis.

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     Subscription Revenues.      Subscription revenues consist of monthly fees paid for the use of our services under our ASP and large-market hosted delivery models, together with related value-added services, as well as the amortization of one-time set-up fees in connection with those services. Large-market hosted revenues contributed approximately 75% of the absolute dollar increase in subscription revenues for both of the three and six months ended March 31, 2003, compared to the same periods in the prior year. The acquisition of Captura in July 2002 accounted for the majority of the increases. The remaining increase in subscription revenues was attributable to growth in ASP revenues resulting from our larger customer base for ASP services in fiscal 2003 compared to fiscal 2002.

     We have a strategic relationship with ADP, under which ADP markets our ASP services to its existing customers and to potential new customers. Sales through this channel commenced in the September quarter of fiscal 2000. In July 2002, we amended our agreement with ADP to transfer to ADP the majority of the business risks associated with any new customers signed through this channel. As a result, we are recording ASP revenues from these new unit sales on a net basis. The majority of new unit sales of ASP services during fiscal 2002 and 2003 occurred through ADP. We expect subscription revenues to continue to grow in fiscal 2003 as a result of the continued development of our existing strategic relationships, the addition of new strategic relationships, the full-year impact of the Captura acquisition, and growing demand for hosting services delivered to the large market.

     Service Revenues.      Service revenues consist of fees for maintenance, consulting services, and training. Maintenance fees are typically billed annually and amortized over the period of the contract. Maintenance revenues are affected by the amount of license revenues from new customers and the retention rate for annual support contracts of existing customers. Growth in maintenance revenues contributed approximately 50% and 60% of the absolute dollar increase in total service revenues for the three and six months ended March 31, 2003, respectively, compared to the same periods in the prior year. This growth reflects an increase in our overall installed customer base compared to the prior year, and high retention rates of existing customers. Growth in consulting and training revenues, including implementations of our software for new customers and implementation of upgrades and enhancements to our software for existing customers, was responsible for the remainder of the increase in total service revenues for the three and six months ended March 31, 2003 over the prior year. We expect future service revenues to fluctuate based on new sales of our products and services and the related consulting and maintenance services provided, as well as the demand for upgrades and enhancements to our products.

     International Revenues.     We market our software and services through our direct sales organization in the United States, the United Kingdom, and Australia, and through strategic referral and reseller arrangements in the United States and international markets. Revenues from licenses and services to customers outside the United States were $2.1 million and $0.7 million for the three months ended March 31, 2003 and 2002, respectively, and $3.8 million and $1.5 million for the six months ended March 31, 2003 and 2002, respectively. Historically, as a result of the relatively small amount of our international sales, fluctuations in foreign currency exchange rates have not had a material effect on our operating results. As our products and services become more widely accepted in international markets, we expect international revenues to continue to grow, both in total dollars and as a percentage of total revenues.

Cost of Revenues

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     Cost of Subscription Revenues.      Cost of subscription revenues consists primarily of salaries and related expenses, server and storage fees, telecommunication charges, strategic referral and reseller fees, and amortization of deferred set-up costs. The cost of subscription revenues increased for the three and six months ended March 31, 2003 compared to the corresponding periods in the prior year primarily due to increased infrastructure costs, such as telecommunication and server storage fees, resulting from the addition of the Captura customer base. The cost of subscription revenues as a percentage of subscription revenues decreased for the three and six months ended March 31, 2003 compared to the same period in the prior year, primarily due to the low incremental cost incurred to host each new customer, including the acquired Captura customer base. We expect our quarterly total cost of subscription revenues to remain relatively consistent throughout the remainder of fiscal 2003.

     Cost of Service Revenues.     Cost of service revenues is comprised primarily of the salaries and related expenses (including travel and entertainment expenses) associated with employees and contractors who provide maintenance, consulting services, and product training. The modest increase in cost of service revenues for the three and six months ended March 31, 2003 compared to the same periods in the prior year was comprised of salaries and related expenses representing approximately 200% and 275% of the absolute dollar increase. These increases were offset in part by reductions in overhead costs, such as depreciation and facilities, representing approximately 115% and 190%, respectively. Cost of service revenues, both in absolute dollars and as a percentage of service revenues, may vary between periods due to changes in the level and mix of services provided.

Operating Expenses

     Sales and Marketing.      Sales and marketing expenses consist primarily of salaries and related expenses (including sales commissions and travel and entertainment expenses), overhead costs for our sales and marketing personnel, and, to a lesser extent, costs of advertising, trade shows, and other promotional activities. The decrease in sales and marketing expenses in the three and six months ended March 31, 2003 compared to the corresponding periods in the prior year was primarily due to measures taken to increase our direct sales force’s productivity and an increase in the productivity of our indirect channel sales, all resulting in a decrease in salaries and related expenses. Reductions in sales and marketing salaries and related expenses and overhead costs accounted for approximately 85% and 80% of the decrease for the first three and six months of fiscal 2003, respectively. The remainder of this decrease was attributable to reductions in advertising and other promotional activities. We expect total sales and marketing expenses as a percentage of total revenues to decrease in fiscal 2003, compared to fiscal 2002, as a result of a greater portion of new unit sales being generated through our strategic referral and reseller partners, as well as our continued efforts to increase productivity across the direct sales channel.

     Research and Development.     Research and development expenses consist primarily of salaries and related expenses as well as overhead costs associated with employees and contractors utilized in software engineering, program management, and quality assurance. The decrease in research and development expenses in the three months ended March 31, 2003 from the prior year corresponding period was due to reductions in overhead costs. In the six months ended March 31, 2003, expenses remained flat compared to the same period in fiscal 2002. This is attributed to an increase during the first quarter of fiscal 2003 in the number of employees utilized in software engineering, program management, and quality assurance, as a result of our acquisition of Captura, which was offset in its entirety by the reductions in overhead costs during the second quarter of fiscal 2003 as indicated above. In fiscal 2003, we expect our total research and development costs to increase modestly compared to fiscal 2002 as we continue to focus on product innovation and enhancement to enable us to extend our leadership position in Corporate Expense Management software and services.

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     In the development of our new products and enhancements of existing products, technological feasibility of the software is not established until substantially all product development is complete. Historically, software development costs eligible for capitalization have been insignificant, and all costs related to research and development have been expensed as incurred.

     General and Administrative.     General and administrative expenses consist primarily of salaries and related expenses as well as overhead costs associated with employees and contractors in finance, human resources, legal, information technology, and facilities, and to a lesser extent, the provision for bad debts. The increase in general and administrative expenses in the quarter ended March 31, 2003 compared to 2002 was primarily due to increased professional fees incurred in preparation for compliance with various requirements of the Sarbanes-Oxley Act of 2002. The decrease in expenses in the six months ended March 31, 2003 compared to 2002 was primarily attributable to our company-wide efforts to reduce costs, which included reductions in salaries and related expeses and overhead costs. These reductions accounted for 91% of the absolute dollar decrease. The remainder of this decrease was related to a reduction in the provision for bad debts, which was offset in its entirety by the increase in professional fees as noted above. In fiscal 2003, we expect total general and administrative expenses decrease slightly compared to fiscal 2002.

     Amortization of Intangible Assets.     Amortization of intangible assets in the three and six months ended March 31, 2003 represents amortization of the acquired customer base intangible asset in connection with our July 2002 acquisition of Captura. This intangible is being ratably amortized over five years, consistent with the expected cash flows from the underlying customer contracts.

Interest Income and Interest Expense