FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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

DOCUCORP INTERNATIONAL, INC.

(214) 891-6500

Not applicable

     Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $.01 par value, 10,977,223 shares outstanding as of March 7, 2005.

Docucorp International, Inc.
Table of Contents
Quarterly Report on Form 10-Q
January 31, 2005

Docucorp International, Inc.

See accompanying notes to interim consolidated financial statements.

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Docucorp International, Inc.

See accompanying notes to interim consolidated financial statements.

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Docucorp International, Inc.

See accompanying notes to interim consolidated financial statements.

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Docucorp International, Inc.

Note 1 — Basis of presentation and summary of significant accounting policies

The accompanying unaudited interim consolidated financial statements of Docucorp International, Inc. and its wholly owned subsidiaries (“Docucorp” or the “Company”) as of January 31, 2005 and July 31, 2004, and for the three and six months ended January 31, 2005 and 2004, have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial information presented should be read in conjunction with our annual consolidated financial statements for the year ended July 31, 2004. The foregoing unaudited interim consolidated financial statements reflect all adjustments (all of which are of a normal recurring nature), which are, in the opinion of management, necessary for a fair presentation of the results of the interim periods, and include the accounts of Docucorp and our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Operating results for the three and six months ended January 31, 2005 are not necessarily indicative of the results to be expected for the year. Certain prior year amounts have been reclassified to conform to the current year presentation.

Revenue recognition

We derive our revenues from the sale of software licenses, annual software maintenance and support agreements, professional services and ASP hosting services. We recognize revenue in accordance with Statement of Position 97-2, “Software Revenue Recognition” and Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”). Revenue is recognized when a contract exists, the fee is fixed or determinable, delivery has occurred and collection of the receivable is deemed probable.

We use the residual method to recognize revenue from the sale of software licenses that are bundled with maintenance and support. Under the residual method, the fair value of the undelivered element(s) is deferred and the remaining value of the contract is recognized as revenue. Fair value of an element is based on vendor-specific objective evidence (“VSOE”). VSOE is based on the price charged when the same element is sold separately. We do not generally sell software licenses without selling maintenance and support for the licensed software. Therefore, we have established VSOE only for the undelivered element(s) included in a multi-element arrangement. Specifically, VSOE for maintenance and support is based upon prices customers pay to renew maintenance and support agreements. After expiration of the initial maintenance term, maintenance and support agreements are renewable on an annual basis and include rights to upgrades, when and if available, telephone support, updates, enhancements and bug fixes. Revenue generated from maintenance and support is recognized ratably over the maintenance term of the agreement. We record deferred revenue for maintenance amounts invoiced prior to the performance of the related services.

Our standard software license agreements do not provide for rights of software return and/or conditions of acceptance. However, in the rare case that acceptance criteria are provided, revenue is deferred and not recognized until all acceptance provisions are satisfied. Revenue from software licenses, which include a cancellation clause, is recognized upon expiration of the cancellation period. Revenue related to products still in the testing phase is deferred until formal acceptance of the product by the customer.

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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)

Professional services revenue includes implementation, integration, training and consulting services related to our software products. The services offered are not essential to the functionality of the software. Professional services revenue is generally recognized as the services are performed.

Professional services revenue derived from the installation and integration of software packages under a fixed price contract is recognized on a percentage-of-completion basis measured by the relationship of hours worked to total estimated contract hours. We follow this method because reasonably dependable estimates of the revenue and contract hours applicable to various elements of a contract can be made. Since the financial reporting of these contracts depends upon estimates, which are assessed continually during the term of these contracts, recognized revenue and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are reflected in the period in which the facts that give rise to the revisions become known. Accordingly, favorable changes in estimates result in additional revenue recognition and net income, and unfavorable changes in estimates result in a reduction of recognized revenue and net income. When estimates indicate that a loss will be incurred on a contract upon completion, a provision for the expected loss is recorded in the period in which the loss becomes evident.

Revenue from our ASP hosting operations is recognized in accordance with SAB 104, generally on a per transaction basis. ASP hosting agreements are generally one-to-five years in duration and provide for monthly billing based on transaction volume or contract minimums, if applicable. Revenue related to the customer’s initial set up and implementation is deferred and subsequently recognized over the expected term of the ASP hosting agreement.

Cash equivalents

We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates fair market value.

Accounts receivable

Accounts receivable is composed of billed and unbilled accounts. Unbilled accounts receivable include amounts that have been recognized as revenue under the percentage-of-completion method or upon execution of the software license contract and shipment of the software, but prior to contractual payment terms.

Allowance for doubtful accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We take into consideration the current financial condition of the customers, the specific details of the customer accounts, the age of the outstanding balance and the current economic environment when assessing the adequacy of the allowance. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required.

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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)

Property and equipment, depreciation and amortization

Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed over the estimated service lives using the straight-line method. Estimated service lives are as follows:

Repairs and maintenance are expensed as incurred. Major renewals and betterments are capitalized and depreciated over the assets’ remaining estimated service lives. Upon retirement or sale of an asset, the cost and accumulated depreciation are removed from the accounts with any resulting gain or loss included in income.

Software development costs

Software development costs are accounted for in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (“SFAS 86”). SFAS 86 requires the capitalization of certain software development costs, which include salaries and personnel related costs incurred in the development activities, once technological feasibility of the software has been established. Research and development costs incurred prior to the establishment of the technological feasibility of a product are expensed as incurred. The cost of capitalized software is amortized on a straight-line basis over its estimated useful life, generally four to six years, or the ratio of current revenues to current and anticipated revenues from the software, whichever provides the greater amortization.

Goodwill

In accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, we do not amortize goodwill, but rather test it annually for impairment. Goodwill is also reviewed for impairment at other times during the year when events or changes in circumstances indicate that an impairment might be present.

Impairment of long-lived assets

We have evaluated our long-lived assets for impairment, and will continue to do so as events or changes in circumstances indicate that the carrying value of such assets may not be fully recoverable. If facts or circumstances support the possibility of impairment, we prepare a projection of future operating cash flows, undiscounted and without interest. If based on this projection we do not expect to recover our carrying cost, an impairment loss equal to the difference between the fair value of the asset and its carrying value will be recognized in operating income.

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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)

Deferred revenue

Deferred revenue relates primarily to maintenance and support agreements that have been invoiced to customers prior to the performance of the related services. Maintenance and support services are generally billed annually in advance for services to be performed over a twelve month period. Maintenance and support provided under an initial software license contract is recorded as deferred revenue based on the VSOE of that maintenance and is recognized over the term of the maintenance and support agreement.

Guarantees

In the ordinary course of business, we include standard indemnification provisions in our customer and distributor agreements. Pursuant to these agreements, we typically indemnify, hold harmless and reimburse the indemnified party for those losses suffered or incurred by the indemnified party arising from any trade secret, trademark, copyright, patent or other intellectual property infringement claim by any third party with respect to our software and services. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments that we could be required to make under these indemnification agreements is unlimited; however, consequential damages are excluded. Since we have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements, we believe the estimated fair value of our obligation under these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of January 31, 2005.

We currently provide software product warranties to our customers. The product warranties generally provide that the licensed software shall operate substantially in accordance with the applicable user documentation for a period typically 90 days from delivery. At January 31, 2005, we had no material product warranty liability. From time to time, in order to manage our customer relationships, we incur costs outside of our product warranty program. These costs are expensed as incurred.

We have agreements in place with our directors and officers whereby we indemnify them for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a director and officer insurance policy that may enable us to recover a portion of any future amounts paid.

Translation of foreign currencies

We translate the financial statements of our European subsidiary into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation”. Assets and liabilities of our European subsidiary, whose functional currency is other than the U.S. dollar, are translated at period-end rates of exchange, and revenues and expenses are translated at average exchange rates prevailing during the period. Gains and losses on foreign currency transactions and the translation of our intercompany loan to a consolidated foreign subsidiary are recognized in other income as incurred.

We account for unrealized gains or losses on our foreign currency translation adjustments in accordance with Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” which requires the adjustments be accumulated in stockholders’ equity as part of other comprehensive income.

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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)

Treasury stock

We account for Treasury Stock using the cost method. Gains on sales of Treasury Stock are credited to Additional Paid-in Capital (“APIC”), losses are charged to APIC to the extent that previous net gains from sales are included therein, otherwise to Retained Earnings.

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates for the year in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.

Net income per share

Our basic and diluted net income per share is computed in accordance with Statement of Financial Accounting Standards No. 128, “Earnings Per Share”. Basic net income per share is computed using the weighted average number of common shares outstanding. Diluted net income per share is computed using the weighted average number of common shares outstanding and the assumed exercise of stock options and unvested restricted stock awards, using the treasury stock method. The treasury stock method recognizes the use of proceeds that could be obtained upon exercise of options and the assumed proceeds on unvested restricted stock in computing diluted net income per share. It assumes that any proceeds would be used to purchase common stock at the average market price during the period. Options and unvested restricted stock will have a dilutive effect under the treasury stock method only when the average market price of common stock during the period exceeds the exercise price of the options or calculated exercise price of the unvested restricted stock. Following is a reconciliation of the shares used in computing basic and diluted net income per share for the periods indicated (in thousands):

At January 31, 2005 and 2004, options to purchase 50,000 shares of Common Stock at average exercise prices of $13.50 per share were anti-dilutive and not included in the computation of diluted net income per share, because the options’ exercise prices were greater than the average market price of the Common Stock for the period.

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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)

Stock-based compensation

We provide equity incentives to our employees and directors by means of non-qualified stock options and restricted stock awards issued from the 1997 Equity Compensation Plan (the “Plan”). In addition, we granted restricted stock awards outside of the Plan in connection with our acquisition of Newbridge Corporation. We account for stock-based compensation under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related Interpretations. For the periods presented, stock-based compensation cost related to options is not reflected in net income, as all options granted under the Plan had an exercise price equal to the market value of the underlying Common Stock on the date of grant. We have implemented the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure.” The following table illustrates the pro forma effect on net income and net income per share as if we had applied the fair value recognition provisions of SFAS 123 (in thousands except per share amounts):

In August 2004, the Compensation Committee of the Board of Directors granted 112,500 shares of restricted stock to certain executive officers and directors. Based on the market value of our Common Stock at the date of grant, this restricted stock grant was valued at approximately $821,000. The restricted stock vests over five years with 50% and 100% acceleration of cumulative vesting in the first two years if specific performance goals are attained. The value of the restricted stock grant is being recognized as compensation expense ratably over the vesting period. As of January 31, 2005, the performance goals were not attained.

In connection with the acquisition of the assets of Newbridge Corporation, which include the capital stock of Newbridge Information Services, Inc. and Matrix Digital Technologies, Inc. (collectively (“Newbridge”)), we entered into employment agreements with several key employees of Newbridge. As a part of these agreements, the Compensation Committee of our Board of Directors granted an aggregate

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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)

of 175,000 shares of restricted stock to those key Newbridge employees. Based on the market value of our Common Stock at the date of acquisition, this restricted stock grant was valued at $1.4 million. The restricted shares vest over seven years with 33%, 67% and 100% acceleration of cumulative vesting in the first three years if certain financial performance goals are achieved by Newbridge. The value of the restricted stock grant is being recognized as compensation expense ratably over the vesting period. As of January 31, 2005, the performance goals were not attained.

Management estimates

The preparation of our financial statements, in accordance with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses at the date of the financial statements. Actual results could differ from those estimates. Certain accounting policies require higher degrees of judgment than others in their application. The following accounting policies require significant estimates: accounts receivable and allowance for doubtful accounts, impairment of long-lived assets and income taxes.

Advertising costs

We expense advertising costs as incurred.

Royalty costs

We incur royalty fees associated with the licensing of certain software products. These fees vary based upon the terms of the royalty agreement.

Note 2 — Acquisition

On September 24, 2004, we acquired the assets of Newbridge Corporation, which include the capital stock of Newbridge Information Services, Inc. and Matrix Digital Technologies, Inc. Newbridge is a leading information services company for the health care market. Newbridge composes, produces and distributes provider directories, ID cards and policy kits, as well as provides health care provider information over the Internet. Operating results of Newbridge are included in the ASP hosting segment of our financial statements from the effective date of the acquisition.

The purchase price for the transaction was approximately $4.0 million, comprised of approximately $2.6 million paid in cash and $1.4 million of net liabilities assumed. During the three months ended January 31, 2005, we completed the initial appraisals of the acquired tangible and intangible assets, and finalized lease negotiations to expand our Dallas ASP center in order to relocate the personnel and operating activities of Newbridge to that facility. These events resulted in the recording of an acquired intangible asset of $940,000, a decrease of $1.9 million in the value previously allocated to property and equipment and the recording of a relocation liability of $475,000, resulting in a net increase to goodwill of $1.4 million. The allocation of purchase consideration is not completed as the valuation of the intangible assets has not been finalized. We expect to complete the purchase price allocation in the three months ended April 30, 2005.

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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)

The acquisition is not considered material to our results of operations; therefore no pro forma information is presented.

Note 3 – Business segments

As set forth in the criteria of Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” we are organized into two reportable segments: Software and ASP. The Software segment consists of initial software license sales, professional services consulting derived from implementation and integration of our software products and continued customer support and maintenance of the software products. The ASP segment provides processing, print, mail, archival and Internet delivery of documents for customers who outsource these activities. The table below presents information about reported segments for the three and six months ended January 31, 2005 and 2004 (in thousands):

Note 4 – Commitments and contingencies

Our U. S. tax return for the year ended July 31, 2002 is currently under examination by the Internal Revenue Service. Assurance can not be given that these tax matters will be resolved in our favor in view of the inherent uncertainties involved in settlement initiatives, and court and tax proceedings. We intend to vigorously defend our tax positions and to aggressively contest these matters through applicable IRS and judicial procedures, as appropriate. As of January 31, 2005, we could not reasonably estimate the tax and related penalties and interest exposure related to these examinations. An unfavorable resolution of these tax matters may have a material adverse impact on our consolidated financial position and result of operations.

Note 5 – Recently issued accounting pronouncements

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, “Shares-Based Payments” (“SFAS 123R”), which is a revision to SFAS 123. SFAS 123R requires employee stock based compensation awards to be accounted for under the fair value

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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements
(Unaudited)

method and eliminates the ability to account for these instruments under the intrinsic value method prescribed by APB 25. SFAS 123R requires the use of an option pricing model for estimating fair value, which is then recognized as compensation expense over the service periods. SFAS 123R is effective for fiscal periods beginning after June 15, 2005. We will be required to adopt SFAS 123R beginning August 1, 2005 for new awards of stock-based compensation granted after that date and for unvested awards outstanding at that date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in preparing pro forma disclosures in accordance with the provisions of SFAS 123.We are in the process of determining the impact of the requirements of SFAS 123R.

The American Jobs Creation Act of 2004 (the “Act”) was signed into law on October 22, 2004. The Act contains numerous amendments and additions to the U.S. corporate income tax rules. Among other things, the Act will provide a deduction with respect to income from certain U.S. manufacturing activities and will provide a reduced tax upon certain repatriated foreign earnings. We are continuing to evaluate the Act and its financial impact pending further guidance to be provided by the U.S. Treasury Department .

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

Certain information contained herein may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts included in this Form 10-Q, are forward-looking statements. Such statements are subject to certain risks and uncertainties, which include, but are not limited to, the economy, dependence upon the insurance and utilities industries, technological advances, attraction and retention of technical employees, affect of business acquisitions, fluctuations in operating results and the other risk factors and cautionary statements listed from time to time in the Company’s periodic reports filed with the Securities and Exchange Commission. All forward-looking statements included in this Form 10-Q and all subsequent oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements.

Overview

Docucorp International, Inc. (“Docucorp”) develops, markets and supports a portfolio of proprietary information software, application service provider (“ASP”) hosting and professional services that enables companies to create, publish, manage and archive complex, high-volume, individualized information. We support the entire information life cycle – from acquisition of the first raw data point to final delivery of personalized information to the customer.

Our software products support leading hardware platforms, operating systems, printers and imaging systems. These products are designed to personalize, produce and manage documents such as insurance policies, utility statements, telephone bills, bank and mutual fund statements, invoices, provider directories, correspondence, bills of lading and other customer-oriented documents. Our ASP offerings include customer statement and bill generation, electronic bill presentment and payment, insurance policy production, provider directory generation, disaster recovery and electronic document archival.

Operating in four key markets, insurance, utilities, financial services and health care, we currently have an installed base of more than 1,300 customers worldwide. More than half of the 200 largest United States insurance companies use our software products and services, including nine of the top 10 life and health insurance companies, nine of the top 10 property and casualty insurance companies and more than 500 managing general agents (MGAs). Many of the largest North American health care and utility companies and major international financial services institutions use our products and services.

We derive our revenues from ASP hosting fees, professional services fees, software license fees and recurring maintenance fees related to our software products. ASP hosting revenue consists of transactional fees earned from customers who outsource the production of customer statements, insurance policies and provider directories. Professional services revenue includes fees for implementation, integration, training and consulting services. Software license revenue is generally derived from perpetual licenses of software products. Maintenance revenue consists primarily of annual software maintenance and support agreements.

As set forth in the criteria of Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”), we are organized into two reportable segments: Software and ASP. The Software segment consists of initial software license sales, professional services consulting derived from implementation and integration of our software products and continued customer support and maintenance of the software products. The ASP segment provides processing, print, mail, archival and Internet delivery of documents for customers who outsource these activities.

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Our operating results are strongly tied to software license revenue. Software license sales have a high margin and ultimately drive additional professional services and maintenance revenues. A large portion of our software license revenue is generated from a small number of relatively large agreements executed in the latter half of a quarter. The timing of such large agreements is often unpredictable and impacted by events beyond our control, therefore making it difficult to forecast software license revenue effectively. Due to the nature of our software license sales, revenues and profits may vary from quarter to quarter.

On September 24, 2004, we completed the acquisition of Newbridge, a leading information services company for the health care market. Operating results of Newbridge are reflected in our ASP hosting segment from the date of acquisition. Full integration of Newbridge with our Dallas ASP center is scheduled to occur during the fourth quarter of our current fiscal year.

For the three months ended January 31, 2005, license revenue of $1.7 million decreased significantly compared with the same period of fiscal year 2004. The decrease is primarily attributable to weak software license sales in North America. The decrease in license revenue negatively impacted our operating margin and profitability.

The growth in ASP hosting revenue of 23% for the three month ended January 31, 2005, is primarily attributable to revenue generated by Newbridge, partially offset by a decrease in existing ASP revenue. In addition, the increase in cost of ASP hosting revenue for the three and six months ended January 31, 2005, is due primarily to costs incurred by Newbridge.

For the three months and six months ended January 31, 2005, professional services revenue increased 12% and 9%, respectively. The increase in professional services revenue was driven by revenue increases in both North America and Europe. In addition, professional services margin increased from 15.3 % to 25.5% for the three months ended January 31, 2005, and from 17.8% to 24.1% for the six months ended January 31, 2005. We have improved both our utilization and average billing rates for professional services staff.

For the three months ended January 31, 2005, our European subsidiary generated license revenue of $526,000, total revenue of $1.6 million and achieved a minimal profit for the quarter.

Going forward, business and market uncertainties may affect results. For a discussion of key factors that could impact results, please refer to the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended July 31, 2004.

Critical Accounting Policies and Estimates

The accompanying “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. We base our estimates and assumptions on historical experiences and various other factors that are believed to be reasonable under the circumstances. These estimates and assumptions are evaluated on an ongoing basis. Actual results may differ from previously estimated amounts under different assumptions or conditions. The following critical accounting policies, which involve significant judgments and estimates, are used in the preparation of our consolidated financial statements:

Revenue recognition

We derive our revenues from the sale of software licenses, annual software maintenance and support agreements, professional services and ASP hosting services. We recognize revenue in accordance with Statement of Position 97-2, “Software Revenue Recognition”, and Staff Accounting Bulletin No. 104,

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“Revenue Recognition” (“SAB 104”). Revenue is recognized when a contract exists, the fee is fixed or determinable, delivery has occurred and collection of the receivable is deemed probable.

We use the residual method to recognize revenue from the sale of software licenses that are bundled with maintenance and support. Under the residual method, the fair value of the undelivered element(s) is deferred and the remaining value of the contract is recognized as revenue. Fair value of an element is based on vendor-specific objective evidence (“VSOE”). VSOE is based on the price charged when the same element is sold separately. We do not generally sell software licenses without selling maintenance and support for the licensed software. Therefore, we have established VSOE only for the undelivered element(s) included in a multi-element arrangement. Specifically, VSOE for maintenance and support is based upon prices customers pay to renew maintenance and support agreements. After expiration of the initial maintenance term, maintenance and support agreements are renewable on an annual basis and include rights to upgrades, when and if available, telephone support, updates, enhancements and bug fixes. Revenue generated from maintenance and support is recognized ratably over the maintenance term of the agreement. We record deferred revenue for maintenance amounts invoiced prior to the performance of the related services.

Our standard software license agreements do not provide for rights of software return and/or conditions of acceptance. However, in the rare case that acceptance criteria are provided, revenue is deferred and not recognized until all acceptance provisions are satisfied. Revenue from software licenses, which include a cancellation clause, is recognized upon expiration of the cancellation period. Revenue related to products still in the testing phase is deferred until formal acceptance of the product by the customer.

Professional services revenue includes implementation, integration, training and consulting services related to our software products. The services offered are not essential to the functionality of the software sold. Professional services revenue is generally recognized as the services are performed.

Professional services revenue derived from the installation and integration of software packages under a fixed price contract is recognized on a percentage-of-completion basis measured by the relationship of hours worked to total estimated contract hours. We follow this method because reasonably dependable estimates of the revenue and contract hours applicable to various elements of a contract can be made. Since the financial reporting of these contracts depends upon estimates, which are assessed continually during the term of these contracts, recognized revenue and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are reflected in the period in which the facts that give rise to the revisions become known. Accordingly, favorable changes in estimates result in additional revenue recognition and net income, and unfavorable changes in estimates result in a reduction of recognized revenue and net income. When estimates indicate that a loss will be incurred on a contract upon completion, a provision for the expected loss is recorded in the period in which the loss becomes evident.

Revenue from our ASP hosting operations is recognized in accordance with SAB 104, generally on a per transaction basis. ASP hosting agreements are generally one-to-five years in duration and provide for monthly billing based on transaction volume or contract minimums, if applicable. Revenue related to the customer’s initial set up and implementation is deferred and subsequently recognized over the expected term of the ASP hosting agreement.

Allowance for doubtful accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We take into consideration the current financial condition of our customers, the specific details of the customer accounts, the age of the outstanding balance and the current economic environment when assessing the adequacy of the allowance. If the financial condition

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of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required.

Software development costs

Software development costs are accounted for in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (“SFAS 86”). SFAS 86 requires the capitalization of certain software development costs once technological feasibility is established. The capitalized costs are then amortized on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenues, whichever provides the greater amortization. Management periodically assesses the realizability of software development costs when events and circumstances indicate a potential decline in value.

Valuation of long-lived and intangible assets and goodwill

We recognize an impairment charge associated with our long-lived assets, including property and equipment, goodwill and other intangible assets whenever we determine that recovery of such long-lived asset is not probable. Such determination is made in accordance with the applicable GAAP requirement associated with the long-lived asset, and is based upon, among other things, estimates of the amount of future net cash flows to be generated by the long-lived asset and estimates of the current fair value of the asset. Adverse changes in future net cash flows or fair value could result in the inability to recover the carrying value of the long-lived asset, thereby requiring an impairment charge to be recognized. We perform an impairment analysis in accordance with Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets,” annually and whenever events and circumstances indicate that an impairment might be present.

Deferred taxes and valuation allowance

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of the assets and liabilities. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. It is possible that in the future we may change our estimate of the amount of the deferred income tax assets that will more likely than not be realized, which will result in an adjustment to the valuation allowance that would either increase or decrease, as applicable, reported net income in the period such change in estimate was made.

Translation of foreign currency

We translate the financial statements of our European subsidiary into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation.” Assets and liabilities of our European subsidiary, whose functional currency is other than the U.S. dollar, are translated at period-end rates of exchange, and revenues and expenses are translated at average exchange rates prevailing during the period. Gains and losses on foreign currency transactions and the translation of our intercompany loan to a consolidated foreign subsidiary are recognized in other income as incurred.

We account for unrealized gains or losses on our foreign currency translation adjustments in accordance with Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” which requires adjustments to be accumulated in stockholders’ equity as part of other comprehensive income. Currently, we do not engage in foreign currency hedging activities.

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Historical Operating Results

The following table sets forth selected unaudited interim consolidated statements of operations data expressed as a percentage of total revenues for the periods indicated:

Comparative analysis of results for the three and six months ended January 31, 2005 and 2004

Revenues

Total revenues increased 3% and 4% for the three and six months ended January 31, 2005, respectively. ASP hosting revenue increased 23%, or $1.4 million, and 14%, or $1.7 million, for the three and six months ended January 31, 2005, respectively. The increase in ASP hosting revenue is primarily due to revenue generated by recently acquired Newbridge, partially offset by a decrease in revenue from existing customers. For the three and six months ended January 31, 2005, professional services revenue increased 12%, or $606,000, and 9%, or $871,000, respectively, due primarily to an increase in utilization of our professional services personnel and an increase in our average billing rate. License revenue decreased 46%, or $1.4 million, and 19%, or $1.1 million, for the three and six months ended

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January 31, 2005, respectively, due to fewer software license sales in North America. For the three months ended January 31, 2005, maintenance revenue increased $71,000, or 1%. Maintenance revenue decreased $28,000 for the six months ended January 31, 2005 due to certain legacy customers consolidating multiple licenses when upgrading to enterprise-wide versions of our latest technology. This decrease was offset for the three months ended January 31, 2005 by maintenance revenue generated primarily from new software license sales.

Backlog for our products and services was approximately $50.8 million as of January 31, 2005, of which approximately $24.9 million is scheduled to be satisfied within one year. Backlog is primarily composed of maintenance revenue for ongoing maintenance and support, software implementation and consulting services and ASP hosting services. Maintenance contracts may generally be terminated upon 30 to 60 days’ notice; however, we have not historically experienced material cancellations of such contracts. Software implementation and consulting services backlog is principally performed under time and material agreements, of which some have cancellation provisions. The estimated future revenues with respect to software implementation and consulting services are based on management’s estimate of revenues over the remaining life of the respective contracts. ASP hosting agreements generally have one-to-five year terms and provide that fees are charged on a per transaction basis. Estimated future revenues with respect to ASP hosting services are based on contractual monthly minimums multiplied by the remaining term of the respective contract.

Cost of revenues

Cost of ASP hosting revenue. Cost of ASP hosting revenue is comprised primarily of salary and personnel related costs, facility and equipment costs and postage and supplies expense related to our ASP hosting centers. Cost of ASP hosting revenue increased 35% to $6.7 million for the three months ended January 31, 2005, and increased 22% to $11.8 million for the six months ended January 31, 2005. These increases are primarily due to the operating expenses associated with Newbridge. For the three months ended January 31, 2005 and 2004, cost of ASP hosting revenue represented 89% and 81% of ASP hosting revenue, respectively. For the six months ended January 31, 2005 and 2004, cost of ASP hosting revenue represented 87% and 81% of ASP hosting revenue, respectively. The increase in cost as a percentage of ASP revenue is primarily due to the currently lower margins associated with Newbridge and the decline in ASP hosting revenue from existing customers. The variable components of cost of ASP hosting revenue are expected to increase as ASP hosting revenue increases.

Cost of professional services revenue. Cost of professional services revenue consists of costs incurred in providing implementation, integration, training and consulting services. Cost of professional services revenue decreased $56,000, or 1% for the three months ended January 31, 2005, and increased $23,000 for the six months ended January 31, 2005. For the three months ended January 31, 2005 and 2004, cost of professional services revenue represented 75% and 85% of professional services revenue, respectively. For the six months ended January 31, 2005 and 2004, cost of professional services revenue represented 76% and 82% of professional services revenue, respectively. The decrease in costs as a percentage of professional services revenue is primarily due to improved staff utilization and an increase in average billing rates. We expect cost of professional services revenue to increase as professional services activities and revenue increase both domestically and internationally.

Cost of license revenue. Cost of license revenue includes amortization of capitalized software development costs and royalties paid to third parties. For the three and six months ended January 31, 2005, cost of license revenue increased 45% and 37%, respectively, primarily due to the addition of amortization expense related to new products introduced to the marketplace during the last twelve months. For the three months ended January 31, 2005 and 2004, cost of license revenue represented 60% and 22% of license revenue, respectively. For the six months ended January 31, 2005 and 2004, cost of license revenue represented 42% and 25% of license revenue, respectively. The increase in costs as a

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percentage of license revenue is due to the decrease in license revenue during the second quarter and the increase in amortization expense. We anticipate cost of license revenue to increase as amortization of capitalized development costs increases as new products become generally available.

Cost of maintenance revenue. Cost of maintenance revenue consists of costs incurred in providing customer telephone and online support. Cost of maintenance revenue increased 5% to $382,000 for the three months ended January 31, 2005, and increased 7% to $727,000 for the six months ended January 31, 2005, due primarily to an increase in customer support costs from our European subsidiary. For both the three months ended January 31, 2005 and 2004, cost of maintenance revenue represented 7% of maintenance revenue. For the six months ended January 31, 2005 and 2004, cost of maintenance revenue represented 7% and 6% of maintenance revenue, respectively. The cost of maintenance revenue is expected to increase as salaries and personnel related costs increase due to annual merit raises and extending customer support hours to accommodate certain international customers.

Operating expenses

Product development. Product development expense consists primarily of costs associated with developing new products prior to establishing technological feasibility, enhancing existing products, testing software products and developing product documentation. Product development expenses increased 4% to $2.2 million for the three months ended January 31, 2005, and increased 1%, or $36,000, for the six months ended January 31, 2005. The increase is primarily due to an increase in salary and personnel related costs, partially offset by an increase in capitalization of software development costs.

Sales and marketing. Sales and marketing expense consists primarily of salaries and personnel related costs, incentive compensation and costs associated with marketing programs. For the three and six months ended January 31, 2005, sales and marketing expense increased $74,000, or 3%, and $138,000, or 2%, respectively. This increase is primarily due to an increase in salary and personnel related costs, partially offset by a decrease in incentive compensation.

General and administrative. General and administrative expense consists of costs for accounting, human resources, legal, information technology and outside legal, accounting and other services. General and administrative expense increased $351,000, or 20%, and $604,000, or 18%, for the three and six months ended January 31, 2005, respectively. The increase is primarily due to an increase in accounting and auditing fees associated with Sarbanes-Oxley compliance.

Interest expense

Interest expense increased $13,000 for the three months ended January 31, 2005, due to the assumption of capital leases from Newbridge. For the six months ended January 31, 2005, interest expense decreased $9,000 due to a decrease in interest expense on our term note with Comerica Bank due to principal payments made over the last twelve months.

Other income, net

Other income, net decreased $62,000 and $90,000 for the three and six months ended January 31, 2005, respectively, primarily due to a decrease in gains associated with fluctuations of foreign currency exchange rates.

Provision for income taxes

The effective tax rate for both the three and six months ended January 31, 2005 was 38.5%. The effective tax rate for both the three and six months ended January 31, 2004 was 41.5%. In fiscal 2004, the rates differ from the federal statutory rate due primarily to losses generated by our European subsidiary, for

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which we do not currently recognize a tax benefit. The decrease in the effective rate from the prior year is primarily due to the improved performance of our European subsidiary.

Net income

Net income decreased approximately 69% and 38% for the three and six months ended January 31, 2005, respectively. This decrease is primarily due to a decrease in software license revenue and an increase in general and administrative costs for the three and six months ended January 31, 2005.

Liquidity and Capital Resources

At January 31, 2005, our principal sources of liquidity consisted of cash and cash equivalents of $7.9 million and our revolving credit facility, which had available borrowings of $10 million. Cash and cash equivalents for the six months ended January 31, 2005, decreased $4.4 million from $12.3 million at July 31, 2004, primarily as a result of cash used in the Newbridge acquisition.

Cash provided by operating activities was $4.9 million and $5.1 million for the six months ended January 31, 2005 and 2004, respectively. Significant changes in assets and liabilities for the six months ended January 31, 2005 that impacted cash flow from operations include an increase in accounts receivable of $1.6 million and a decrease in accounts payable of $1.1 million, of which approximately $0.9 million related primarily to past due payments made on the assumed payables of Newbridge.

During the six months ended January 31, 2005 and 2004, cash used in investing activities was $6.2 million and $3.1 million, respectively. For the six months ended January 31, 2005, we used $2.5 million, net of cash received of $100,000, for the purchase of Newbridge. Cash used for the purchase of property and equipment was $911,000 and $601,000 for the six months ended January 31, 2005 and 2004, respectively. Cash used in the investment of capitalized software development costs was $2.7 million and $2.5 million for the six months ended January 31, 2005 and 2004, respectively.

Cash used in financing activities was $3.1 million and $1.2 million for the six months ended January 31, 2005 and 2004, respectively. Cash used in financing activities during the six months ended January 31, 2005, primarily related to payments under our bank note of $1.8 million, principal payments made under the assumed debt obligations of Newbridge of $1.2 million and payments under capital lease obligations of $557,000. The $1.2 million of cash used in financing activities during the six months ended January 31, 2004, related to the payments made under our bank note of $1.8 million and capital lease obligations of $287,000, partially offset by proceeds received from the exercise of stock options of $774,000.

As of January 31, 2005, we held approximately 5,622,000 shares of treasury stock at an average per share cost of $5.56. Since inception of our stock repurchase program in fiscal 1999, we have repurchased approximately 9,366,000 shares of stock at an average purchase price of $5.37. Our Board of Directors believes the repurchase program is an appropriate means of increasing shareholder value.

Working capital was $5.8 million at January 31, 2005, compared with $10.7 million at July 31, 2004. The decrease in working capital of $4.9 million is primarily due to cash expenditures aggregating approximately $4.6 million to purchase Newbridge and make payments on their outstanding and past due liabilities and debt obligations.

In June 2003, we repurchased approximately 3.1 million shares of our Common Stock along with warrants to purchase an additional 161,000 shares of Common Stock from Safeguard Scientifics, Inc. (“Safeguard”) and a former officer of Safeguard for $5.95 per share. In connection with the repurchase, we entered into a $14.2 million term note with Comerica Bank. The bank note bears interest at a fixed annual rate of 3.32% and is repayable in equal monthly installments over four years. At January 31, 2005, the outstanding balance on our bank note was $8.6 million, of which $3.6 million is due within one year.

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At January 31, 2005, we had a $10.0 million revolving credit facility from Comerica Bank, which expires on August 31, 2006. The credit facility bears interest at the bank’s prime rate less 100 basis points or LIBOR rate of interest plus 150 basis points, and is collateralized by substantially all of our assets. As of January 31, 2005, there were no borrowings under this credit facility. Under our bank note and credit facility, we are required to maintain certain financial and non-financial covenants.

Our liquidity needs are expected to arise primarily from the repayment of debt, obligations under capital leases, funding the continued development, enhancement and support of our software offerings and sales and marketing costs associated with expansion in new vertical and international markets. A portion of our cash or borrowings under our revolving credit facility could be used to acquire complementary businesses or obtain the right to use complementary technologies.

Our liquidity could be negatively impacted by a decrease in demand for our products, which are subject to rapid technology changes, reduction in capital expenditures by our customers and intense competition, among other factors. Operating leases and purchase obligations related to services agreements are our only off balance sheet arrangements.

We currently anticipate that existing cash and cash equivalents, together with cash generated from operations and available borrowings under our credit facility, will be sufficient to satisfy our operating cash needs for the foreseeable future .

Recently issued accounting pronouncements

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, “Shares-Based Payments” (“SFAS 123R”), which is a revision to SFAS 123. SFAS 123R requires employee stock based compensation awards to be accounted for under the fair value method and eliminates the ability to account for these instruments under the intrinsic value method prescribed by APB 25. SFAS 123R requires the use of an option pricing model for estimating fair value, which is then recognized as compensation expense over the service periods. SFAS 123R is effective for fiscal periods beginning after June 15, 2005. We will be required to adopt SFAS 123R beginning August 1, 2005 for new awards of stock-based compensation granted after that date and for unvested awards outstanding at that date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in preparing pro forma disclosures in accordance with the provisions of SFAS 123. We are in the process of determining the impact of the requirements of SFAS 123R.

The American Jobs Creation Act of 2004 (the “Act”) was signed into law on October 22, 2004. The Act contains numerous amendments and additions to the U.S. corporate income tax rules. Among other things, the Act will provide a deduction with respect to income from certain U.S. manufacturing activities and will provide a reduced tax upon certain repatriated foreign earnings. We are continuing to evaluate the Act and its financial impact pending further guidance to be provided by the U.S. Treasury Department.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have no derivative financial instruments. We invest our cash and cash equivalents in investment grade, highly liquid investments, consisting of money market instruments and commercial paper. We have a fixed rate debt instrument of $8.6 million as of January 31, 2005.

We are exposed to market risk arising from changes in foreign currency exchange rates as a result of selling our products and services outside the U.S. (principally Europe). A portion of our sales generated from our non-U.S. operations are denominated in currencies other than the U.S. dollar, principally British pounds. Consequently, the translated U.S. dollar value of Docucorp’s non-U.S. sales, operating results

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and cash flows are subject to currency exchange rate fluctuations, which may favorably or unfavorably impact reported earnings and may affect comparability of period-to-period operating results.

For the three months ended January 31, 2005 and 2004, 8% and 7%, respectively, of our revenues were denominated in British pounds. For the three months ended January 31, 2005 and 2004, 8% and 9%, respectively, of our cost of revenues and operating expenses were denominated in British pounds. For the six months ended January 31, 2005 and 2004, 7% and 6%, respectively, of our revenues and 8% and 9%, respectively, of our cost of revenues and operating expenses were denominated in British pounds. Historically, transactional gains and losses from the effect of fluctuations in currency exchange rates have not had a material impact on our operations; however, there can be no guarantees that it will not have a material impact in the future. The exposure to fluctuations in currency exchange rates will increase as we expand our operations outside the U.S.

Item 4. Controls and Procedures

Our management, with participation of our President and Chief Executive Officer and Senior Vice President, Finance and Administration (“Principal Financial Officer”) evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 12a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report.

The evaluation included the subsidiary, Newbridge, which we acquired on September 24, 2004. Since the acquisition of Newbridge, we have focused on analyzing and implementing changes in their procedures and controls to determine their effectiveness and to make them consistent with, and integrate them into, our disclosure controls and procedures. We continue to analyze Newbridge’s procedures and controls and expect to make additional changes in those procedures and controls in the future. We performed additional procedures to review Newbridge’s accounting records and substantiate the financial information of Newbridge included in this report.

Based upon that evaluation, the President and Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures, as of January 31, 2005, were designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by Docucorp in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There were no significant changes in our internal controls or in other factors that could significantly affect these controls that occurred during the period covered by this report. However, we are continuing to analyze, and expect to make changes in, the controls and procedures in place at Newbridge, our recently acquired subsidiary.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

We are occasionally involved in legal proceedings and other claims arising out of our operations in the normal course of business. No such claims are expected, individually or in the aggregate, to have a material adverse effect on our consolidated financial statements.

Item 4. Submission of Matters to a Vote of Security Holders

We held our Annual Meeting of Stockholders on December 7, 2004. At this meeting, the stockholders voted in favor of electing as directors the six nominees named in the Proxy Statement dated October 21, 2004 and ratifying the selection of PricewaterhouseCoopers LLP as its independent registered public accounting firm for the 2005 fiscal year. Also at this meeting, the stockholders voted in favor of amending the 1997 Equity Compensation Plan to increase the number of shares of Common Stock issuable pursuant to awards under the plan from 3,800,000 to 4,500,000 shares, of which a maximum of 1,000,000 shares may be used for grants of restricted stock, SARs and performance units. The number of votes cast for each item was as follows:

I.	Election of Directors

II.	Ratification of selection of PricewaterhouseCoopers LLP as Independent Registered Public Accounting Firm

 III. Amendment to the 1997 Equity Compensation Plan

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Item 6. Exhibits and Reports on Form 8-K

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SIGNATURES

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

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