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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2003

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-30389

EXE TECHNOLOGIES, INC.

8787 Stemmons Freeway
Dallas, Texas 75247
(Address including zip code of principal executive offices)

(214) 775-6000
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 31, 2003.

Common stock, $0.01 par value, 6,669,748 shares outstanding.

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EXE TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EXE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

See accompanying notes.

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EXE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See accompanying notes.

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EXE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

See accompanying notes.

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EXE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Principles of Consolidation and Basis of Presentation

     EXE Technologies, Inc. (the Company or EXE) provides software that drives customers’ supply chain execution processes, including fulfillment, warehousing, distribution, and inventory management. The Company operates from its headquarters in Dallas, Texas, and through its various subsidiary and sales offices serving North America, Europe, the Middle East, Asia and Australia. The accompanying unaudited consolidated financial statements include the accounts of EXE Technologies, Inc. and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

     The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for fiscal year end financial statements. In the opinion of management, all adjustments (consisting only of normal recurring entries) considered necessary for a fair presentation of the results have been included for the interim periods presented. Operating results for the three and nine month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2003. These statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Form 10-K for the year ended December 31, 2002.

     All share and per share amounts in the accompanying financial statements and footnotes have been adjusted to reflect the Company’s one for seven reverse stock split which was effective January 2, 2003. Certain amounts in prior years financial statements have been reclassified to conform to the current year presentation.

2. Pending Merger with a Subsidiary of SSA Global Technologies, Inc.

     On August 15, 2003, the Company entered into a definitive agreement with SSA Global Technologies, Inc. (SSA GT), under which a subsidiary of SSA GT will merge into the Company and all holders of the Company’s outstanding common stock will receive $7.10 per share in cash. The acquisition is subject to approval of a majority of the Company’s stockholders as well as regulatory and certain other customary conditions. The Company intends to mail a proxy statement to our stockholders and hold a stockholders’ meeting to vote on the merger during the fourth quarter of 2003. If the stockholders approve the merger, it is anticipated that the acquisition will be completed shortly thereafter. Once the acquisition is completed, the Company will be a wholly-owned subsidiary of SSA GT, and the Company’s outstanding common stock will no longer be publicly traded.

     A company, who owns 30.1% of the Company's shares of common stock, also owns 25.0% of the capital stock of SSA GT.

     Approximately $0.8 million of merger-related costs, including outside legal costs, investment banker fees, accounting fees, and printing costs were expensed in the third quarter of 2003. Additional merger-related costs are expected to be incurred in the fourth quarter of 2003.

3. Net Loss Per Share

     The Company computes net income (loss) per share in accordance with the provisions of Statement of Financial Accounting Standards No. 128, “Earnings per Share” (SFAS 128). Basic net income (loss) per common share is computed using the weighted average number of shares of common stock outstanding during each period.

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EXE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3. Net Loss Per Share (continued)

     Diluted net income (loss) per common share is computed using the weighted average number of shares of common stock outstanding during each period and common equivalent shares consisting of warrants and stock options (using the treasury stock method), if dilutive. Diluted loss per common share is the same as basic loss per common share for all periods presented because all potentially dilutive securities were anti-dilutive. The following table sets forth anti-dilutive securities that have been excluded from diluted earnings per share for the periods presented:

4. Comprehensive Loss

     Comprehensive loss includes foreign currency translation gains (losses) and unrealized gains (losses) on securities available for sale. The following table sets forth the calculation of comprehensive loss for the periods presented:

5. Stock-Based Compensation Plans

     The Company accounts for its stock-based compensation plans utilizing the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). Under APB 25, if the exercise price of an employee’s stock option equals or exceeds the fair market value of the underlying stock on the date of grant, no compensation expense is recognized. Any compensation expense associated with employee stock options is recognized ratably over the vesting period of the underlying option. The Company accounts for stock-based compensation for non-employees under the fair value method prescribed by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123).

     Although SFAS 123 allows the APB 25 guidelines to be applied to accounting for stock options, SFAS 123 requires the disclosure of pro forma net income (loss) and earnings (loss) per share information as if the Company had accounted for its employee stock options under the fair value method. The following table sets forth the pro forma information as if the provisions of SFAS 123 had been applied to account for stock-based employee compensation:

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EXE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5. Stock-Based Compensation Plans (continued)

     The fair value for options was estimated at the date of grant using a Black-Scholes options pricing model and the following weighted-average assumptions for 2002 and 2003: a risk-free interest rate of 4.47% in 2002 and 2.01% for the nine months ended September 30, 2003; no dividend; an expected life of three to five years; and a volatility for grants of 0.93 in 2002 and 0.82 for the nine months ended September 30, 2003. No options were granted during the three months ended September 30, 2003.

6. Segment Information

     The Company provides software that drives customers’ supply chain execution processes, including fulfillment, warehousing, distribution, and inventory management. All financial information is reviewed on a consolidated basis with additional information by geographic region used to make operating decisions and assess the results of the Company. Total assets are presented net of intercompany receivables and payables. The Company’s geographic information as of and for the three and nine months ended September 30, 2002 and 2003 is as follows:

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EXE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6. Segment Information (continued)

7. Income Taxes

     Income tax provisions are primarily due to foreign withholding taxes and taxes on income earned by foreign subsidiaries. The Company has established a valuation allowance to reserve its net deferred tax assets due to the uncertainty of the timing and amount of future taxable income.

8. Commitments and Contingencies

     The Company is involved in various legal actions and claims that arise in the normal course of business. In the opinion of management, the final disposition of these matters will not have a material adverse effect on the Company’s business, financial condition, cash flows or results of operations. The Company establishes accruals for losses related to such matters that are probable and reasonably estimable. However, an unfavorable outcome of some or all of these matters could have a material effect on the Company’s business, financial condition, cash flows and results of operations.

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EXE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

9. Employee Severance and Lease Abandonment

     During the years ended December 31, 2001 and 2002, the Company implemented various cost reduction actions to lower the Company’s cost structure, including employee severance, the write-off of equipment and the abandonment of certain leased facilities. As a result, charges totaling approximately $14.3 million and $9.7 million were charged against operating results during the years ended December 31, 2001 and 2002, respectively. Of these charges, $6.5 million were recorded during the nine months ended September 30, 2002, including $1.4 million for severance and other employee related costs for the termination of approximately 60 services, sales and marketing, development and administrative employees, $4.0 million for abandoned facility losses, and $1.1 million for other facility closure costs primarily for the write-down of property and equipment. Additionally, the 2002 charges included approximately $1.4 million in severance paid to the Company’s former Chief Executive Officer in March 2003, in accordance with his employment agreement.

     The Company has made cash payments of approximately $13.3 million, of which approximately $4.0 million and $4.4 million was paid during the nine months ended September 30, 2002 and 2003, respectively. Additionally, the Company has written-off approximately $1.6 million in non-cash charges against the reserves established for these various cost reduction actions.

     Substantially all of the remaining liability of $9.1 million at September 30, 2003 related to the abandoned Dallas facility lease. Approximately $5.6 million of the liability is classified as a long-term liability and is expected to be paid through 2009. The estimated liability includes estimates pertaining to sublease rates and vacancy periods. Although the Company does not anticipate significant changes, the actual costs may differ from these estimates.

     At September 30, 2003, the Company occupied less than 50% of the Dallas facility, most of which has been abandoned. The Company is attempting to sublease the unoccupied leased space and continues to have discussions with the lessor regarding a restructuring or a termination of the Dallas lease. If the Company is able to reach a settlement with the lessor on terms favorable to the Company, the settlement payment could significantly increase the Company’s near term cash requirements, but could reduce monthly lease payments in the future. If a satisfactory settlement cannot be reached and the unoccupied space cannot be subleased, the Company will be required to continue to make significant scheduled lease payments and pay operating expenses over the remaining lease term and this could result in additional reserve requirements above those recorded at September 30, 2003.

10. Related Party Transactions

     In October 2002, the Company entered into an agreement with a company in India to provide development services, with a minimum obligation of $2.1 million over a three-year period. A stockholder of the Company, who owns approximately 6% of the Company's outstanding shares, has an indirect financial interest in the India operation. The Company believes that the terms of this agreement are on an arms length basis. The Company has expensed $1.0 million for these development services during the nine months ended September 30, 2003.

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Management’s discussion and analysis of the financial condition and results of operations should be read in conjunction with the Certain Factors That May Affect Future Results included elsewhere in this Form 10-Q and the Company’s Critical Accounting Policies and Estimates included in the Company’s Form 10-K for the year ended December 31, 2002.

Overview

     We provide software that drives customers’ supply chain execution processes, including fulfillment, warehousing, distribution and inventory management. Our software solutions deliver the vital, frontline supply chain intelligence necessary to drive customer execution decisions and processes. Our products and services help customers worldwide to increase revenue, reduce distribution costs, manage inventory across the supply chain, and improve customer loyalty and satisfaction. We provide global service and support for our software from established facilities in North America, Europe, the Middle East, Asia, and Australia.

     In October 2002, we were notified by the NASDAQ Stock Market, Inc. that our common stock price had failed to maintain a minimum closing bid price greater than or equal to $1.00 for 30 consecutive trading days and thereby subjected our common stock to possible delisting from NASDAQ. In response, effective January 2, 2003, we completed a one for seven reverse stock split.

     We derive our revenue from the sale of software licenses; product related consulting, training, maintenance and support (collectively, “services and maintenance”); and the resale of software and equipment.

     Our business has been adversely impacted for the last two years by a number of factors. A major factor has been the global slowdown in customer spending for large-scale IT projects. We made significant progress in lowering our cost structure in the first nine months of 2003. Although total revenues of $54.3 million for the first nine months of 2003 were substantially the same level as recorded in the first nine months of 2002, our operating loss of $4.7 million in the 2003 period was significantly improved over the $16.9 million operating loss (which includes charges of $6.5 million for lease abandonment, employee severance and other facility closure costs) incurred in the same period of 2002. The improvement was due primarily to higher service and support margins and significantly lower operating costs. Services and support margins improved from 34.9% in the nine months of 2002 to 37.6% for the same period in 2003. Sales and marketing, research and development and general and administrative expenses declined approximately $5.4 million, or 16.9%, compared to the first nine months of 2002. Although our net loss was significantly lower than in the previous quarters, we continue to have operating losses.

     In response to the less than satisfactory operating performance, we took a number of actions in 2002 to improve operating performance. First, we substantially reduced our cost structure to more closely align with our current levels of revenue. These actions included, among other things, a 17% reduction in global headcount, the closure of our Philadelphia office, the consolidation of our North American professional services and development operations in Dallas and expanding our lower-cost offshore development activities. We also replaced our Chief Executive Officer and Chief Financial Officer, and eliminated the Chief Operating Officer function.

     As a result of these actions in 2002 and other actions taken in 2001, we made provisions for severance and related employee costs, facility closure costs and estimated losses on abandoned facilities totaling $9.7 million and $14.3 million in 2002 and 2001, respectively. Of these charges, $6.5 million were recorded in the nine months ended September 30, 2002. The remaining liability at September 30, 2003 is approximately $9.1 million, of which $5.6 million is long-term and expected to be paid through 2009. Should additional cost reduction actions be required in the future or if management’s estimates of the losses on the current abandoned facility leases are inadequate, future provisions could be required.

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     On August 15, 2003, we entered into a definitive agreement with SSA Global Technologies, Inc. (SSA GT), under which a subsidiary of SSA GT will merge into EXE and all holders of our outstanding common stock will receive $7.10 per share in cash. The acquisition is subject to approval of a majority of our stockholders as well as regulatory and certain other customary conditions. We intend to mail a proxy statement to our stockholders and hold a stockholders’ meeting to vote on the merger during the fourth quarter of 2003. If the stockholders approve the merger, it is anticipated that the acquisition will be completed shortly thereafter. Once the acquisition is completed, the Company will be a wholly-owned subsidiary of SSA GT, and the Company’s outstanding common stock will no longer be publicly traded.

     A company, who owns 30.1% of the Company's shares of common stock, also owns 25.0% of the capital stock of SSA GT.

Critical Accounting Policies and Estimates

     Our discussion and analysis of our financial condition and the 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 management to make judgments regarding estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management bases its judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not apparent from other sources. Although management evaluates these judgments on an ongoing basis, there can be no assurance that actual results will not ultimately differ from those estimates. For a more detailed explanation of these judgments, including our judgments relating to revenue recognition, allowance for doubtful accounts and adjustments, goodwill and intangible impairment, accruals for lease abandonment and employee termination costs, related party transactions, and contingencies you may refer to our Annual Report on Form 10-K for the year ended December 31, 2002.

Results of Operations

Three Months Ended September 30, 2003 Compared to the Three Months Ended September 30, 2002

Revenue

     Total Revenue. Total revenue increased $2.4 million, or 14.1%, to $19.1 million for the three months ended September 30, 2003, from $16.7 million for the three months ended September 30, 2002. International revenue accounted for 48.8% and 55.0% of total revenue during the three months ended September 30, 2003 and 2002, respectively. No single customer accounted for more than 10.0% of total revenue during the three months ended September 30, 2003 or 2002.

     Software License. Software license revenue of $2.8 million for the three months ended September 30, 2003 was $0.1 million, or 4.3%, higher than the $2.7 million recorded during the three months ended September 30, 2002. Software license revenue as a percentage of total revenue excluding reimbursable expenses was 15.0% for the three months ended September 30, 2003 versus 16.5% for the three months ended September 30, 2002.

     Services and Maintenance. Services and maintenance revenue increased $0.1 million, or 1.0%, to $12.4 million for the three months ended September 30, 2003 from $12.3 million for the three months ended September 30, 2002. Services and maintenance revenue as a percentage of total revenue excluding reimbursable expenses declined to 66.3% for the three months ended September 30, 2003 from 75.4% for the three months ended September 30, 2002. This decline is largely attributed to a larger volume of resale software and equipment shipments during the three months ended September 30, 2003.

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     Resale Software and Equipment. Resale software and equipment revenue increased $2.2 million to $3.5 million for the three months ended September 30, 2003, from $1.3 million for the three months ended September 30, 2002. Resale software and equipment as a percentage of total revenue excluding reimbursable expenses was 18.6% for the three months ended September 30, 2003 versus 8.1% for the three months ended September 30, 2002. This increase was due primarily to a higher volume of shipments of hardware related to voice technology in the North American region.

Costs and Expenses

     Cost of Software Licenses. Cost of software licenses consists primarily of royalties associated with software used to develop our software products, the cost of reproduction, and the cost of complementary software applications that we purchase to sell to our customers. Cost of software licenses represented 7.8% of software license revenue for the three months ended September 30, 2003 and 8.8% for the three months ended September 30, 2002.

     Cost of Services and Maintenance. Cost of services and maintenance consists primarily of salaries of professional staff and costs associated with implementation, consulting and training services, hotline telephone support, new releases of software and updating user documentation. As a percentage of services and maintenance revenue, cost of services and maintenance was approximately 60.5% for the three months ended September 30, 2003 compared to 64.0% for the three months ended September 30, 2002. Cost of services and maintenance declined 4.5%, or $0.4 million, to $7.5 million for the three months ended September 30, 2003, from $7.9 million for the three months ended September 30, 2002. Increased costs during the current quarter associated with the use of subcontractors to perform a large implementation rollout project for a customer in Japan were substantially offset by lower internal staff costs and higher staff utilization in the North American and European regions.

     Cost of Resale Software and Equipment. Cost of resale software and equipment consists primarily of the costs of the database software tools and hardware we purchase to resell to our customers. Cost of resale software and equipment increased $1.6 million, or 151.7%, to $2.7 million for the three months ended September 30, 2003, from $1.1 million for the three months ended September 30, 2002. This increase was due to increased resale transactions in our North American region during the current quarter. As a percentage of resale software and equipment revenue, cost of resale software and equipment was 78.0% for the three months ended September 30, 2003, and 81.8% for the three months ended September 30, 2002. This improvement was attributed to increased sales of higher margin database software during the current quarter.

     Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions, bonuses, recruiting costs, travel, marketing materials and trade shows. Sales and marketing expenses declined $1.1 million, or 23.4%, to $3.4 million for the three months ended September 30, 2003, from $4.5 million for the three months ended September 30, 2002. The decline was related primarily to a 30% reduction in the number of sales and marketing employees and lower marketing expense. As a percentage of total revenue excluding reimbursable expenses, sales and marketing expenses declined to 18.3% for the three months ended September 30, 2003, from 27.5% for the three months ended September 30, 2002.

     Research and Development. Research and development expenses consist primarily of salaries and other personnel-related costs for our product development activities. Research and development expenses declined $0.6 million, or 20.7%, to $2.3 million for the three months ended September 30, 2003, from $2.9 million for the three months ended September 30, 2002. As a percentage of total revenue excluding reimbursable expenses, research and development expenses decreased to 12.1% for the three months ended September 30, 2003, from 17.5% for the three months ended September 30, 2002. As a part of our cost reduction program, in late 2002 we signed a three-year agreement with a company to provide offshore development resources in India at a cost that is lower than our historic development costs. Additionally, we reduced the number of full time research and development employees in North America.

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     General and Administrative. General and administrative expenses consist primarily of salaries and other personnel-related costs of our finance, human resources, information systems, administrative, legal and executive departments, insurance costs and the costs associated with legal, accounting, and other administrative services. General and administrative costs declined $0.3 million, or 9.0%, to $2.6 million for the three months ended September 30, 2003, from $2.8 million for the three months ended September 30, 2002. This decline was due primarily to a reduction in administrative personnel and lower legal costs. As a percentage of total revenue excluding reimbursable expenses, general and administrative expenses declined to 13.7% for the three months ended September 30, 2003, from 17.2% for the three months ended September 30, 2002.

     Amortization of Intangible Assets. Amortization of intangible assets relates primarily to acquired developed software technology and assets acquired in connection with the 1997 acquisition of Dallas Systems. Amortization of intangible assets decreased $0.1 million to $0.2 million for the three months ended September 30, 2003, from $0.3 million for the three months ended September 30, 2002. The decline from the prior year is attributed to intangible assets acquired in the 1997 acquisition of Dallas Systems that were fully amortized in the final quarter of the prior year. In November of 2001 and July of 2002, we acquired a total of $2.0 million of developed software technology that has resulted in $0.2 million in amortization during the three months ended September 30, 2003.

     Non-Cash Warrant and Stock Compensation. Non-cash warrant and stock compensation expense relates to the amortization of deferred compensation recorded primarily in connection with stock options granted to employees. The deferred compensation recorded represents the difference between the exercise price and the deemed fair value of our common stock on the date of grant of these options. Non-cash warrant and stock compensation expense decreased $0.1 million to $0.1 million for the three months ended September 30, 2003, from $0.2 million for the three months ended September 30, 2002.

     Other Income (Expense). Other income (expense) consists of gains and losses from currency fluctuations, merger costs, interest expense, and interest income on investments. We reported net other expense of $0.3 million during the three months ended September 30, 2003 compared to net other income of $0.2 million during the three months ended September 30, 2002. The third quarter of 2003 net other expense included $0.8 million of merger-related costs, which were partially reduced by interest income and foreign currency gains. In the third quarter of 2002, there were no merger-related costs, and interest income and foreign currency gains were lower than in the third quarter of 2003. The merger-related costs consist primarily of outside legal costs, investment banker fees, accounting fees, and printing costs associated with the pending merger with SSA GT. We expect to incur additional merger-related costs in the fourth quarter of 2003.

     Income Taxes. Income tax provision increased $0.3 million to $0.4 million during the three months ended September 30, 2003, from $0.1 million during the three months ended September 30, 2002. The income tax provisions were primarily due to foreign withholding taxes and taxes on income earned by foreign subsidiaries.

Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September 30, 2002

Revenue

     Total Revenue. Total revenue declined $0.5 million, or 0.9%, to $54.3 million for the nine months ended September 30, 2003, from $54.8 million for the nine months ended September 30, 2002. International revenue accounted for 50.4% and 52.9% of total revenue during the nine months ended September 30, 2003 and 2002, respectively. No single customer accounted for more than 10.0% of total revenue during the nine months ended September 30, 2003 or 2002.

     Software License. Software license revenue of $9.0 million for the nine months ended September 30, 2003 was $1.0 million, or 10.1%, lower than the $10.0 million recorded during the nine months ended September 30, 2002. Software license revenue as a percentage of total revenue excluding reimbursable

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expenses was 16.9% for the nine months ended September 30, 2003 versus 18.7% for the nine months ended September 30, 2002. The lower software license revenue primarily occurred in our North American and Asia Pacific regions.

     Services and Maintenance. Services and maintenance revenue declined $0.9 million, or 2.4%, to $36.1 million for the nine months ended September 30, 2003 from $37.0 million for the nine months ended September 30, 2002. The lower license revenue of the last several quarters has impacted services and maintenance revenues, since there have been fewer software implementation projects. As a result, revenue from consulting services has declined. Services and maintenance revenue as a percentage of total revenue excluding reimbursable expenses decreased to 68.0% for the nine months ended September 30, 2003 from 69.3% for the nine months ended September 30, 2002.

     Resale Software and Equipment. Resale software and equipment revenue increased $1.6 million, or 25.0%, to $8.0 million for the nine months ended September 30, 2003, from $6.4 million for the nine months ended September 30, 2002. This increase is primarily attributed to additional sales of voice products within our North American region despite the exclusion of $0.5 million of revenue associated with resale equipment sold to a customer during the first quarter of 2003 that subsequently filed for bankruptcy. We did not recognize this revenue from the resale equipment sale and provided an estimated loss for the cost of the equipment. Resale software and equipment as a percentage of total revenue excluding reimbursable expenses was 15.1% for the nine months ended September 30, 2003 versus 12.0% for the nine months ended September 30, 2002.

Costs and Expenses

     Cost of Software Licenses. Cost of software licenses represented 7.7% of software license revenue for the nine months ended September 30, 2003 and 4.4% for the nine months ended September 30, 2002. The increase in cost of software licenses as a percentage of software license revenue was attributed to an increase in purchasing of complementary software that was sold during the nine months ended September 30, 2003.

     Cost of Services and Maintenance. Cost of services and maintenance were lower by 6.5%, or $1.6 million, to $22.5 million for the nine months ended September 30, 2003, from $24.1 million for the nine months ended September 30, 2002. As a percentage of services and maintenance revenue, cost of services and maintenance was approximately 62.4% for the nine months ended September 30, 2003 compared to 65.1% for the nine months ended September 30, 2002. Increased costs during the current year associated with the use of subcontractors to perform a large implementation rollout project for a customer in Japan were substantially offset by lower internal staff costs and higher utilization in the North American and European regions.

     Cost of Resale Software and Equipment. Cost of resale software and equipment increased $1.0 million, or 19.6%, to $6.3 million for the nine months ended September 30, 2003, from $5.3 million for the nine months ended September 30, 2002. As a percentage of resale software and equipment revenue, cost of resale software and equipment declined to 79.1% for the nine months ended September 30, 2003, compared to 82.7% for the nine months ended September 30, 2002, due to sales of higher margin database software during 2003.

     Estimated Loss on Resale Equipment Sold to Company in Bankruptcy. We sold approximately $0.5 million of resale equipment early in the first quarter of 2003 to a customer who subsequently filed bankruptcy in April 2003. As a result, we did not recognize the revenue from the equipment sale and provided $0.5 million loss for the cost of the equipment.

     Sales and Marketing. Sales and marketing expenses declined $2.9 million, or 20.6%, to $11.5 million for the nine months ended September 30, 2003, from $14.4 million for the nine months ended September 30, 2002. The decline was related primarily to a 27% reduction in the number of sales and marketing employees and lower marketing expense. As a percentage of total revenue excluding reimbursable expenses, sales and marketing expenses declined to 21.6% for the nine months ended September 30, 2003, from 27.1% for the nine months ended September 30, 2002.

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     Research and Development. Research and development expenses declined $1.7 million, or 19.9%, to $7.1 million for the nine months ended September 30, 2003, from $8.8 million for the nine months ended September 30, 2002. As a percentage of total revenue excluding reimbursable expenses, research and development expenses decreased to 13.3% for the nine months ended September 30, 2003, from 16.5% for the nine months ended September 30, 2002. As a part of our cost reduction program, in late 2002 we signed a three-year agreement with a company to provide offshore development resources in India at a cost that is lower than our historic development costs. Additionally, we reduced the number of full time research and development employees in North America.

     General and Administrative. General and administrative costs declined $0.7 million, or 8.0%, to $8.3 million for the nine months ended September 30, 2003, from $9.0 million for the nine months ended September 30, 2002. The decline is largely attributed to lower depreciation costs due to asset disposals and retirements and lower payroll cost due to staff reductions. As a percentage of total revenue, excluding reimbursable expenses, general and administrative expenses were 15.6% for the nine months ended September 30, 2003 and 16.9% for the nine months ended September 30, 2002.

     Amortization of Intangible Assets. Amortization of intangible assets relates primarily to acquired developed software technology and assets acquired in connection with the 1997 acquisition of Dallas Systems. Amortization of intangible assets decreased $0.4 million to $0.5 million for the nine months ended September 30, 2003, from $0.9 million for the nine months ended September 30, 2002. The decline from the prior year is attributed to intangible assets acquired in the 1997 acquisition of Dallas Systems that were fully amortized in the final quarter of the prior year. In November of 2001 and July of 2002, we acquired a total of $2.0 million of developed software technology that has resulted in $0.4 million in amortization during the nine months ended September 30, 2003.

     Non-Cash Warrant and Stock Compensation. Non-cash warrant and stock compensation expense relates to the amortization of deferred compensation recorded primarily in connection with stock options granted to employees. The deferred compensation recorded represents the difference between the exercise price and the deemed fair value of our common stock on the date of grant of these options. Non-cash warrant and stock compensation expense decreased $0.3 million to $0.4 million for the nine months ended September 30, 2003, from $0.7 million for the nine months ended September 30, 2002.

     Estimated Provisions for Lease Abandonment, Employee Severance and Other Facility Closure Costs. During the years ended December 31, 2001 and 2002, the Company implemented various cost reduction actions to lower the Company’s cost structure, including employee severance, the write-off of equipment and the abandonment of certain leased facilities. As a result, charges totaling approximately $14.3 million and $9.7 million were charged against operating results in 2001 and 2002, respectively. Of these charges, $6.5 million were recorded during the nine months ended September 30, 2002.

     We have made payments of approximately $13.3 million, of which approximately $4.4 million were paid during the nine months ended September 30, 2003, and have written off approximately $1.6 million in non-cash charges against the reserves established for the various cost reduction actions that occurred during 2002 and 2001. The remaining liability at September 30, 2003 is approximately $9.1 million, of which $5.6 million is long-term and is expected to be paid through 2009. The reserves include estimates pertaining to sublease rates, vacancy periods, employee separation costs and settlement of contractual obligations. Although we do not anticipate significant changes, the actual costs may differ from these estimates.

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     Other Income (Expense). Other income declined $1.0 million to $0.5 million during the nine months ended September 30, 2003 compared to $1.5 million during the nine months ended September 30, 2002. This decline was primarily attributed to merger costs associated with our pending merger with SSA GT and lower interest earned on investment securities.

     Income Taxes. An income tax provision of $0.8 million and $0.3 million was recognized during the nine months ended September 30, 2003 and 2002, respectively. The income tax provisions were primarily due to foreign withholding taxes and taxes on income earned by foreign subsidiaries.

Liquidity and Capital Resources

     We have funded our operations through the issuance of our preferred and common stock, bank borrowings and cash flow from operations. As of September 30, 2003 we had approximately $29.4 million in cash and marketable securities, a decline of approximately $8.0 million from the end of 2002.

     Net cash used in operating activities was approximately $7.4 million for the nine months ended September 30, 2003. The $5.0 million net loss includes approximately $3.0 million of non-cash items (depreciation and amortization, provision for losses on receivables, amortization of deferred compensation, and minority interest), and operating assets and liabilities consumed approximately $5.4 million of cash. Although we generated approximately $1.9 million of cash by lowering our receivables, we used approximately $7.3 million of cash primarily from the reduction of accounts payable and accrued liabilities. Receivable days declined from 80 days in the fourth quarter of 2002 to 68 days in the third quarter of 2003. A portion of the accounts payable reduction was due to payments to resale software and equipment vendors related to resale equipment deliveries that were made in the fourth quarter of 2002. The reduction of accrued liabilities was due primarily to payments for employee severance related to cost reduction actions taken during 2002 and lease payments on our abandoned Dallas facility. Net cash used in operating activities was approximately $1.2 million for the comparable nine month period in 2002.

     During the nine months ended September 30, 2003, we used approximately $0.2 million for capital expenditures and approximately $0.4 million for scheduled debt payments. Capital expenditures in the first nine months of 2002 were approximately $0.6 million. We expect that capital expenditures will not exceed $1.0 million for the next 12 months.

     In October 2002, we entered into a revolving line of credit agreement with a financial institution under which we can borrow up to $10.0 million over a two-year period. The agreement contains certain financial covenants, including a minimum $10.0 million cash and marketable securities balance, restrictions on dividends and the facility is secured with all of our tangible assets. Borrowings for half of the revolving credit line will be based on a defined borrowing base, while the balance does not contain this restriction. Interest on any borrowings will be at the prime rate, and we will pay a fee on the unused portion of the line of credit of 0.375% per annum. As of September 30, 2003, we have had no borrowings under this agreement.

     At the end of September 30, 2003, we had operating lease obligations of approximately $41.6 million. Approximately $36.6 million of the total lease obligations relate to our Dallas facility lease for approximately 195,000 square feet, which expires in 2015. Currently, we occupy less than 50% of the Dallas facility, and we are attempting to sublease the unoccupied leased space. A provision has been made for estimated losses on the portion of the Dallas lease that has been abandoned (see Note 9 of the Notes to the Consolidated Financial Statements included elsewhere herein), but cash payments will be required for the remaining term of the existing lease obligation.

     We have had discussions with the lessor regarding a restructuring or a termination of the Dallas lease. To date, we have been unable to reach an agreement acceptable to us. If we are able to reach a settlement with the lessor on terms favorable to the Company, the settlement payment could significantly increase our near term cash requirements, but could reduce monthly lease payments in the future. If a satisfactory settlement cannot be reached and the unoccupied space cannot be subleased, we will be required to continue to make the significant

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scheduled lease payments and pay operating expenses over the remaining lease term and this could result in additional reserve requirements above those recorded at September 30, 2003.

     We expect to incur and pay significant additional merger-related costs in the fourth quarter of 2003 and pay for some of the merger-related costs incurred in the third quarter, whether or not the merger with SSA GT is consummated.

     We believe that our existing working capital and the availability of cash under the revolving credit line will be sufficient to fund our operations for at least the next year. However, there can be no assurance that we will not require additional financing in the future. We cannot be sure that we will be able to obtain any additional required financing or that, if we can, the terms will be acceptable to us.

     We do not engage in any activities involving special purpose entities or off-balance sheet financing.

Special Note Regarding Forward-Looking Statements

     In addition to historical information, this filing and our Annual Report on Form 10-K contain forward-looking statements. Any statements contained herein (including, without limitation, statements to the effect that EXE or its management “believes,” “expects,” “anticipates,” “plans,” “estimates,” “predicts,” “seeks,” “intends” and similar expressions) that relate to future events or conditions should be considered forward-looking statements. The forward-looking statements are made pursuant to safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled “Certain Factors That May Affect Future Results” below. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, whether as a result of new information, future events or otherwise.

Certain Factors That May Affect Future Results

Risks Relating to Our Business

Should the merger with SSA Global Technologies, Inc. not be consummated, our common stock price could decline significantly and our business could be negatively impacted.

     On August 15, 2003, we entered into a definitive agreement with SSA GT, under which a subsidiary of SSA GT will merge into EXE and all holders of our outstanding common stock will receive $7.10 per share in cash. The acquisition is subject to approval of a majority of our stockholders as well as regulatory and certain other customary conditions. We intend to mail a proxy statement to our stockholders and hold a stockholders’ meeting to vote on the merger during the fourth quarter of 2003. If the stockholders approve the merger, it is anticipated that the acquisition will be completed shortly thereafter. Once the acquisition is completed, we will be a wholly-owned subsidiary of SSA GT, and our outstanding common stock will no longer be publicly traded.

     Although we expect the merger to be consummated, it is possible that a majority of our stockholders could vote against the merger or that one of the customary closing conditions is not met. If so, the merger would not be consummated and we would remain a publicly traded company. Should the merger not be completed, our stock price could decline significantly. Prior to the announcement of the proposed merger, our stock traded in the $6.00 per share range. Subsequent to the public announcement of the proposed merger, our stock traded in the $7.00 to $7.05 per share range. Additionally, potential negative publicity of the merger not being completed could adversely affect our future operating performance.

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Our customers may continue to delay or cancel spending on software and services because of the current economic climate.

     Since the beginning of 2001, some companies have experienced financial difficulties or uncertainty and, as a result, have delayed or canceled spending on information technology projects such as fulfillment software and services. If companies continue to delay, or cancel, their information technology initiatives because of the current economic climate, or for other reasons, our business, financial condition and results of operations could be materially adversely affected.

We can give you no assurance that we will be able to maintain or grow our level of revenue or achieve profitability in the future.

     Our future operating results may be affected by any of the following factors:

•

a continued decline in general economic conditions;

•

the level of market acceptance of, and demand for, our software;

•

the overall growth rate of the markets in which we compete;

•

our competitors’ products and prices;

•

our ability to establish strategic marketing relationships;

•

our ability to develop and market new and enhanced products;

•

our ability to successfully train alliance companies and consulting organizations;

•

our ability to control costs;

•

changes in our products and services mix; and

•

our ability to train and expand our direct sales force and indirect distribution channels worldwide.

We may not be profitable in the future.

     With the exception of the third and fourth quarters of the year ended December 31, 2000, we have experienced quarterly and annual losses since the formation of EXE in September 1997. We experienced net losses of $63.9 million in 2001, $23.8 million in 2002 and $5.0 million for the nine months ended September 30, 2003. We may continue to incur losses on both a quarterly and an annual basis. Moreover, we expect to continue to incur significant sales and marketing, research and development and general and administrative expenses and, as a result, we will need to generate significant revenue to report net income in future periods. We may not achieve our planned growth or generate sufficient revenue to report net income in future periods.

Our non-cancelable, long-term lease of office space in Dallas, Texas is substantially in excess of our expected facility requirements resulting in significant future cash obligations for unused office space, which could negatively impact our financial condition in the future.

     We lease approximately 195,000 square feet of office space in Dallas, Texas under a lease that extends to 2015. Amounts due the landlord over the remaining term of the lease are in excess of $36.6 million. Currently, we occupy less than 50% of the Dallas facility and we are attempting to sublease the unoccupied leased space. A provision has been made for estimated losses on the portion of the Dallas lease that has been abandoned (see Note 9 of the Notes to the Consolidated Financial Statements included elsewhere herein), but cash payments will be required for the remaining term of the existing lease obligation.

     We have had discussions with the lessor regarding a restructuring or a termination of the Dallas lease. To date, we have been unable to reach an agreement acceptable to us. If we are able to reach a settlement with the lessor on terms favorable to the Company, the settlement payment could significantly increase our near term cash requirements, but could reduce monthly lease payments in the future. If a satisfactory settlement cannot be reached and the unoccupied space cannot be subleased, we will be required to continue to make the significant scheduled lease payments and pay operating expenses over the remaining lease term and this could result in additional reserve requirements above those recorded at September 30, 2003.

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Our revenue could decline if our customers do not continue to accept our existing products, including fulfillment and collaboration products.

     We expect to derive a majority of our product license revenue in the future from our fulfillment and collaboration products and their components. Our business depends on continued customer acceptance of these products and the release, introduction and customer acceptance of new products. We expect that we will continue to depend on revenue from new and enhanced versions of our fulfillment and collaboration products, and our revenue could decline if our target customers do not continue to adopt and expand their use of these products and their components.

Our quarterly operating results depend heavily on software license revenue, which is difficult to forecast and may fluctuate.

     Our quarterly software license revenue is difficult to forecast because our sales cycles, from initial evaluation to delivery of software, vary substantially from customer to customer. Revenue in any quarter is dependent on orders received, contracts signed and products shipped in that quarter. We typically recognize the majority of our revenue in the last month of the quarter, frequently in the last week or even days of the quarter. In addition, the timing of large individual license sales is difficult for us to predict, and, in some cases, transactions are concluded later than anticipated. Since our operating expenses are based on anticipated revenue levels and most of our operating expenses, particularly personnel and facilities costs, are relatively fixed in advance of any particular quarter, any revenue shortfall may cause fluctuations in operating results in any particular quarter. We can give you no assurance that revenue will grow in future periods, that revenue will grow at historical rates, or that we will achieve and maintain positive operating margins in future quarters. If revenue falls below our expectations in a particular quarter, our operating results could be harmed.

Because our sales cycles are lengthy and subject to uncertainties, it is difficult to forecast our sales, and the delay or failure of a significant software license transaction or our inability to anticipate a delay could harm our operating results.

     Our software is used for mission critical division- or enterprise-wide purposes and involves a significant commitment of resources by customers. A customer’s decision to license our software usually involves the evaluation of the available alternatives by a number of personnel in multiple functional and geographic areas, each often having specific and conflicting requirements. Accordingly, we typically must expend substantial resources educating prospective customers about the value of our solutions. For these and other reasons, the length of time between the date of initial contact with the potential customer and the execution of a software license agreement typically ranges from three to nine months, and is subject to delays over which we may have little or no control. As a result of the length and variability of the sales cycle for our software products, our ability to forecast the timing and amount of specific sales is limited, and the delay or failure to complete one or more anticipated large license transactions could harm our operating results.

We depend on the services of a number of key personnel. A loss of any of these personnel could disrupt our operations and result in reduced revenue.

     Our success depends on the continued services and performance of our senior management staff. The loss of the services of any of our senior management staff or key employees could seriously impair our ability to operate and achieve our objectives, which could reduce our revenue. We have employment agreements with all of our executive officers. However, these employment agreements do not prevent key employees from voluntarily terminating their employment with us.

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Failure to expand our alliance relationships with consulting firms and complementary software vendors and to establish new strategic alliances may slow acceptance of our software and delay the growth of our revenue.

     To supplement our direct sales force and our implementation capabilities, we have established strategic marketing alliances with consulting firms and complementary software vendors, and we rely on them to recommend our software to their customers and to periodically install and support our software. To increase our sales and implementation capabilities, one of our key strategies is to expand our existing relationships and establish new strategic alliances with consulting firms and complementary software vendors. The loss of, or failure to expand, existing relationships or our failure to establish new strategic alliances could limit the number of transactions we may complete, may result in our inability to recognize revenue and may harm our operating results.

If our new or enhanced products do not gain market acceptance, our business and results of operations would be harmed.

     The growth of our business will depend on the successful development, introduction and acceptance of new and enhanced versions of our products. The introduction of new or enhanced products requires that we manage the transition from existing products to these new or enhanced products. We have recently introduced our EXceed AIM and EXceed SNx software solutions to work in conjunction with our existing fulfillment software suite in order to extend our product reach into complementary markets. We expect to derive a portion of our revenues in the future from new and enhanced products currently being developed, including Exceed AIM and Exceed SNx. If EXceed AIM and EXceed SNx and our other new and enhanced products do not gain market acceptance, our revenues may decline. Factors that may affect the market acceptance of EXceed AIM and EXceed SNx and our other new and enhanced products, some of which are beyond our control, may include:

•

the changing requirements of our industry;

•

the performance, quality and price of our new and enhanced products; and

•

the availability, performance, quality and price of competing products and technologies.

We may experience delays in the scheduled introduction of new or upgraded software, and our software may contain undetected errors or “bugs,” resulting in loss of revenue and harm to our reputation.

     Historically, we have issued significant new software products or new releases of our software periodically, with interim releases issued more frequently. Our software is particularly complex, because it must perform in environments operating multiple computer systems and respond to customer demand for high performance fulfillment, warehousing and distribution applications and major new product enhancements. Our software requires long development and testing periods before it is commercially released. For example, the development cycle for the introduction of our EXceed Crossdock component took approximately nine months. If we experience delays in the scheduled introduction of new software or software upgrades, our customers may become dissatisfied and our reputation and operating results could be harmed.

     Also, despite testing by us, our software may contain undetected errors or “bugs.” In the past, we have discovered software bugs in new versions of our software after its release. We may experience software bugs in the future. These bugs could result in a delay or loss of revenue, diversion of development resources, damage to our reputation, increased service and warranty costs, or impaired market acceptance and sales of this software, any of which could harm our operating results.

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If we are unable to timely collect our accounts receivable, our cash flow will be harmed.

     Although we have recently improved on the time required to collect accounts receivable from our customers, there is no assurance that this trend will continue. Historically, we have experienced longer receivable collection periods that have largely been attributed to the deterioration of certain of our customers’ financial condition due to the negative economic climate in the United States and the international markets we serve. The failure of any significant customer to pay for our products on a timely basis could adversely affect our results of operations and our operating cash flow.

If we do not expand our customer base, our business may not grow.

     Our growth is dependent in part on our ability to attract new customers for our products. We derive a substantial portion of our revenue from the sale of additional products and services to our existing customers. If we are unable to expand our customer base by attracting new customers for our products, our business will suffer. In addition, a material reduction in the demand for our products and services from our existing customers would have a material adverse effect on our business, financial condition and results of operations.

Our international operations are subject to heightened risks. If any of these risks actually occur, our earnings could decline.

     International revenue accounted for approximately 50.4% of our total revenue during the nine months ended September 30, 2003, 52.2% of our total revenue during the year ended December 31, 2002, and 46.6% of our total revenue during the year ended December 31, 2001.

     Our international operations are subject to risks inherent in international business activities, including:

•

difficulty in staffing and managing geographically diverse operations;

•

longer accounts receivable payment cycles in certain countries;

•

compliance with a variety of foreign laws and regulations;

•

unexpected changes in regulatory requirements and overlap of different tax structures;

•

greater difficulty in safeguarding intellectual property;

•

trade restrictions;

•

changes in tariff rates and import and export licensing requirements; and

•

general economic conditions in international markets.

     In addition, we have expanded our offshore research and development activities. In the instance of a political upheaval in certain regions, our development process could be severely disrupted. Our operating results could be negatively impacted if these or other factors affect international operations.

Because many of our customers pay us in foreign currencies, we may be exposed to exchange rate risks and our profitability may suffer due to currency fluctuations.

     A majority of the revenue and expenses incurred by our international operations are denominated in currencies other than the United States dollar. In particular, our revenue and costs of operations in Japan and Singapore are denominated in Japanese Yen and Singapore Dollars, and in Europe some of our contracts are denominated in the Euro. Exchange rate fluctuations have caused and will continue to cause currency transaction gains and losses. We experienced currency transaction gains (losses) of $1.0 million for the nine months ended September 30, 2003, $1.2 million for the year ended December 31, 2002, and $(0.5) million for the year ended December 31, 2001. We can give you no assurance that currency transaction losses will not adversely affect our results in future periods.

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Our success depends on our ability to attract and retain key personnel, in particular knowledgeable and experienced sales and marketing personnel and professional services personnel. If we are unable to attract these personnel and use them efficiently, our ability to sell and implement our software could be harmed.

     We believe our success will depend significantly on our ability to attract, motivate and retain highly skilled technical, managerial, consulting, sales and marketing personnel and professional services personnel. We compete intensely for these personnel, and we may be unable to achieve our personnel goals. Our failure to attract, motivate and retain such highly skilled personnel could seriously limit our ability to expand our business.

     Our operating performance, personnel reductions and lower stock price over the last two years has made it difficult to retain key personnel. There is no assurance we will be able to retain our key personnel in the future.

     Also, we believe our success will depend on our ability to productively manage our personnel. Any significant growth in software license revenue will likely generate the need for more professional services personnel to deploy and implement software and to train customers. A shortage in the number of trained personnel, either within our Company or available from outside consulting firms, could limit our ability to implement our software on a timely and cost-effective basis. Our operating performance will suffer if we generate insufficient revenue to cover growth-related expenses, significantly strain management resources with additional responsibilities, fail to successfully expand our relationships and develop additional relationships with third-party implementers and complementary software vendors or fail to have sufficiently trained sales and marketing personnel and professional services personnel.

The length and complexity of our implementation cycle may result in implementation delays, which may cause customer dissatisfaction.

     The introduction of new products and the size and complexity of some of our software implementations can result in lengthy implementation cycles and may result in delays. These delays could result in customer dissatisfaction, which could adversely affect our reputation. Additional delays could result if we fail to attract, train and retain services personnel, or if our alliance companies fail to commit sufficient resources towards implementing our software. These delays and resulting customer dissatisfaction could harm our reputation and cause our revenue to decline.

The use of fixed-price service contracts subjects us to the risk that we may not successfully complete these contracts on budget.

     We offer software implementation and related consulting services to our customers. Although we typically provide services on a “time and material” basis, we have from time to time entered into fixed-price service contracts, and we expect that some customers will demand these contracts in the future. These contracts specify certain milestones to be met by us regardless of actual costs incurred in meeting those obligations. If we are unable to successfully complete these contracts on budget, our earnings could suffer.

We rely on software licenses that may be terminated or unavailable to us on commercially reasonable terms.

     We market and resell, under license, third-party software, including:

•

software embedded in our products;

•

software that enables our software to interact with other software systems or databases; and

•

software in conjunction with which our software operates.

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     We also license software tools used to develop our software and software for internal systems. We cannot assure you that the third-party software or software tools will continue to be available to us on commercially reasonable terms. The loss or inability to maintain any of these software licenses could result in delays or reductions in product shipments until equivalent software could be identified and licensed or compiled, which could harm our business.

We could be subject to legal actions by former personnel, which could be costly, divert management time and attention and harm our operating results.

     During 2001 and 2002, we terminated approximately 343 of our services, sales, development and administrative personnel. It is possible that some of these employees could bring legal actions against us under applicable federal, state or local laws. Any such claims, whether with or without merit, could subject us to costly litigation and the diversion of management time and attention, and successful claims could result in awards of damages to or reinstatement of former employees, any of which could harm our operating results.

Product liability and other claims related to our customers’ business operations could result in substantial costs.

     Many of our installations involve projects that are critical to the operations of our clients’ businesses and provide benefits that may be difficult to quantify. Any failure in a client’s system or any intellectual property infringement claims by third parties could result in a claim for substantial damages against us, regardless of our responsibility for the failure or for the alleged intellectual property infringement. We cannot assure you that our customer contracts will protect us in the event of any such claim. In addition, although we maintain general liability insurance coverage, including coverage for errors or omissions, we cannot assure you that this coverage will continue to be available on reasonable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not disclaim coverage.

     The successful assertion of one or more large claims against us that exceeds available insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could result in substantial costs.

Should our stock price fall below $1 per share for a period of time our common stock could be de-listed from the NASDAQ National market.

     During the last half of 2002 our common stock price was subject to de-listing on the NASDAQ National Market due to our stock price being below $1 per share for a specified period of time. Our stockholders approved a one for seven reverse stock split which was effective in January 2003. As a result of the reverse stock split, our stock price increased substantially above $1 per share. Should our stock price fall below $1 per share again, we could be subject to de-listing again.

     If our common stock is de-listed by NASDAQ and our securities begin to trade on the OTC Bulletin Board maintained by NASDAQ, another over-the-counter quotation system, or on the pink sheets, investors may find it more difficult to dispose of or obtain accurate quotations as to the market value of the securities. In addition, we would be subject to a rule promulgated by the Securities and Exchange Commission that, if we fail to meet criteria set forth in such rule, imposes various practice requirements on broker-dealers who sell securities governed by the rule to persons other than established customers and accredited investors. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transactions prior to sale. Consequently, the rule may deter broker-dealers from recommending or selling our common stock, which may further affect the liquidity of our common stock. De-listing from NASDAQ will make trading our shares more difficult for investors, potentially leading to further declines in our share price. It would also make it more difficult for us to raise additional capital. Further, if we are de-listed we could also incur additional costs under state blue-sky laws in connection with any sales of our securities.

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Additionally, because brokers’ commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher priced stocks, the low share price of the common stock can result in an individual stockholder paying transaction costs that represent a higher percentage of total share value than would be the case if the share price were higher. This factor may also limit the willingness of institutions to purchase our common stock.

We expect our results of operations to fluctuate, and the price of our common stock could fall if quarterly results differ from the expectations of securities analysts.

     Our operating results historically have fluctuated on a quarterly basis and may continue to do so in the future. If our quarterly results differ from the expectations of securities analysts, the price of our common stock could fall. Some of the factors that could cause our operating results to fluctuate include:

•

general economic conditions;

•

demand for our products and services;

•

our competitors’ products and prices;

•

the timing and market acceptance of new product introductions and upgrades by us or our competitors;

•

our success in expanding our services, customer support and marketing and sales organizations, and the timing of these activities;

•

the mix of products and services sold;

•

delays in, or cancellations of, customer implementations;

•

customers’ budget constraints;

•

the level of research and development expenditures;

•

the size of recurring compensation charges;

•

changes in foreign currency exchange rates;

•

our ability to control costs; and

•

the timing of acquisitions and of the amortization or impairment of intangible assets.

     A large portion of our expenses, including expenses for facilities, equipment and personnel, is relatively fixed. Accordingly, if our revenue declines or does not grow as anticipated, we may not be able to correspondingly reduce our operating expenses in a timely manner. Failure to achieve anticipated levels of revenue could therefore significantly harm our operating results for a particular fiscal period.

Our stock price could be extremely volatile and may result in litigation against us.

     The stock market has experienced significant price and volume fluctuations, and the market price for our common stock has been in the past and could continue to be volatile. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. Litigation could result in substantial costs and a diversion of management’s attention and resources.

The concentration of ownership of our common stock may have the effect of delaying or preventing a change of control of us.