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LAWSON SOFTWARE, INC. Form 10-K Index
Part IV

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

FORM 10-K

Commission file number: 000-33335

LAWSON SOFTWARE, INC.
(Exact name of registrant as specified in its charter)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.01 Par Value Per Share

        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 ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by Reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

        The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant, based upon the closing sale price of Common Stock on November 30, 2002 as reported on the Nasdaq National Market, was approximately $395,996,802. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

        The number of shares of the registrant's common stock outstanding on July 18, 2003 was 98,509,275.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Proxy Statement for Registrant's 2003 Annual Meeting of Stockholders to be held October 30, 2003 are incorporated by reference in Part III of this Form 10-K Report.

LAWSON SOFTWARE, INC.
Form 10-K
Index

Forward-Looking Statements

        In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements. The forward-looking statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Our Future Results or the Market Price of Our Stock." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this Annual Report on Form 10-K and in other documents the Company files from time to time with the Securities and Exchange Commission.

Part I

Item 1. Business

General

        We are a provider of enterprise software solutions targeting specific service industries. In the markets we serve, we offer comprehensive financial management, human resources, services automation, procurement, distribution and retail operations solutions designed to manage, analyze and improve our customers' businesses. Our software solutions automate and integrate critical business processes, facilitating collaboration among customers, and their partners, suppliers and employees. We also provide professional services that optimize and support the selection, implementation and execution of a customer's e-business technology and solutions infrastructure.

        Founded in 1975, we currently have over 2,000 customers, primarily in the healthcare, professional services, public sector, financial services and retail markets. We generate revenue through license fees and separate fees for professional services, including consulting, training and implementation services, as well as ongoing customer support and maintenance. We market and sell our software and services solutions primarily through a direct sales force, augmented by a combination of channel partners and resellers.

        Lawson Software is a Delaware corporation. In February 2001, we were reincorporated through a merger with our predecessor, Lawson Associates, Inc., a Minnesota corporation, which was incorporated in 1975. Our principal executive office is located at 380 Saint Peter Street, St. Paul, Minnesota 55102-1302. Our telephone number at that address is (651) 767-7000. We maintain a website at www.lawson.com. Our website, and the information contained therein, is not a part of this Form 10-K.

Our Solution

        We provide collaborative, industry-tailored enterprise software solutions that fundamentally improve the business processes of our customers. The open architecture of our solutions offers our customers the choice of directly deploying a pre-configured solution or quickly and easily customizing our product offerings to conform to our customers' unique business processes. The benefits of our solutions include:

        Comprehensive Software Suite.    Our software provides integrated, comprehensive solutions that automate business processes, enable collaboration among participants in the processes and deliver detailed analyses of the results of the processes. For example, our services automation solution enables appropriate staff to assess critical information on service projects. Managers can easily identify and

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assign the appropriate personnel to projects based on skills and availability. Personnel can enter their time and expenses associated with a project into our services automation solution, which processes these entries to automatically update our financial management solution for client billing, revenue recognition and project accounting; our payroll solution to update time records; our accounts payable solution to reimburse any employee expenses; and our enterprise performance management solution to deliver financial, project and resource performance reports to appropriate managers.

        Industry-Tailored Solutions.    We use our expertise in each of our targeted service industries to provide pre-configured functionality that addresses the specific business needs of these industries, thereby increasing the utility of the overall solution. For example, our e-Procurement for Healthcare solution allows healthcare organizations to coordinate and automate the process of ordering, receiving and paying for medical and other supplies from multiple suppliers, networks and web exchanges, using a single Web-based portal.

        Flexible, Open, Web-Based Architecture.    Our software is flexible. It can be deployed into a customer's system with pre-configured industry solutions or efficiently customized to conform to the customer's business processes using our adaptable extensions. Our open architecture enables our software to run on most leading hardware and operating system platforms and to operate with the leading relational database management systems. This allows our customers to choose the most appropriate platforms independently from selecting our solutions. Furthermore, our solutions can integrate with legacy systems through standard interfaces and integration protocols. Because many of our solutions do not require software to reside on the desktop computer and are accessed directly through a standard Web-browser or a supported wireless device, we believe many of our solutions can be readily deployed and used without extensive training. Our software is also highly scalable, enabling deployment in large, global enterprises as well as in small and medium-sized businesses.

        Rapid and Cost-Effective Implementation.    Our industry focus and flexible product design enables fast and easy enterprise deployment. We believe our knowledge of our target services industries allows our industry-focused services teams to implement our software with an in-depth understanding of the business needs of the customer, thereby reducing time, effort and expense.

Products

        Our software solutions are comprised of:

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services automation applications;



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core business applications;



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integration and collaboration tools;



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enterprise performance management applications; and



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Lawson Portal.

        Our services automation application automates the business processes of professional services organizations and corporate internal and external service departments. This application is a complete solution and can work independent of any other system or in conjunction with our core business applications to add reporting and analysis, invoicing and capitalization capabilities. We developed this application for corporate internal service departments, external services departments and professional services organizations.

        Our core business applications provide the platform and functionality for handling financial management, human resources, procurement, distribution and retail operations functions. These applications include several components in each functional area, which we license separately or bundle together as suites designed for our targeted vertical markets.

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        Our pre-configured integration and collaboration tools help customers improve their business processes through simplified presentation, navigation and access to information, automation of complex business processes, and intelligent routing of work and tasks to appropriate personnel.

        Our product offerings include enterprise performance management applications that track over 200 pre-configured business metrics, including industry-specific metrics that enable users to view and analyze key operational performance measurements and use graphical, end-user interfaces to navigate through relevant information stored in our customer's transactional system.

        Lawson Portal enables a wide distribution of information to users based on their role in an organization, while controlling access to data. Our pre-configured Portal is combined with the appropriate Lawson core business applications as well as third-party applications and data to provide a comprehensive solution for the industries we target. Portal allows the user to participate in automated, industry-specific business processes with limited training.

Services Automation Applications

        The services automation applications automate the work processes of service organizations, enabling them to initiate, deliver and measure projects. Customers can also use this application to track and monitor professional resources, schedules, expenses and invoices. Our services automation application is comprised of several principal components, including the following: forecasting and planning, scheduling and assignment, skills and resource allocation, and time and expense reporting. We tailor this application for internal services departments, as well as professional services organizations and the other service industries on which we focus.

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Services Automation helps internal services departments within organizations to improve their service delivery capabilities, lower and stabilize costs, better align resources and investments with business strategy, and improve work efficiency and effectiveness. This application offers additional tools to track services requests and define approval processes and allows for incorporation of best practices and facilitation of project accounting and internal billing.



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Services Automation for Professional Services helps professional services organizations, such as consulting firms, improve their balance sheets with faster cash flow and increase resource utilization and bid management. Services Automation provides greater visibility into service businesses by helping customers determine which projects and clients will bring the greatest profit margins.

Core Business Applications

        We offer the following core business applications: financials, human resources, procurement, distribution and retail operations. Our applications enable organizations to execute standard business processes in each of the following areas, as well as provide functionality specific to the industries we target. The following pages list the primary components within each core business application:

        Lawson Financials Suite.    The financials applications give our customers the ability to create and track financial and accounting data across multiple companies, languages, currencies and books of accounts. These applications provide extensive analytical capabilities and integrate our customers' financial management processes with other core business applications. The financials applications are comprised of several principal components, including the following:

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General Ledger provides an organizational and accounting framework for processing transactions in Lawson and third-party applications, manages an enterprise's financial data and assists with regulatory compliance reporting requirements and standards. Multi-book Ledger assists organizations in complying with the requirements for different accounting rules for multiple

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regulatory agencies, multi-national accounting rules and divergent accounting policies. Average Daily Balance assists financial services organizations in the forecasting of available funds.

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Project and Activity Accounting collects financial and non-financial information about specific jobs, tasks, processes and projects, performs activity billing, manages revenue recognition and enables operational analysis.



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Enterprise Budgeting manages enterprise-wide budgeting, planning and approval processes. We offer this component through our relationship with Hyperion Solutions Corporation.



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Enterprise Consolidations accumulates information from diverse financial systems across an enterprise to provide immediate access to information and analytical functions.



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Asset Management is a fully integrated asset acquisition, retention, optimization and collaboration management solution. Lease Management expands the core Asset Management system with an integrated solution for managing capital and operating leases.



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Accounts Payable enables businesses to enter invoices, create and store vendor records, manage cash flow and generate payments, quickly, accurately and efficiently.



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Payables Management extends the functionality of the Accounts Payable application for high volume invoice matching. Purchase orders and receipts can be matched to invoices for Lawson and non-Lawson applications. Payables Management is integrated with Lawson Procurement.



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Accounts Receivable provides flexible cash application and credit management and business rules-based processing.



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Encumbrance Accounting provides a rules-based budget allocation solution, enabling an organization to evaluate real-time budget information prior to making spending decisions.



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Cash and Treasury Management automates the corporate treasury function. We offer this component through our relationship with XRT.



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Financial Reporting Self- Service delivers a comprehensive suite of financial reports securely over the Web and enables on-line charting and analysis of data in the financials engine to support timely and informed decision-making.

        Lawson Human Resources Suite.    The human resources applications assist in attracting, developing and managing employees. These applications are integrated with our financials applications to automatically update the financial reporting functions for changes in employment and payroll. The human resources applications are comprised of several principal components, including the following:

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Benefits Administration automates day-to-day maintenance of standard and flexible employee benefit plans, as well as eligibility and enrollment processes.



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Payroll provides accurate, efficient and secure payroll processing. This application handles time-sensitive information, such as time entry, check or receipt printing, and regulatory filings.



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Absence Management tracks paid time off and accruals and monitors employee attendance online.



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Personnel Administration tracks workforce data including current employees, open positions and job history, education and other employee information; administers employee training, orientation and re-certification programs; and manages employee health and safety records for compliance with health and safety policies.



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Pay-to-Bill streamlines the process of creating fees for the services an organization provides, calculating payrolls and invoicing clients for these services.

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Human Resources Analytics provides analytical tools to examine human resources information online, including the ability to benchmark an organization's key human resources metrics against organizations both within and outside of their industry.



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Employee and Manager Self- Service allows employees to maintain personal information using our Web-based self-service forms and provides managers with applications for accessing information about their direct reports, thereby reducing human resources' administrative tasks.



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e-Recruiting provides Web-based recruitment management services that improve relationships, information and speed throughout the hiring process and provides organizations with automated sourcing, profiling, matching, tracking and hiring.

        Lawson Procurement Suite.    The procurement applications automate the operational and administrative procurement process, promote adherence to purchasing policies, assist businesses in negotiating pricing for supplies, lower materials and services costs and improve inventory practices. These applications are comprised of several principal components, including the following:

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Requisitions helps a business manage its purchasing function more effectively by allowing pre-authorized users to monitor and replenish supplies and streamline processes to reduce procurement costs.



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Purchase Order manages the replenishment process, purchase order creation and transmission processes with third-party vendors.



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Inventory Control manages inventory, automatically updating records for purchases, transfers from other categories, returns and other allocations. Customers can use wireless hand-held devices for data collection.



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Requisitions Self-Service manages internal requests for items such as maintenance, repairs, equipment and supplies, as well as allows users to enter receipts directly into the system.



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Vendor Self-Service allows suppliers to electronically receive information on the status of their invoices.



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e-Procurement provides purchasing management services with automated requisitioning, approval, receiving, reconciliation, invoice payment and posting to a user's general ledger, while integrating with Web-based exchanges, suppliers and manufacturers.

        Lawson Distribution Suite.    The distribution applications provide sell-side order management, warehouse fulfillment, customer invoicing and accounts receivable in an integrated solution. The distribution applications are comprised of several principal components, including the following:

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Order Entry automates the customer order process from receipt of order to invoice. Customers may submit orders via many different sources, including e-commerce websites.



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Work Order manages the fulfillment of orders that require assembly, providing scheduling, order component and cost adjustment capabilities.



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Warehouse provides timely and accurate execution of a wide variety of storage, distribution and tracking functions, including, for example, processing orders, backorders and requisitions, allocating inventory, processing pick lists and kits and packing operations.



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Sales Analysis provides comprehensive vendor and supplier analysis coupled with past purchase analysis and key performance indicators that allow a customer to manage profitability and quickly react to changing competitive climates.



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Billing provides flexibility, real-time bill presentment, automated invoice creation and pricing management.

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Franchise Management is an integrated franchiser-to-franchisee solution that manages contracts, loans and royalties for the franchisees.



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Customer Self-Service allows customers to place orders, review invoices, make address changes, analyze previous item histories and review their order-payment status.

        Retail Operations Suite.    Retail operations solutions are built for high-volume retail enterprises and encompass a complete range of activities, including the management of item information, category planning and review, assortment, pricing, promotions, warehouse replenishment, multi-channel ordering, store replenishment, forecasting and order determination. The principal components of the retail operations applications include the following:

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Merchandising assists category managers in the management, definition, planning, promotions, pricing and reviewing of product categories.



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Lawson Library serves as a data management hub for all of a retail customer's systems, including back office, merchandising, warehouse replenishment, distribution and even non-Lawson applications.



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Supply Chain provides an automated system for warehouse management and replenishment, as well as centralized control of multi-channel ordering.



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Store Operations extends the power of Lawson Supply Chain to each of a customer's retail location and contains a number of components to simplify and automate forecasting, replenishment, inventory control and analysis.

Integration and Collaboration Tools

        Our information management and integration and collaboration tools help customers improve their business processes through simplified presentation, navigation and access to information; automation of complex business processes; and intelligent routing of work and tasks to appropriate personnel.

        Lawson Extensions include:

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Information Management allows users to store, select, retrieve and customize information about employees, managers, vendors and business partners.



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Integration and Collaboration Extensions help businesses communicate with customers, partners and suppliers outside their organization and integrate with their back-office applications.



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Support Extensions are project management tools for product implementation, as well as tools for integrating voice, video and data communications to provide interactive functionality, including application sharing, which enables greater collaboration during our service and support for customers.



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System Management Extensions integrate our products with industry-leading system management tools to enable our customers to better manage their computer and network resources.

Enterprise Performance Management

        We offer a suite of role-based, pre-built reporting options and analytical tools to report, analyze and examine key metrics from both Lawson and non-Lawson sources. Key products in Enterprise Performance Management include:

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Enterprise Reporting allows our customers to customize and create interactive reports featuring data from Lawson and non-Lawson applications in one complete, visually appealing report formatted for the Internet.

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Scorecard uses online analytical processing to provide comprehensive analytical vertical and business process performance measurements, and customized tools for company-wide balanced scorecard initiatives, allowing collaboration among employees.



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Analytic Architect features pre-defined dimensions to create subject-specific data marts from relevant financial, transactional and operational data from employees, customers, internal processes and financial systems, eliminating the cost and time to define and program custom data marts.



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Workforce Analytics manages human capital and measures human resources initiatives, and allows businesses to analyze organizational effectiveness, compensation, benefits, separations and staffing, with the ability to import external benchmarking data for side-by-side comparisons of similar businesses.



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Strategic Ledger captures data that would not typically be maintained in an organization's general ledger to measure profitability and business performance in multi-dimensional detail.



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Smart Notification monitors data, filters out noise and delivers important information to users, allowing them to act quickly and intelligently to optimize organizational performance.

Lawson Portal

        Lawson Portal enables a wide distribution of information to users based on their role in an organization, while controlling access to data. Our pre-configured portal is combined with the appropriate Lawson core business applications, as well as third-party applications and data to provide a comprehensive solution for the industries we target. Lawson Portal allows the user to participate in automated, industry-specific business processes with limited training. Key features include:

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The Web-based Portal consolidates and integrates data from disparate sources, and provides a single place for users to access the information and work with the applications they need to do their jobs.



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The Portal can be configured to simply provide access to Lawson applications, non-Lawson applications and other content sources.



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The Portal can be configured to reflect corporate standards and processes, and can be deployed to all users within an organization. Individual users can further personalize the Portal with specific role-based data to match their specific needs.

Technology Partners

        We have relationships with other software companies that allow us to expand and complement our product offerings. For example, our relationships with Hyperion Solutions Corporation (Hyperion) and Microsoft Corporation enhance our analytics offerings. Our contractual relationship with Hyperion allows us to incorporate its online analytical processing technology into our financial suite of products. Other strategic relationships also allow us to expand our product functionality through the offering of services that are not our core competency, such as BSI TaxFactory for state and local tax data.

Services

        We offer comprehensive professional services, including consulting, training and implementation services, as well as ongoing customer support and maintenance, which support our enterprise software solutions. Generally, we charge our customers for professional services on a fee-for-service basis, with training services billed based on attendance. Customer support and maintenance typically is charged as a percentage of license fees and can be renewed annually at the election of our customers based on available support offerings. Our in-house professional services organization also educates third-party

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system integrators in the use of our products to assist them in providing services to our customers. Given our current base of over 2,000 customers, our services organization is a large and important part of our overall business. As of May 31, 2003, our services organization consisted of 698 employees.

        Professional Services.    Our professional services are integral to our ability to provide customers with successful enterprise solutions. Our industry-experienced employees work with customers to design and execute an implementation plan based on their business processes. Our professional services organization is aligned with our targeted vertical markets in order to best support our customers' needs. We also provide our customers with education and training. Our training services include providing user documentation and training at our corporate offices in St. Paul, Minnesota and in several regional offices, as well as Web-based training and computer-based training that our customers can access from their own offices.

        Customer Support and Maintenance.    We provide our customers with product updates, new releases, new versions and corrections as part of our support fees. We offer help desk support through our Global Support Center, which provides technical and product error reporting and resolution support. Clients can access our global support center by various methods, including the ability to manage their support issues online by enabling electronic submission of support issues to our global support center, with all communication regarding the support issue being managed electronically. We enable customers to monitor the progress of their requests for assistance, and offer a wide variety of up-to-date Lawson-specific product knowledge, including release planning, application descriptions, publications and training course dates, with intuitive search capabilities on our company-wide intranet, a portion of which is accessible by our partners and customers.

Technology and Product Architecture

        Our product architecture is designed to support today's rapidly changing technology standards by providing the following attributes:

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Layered Architecture. Allows us to adopt new technologies more readily by modifying individual components of our solutions, as well as to develop industry-specific solutions, without having to redesign other components of our product architecture.



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Web-Based and XML-Accessible. Facilitates open, scalable and secure electronic communication and collaboration among customers, suppliers, partners and employees.



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Flexible. Allows customers to deploy a pre-configured solution or customize our product offerings to conform to their business processes.



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Open. Allows our customers to operate on a number of operating systems (such as UNIX, NT and iSeries), database systems (such as DB2, Microsoft SQL Server and Oracle) and hardware platforms (such as Hewlett Packard, IBM, Sun Microsystems and Windows/Intel).



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Device-Independent. Allows customers to access our applications through various end-user devices, including personal computers, wireless devices and personal digital assistants.

        Our products are built upon proprietary, as well as industry-standard components. Over time, as industry standards evolve, we will be required to re-design our products to incorporate new industry standards.

        Our technology architecture is composed of the following:

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Web Services. The Web Services component includes Lawson Portal and Internet Object Services, which are key components for deploying Lawson applications via the Internet. Our Portal provides a single point of navigation through which users can access information from disparate sources, including Lawson core business applications, third-party applications, Internet sites and

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other miscellaneous data sources. Furthermore, businesses can customize our pre-configured user interfaces by using extensions to tailor solutions to meet their specific requirements. Internet Object Services provides the connection between Lawson and the Internet, and manages the communication between Lawson's browser-based interfaces and Lawson applications and databases. Internet Object Services delivers user requests to our applications and responds with results to users.

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Application Server. Our application server components include the business logic applications, active object repository, database layer and environment. Our proprietary business logic applications contain the server-based logic components of our software solutions. The active object repository is a proprietary library of objects that contain data attributes that define the interrelationship between the application logic and the data. For example, the active object repository would contain the attributes about an employee record in the human resources application. The employee attributes are loaded into memory for use as the human resources application runs, thereby enhancing speed, accuracy and efficiency. In addition, the active object repository enables any authorized user to look through and around transaction data by using our Drill Around® feature, based on the user's needs and analysis criteria. Drill Around® is not dependent on a pre-defined path, but rather is driven by the unique transaction and the attributes that the user is investigating, regardless of the application. The database layer maximizes data management performance, and exists independently from all other components, allowing our customers flexibility in configuring their system. Our environment maximizes the database system's performance, reliability and availability while providing secured access across our solutions. The environment enables the proprietary software in the business logic applications to function in multiple operating system platforms.

Trademarks

        Drill Around® and Lawson®, are registered trademarks of ours. Other trademarks and trade names appearing in this document are the property of their respective holders.

Sales and Marketing

        We market and sell our software and services solutions through a combination of a direct sales force, channel partners and resellers.

        Our direct sales force and services organization is aligned with our strategy to provide industry-tailored solutions, and focuses on the unique business processes for each of our targeted services industries. Within each services industry, we have a sales team dedicated to prospective customers, and another team dedicated to sales to existing customers. We also have regional sales teams that focus on specific geographic territories. Our domestic sales offices are located in Atlanta, Boston, Chicago, Columbus, Dallas, Denver, Los Angeles, St. Paul, New York, Philadelphia, San Francisco, Seattle and Washington, D.C. We also have international sales offices in Canada, France, the Netherlands and the United Kingdom and sell our solutions through affiliates in other international locations.

        In addition to our direct sales teams, we enter into strategic alliances with systems integrators and resellers to benefit from our partners' resources, expertise and customer base.

        Through our alliances, we believe we are able to expand our market presence through increased awareness of our enterprise software solutions within their organizations and customer base and through their personnel who are trained to implement our software solutions. Our channel partners and resellers market and promote our software products and typically provide implementation services to their end users. Channel partners generate sales leads, make initial customer contacts and assess needs prior to our introduction. In addition, some of our channel partners engage in customer support

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and localization of our products. We also engage in joint marketing programs, presentation of seminars, attendance at trade shows and the hosting of conferences with many of our business partners.

        We also use application service providers ("ASP's") to distribute our products. ASPs allow us to reach small-to medium-sized businesses that prefer a hosted solution. Our software's architecture is easily distributed over the Internet and is highly scalable to serve many customers and supports multi-tenancy, which lets ASPs securely host multiple customers on a single set of our applications.

Research and Development

        Since inception, we have made substantial investments in research and software product development. We believe that timely development of new software products, enhancements to existing software products and the acquisition of rights to sell or incorporate complementary technologies and products into our software product offerings are essential to maintain our competitive position in the market. The enterprise software market is characterized by rapid technological change, frequent introductions of new products, changes in customer demands and rapidly evolving industry standards.

        Our total research and development expenses were $59.1 million, $66.9 million and $52.6 million in fiscal 2003, 2002 and 2001, respectively. As of May 31, 2003, our research and development organization consisted of 406 employees.

Competition

        The markets for our products and services are intensely competitive and we expect substantial additional competition from established and emerging software companies. We believe that the principal competitive factors affecting our market include:

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product features, functionality, performance and price;



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knowledge of a customer's industry;



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ease of integration and speed of implementation;



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level of customer service;



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sales and marketing efforts;



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new product and technology introductions; and



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company stability, resources and reputation.

        We believe we have competitive advantages over a number of our competitors. Some of these advantages include the breadth and completeness of our software solutions, our focus on each of our targeted industries, the depth of our product functionality for each of our targeted industries, the openness and flexibility of our software's architecture, the industry knowledge and expertise of the members of our sales, marketing and services organizations and our long operating and product development history.

        Many of our competitors may have an advantage over us due to their larger customer bases, greater name recognition, operating and product development history, greater international presence and substantially greater financial, technical and marketing resources. These competitors include, for example, well-established companies such as Oracle Corporation, PeopleSoft Inc. and SAP AG. We also compete with numerous other software companies including Internet software vendors, single-industry software vendors and those companies that offer a specific solution that directly competes with a portion of our comprehensive product offering.

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Intellectual Property and Product Liability

        We regard certain aspects of our internal operations, software and documentation as proprietary, and rely on a combination of contract, copyright, trademark and trade secret laws and other measures, including confidentiality agreements, to protect our proprietary information. Existing copyright laws afford only limited protection. We believe that, because of the rapid pace of technological change in the computer software industry, trade secret and copyright protection is less significant than factors such as the knowledge, ability and experience of our employees, frequent software product enhancements and the timeliness and quality of support services. We cannot guarantee that these protections will be adequate or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. In addition, when we license our products to customers, we provide source code for most of our products. We also permit customers to possibly obtain access to our other source code through a source code escrow arrangement. This access to our source code may increase the likelihood of misappropriation or other misuse of our intellectual property. In addition, the laws of certain countries in which our software products are or may be licensed do not protect our software products and intellectual property rights to the same extent as the laws of the United States.

        Software companies have increasingly applied for, and relied on, the protection of patents. To date, we have filed two patent applications. These applications may not result in issued patents and, even if issued there is no assurance that the patents will provide us with any competitive advantage.

        We do not believe our software products, third-party software products we offer under sublicense agreements, our trademarks or other Lawson proprietary rights infringe the property rights of third parties. However, we cannot guarantee that third parties will not assert infringement claims against us with respect to current or future software products or that any such assertion may not require us to enter into royalty arrangements or result in costly litigation.

        Our license agreements with our customers contain provisions designed to limit the exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in these license agreements may not be valid as a result of future federal, state or local laws or ordinances or unfavorable judicial decisions. The license and support of our software for use in mission critical applications creates the risk of a claim being successfully pursued against us. Damages or injunctive relief resulting under such a successful claim could seriously harm our business.

Employees

        As of May 31, 2003, we had 1,675 employees, including 366 in sales and marketing, 406 in research and development, 698 in services and customer support and 205 in administration. Our performance depends in significant part on our ability to attract, train and retain highly qualified personnel. None of our employees are represented by a labor union and we believe our relations with our employees are good.

        Our executive officers are:

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        H. Richard Lawson is one of our founders and has been one of our directors and an executive officer since our inception in 1975. Mr. Lawson has served as the chairman of our board of directors since February 2001. From March 2000 until February 2001, Mr. Lawson was our chief executive officer. Prior to that time, Mr. Lawson served as our president and chief operating officer from October 1998 until March 2000 and our chairman from June 1996 until October 1998.

        John J. Coughlan has served as our chief executive officer since February 2001, our president since March 2000, and one of our directors since April 2000. From March 2000 until February 2001, Mr. Coughlan also served as our chief operating officer. From 1987 until March 2000, Mr. Coughlan worked for us in various capacities, including as executive vice president of the healthcare business unit and most recently as executive vice president of field operations and marketing. In 1998, Mr. Coughlan was convicted of criminal vehicular homicide in connection with a one-car traffic accident that resulted in the death of his father. Mr. Coughlan's conviction was reduced to a misdemeanor after the court received testimony from his probation officer, community members and family members regarding his personal character and community service, including his activities on behalf of Mothers Against Drunk Driving. Our board of directors is fully informed of the facts and circumstances surrounding this event and has expressed its full confidence in Mr. Coughlan's integrity and ability as an officer and director of our company.

        Robert G. Barbieri has served as our executive vice president and chief financial officer since August 2000 and as our executive vice president of operations since June 2003. From January 1997 until August 2000, Mr. Barbieri was employed by Apogee Enterprises, Inc., a publicly traded glass, coatings and service technologies company, serving most recently as vice president and chief financial officer. From 1984 until joining Apogee, Mr. Barbieri was employed by Air Products and Chemicals, Inc., a global gases and chemicals company, where he held several senior financial management positions, serving most recently as controller for the general industries division of the gases group. Mr. Barbieri is a certified management accountant.

        James F. DeSocio has served as an executive vice president since March 2000, and since June 2002 has been responsible for the retail industry market. Mr. DeSocio has worked in various capacities since joining us in September 1991 as an account executive. Mr. DeSocio served as our executive vice president, worldwide field operations from February 2001 until May 2002, our executive vice president, field operations from March 2000 until February 2001, our vice president/ general manager, professional services from June 1999 until March 2000, our vice president of eastern area field operations from June 1996 until May 1999, and our New York regional sales manager from March 1993 until May 1996. From October 1986 until September 1991, Mr. DeSocio was employed by Software Plus, Inc. a developer of human resources information systems, serving most recently as senior marketing representative for HRIS software and services. From 1982 until 1986, Mr. DeSocio was employed by Automatic Business Centers, an application service provider of financial, payroll and tax services, serving most recently as New York/ New Jersey sales manager.

        Dean J. Hager has served as an executive vice president since June 2000, and since June 2002 has been responsible for the professional services industry market. Mr. Hager has worked in various capacities since joining us in May 1998. Mr. Hager served as our executive vice president, global products division from February 2001 until May 2002, our executive vice president, worldwide marketing from June 2000 to February 2001, our vice president, e-business marketing from June 1999 until June 2000, and our director of marketing for our former AS/400 business unit from May 1998 until June 1999. From March 1989 to May 1998, Mr. Hager was employed by IBM, where he held several senior management positions, serving most recently as senior program manager with its server products division.

        Eric C. Morgan has served as an executive vice president since February 2001, and since June 2002 has been responsible for the healthcare services industry market. Mr. Morgan has worked in various

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capacities since joining us in 1991 as an account executive. Mr. Morgan served as our executive vice president, strategic market development from February 2001 until May 2002, vice president and general manager, healthcare, from September 1999 until February 2001, and our vice president of sales, healthcare, from March 1999 until September 1999. From 1988 to 1991, Mr. Morgan was employed by Global Turnkey Systems, an enterprise resource planning vendor for small- to medium-sized companies, serving in a variety of sales positions. From 1983 to 1988, Mr. Morgan was an account executive for NCR, a diversified hardware and software provider.

        Bruce B. McPheeters has served as our senior vice president of administration since June 2002, our general counsel since April 2000, our corporate secretary since October 1999, and our vice president of administration from April 2000 until May 2002. Mr. McPheeters joined us as corporate counsel in September 1999. From 1981 until September 1999, Mr. McPheeters was a business lawyer in private practice, focusing primarily in the areas of intellectual property, securities, and mergers and acquisitions of privately and publicly held companies. From December 1995 until September 1999, he was employed by the law firm of Gray, Plant, Mooty, Mooty & Bennett, P.A.

Available Information

        We make available, free of charge, on our website (www.lawson.com) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we have electronically filed or furnished such materials to the Securities and Exchange Commission.

Item 2. Properties

        Our corporate headquarters and executive offices are in St. Paul, Minnesota, where we lease approximately 300,000 square feet of space. The lease on this facility expires July 31, 2015. We also lease approximately 240,000 square feet of space, primarily for regional sales and support offices, elsewhere in the United States. Additionally, we lease approximately 41,000 square feet of office space in countries outside the United States, used primarily as sales and services offices. Expiration dates of leases on these offices range from 2003 to 2017. We believe that our current domestic and international facilities will be sufficient to meet our needs for at least the next 12 months and that, if required, suitable additional or alternative space will be available on commercially reasonable terms to accommodate expansion of our operations.

Item 3. Legal Proceedings

Pending Employment Litigation

        We are a defendant in a lawsuit, Felice Cambridge v. Lawson Software, Inc. et. al., filed on December 26, 2001, in the United States District Court for the Northern District of Texas. The lawsuit primarily alleges violations of the Americans with Disabilities Act of 1990 and related claims with respect to one former employee. We believe these claims are without merit and we will vigorously defend against these claims.

Other Matters

        We are, and from time to time may become, involved in litigation in the normal course of business concerning our products and services. While the outcome of these claims cannot be predicted with certainty, we do not believe that the outcome of any of these or the above mentioned legal matter will have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, depending on the amount and the timing, an unfavorable resolution of some or all of

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these matters could materially affect our future results of operations or cash flows in a particular period.

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

        No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended May 31, 2003.

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Part II

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters

        Our common stock is traded in the Nasdaq National Market (Nasdaq) under the symbol LWSN. The following table lists the high and low closing prices by quarter as reported by Nasdaq since our initial public offering in December 2001.

        We have never declared or paid any cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. We intend to retain future earnings to fund the development and growth of our business. Our credit agreement with US Bank prohibits cash dividends without the bank's consent.

        As of July 18, 2003, the approximate number of stockholders of record was 226.

        Between June 1, 2002 and June 26, 2002, we sold 731,353 shares of common stock to various employees pursuant to the exercise of outstanding stock options for an aggregate consideration of $1,004,608 in reliance upon Rule 701 of the Securities Act of 1933, as amended ("Securities Act"). Between June 1, 2002 and June 26, 2002 we granted options to purchase an aggregate of 36,780 shares of common stock to four persons in exempt transactions under Section 4(2) under the Securities Act. After June 26, 2002, all stock option grants and exercises were completed pursuant to a registration statement on Form S-8 effective June 26, 2002.

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Item 6. Selected Consolidated Financial Data

(1)

In the fourth quarter of fiscal 2002, we adopted the Emerging Issues Task Force (EITF) Issue 01-14, "Income Statement Characterization of Reimbursement Received for 'Out-of-Pocket' Expenses Incurred". Adoption of the EITF Issue 01-14 resulted in reclassifications that increased both revenues and cost of revenues equally by $13,379, $10,392, $7,223 and $6,395 for the years ended May 31, 2002, 2001, 2000, and 1999, respectively. All prior years presented have been restated to reflect these reclassifications. The change had no effect on net (loss) income or net (loss) income per share.

(2)

Includes non-cash stock-based compensation of $199, $428 and $114 in the years ended May 31, 2003, 2002 and 2001, respectively.

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(3)

Includes non-cash stock-based compensation of $665, $1,623 and $510 in the years ended May 31, 2003, 2002 and 2001, respectively.

(4)

Includes non-cash stock-based compensation of $816, $2,335 and $911 in the years ended May 31, 2003, 2002 and 2001, respectively.

(5)

Includes non-cash stock-based compensation of $1,882, $4,168, $2,061 and $72 in the years ended May 31, 2003, 2002, 2001 and 2000, respectively; lease abandonment expense (benefit) of $551, $215, $1,765, $(516) and $4,350, in the years ended May 31, 2003, 2002, 2001, 2000 and 1999, respectively; and compensation associated with a repurchase of stock options from current employees of $5,130 in the year ended May 31, 2001.

(6)

Includes business process improvement initiatives of $655 and $4,929 in the years ended May 31, 2002 and 2001, respectively; expense associated with a warrant issued to a strategic partner of $1,800 in the year ended May 31, 2000; and expense associated with the repurchase of stock options held by former employees of $2,379 and $2,700 for the years ended May 31, 2001 and 2000, respectively.

(7)

Includes restructuring charges of $6,035 and $3,258 in the years ended May 31, 2003 and 2002, respectively for severance and related benefits and lease termination costs.

(8)

Includes restructuring charges, non-cash stock-based compensation, lease abandonment expense, business process improvement initiative expenses, warrant issued to a strategic partner and expenses associated with repurchases of options in the aggregate of $9,949, $12,254, $17,865, $4,056 and $4,350, in the years ended May 31, 2003, 2002, 2001, 2000 and 1999, respectively.

(9)

We used $10,240 proceeds from our initial public offering to repay senior subordinated convertible notes. Due to the repayment of the notes prior to the scheduled maturity date, we recorded early extinguishment of debt expense in the third quarter of fiscal 2002 consisting of the unamortized debt issuance costs and the discount on the notes totaling $2,321.

(10)

As a result of the conversion of the Series A Preferred Stock to common stock, which accelerated the amortization of the beneficial conversion feature, we recognized a $29,998 non-cash charge to net income available to common stockholders for the unamortized value of the beneficial conversion feature of our preferred stock in the third quarter of fiscal 2002. We also recognized accretion on the preferred stock of $100 and $52 in the years ended May 31, 2002 and 2001, respectively.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following should be read with our consolidated financial statements and the notes to those statements and other financial information appearing elsewhere in this statement.

Forward-Looking Statements

        In addition to historical information, this Form 10-K contains forward-looking statements. The forward-looking statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—"Factors That May Affect Our Future Results or the Market Price of Our Stock". 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. Readers should carefully review the risk factors described in this report on Form 10-K and in other documents we file from time to time with the Securities and Exchange Commission.

Overview

        We are a provider of enterprise software solutions for specific services industries. We derive revenues from licensing software solutions and providing comprehensive professional services, including consulting, training and implementation services, as well as ongoing customer support and maintenance. Consulting, training and implementation services are separately priced and generally are available from a number of suppliers and are not essential to the functionality of our software products. Accordingly, revenues from these services are generally recorded separately from the license fee. Additionally, we generate a portion of our revenues from reselling our software solutions through third-party vendors.

Critical Accounting Policies and Estimates

        Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period, and related disclosures of contingent assets and liabilities. The Notes to Consolidated Financial Statements contained herein describe our significant accounting polices used in the preparation of the consolidated financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to bad debts, sales returns and allowances, intangible assets and contingencies. We base our estimates on historical experience and on various other assumptions that we believe 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 readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions.

        We believe the critical accounting policies listed below affect significant judgments and estimates used in the preparation of our consolidated financial statements.

        Revenue Recognition.    We recognize revenues in accordance with the provisions of the American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4 and SOP 98-9, as well as Technical Practice Aids issued from time to time by the AICPA, and in accordance with the Securities and Exchange

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Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." We license software under non-cancelable license agreements and provide related professional services, including consulting, training, and implementation services, as well as ongoing customer support and maintenance. Consulting, training and implementation services are not essential to the functionality of our software products, are sold separately and also are available from a number of third-party service providers. Accordingly, revenues from these services are generally recorded separately from license fees. Software arrangements which include fixed-fee service components are recognized using contract accounting. Our specific revenue recognition policies are as follows:

•

Software License Fees—License fee revenues from end-users and resellers are generally recognized using the residual method when the software product has been shipped, provided a non-cancelable license agreement has been signed, there are no uncertainties surrounding product acceptance, the fees are fixed or determinable and collection of the related receivable is considered probable. We do not generally offer rights of return, acceptance clauses or price protection to our customers. Typically, our software license fees are due within a twelve-month period from the date of shipment. If the fee due from the customer is not fixed or determinable, including payment terms greater than twelve months from shipment, revenue is recognized as payments become due and all other conditions for revenue recognition have been satisfied. In software arrangements that include rights to multiple software products, specified upgrades, maintenance or services, we allocate the total arrangement fee among each deliverable using the fair value of each of the deliverables determined using vendor-specific objective evidence. Vendor-specific objective evidence of fair value is determined using the price charged when that element is sold separately. In software arrangements in which we do not have vendor-specific objective evidence of fair value of undelivered elements, revenue is deferred until fair value is determined or all elements have been delivered.



•

Services—Revenues from training and consulting services are recognized as services are provided to customers. Revenues from maintenance contracts are deferred and recognized ratably over the term of the maintenance agreements. Revenues for customer support and maintenance that are bundled with the initial license fee are deferred based on the fair value of the bundled support services and recognized ratably over the term of the agreement; fair value is based on the renewal rate for continued support arrangements.

        Allowance for Doubtful Accounts.    We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required or future revenue could be deferred until collectibility becomes probable.

        Sales Returns and Allowances.    We also record a provision for estimated sales returns and allowances on product and service related sales in the same period the related revenues are recorded or when current information indicates additional amounts are required. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. If the historical data we use to calculate these estimates does not properly reflect future returns, then a change in the allowances would be made in the period in which such a determination is made and revenues in that period could be materially affected.

        Valuation of Long-Lived and Intangible Assets and Goodwill.    We review identifiable intangible and other long-lived assets for impairment annually or sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable. Events or changes in circumstances that indicate the carrying amount may not be recoverable include, but are not limited to, a significant decrease in the market value of the business or asset acquired, a significant adverse change in the extent or manner in which the business or asset acquired is used or a significant adverse change in the business climate. If

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such events or changes in circumstances are present, the undiscounted cash flow method is used to determine whether the asset is impaired. Cash flows would include the estimated terminal value of the asset and exclude any interest charges. To the extent that the carrying value of the asset exceeds the undiscounted cash flows over the estimated remaining life of the asset, the impairment is measured using the discounted cash flows. The discount rate utilized would be based on our best estimate of the related risks and return at the time the impairment assessment is made. In accordance with Statement of Financial Accounting Standard ("SFAS') No. 142, "Goodwill and Other Intangible Assets," we test goodwill and other indefinite lived intangible assets for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. All of our goodwill was assigned to a single reporting unit, which is our sole operating segment.

        Deferred Taxes.    Significant judgment is required in determining our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. Although we believe our assessments are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in our historical income tax provisions, benefits and accruals. Such differences could have a material effect on our income tax provision and net income in the period in which such a determination is made.

        We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance, we must include an expense within the tax provision in the statement of operations. We have not recorded a valuation allowance as of May 31, 2003, as we expect to be able to utilize all of our deferred tax assets. The ability to utilize our deferred tax assets is solely dependent on our ability to generate future taxable income. In the event that we adjust our estimates of future taxable income, we may need to establish a valuation allowance, which could materially impact our financial position and results of operations.

        Contingencies.    We are subject to the possibility of various loss contingencies in the normal course of business. We accrue for loss contingencies when a loss is estimable and probable.

Initial Public Offering and Other Equity Transactions

        In fiscal 2002, we closed our initial public offering on December 12, 2001, at which time we issued 13,675,000 shares of common stock from the primary offering, 10,316,319 shares of common stock upon conversion of all of the outstanding shares of Series A Preferred Stock, 1,661,153 shares of common stock as part of the over-allotment option exercise and 438,847 shares of common stock issued upon the exercise of warrants and sold as part of the over-allotment option exercise. After giving effect to the issuance of these shares on December 12, 2001, we had 93,316,268 outstanding shares of common stock and 106,825,000 shares on a fully diluted basis using the treasury method. We received proceeds, net of commissions and expenses, of $197.3 million in the initial public offering including exercise of the over-allotment option in full. Proceeds from the initial public offering are invested in interest-bearing, investment grade securities. We used $10.2 million of the proceeds from the offering to repay senior subordinated convertible notes. Due to the repayment of the notes prior to the scheduled maturity date, we recorded a charge in the third quarter of fiscal 2002 for the total amount of the unamortized debt issuance costs and the discount on the notes of $2.3 million. Additionally, as a result of the conversion of the Series A Preferred Stock to common stock, which accelerated the amortization of the beneficial conversion feature, we recognized a $30.0 million non-cash charge to net income

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available to common stockholders for the unamortized value of the beneficial conversion feature of our preferred stock in the third quarter of fiscal 2002. We also recognized accretion on the preferred stock of $0.1 million for the year ended May 31, 2002. These charges adversely affected basic and diluted earnings per share by $0.38. However, these charges had no impact on net income.

Acquisitions

        The following acquisitions were accounted for by the purchase method of accounting, and, accordingly, the results of operations have been included in the Consolidated Statements of Operations since the acquisition dates. All of the acquisitions were cash transactions. The assets and liabilities acquired were recorded at their estimated fair values at the effective date of the acquisition. See Note 6 of Notes to Consolidated Financial Statements for a pro forma presentation of our significant acquisitions.

Armature

        On June 28, 2002, we acquired certain assets of Armature Holdings Ltd. Armature provided merchandising/category management and supply chain management solutions for retailers, consumer goods manufacturers and wholesalers. The assets acquired included all software applications, related trademarks and technologies. The purchase price for this transaction was $8.1 million.

Keyola

        On April 17, 2002, we acquired all of the outstanding capital stock of Keyola Corporation for $5.0 million. Keyola developed innovative business intelligence technology to automatically deliver event-driven notifications to organizations. At May 31, 2003, additional cash payments ranging from zero to $1.5 million are contingent upon the future performance of Keyola and will be recorded as additional goodwill if earned.

Account4, Inc.

        On July 11, 2001, we acquired the outstanding securities of Account4, Inc. for $31.3 million including the repayment of assumed debt. Account4 provided web-based professional services automation software that enables service organizations to more efficiently manage their businesses and workforce. As a result of the acquisition, we expanded our software solution for service organizations to include automated functions such as forecasting and planning, scheduling and assignments, skills and resource management, time and expense reporting, project management and invoicing. The acquisition of Account4 was intended to enhance our strategies of focusing on targeted vertical markets and providing additional value-added products and services to customers.

Acquisition of Numbercraft Limited Subsequent to Year-End

        On July 24, 2003, we acquired all of the outstanding capital stock of Numbercraft Limited (Numbercraft) for $4.0 million. Numbercraft provided solutions for retailers and consumer packaged goods companies which enable a quantitative understanding of consumer dynamics, product and offer performance, and customer trends. Additional cash payments ranging from zero to $9.0 million are contingent upon the future performance of Numbercraft and will be recorded as additional goodwill if earned.

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Results of Operations

        The following table sets forth certain line items in our Consolidated Statements of Operations as a percentage of total revenues for the periods indicated:

Fiscal Year Ended May 31, 2003 Compared To Fiscal Year Ended May 31, 2002

Revenues

        Total Revenues.    We license software under non-cancelable license agreements and provide related services including consulting, training, and implementation services, as well as ongoing customer support and maintenance. Total revenues decreased to $344.3 million in fiscal 2003 from $428.3 million in fiscal 2002, or 19.6%. The decrease was primarily due to a decline in revenues from license fees. The general economic slowdown in information technology spending has continued to negatively impact the sales of our products to our customers and prospective customers.

        License Fees.    Revenues from license fees decreased to $77.6 million in fiscal 2003 from $150.2 million in fiscal 2002, or 48.3%. The decrease is principally the result of a continued economic slowdown in information technology spending. Customers continue to delay purchasing new products, or purchase individual products, rather than multi-product suites or systems, resulting in a lower average sales price of the mix of products sold. Revenues from license fees as a percentage of total revenues for fiscal 2003 were 22.5%, compared to 35.1% in 2002. The decrease in license fees as a percentage of total revenues was primarily a result of the decrease in license fees in proportion to revenues from services.

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        Services.    Revenues from services decreased to $266.7 million for fiscal 2003 from $278.1 million for fiscal 2002, or 4.1%. The decline reflects the overall decrease in contracting activity which has resulted in less consulting and training opportunities. The decline in services revenue included a partially offsetting increase in maintenance revenue which was primarily due to an expanded customer base and increased maintenance prices. Services revenues as a percentage of total revenues for fiscal 2003 and 2002 were 77.5% and 64.9%, respectively.

        The current technology recession and decline in overall technology spending may cause our customers to continue to reduce or eliminate their information technology spending, which could substantially reduce the number of new software licenses we sell, the average sales price for these licenses and the need for our services. Given continued weak economic conditions and the uncertainty regarding Middle East conflicts and threats of hostilities elsewhere, projections of future revenue and operating results are difficult to predict. There can be no assurance that our future revenue and operating results will not be adversely affected by the aforementioned factors.

Cost of Revenues

        Cost of License Fees.    Cost of license fees includes royalties to third parties, amortization of acquired software and software delivery expenses. Our software solutions may include embedded components of third-party vendors, for which a fee is paid to the vendor upon sale of our products. In addition, we resell third-party products in conjunction with the license of our software solutions. The cost of license fees is higher when we resell products of third-party vendors. As a result, gross margins vary depending on the proportion of third-party product sales in our revenue mix. Cost of license fees includes amortization expense of intangibles related to the acquisitions of Armature in 2003 and Account4 and Keyola in 2002, of $1.5 million and $0.9 million for fiscal 2003 and 2002, respectively. Cost of license fees decreased to $14.4 million for fiscal 2003 from $30.9 million for fiscal 2002, or 53.5%. Cost of license fees as a percentage of total revenues for fiscal 2003 and 2002 were 4.2% and 7.2%, respectively. This decline reflects an overall decrease in license fees and third party products sold in relation to total sales due, in part, to the termination of our Siebel Systems reseller agreement in the fourth quarter of fiscal 2002. Gross margin on revenue from license fees was 81.5% and 79.5% for fiscal 2003 and 2002, respectively. The increase in gross margin on license fees was primarily attributable to the decrease in sales of third party products which typically carry lower margins, partially offset by higher amortization expense of intangibles.

        Cost of Services.    Cost of services includes the salaries, employee benefits and related travel and overhead costs for providing consulting, training, implementation and support services to customers. Cost of services decreased to $141.7 million for fiscal 2003 from $153.8 million for fiscal 2002, or 7.9%. The decrease in cost of services was primarily due to lower compensation expense and related travel expenses as a result of our May 2002 and September 2002 workforce reductions, and a reduction in the use of third-party consultants' services in our revenue mix. These declines are partially offset by an increase in expenses due to the addition of headcount resulting from the Armature acquisition. Cost of services as a percentage of total revenues for fiscal 2003 and 2002 were 41.1% and 35.9%, respectively. The increase in cost of services as a percentage of total revenues is due to the decrease in total revenues. Gross margin on services revenues was 46.9% and 44.7% for fiscal 2003 and 2002, respectively. The gross margin improvement on services was primarily attributable to the increase in maintenance revenue in proportion to consulting and other service revenue.

Operating Expenses

        Research and Development.    Research and development expenses consist primarily of salaries, employee benefits, related overhead costs and consulting fees associated with product development, enhancements, upgrades, testing, quality assurance and documentation. Research and development expenses decreased to $59.1 million for fiscal 2003 from $66.9 million for fiscal 2002, or 11.6%. The

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decrease in expense is primarily attributed to the workforce reductions, partially offset by an increase in headcount as a result of the Armature acquisition. Also, research and development expenses included lower non-cash charges for stock-based compensation of $0.7 million for fiscal 2003 compared to $1.6 million for fiscal 2002. Research and development expenses as a percentage of total revenues for fiscal 2003 and 2002 were 17.2% and 15.6%, respectively. The increase reflects the lower total revenue in fiscal 2003 compared to fiscal 2002 and our continued commitment to reinvest in research and development.

        Sales and Marketing.    Sales and marketing expenses consist primarily of salaries and incentive compensation, employee benefits and travel and overhead costs related to our sales and marketing personnel, as well as trade show activities and advertising costs. Sales and marketing expenses decreased to $103.0 million for fiscal 2003 from $124.6 million for fiscal 2002, or 17.4%. The decrease in expenses is largely the result of our two workforce reductions, a reduction in marketing activities and a decrease non-cash stock-based compensation expense. Stock based compensation expense for the sales and marketing area was $0.8 million for fiscal 2003 compared to $2.3 million for fiscal 2002. Sales and marketing expenses as a percentage of total revenues for fiscal 2003 and 2002 were 29.9% and 29.1%, respectively.

        General and Administrative.    General and administrative expenses consist primarily of salaries, employee benefits and related overhead costs for administrative employees, as well as legal and accounting fees, consulting fees and bad debt expense. General and administrative expenses decreased to $30.0 million for fiscal 2003 from $32.1 million for fiscal 2002, or 6.6%. The decrease in expense is primarily due to a $5.8 million decline in bad debt expense reflecting the decrease in the trade accounts receivable balance and our collection history, a decrease in employee and employee related costs resulting from workforce reductions and a decrease in non-cash charges for stock-based compensation. General and administrative expenses included non-cash charges for stock-based compensation of $1.9 million in fiscal 2003 compared to $4.2 million for fiscal 2002. The decrease in general and administrative expenses was partially offset by an increase in insurance costs of $0.9 million, an asset impairment charge related to a discontinued project of $0.7 million, non-recurring costs of $0.4 million incurred for the audit of Armature in preparation for the required Form 8-K/A filing and increased lease termination expense related to our former headquarters of $0.3 million. General and administrative expenses as a percentage of total revenues for fiscal 2003 and 2002 were 8.7% and 7.5%, respectively.

        Restructuring Charges.    During fiscal 2003, we recorded a total of $6.0 million of restructuring charges for our 2003 restructuring plan and adjustments to the 2002 plan. In the second quarter of fiscal 2003, we approved a $5.8 million restructuring plan to realign projected expenses with anticipated lower revenue levels resulting from the continued economic downturn. The plan included the termination and payment of severance-related benefits of $4.7 million for 244 employees in various functions including administrative, professional, and managerial, in the United States, Canada and Europe. The charges also included expenses totaling $1.1 million related to the closure and consolidation of facilities. All terminations and associated payments are expected to be paid in calendar 2003. Cash payments related to remaining facility closure liabilities are expected to continue through October 2003. Adjustments to the charges were recorded upon finalization of lease termination agreements and severance related benefits. For a summary of the activity for the year, see Note 5 of Notes to Consolidated Financial Statements.

        In the fourth quarter of fiscal 2002, we approved a restructuring plan in response to the general economic downturn and incurred restructuring charges of $3.3 million. The plan included the termination and payment of severance-related benefits of $2.9 million for 111 employees in various functions including administrative, professional, and managerial, primarily in the United States. All terminations and associated payments were completed during the first quarter of fiscal 2003. The

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charges also included expenses of $0.3 million related to closing a leased office facility. An additional $0.2 million provision was recorded in 2003 related to the closed facility based on finalization of lease termination agreements. Cash payments related to remaining facility closure liabilities are expected to continue through June 2005. For a summary of the activity for the year, see Note 5 of Notes to Consolidated Financial Statements.

        Other General Expenses.    Other general expenses in fiscal 2002 consisted of $0.7 million of business process improvement initiatives designed to prepare our organization for our initial public offering. We did not incur similar expenses for fiscal 2003.

        Amortization of Acquired Intangibles.    Amortization of acquired intangibles was $0.9 million for fiscal 2003 and $0.6 million for fiscal 2002 and consisted of amortization expense related to the purchase of Account4 in July 2001, Keyola in April 2002 and Armature in June 2002.

Other Income (Expense), net

        Other income (expense), net was $4.5 million of income for fiscal 2003 compared with expense of $1.6 million for fiscal 2002. Other income (expense), net as a percentage of total revenues for fiscal 2003 and 2002 was 1.3% and (0.3)%, respectively. We earned interest income of $4.6 million and $2.8 million for fiscal 2003 and 2002, respectively. This was partially offset by interest expense of $0.1 million and $2.0 million for fiscal 2003 and fiscal 2002, respectively. The increase in interest income is due to an increase in our invested cash, cash equivalents and marketable securities balances. The decrease in interest expense is due to the repayment of senior subordinated convertible notes subsequent to our initial public offering in December 2001. As a result of the early repayment of the notes, we recorded a non-cash charge of $2.3 million to write-off unamortized debt issuance costs and the discount on notes for fiscal 2002. In accordance with SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," we have reclassified the $2.3 million previously reported as an extraordinary loss in fiscal 2002, to a component of other income (expense) in the Consolidated Statements of Operations contained in this report.

(Benefit) Provision for Income Taxes

        We recognized an income tax benefit of $2.4 million for fiscal 2003 compared to a tax provision of $5.6 million for fiscal 2002. Our income tax (benefit) provision is comprised primarily of federal and state taxes. Our effective rate was 39.0% and 40.0% for fiscal 2003 and 2002, respectively. The decrease in the effective tax rate was primarily due to an increase in tax-exempt income.

Fiscal Year Ended May 31, 2002 Compared To Fiscal Year Ended May 31, 2001

Revenues

        Total Revenues.    Total revenues increased to $428.3 million in fiscal 2002 from $394.3 million in fiscal 2001, or 8.6%. The increase was attributable to a $36.1 million increase in services revenues.

        License Fees.    Revenues from license fees decreased to $150.2 million in fiscal 2002 from $152.3 million in fiscal 2001, or 1.3%. The decrease is primarily due to a decline in the average sales price per customer, particularly during the fourth quarter of fiscal 2002, reflecting an increase in customer purchases of individual products, rather than multi-product suites or systems, which was partially offset by an increase in the volume of license transactions. Revenues from license fees as a percentage of total revenues for fiscal 2002 and 2001 were 35.1% and 38.6%, respectively. The decrease as a percentage of revenues was primarily a result of the increase in revenues from services as a percentage of total revenues.

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        Services.    Revenues from services increased to $278.1 million for fiscal 2002 from $242.0 million for fiscal 2001, or 14.9%. The increase was primarily due to greater demand for consulting services and maintenance revenues from our expanding customer base. Services revenues as a percentage of total revenues for fiscal 2002 and 2001 were 64.9% and 61.4%, respectively.

Cost of Revenues

        Cost of License Fees.    Cost of license fees increased to $30.9 million for fiscal 2002 from $23.6 million for fiscal 2001, or 30.9%. Cost of license fees included amortization expense of acquired intangibles related to the purchases of Account4 and Keyola of $0.9 million for fiscal 2002. Cost of license fees as a percentage of total revenues for fiscal 2002 and 2001 were 7.2% and 6.0%, respectively. Gross margin on revenue from license fees was 79.5% and 84.5% for fiscal 2002 and 2001, respectively. The increase in cost of license fees as a percentage of total revenues and the decrease in gross margin on license fees was due primarily to the increased proportion of sales of third-party products in our revenue mix.

        Cost of Services.    Cost of services increased to $153.8 million for fiscal 2002 from $130.9 million for fiscal 2001, or 17.5%. The increase in expenses was primarily due to higher compensation expenses, and other related costs from additional headcount, and increased third party consulting expenses. Cost of services included non-cash charges for stock-based compensation of $0.4 million and $0.1 million for fiscal 2002 and 2001, respectively. Cost of services as a percentage of total revenues for fiscal 2002 and 2001 were 35.9% and 33.2%, respectively. Gross margin on services revenues was 44.7% and 45.9% for fiscal 2002 and 2001, respectively. The increase in cost of services as a percentage of total revenues and the decrease in gross margin on services was primarily due to increased headcount and increased use of third-party consultants.

Operating Expenses

        Research and Development.    Research and development expenses increased to $66.9 million for fiscal 2002 from $52.6 million for fiscal 2001, or 27.2%. Research and development expenses included non-cash charges for stock-based compensation of $1.6 million and $0.5 million for fiscal 2002 and 2001, respectively. Research and development expenses as a percentage of total revenues for fiscal 2002 and 2001 were 15.6% and 13.3%, respectively. The increase in expenses was primarily due to higher compensation expenses and other related costs from additional headcount, increased amounts paid to third parties for language translation services, and increased lease expense for additional computer equipment.

        Sales and Marketing.    Sales and marketing expenses increased to $124.6 million for fiscal 2002 from $116.7 million for fiscal 2001, or 6.8%. The increase in expenses was primarily due to higher compensation expenses and other related costs from additional headcount and increased expenses related to expanded branding efforts subsequent to our initial public offering. Sales and marketing expenses also included non-cash charges for stock-based compensation of $2.3 million and $0.9 million for fiscal 2002 and 2001, respectively. Sales and marketing expenses as a percentage of total revenues for fiscal 2002 and 2001 were 29.1% and 29.6%, respectively.

        General and Administrative.    General and administrative expenses decreased to $32.1 million for fiscal 2002 from $39.1 million for fiscal 2001, or 18.0%. General and administrative expenses included non-cash charges for stock-based compensation of $4.2 million and $2.1 million for fiscal 2002 and 2001, respectively and compensation associated with a repurchase of stock options from current employees of $5.1 million for fiscal 2001. Additionally, general and administrative expenses included a lease abandonment expense of $0.2 million and $1.8 million for fiscal 2002 and 2001, respectively. General and administrative expenses as a percentage of total revenues for fiscal 2002 and 2001 were 7.5% and 9.9%, respectively.

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        Restructuring Charges.    In the fourth quarter of fiscal 2002, we approved a restructuring plan in response to the general economic downturn and incurred restructuring charges of $3.3 million. The plan included the termination and payment of severance-related benefits for 111 employees in various functions including administrative, professional, and managerial, primarily in the United States. All terminations and associated payments were completed during the first quarter of fiscal 2003. The charge also included expenses related to closing a leased office facility. The remaining facility closure liabilities are expected to be paid through 2005. For a summary of the activity for the year, see Note 5 of Notes to Consolidated Financial Statements.

        Other General Expenses.    Other general expenses in fiscal 2002 consisted of $0.7 million of business process improvement initiatives. Fiscal 2001 consisted of $4.9 million in consulting fees related to business process improvement initiatives designed to prepare our organization for our initial public offering and $2.4 million in expenses related to the repurchase of options held by one of our former executives.

        Amortization of Acquired Intangibles.    Amortization of acquired intangibles for fiscal 2002 consisted of $0.6 million in amortization expense related to the purchase of Account4 in July 2001 and Keyola in April 2002.

Other Income (Expense), net

        Other income (expense), net was $(1.6) million for fiscal 2002 compared with $0.9 million for fiscal 2001. Other income (expense), net as a percentage of total revenues for fiscal 2002 and 2001 was (0.3)% and 0.3%, respectively. We earned interest income of $2.8 million and $2.5 million for fiscal 2002 and 2001, respectively. This was partially offset by interest expense of $2.0 million and $1.5 million for fiscal 2002 and fiscal 2001, respectively. The increase in interest income was primarily due to the interest earned on proceeds from our initial public offering. The increase in interest expense was due to interest on Senior Subordinated Convertible Notes and accretion of stock warrants, which were outstanding for two quarters of fiscal 2002 and only one quarter in fiscal 2001. Subsequent to our initial public offering, in the third fiscal quarter of 2002, we repaid the notes. As a result of the early repayment of the notes, we recorded a non-cash charge of $2.3 million to write-off unamortized debt issuance costs and the discount on notes in fiscal 2002.

Provision for Income Taxes

        We recognized an income tax provision of $5.6 million for fiscal 2002 compared to $10.6 million for fiscal 2001. Our income tax provision is comprised primarily of federal and state taxes. Our effective rate was 40.0% and 42.0% for fiscal 2002 and 2001, respectively. The decrease in the effective tax rate was primarily due to a decrease in permanent non-deductible expenses and an increase in tax-exempt interest income.

Accretion and Conversion of Preferred Shares

        As part of our initial public offering on December 12, 2001, we converted all of the outstanding shares of Series A Preferred Stock and issued 10,316,000 shares of common stock. As a result of the conversion of the Series A Preferred Stock, we recognized a $30.1 million non-cash charge to net income available to common stockholders for the unamortized value of the beneficial conversion feature of our preferred stock. The charge had no impact on net income. See Note 10 of Notes to Consolidated Financial Statements.

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Liquidity and Capital Resources

        We finance our operations primarily with cash generated through operations. As of May 31, 2003, we had $260.5 million in cash, cash equivalents and marketable securities and $213.3 million in working capital.

        Net cash provided by operating activities was approximately $47.9 million, $6.0 million and $33.4 million in fiscal 2003, 2002, and 2001, respectively. The increase in cash from operating activities in fiscal 2003 was primarily due to a decrease in accounts receivable, partially offset by our net loss and a decrease in accounts payable and other liabilities. The decrease in 2002 was primarily due to changes in operating assets and liabilities, reduced net income, partially offset by tax benefits resulting from stockholders transactions, and non-cash charges related to stock-based compensation.

        Net cash provided by (used in) investing activities was $34.8 million, $(180.5) million and $(24.8) million in fiscal 2003, 2002, and 2001, respectively. Cash flows provided by investing activities for fiscal 2003 consisted of $48.8 million of net sales of marketable securities, partially offset by $7.8 million used for the purchase of Armature assets, and $6.1 million for the purchase of property and equipment. We have generally funded capital expenditures through the use of cash generated through operations and stockholder transactions. Net cash used in investing activities in 2002 primarily reflects net purchases of marketable securities of $137.7 million, $31.6 million for the acquisitions of Account4 and Keyola, and $11.1 million of property and equipment additions.

        We have a contingent consideration agreement related to the acquisition of Keyola in fiscal 2002. Under the terms of the agreement, additional cash payments ranging from zero to $1.5 million are contingent upon the future performance of Keyola, measured annually through fiscal 2005, and will be recorded as additional goodwill if earned. At May 31, 2003, no amounts had been earned under this agreement.

        Net cash (used in) provided by financing activities was $(2.8) million, $188.8 million and $4.4 million in fiscal 2003, 2002, and 2001, respectively. Net cash used in financing activities in fiscal 2003 reflects $15.0 million used to repurchase shares of our common stock and $1.4 million used for repayment of debt, partially offset by $7.0 million received from the exercise of stock options and $6.6 million from the issuance of treasury shares for our employee stock purchase program. Net cash provided by financing activities in fiscal 2002 reflects $197.3 million of net proceeds from our initial public offering, of which $10.2 million was used to repay senior subordinated convertible notes. During fiscal 2002, we received $3.9 million for the exercise of stock options and paid $1.2 million for the repurchase of common stock related to the mandatory redemption requirement of certain shares under our ESOP plan and $1.0 million for the repayment of debt.

        In December 2002, our Board of Directors authorized us to repurchase, from time to time, up to $15.0 million of our common shares. We repurchased a total of 2.9 million shares for $15.0 million during fiscal 2003. The share repurchase was largely funded by cash proceeds obtained from exercise of employee stock options and the employee stock purchase plan. The repurchased shares will be used for general corporate purposes.

        In June 2003, our Board of Directors authorized us to repurchase up to $50.0 million worth of our common shares. Shares will be repurchased from time to time as market conditions warrant either through open market transactions, block purchases, private transactions or other means. The repurchase will be funded primarily from proceeds and tax benefits derived from the Company's stock option and employee stock purchase plans, and supplemented with portions of available cash from operations. The repurchased shares will be used for general corporate purposes. No time limit has been set for the repurchase program.

        We have summarized future minimum lease commitments as of May 31, 2003 in Note 19 of Notes to Consolidated Financial Statements included in this Form 10-K.

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        We have a $25.0 million revolving credit facility, which expires on September 30, 2003. At May 31, 2003, we had no amounts outstanding under the revolving credit facility. The agreement with the bank contains limitations on dividends and capital expenditures and requires compliance with specific financial ratios and covenants. We were in compliance with or had obtained waivers for all covenants and restrictions under the debt agreement at May 31, 2003.

        We believe that cash flow from operations, together with our cash, cash equivalents and marketable securities will be sufficient to meet our cash requirements for working capital, capital expenditures and investments for the foreseeable future.

Disclosures about Contractual Obligations and Commercial Commitments

        The following summarizes our contractual obligations at May 31, 2003, and the effect these contractual obligations are expected to have on our liquidity and cash flows in future periods (in millions):

Recent Accounting Pronouncements

        In August, 2001 the Financial Accounting Standards Board ("FASB") issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In June 2002 we adopted this statement which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of and supersedes SFAS No.121, "Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to Be Disposed Of" and Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Upon adoption, we determined we did not have any impaired long-lived assets.

        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement provides guidance on the classification of gains and losses from the extinguishment of debt and on the accounting for certain specified lease transactions. The provisions of this statement, related to the rescission of FASB Statement No. 4, were effective for us beginning on June 1, 2002. All other provisions of this statement were effective for transactions occurring after May 15, 2002. In accordance with the transition provisions the adoption resulted in our fiscal 2002 extraordinary item being reclassified in the Consolidated Statements of Operations to other income (expense) in fiscal 2003.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." This statement addresses the accounting for costs associated with exit or disposal activities. Commitment to a plan to exit an activity or disposal of long-lived assets will no longer be sufficient to record a one-time charge for most anticipated costs. Instead, SFAS 146 requires exit or disposal costs be recorded when they are "incurred" and can be measured at fair value. SFAS 146 further requires that the recorded liability be adjusted for changes in estimated cash flows. The provisions of the statement were effective for exit and disposal activities initiated after December 31, 2002. The adoption of this statement did not have an impact on our consolidated financial position, results of operations or cash flows, but will change on a prospective basis, the timing of when restructuring charges are recorded from the commitment date to when the liability is incurred.

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        In November 2002, the FASB issued Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34." The Interpretation requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. The Interpretation also requires additional disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. The initial recognition and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements of FIN No. 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN No. 45 did not have a material effect on our consolidated financial position; however, management is continuing to evaluate the impact on future financial statements. A summary of agreements that we have determined are within the scope of FIN No. 45 is included in Note 19 of Notes to Consolidated Financial Statements.

        In December 2002, the FASB issued SFAS No. 148,"Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123." This statement provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based compensation. The statement amends the disclosure requirements of SFAS No. 123, "Accounting for Stock Based Compensation", to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. We account for stock-based compensation arrangements in accordance with the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and comply with the disclosure provisions of SFAS No. 123. The transition provisions are effective for fiscal years ending after December 15, 2002. The disclosure provisions are effective for interim periods beginning after December 15, 2002, with early application encouraged. We currently have no plans to change to the fair value method of accounting for stock-based compensation. The adoption of this statement is not expected to have a material impact on our consolidated financial position, results of operations or cash flows. We implemented the year-end disclosure provisions as of May 31, 2003 and will implement the interim period disclosure provisions in the quarter ending August 31, 2003.

        In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51." FIN No. 46 requires certain variable interest entities or VIEs, to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is effective for all VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions of FIN No. 46 must be applied for the first interim or annual period beginning after June 15, 2003. We currently have no contractual relationship or other business relationship with a variable interest entity and therefore the adoption of FIN No. 46 did not have a material effect on our consolidated financial position, results of operations or cash flows. However, if we enter into any such arrangement with a variable interest entity in the future, our consolidated financial position or results of operations may be adversely effected.

Factors That May Affect Future Results or the Market Price of Our Stock

        An investment in our common stock involves a high degree of risk. Investors evaluating our company and its business should carefully consider the factors described below and all other information contained in this report on Form 10-K. This section should be read in conjunction with the Consolidated Financial Statements and Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report on Form 10-K. Any of the

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following factors could materially harm our business, operating results and financial condition. Additional factors and uncertainties not currently known to us or that we currently consider immaterial could also harm our business, operating results and financial condition. The Company may make forward-looking statements from time to time, both written and oral. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements based on circumstances or events which occur in the future. The actual results may differ materially from those projected in any such forward-looking statements due to a number of factors, including those set forth below and elsewhere in this report on Form 10-K.

A continuing reduction in information technology spending may decrease our revenues, lower our growth rate or adversely affect our operating results.

        During fiscal 2003, our license revenue was lower than the prior fiscal year because prospective customers continued to delay or cancel their information technology projects, or purchase individual products, rather than multi-product suites or systems. Demand for enterprise software and demand for our solutions are affected by general economic conditions, competition, product acceptance and technology lifecycles. The current technology recession and decline in overall technology spending, terrorist activity, Middle East conflicts, and threats of hostilities elsewhere may cause our customers to continue to reduce or eliminate their information technology spending, which could substantially reduce the number of new software licenses we sell, the average sales price for these licenses and the need for our services. Because of these factors, we believe the level of demand for our products and services, and projections of future revenue and operating results, are difficult to predict. In fiscal 2003, we continued to take measures to realign our projected expenses with anticipated revenue, and incurred restructuring charges for severance and related benefits and facility closure and consolidation charges. We may need to make further expense reductions to address shortfalls in revenue caused by these or other conditions and we cannot assure you those reductions will be available or sufficient to offset revenue declines.

Because our customers are concentrated in targeted service industries, our operating results may be adversely affected by adverse changes in one or more of these industries.

        As a result of our focus on targeted service industries, our financial results depend, in significant part, upon economic and market conditions in the healthcare, professional services, retail, public sector and financial services industries. Because the healthcare marketplace for our products is maturing, we will need to expand our product offerings to achieve long-term revenue growth at our historical rate in that market. Many state and local governments are facing budget shortfalls and are reducing capital spending, including spending on software and services. The economic downturn has also reduced capital spending in the professional services and financial services industries. A continued economic downturn, or adverse change in the regulatory environment or business prospects for one or more of these industries may further decrease our revenues or lower our growth rate. In addition, we must continue to develop industry specific functionality for our solutions, which satisfies the changing, specialized requirements of prospective customers in our target industries.

We may experience fluctuations in quarterly revenue that could adversely impact our stock price and our operating results.

        Our actual revenues in a quarter could fall below expectations, which could lead to a decline in our stock price. Our revenues and operating results are difficult to predict and may fluctuate substantially from quarter to quarter. Revenues from license fees in any quarter depend substantially upon our licensing activity and our ability to recognize revenues in that quarter in accordance with our

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revenue recognition policies. Our quarterly revenue may fluctuate and may be difficult to forecast for a variety of reasons, including the following:

•

a significant number of our existing and prospective customers' decisions regarding whether to enter into license agreements with us are made within the last few weeks or days of each quarter;



•

we have historically had a higher concentration of licensing activities in the second half of our fiscal year due to the nature of our sales personnel compensation programs, but there is no assurance that this pattern will or will not continue;



•

the size of license transactions can vary significantly;



•

a decrease in license fee revenue may likely result in a decrease in services revenue in the same or subsequent quarters;



•

customers may unexpectedly postpone or cancel projects due to changes in their strategic priorities, project objectives, budget or personnel;



•

the uncertainty caused by announced potential business combinations in the software industry, may cause customers to cancel, postpone or reduce capital spending projects on software;



•

customer evaluations and purchasing processes vary significantly from company to company, and a customer's internal approval and expenditure authorization process can be difficult and time consuming to complete, even after selection of a vendor;



•

the number, timing and significance of software product enhancements and new software product announcements;



•

prospective customers may decline or defer the purchase of new products or releases if we don't have sufficient customer references for those products; and



•

we may have to defer revenues under our revenue recognition policies.

        Fluctuation in our quarterly revenues may adversely affect our operating results. In each fiscal quarter our expense levels, operating costs and hiring plans are based on projections of future revenues and are relatively fixed. If our actual revenues fall below expectations we could experience a reduction in operating results.

Our lengthy and variable sales cycle makes it difficult to predict our operating results.

        It is difficult for us to forecast the timing and recognition of revenues from sales of our products because our existing and prospective customers often take significant time evaluating our products before licensing them. The period between initial customer contact and a purchase by a customer may vary from nine months to more than one year. During the evaluation period, prospective customers may decide not to purchase or may scale down proposed orders of our products for various reasons, including:

•

reduced demand for enterprise software solutions;



•

introduction of products by our competitors;



•

lower prices offered by our competitors;



•

changes in budgets and purchasing priorities; and



•

reduced need to upgrade existing systems.

        Our existing and prospective customers routinely require education regarding the use and benefit of our products. This may also lead to delays in receiving customers' orders.

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A reduction in our licensing activity may result in reduced services revenues in future periods.

        Our ability to maintain or increase service revenue primarily depends on our ability to increase the number of our licensing agreements. Variances or slowdowns in licensing activity may impact our consulting, training and maintenance service revenues in future periods.

We may be required to delay revenue recognition into future periods, which could adversely impact our operating results.

        We have in the past had to, and in the future may have to, defer revenue recognition for license fees due to several factors, including the following situations:

•

the license agreements include applications that are under development or have other undelivered elements;



•

we must deliver services, including significant modifications, customization or complex interfaces, which could delay product delivery or acceptance;



•

the transaction includes acceptance criteria;



•

the transaction includes contingent payment terms or fees;



•

a third-party vendor, whose technology is incorporated into our software products, delays delivery of the final software product to the customer;



•

we are required to accept a fixed-fee services contract; or



•

we are required to accept extended payment terms.

        Because of the factors listed above and other specific requirements under accounting principles generally accepted in the United States for software revenue recognition, we must have very precise terms in our license agreements to recognize revenue when we initially deliver software or perform services. Negotiation of mutually acceptable terms and conditions can extend the sales cycle, and sometimes we do not obtain terms and conditions that permit revenue recognition at the time of delivery or even as work on the project is completed.

If we account for employee stock option and employee stock purchase plans using the fair value method, it could significantly reduce our net income and earnings per share.

        There has been ongoing public debate whether employee stock option and employee stock purchase plans shares should be treated as a compensation expense and, if so, how to properly value such charges. If we elected or were required to record an expense for our stock-based compensation plans using the fair value method, we could have material accounting charges. Although we are not currently required to record any compensation expense using the fair value method in connection with option grants that have an exercise price at or above fair market value and for shares issued under our employee stock purchase plan, it is possible that future laws or regulations will require us to treat all stock-based compensation as a compensation expense using the fair value method. Note 2 of the Notes to Consolidated Financial Statements describes the pro forma impact of a change to fair market value accounting on earnings and earnings per share for each of the past three years.

A number of our competitors are well-established software companies that have advantages over us.

        We face competition from a number of software companies that have advantages over us due to their larger customer bases, greater name recognition, long operating and product development history, greater international presence and substantially greater financial, technical and marketing resources. These competitors include well-established companies such as Oracle Corporation, PeopleSoft Inc. and SAP AG, all of which have larger installed customer bases. Furthermore, Oracle is capable of bundling

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its software with its database applications, which underlie a significant portion of our installed applications.

        In addition, we compete with a variety of more specialized software and services vendors, including:

•

Internet software vendors;



•

single-industry software vendors;



•

emerging enterprise resource optimization software vendors;



•

human resource management software vendors;



•

financial management software vendors;



•

merchandising software vendors;



•

services automation software vendors; and



•

outsourced services providers.

        As a result, the market for enterprise software applications has been and continues to be intensely competitive. Some competitors have become more aggressive with their pricing, payment terms and/or issuance of contractual warranties, implementation terms or guarantees. We may be unable to continue to compete successfully with new and existing competitors without lowering prices or offering other favorable terms. We expect competition to persist and intensify, which could negatively impact our operating results and market share.

Changes in the terms on which we license technologies from third-party vendors could result in the loss of potential revenues or increased costs or delays in the production and improvement of our products.

        We license complementary third-party software products that we incorporate into, or resell with, our own software products. For example, we incorporate Micro Focus International, Inc.'s software in many of our products and have reseller relationships with Business Software Incorporated, Crystal Decisions, Inc. and Hyperion Solutions Corporation that allows us to resell their technology with our products. These licenses and other technology licenses are subject to periodic renewal and may include minimum sales requirements. A failure to renew, or early termination of these licenses or other technology licenses could adversely impact our business. If any of the third-party software vendors change their product offerings or terminate our licenses, we may lose potential revenues and may need to incur additional development costs and seek alternative third-party relationships. In addition, if the cost of licensing any of these third-party software products significantly increases, or if there is a change in the relative mix of products we offer, our gross margins could significantly decrease. We rely on existing relationships with software vendors who are also competitors. If these vendors change their business practices, we may be compelled to find alternative vendors with complementary software, which may not be available on attractive terms or at all, or may not be as widely accepted or as effective as the software provided by our existing vendors. Our relationships with these and other third-party vendors are an important part of our business, and a deterioration of these relationships could adversely impact our business and operating results.

A deterioration in our relationship with resellers, systems integrators and other third parties that market and sell our products could reduce our revenues.

        Our ability to achieve revenue growth will depend in large part on adding new partners to expand our sales channels, as well as leveraging our relationships with existing partners, such as Siemens Medical Solutions Health Services Corporation. If our relationships with these resellers, system integrators and strategic and technology partners deteriorate or terminate, we may lose important sales

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and marketing opportunities. Our reseller arrangements from time to time give rise to disputes regarding marketing strategy, exclusive territories, payment of fees and customer relationships, which could negatively affect our business or result in costly litigation. For example, we are currently in discussions with Siemens regarding our current reseller agreement and potential modifications to our reselling relationship.

        Our current and potential customers often rely on third-party systems integrators to implement and manage new and existing applications. These systems integrators may increase their promotion of competing enterprise software applications, or may otherwise discontinue their relationships with or support of us.

        We also may enter into joint arrangements with strategic partners to develop new software products or extensions, sell our software as part of integrated products or serve as an application service provider for our products. Our business may be adversely affected if these strategic partners change their business priorities or experience difficulties in their operations, which in either case causes them to terminate or reduce their support for the joint arrangements. Furthermore, the financial condition of our channel partners impacts our business. If our partners are unable to recruit and adequately train a sufficient number of consulting personnel to support the implementation of our software products, or they otherwise do not adequately perform implementation services, we may lose customers. Our relationships with resellers, systems integrators and other third-party vendors are an important part of our business, and a deterioration of these relationships could adversely impact our business and operating results.

We may be unable to retain or attract clients if we do not develop new products and enhance our current products in response to technological changes.

        As a software company, we have been required to migrate our products and services from mainframe to client-server to web-based environments. In addition, we have been required to adapt our products to emerging standards for operating systems, databases and other technologies. We will be unable to compete effectively if we are unable to:

•

maintain and enhance our technological capabilities to correspond to these emerging environments and standards;



•

develop and market products and services that meet changing customer needs; and



•

anticipate or respond to technological changes on a cost-effective and timely basis.

        New products require significant development investment. We face uncertainty when we develop or acquire new products because there is no assurance that a sufficient market will develop for those products. For example, we have made a significant investment in the acquisition and development of services automation and retail merchandising software products. If we do not attract sufficient customer interest in those products, we will not realize a return on our investment and our operating results will be adversely affected.

        Our core technologies face competition from new or revised technologies that may render our existing technology less competitive or obsolete, reducing the demand for our solutions. As a result, we must continually redesign our products to incorporate these new technologies and to adapt our software products to operate on, and comply with evolving industry standards for hardware and software platforms. In addition, conflicting new technologies present us with difficult choices of which new technologies to adopt. If we fail to anticipate or respond adequately to technological developments, or experience significant delays in product development or introduction, our business and operating results will be negatively impacted.

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        In addition, to the extent we determine that new technologies and equipment are required to remain competitive, the development, acquisition and implementation of such technologies may require us to make significant capital investments. We may not be able to obtain capital for these purposes and investments in new technologies may not result in commercially viable technological products. The loss of revenue and increased costs to us from such changing technologies would adversely affect our business and operating results.

Our programs are deployed in large and complex systems and may contain defects that are not detected until after our programs have been installed, which could damage our reputation and cause us to lose customers or incur liabilities.

        Our software programs are often deployed in large and complex computer networks. Because of the nature of these programs, they can only be fully tested for reliability when deployed in networks for long periods of time. Our software programs may contain undetected defects when first introduced or as new versions are released, and our customers may discover defects in our products or experience corruption of their data only after our software programs have been deployed. As a consequence, from time to time we have received customer complaints following installation of our products. In addition, our products are combined with products from other vendors. As a result, should problems occur, it may be difficult to identify the source of the problem. Software and data security are becoming increasingly important because of regulatory restrictions on data privacy and the significant legal exposures and business disruptions stemming from computer viruses and other unauthorized entry or use of computer systems. These conditions increase the risk that we could experience, among other things:

•

loss of customers;



•

damage to our brand reputation;



•

failure to attract new customers or achieve market acceptance;



•

diversion of development and services resources; and



•

legal actions by our customers or government regulators.

        In addition, we may not be able to avoid or limit liability for disputes relating to product performance, software security or the provision of services. The occurrence of any one or more of the foregoing factors could cause us to experience losses, incur liabilities and adversely affect our operating results.

We may not be able to develop our international operations successfully.

        We may not be successful in developing business outside of the United States despite continued investment in our international operations. Additionally, we must adapt our products to meet the requirements of local markets, primarily in Asia. Factors that could have an adverse effect on our ability to develop our international operations include:

•

lack of experience in a particular geographic market;



•

significant presence of our competitors in international markets;



•

increased cost and development time required to modify and translate our products for local markets;



•

inability to recruit personnel in a specific country or region;



•

failure to enter into relationships with local resellers, systems integrators or other third-party vendors;

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•

differing foreign technical standards; and



•

regulatory, social, political, labor or economic conditions in a specific country or region.

        If our international operations expand, our business may become subject to unexpected, uncontrollable and rapidly changing events and circumstances in addition to those experienced in the United States. The following factors, among others, could have an adverse effect on our business and operating results:

•

operating costs in many countries are higher than in the United States;



•

conducting business in currencies other than United States dollars subjects us to currency controls and fluctuations in currency exchange rates;



•

we may be unable to hedge some transactions because of uncertainty or the inability to reasonably estimate our foreign exchange exposure;



•

we may hedge some anticipated transactions and transaction exposures, but could still experience losses due to exchange rate fluctuations;



•

laws, policies and other regulatory requirements affecting trade and investment including loss or modification of exemptions for taxes and tariffs, and import and export license requirements; and



•

exposure to different legal standards or risks.

We may be unable to identify or complete suitable acquisitions and investments; and any acquisitions and investments we do complete may create business difficulties or dilute our stockholders.

        As part of our business strategy, we intend to pursue strategic acquisitions. We may be unable to identify suitable acquisitions or investment candidates. Even if we identify suitable candidates, we cannot assure you that we will be able to make acquisitions or investments on commercially acceptable terms. If we acquire a company, we may have difficulty integrating its products, personnel and operations into our business. In addition, its key personnel may decide not to work for us. We may also have difficulty integrating acquired businesses, products, services and technologies into our operations. These difficulties could disrupt our ongoing business, distract our management and workforce, increase our expenses and adversely affect our operating results. We may also incorrectly judge the value or worth of an acquired company or business. Furthermore, we may incur significant debt or be required to issue equity securities to pay for future acquisitions or investments. The issuance of equity securities may be dilutive to our stockholders.

Increases in services revenue as a percentage of total revenues could decrease overall margins and adversely affect our operating results.

        We realize lower margins on service revenue than on license revenue. We subcontract certain consulting services to systems integrators, which generally causes such services to carry lower gross margins than services provided by our employees. Therefore, an increase in the percentage of services provided by systems integrators versus services provided by our employees could have a detrimental impact on our overall gross margins and could adversely affect operating results.

We may be unable to compete effectively in the application service provider market.

        Some businesses choose to access enterprise software applications through application service providers, or ASPs, which are businesses that host applications and provide access to software on a subscription basis. We have limited experience selling our solutions through ASPs and may not be successful in generating revenue from this distribution channel. Moreover, the use of ASPs as a distribution channel may occur more rapidly than we anticipate, and we may not be able to compete effectively in this environment.

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In the event our products infringe on the intellectual property rights of third parties, our business may suffer if we are sued for infringement or cannot obtain licenses to these rights on commercially acceptable terms.

        We are subject to the risk of adverse claims and litigation alleging infringement by us of the intellectual property rights of others. Many participants in the technology industry have an increasing number of patents and patent applications and have frequently demonstrated a readiness to take legal action based on allegations of patent and other intellectual property infringement. Further, as the number and functionality of our products increase, we believe that we may become increasingly subject to the risk of infringement claims. If infringement claims are brought against us, these assertions could distract management and we may have to expend potentially significant funds and resources to defend or settle such claims. If we are found to infringe on the intellectual property rights of others, we could be forced to pay significant license fees or damages for infringement.

        As part of our standard license agreements, we agree to indemnify our customers for some types of infringement claims under the laws of the United States and some foreign jurisdictions that may arise from the use of our products. If a claim against us were successful, we may be required to incur significant expense and pay substantial damages as we are unable to insure against this risk. Even if we were to prevail, the accompanying publicity could adversely impact the demand for our software. Provisions attempting to limit our liability in our standard agreements may be invalidated by unfavorable judicial decisions or by federal, state, local or foreign laws or ordinances.

It may become increasingly expensive to obtain and maintain liability insurance.

        We contract for insurance to cover several, but not all, potential risks and liabilities. In the current market, insurance coverage is becoming more restrictive, and, when insurance coverage is offered, the deductible for which we are responsible is larger. In light of these circumstances, it may become more difficult to maintain insurance coverage at historical levels, or if such coverage is available, the cost to obtain or maintain it may increase substantially. This may result in our being forced to bear the burden of an increased portion of risks for which we have traditionally been covered by insurance, which could negatively impact our results of operations.

We have limited protection of our intellectual property and, if we fail to adequately protect our intellectual property, we may not be able to compete.

        We consider certain aspects of our internal operations, software and documentation to be proprietary, and rely on a combination of contract, copyright, trademark and trade secret laws to protect this information. In addition, to date we have filed two patent applications but we intend to file additional patent applications. Outstanding applications may not result in issued patents and, even if issued, the patents may not provide any competitive advantage. Existing copyright laws afford only limited protection. Our competitors may independently develop technologies that are less expensive or better than our technology. In addition, when we license our products to customers, we provide source code for many of our products. We may also permit customers to obtain access to our other source code through a source code escrow arrangement. This access to our source code may increase the likelihood of misappropriation or other misuse of our intellectual property. In addition, the laws of some countries in which our software products are or may be licensed do not protect our software products and intellectual property rights to the same extent as the laws of the United States. Defending our rights could be costly.

Business disruptions may interfere with our ability to conduct business.

        Business disruptions could affect our future operating results. Our operating results and financial condition could be adversely affected in the event of a security breach, major fire, war, terrorist attack or other catastrophic event. Impaired access or significant damage to our data center at our

38

headquarters in St. Paul, Minnesota due to such an event could cause a disruption of our information systems and loss of financial data and certain customer data, which could adversely impact results of operations and business financial conditions.

There are a large number of shares that may be sold in the market, which may depress our stock price.

        In January 2003, we announced that our Chairman, H. Richard Lawson, had entered into a selling plan to sell up to 500,000 shares of our stock over a six-month period and that our Chief Executive Officer, John Coughlan, and three other executive officers had each entered into selling plans to sell up to an aggregate of 664,000 shares of our stock over a 12-month period. These executives may also elect to sell or transfer other shares apart from these selling plans. A substantial number of shares of our common stock are held by our founders, their family members, current or former employees, officers or directors. Sale of a portion of these shares in the public market, or the perception that such sales are likely to occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities.

Control by existing shareholders could significantly influence matters requiring stockholder approval.

        As of May 31, 2003, our executive officers, directors, and affiliated entities, in the aggregate, beneficially owned approximately 21.8% of our outstanding common stock. These stockholders, if acting together, would be able to significantly influence all matters requiring approval by stockholders, including the election of directors and the approval of mergers or other business combinations.

Financial outlook.

        From time to time in press releases and otherwise, we may publish forecasts or other forward-looking statements regarding our future results, including estimated revenues or net earnings. Any forecast of our future performance reflects various assumptions. These assumptions are subject to significant uncertainties, and as a matter of course, any number of them may prove to be incorrect. Further, the achievement of any forecast depends on numerous risks and other factors (including those described in this discussion), many of which are beyond our control. As a result, we cannot provide assurance that our performance will be consistent with any management forecasts or that the variation from such forecasts will not be material and adverse. Current and potential stockholders are cautioned not to base their entire analysis of our business and prospects upon isolated predictions, but instead are encouraged to utilize our entire publicly available mix of historical and forward-looking information, as well as other available information affecting us, our products and services, and the software industry when evaluating our prospective results of operations.

Item 7A. Qualitative and Quantitative Disclosures About Market Risk.

        Currently, we have minimal monetary assets, liabilities and operating expenses denominated in foreign currencies. If our international operations expand and we decide to enter into hedging transactions to minimize foreign currency rate risk, the adoption of SFAS No. 133, as amended by SFAS Nos. 137 and 138, could have a material impact on our operating results.

        We do not utilize any derivative security instruments. Our investments are consistent with the Company's investment policies. We invest our cash in financial instruments consisting principally of tax-exempt money market funds and highly liquid debt securities of corporations and municipalities. These investments are denominated in U.S. dollars. Investments with original maturities of three months or less are classified as cash and cash equivalents. As of May 31, 2003, the average maturity of our investment securities was less than three months and all investment securities had maturities less than 24 months. As of May 31, 2003, we consider the reported amounts of these investments to be

39

reasonable approximations of their values. Changes in the market interest rates will not have a material impact on our financial position.

        Through May 31, 2003, interest expense was not sensitive to the general levels of United States interest rates because all of our notes payable bear fixed interest rates.

Item 8. Consolidated Financial Statements and Supplementary Data.

        The information required by this Item is included in Part IV Item 14(a)(1) and (2).

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

        None.

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Part III

        The information required by Items 10 through 13 is incorporated by reference from our definitive Proxy Statement pursuant to general instruction G(3), with the exception of the executive officers section of Item 10, which is included in Part I of this Form 10-K. We will file our definitive 2003 Proxy Statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

Item 10. Directors and Executive Officers of the Registrant.

        The information concerning our officers required by this item is included in Part I hereof under the heading "Employees." Information required under this item is contained in the section entitled "Election of Directors" in our 2003 Proxy Statement and is incorporated herein by reference.

Item 11. Executive Compensation.

        Information required under this item is contained in the sections entitled "Executive Compensation and other Information" and "Employment Agreements" in our 2003 Proxy Statement and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

        Information required under this item is contained in the sections entitled "Securities Authorized for Issuance Under Equity Compensation Plans" and "Security Ownership of Principal Stockholders and Management" in our 2003 Proxy Statement and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

        Information required under this item is contained in the section entitled "Certain Transactions" in our 2003 Proxy Statement and is incorporated herein by reference.

Item 14. Controls and Procedures.

(a)

Evaluation of disclosure controls and procedures.

        Under the supervision and with the participation of our management, including the Company's Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic SEC filings.

(b)

Changes in internal controls.

        During our fourth fiscal quarter, there were no significant changes made in our internal control over financial reporting (as defined in Rule 13(a) - 15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part IV

Item 15. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K.

(a)

Consolidated Financial Statements, Consolidated Financial Statement Schedules and Exhibits

        1.    Financial Statements.    The following Consolidated Financial Statements, and the related Notes thereto, and the Report of Independent Auditors are filed as a part of this Annual Report on Form 10-K.

        2.    Financial Statement Schedules.    Schedules not listed below have been omitted because they are not applicable or are not required or the information required to be set forth in those schedules is included in the financial statements or related notes.

        3.    Exhibits.    The exhibits filed or incorporated by reference in response to Item 601 of Regulation S-K are listed in the Index to Exhibits.

(b)

Reports on Form 8-K

        No reports on Form 8-K were filed during the fourth quarter of fiscal 2003.

Index To Financial Statements and Financial Statement Schedules (Item 14-(a))

Index to Exhibits (Item 14(a))

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(1)

Incorporated by reference to a similarly numbered exhibit to the Company's Form S-1 Registration Statement (File No. 333-63394) filed on June 20, 2001.

(2)

Confidential information is omitted from this exhibit and filed separately with the Securities and Exchange Commission accompanied by a confidential treatment request pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: July 29, 2003

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints John J. Coughlan and Robert G. Barbieri, and each of them, his true and lawful attorney-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite or necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Act of 1934, this Annual Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated.

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45

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of
Lawson Software, Inc.:

        In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity (deficit) and comprehensive income (loss) and of cash flows present fairly, in all material respects, the financial position of Lawson Software, Inc. and its subsidiaries at May 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        As discussed in Note 2 to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" on June 1, 2001.

Minneapolis, Minnesota
June 20, 2003, except as to Note 23, which is as of July 24, 2003

F-1

LAWSON SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

The accompanying notes are an integral part of the consolidated financial statements.

F-2

LAWSON SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

The accompanying notes are an integral part of the consolidated financial statements.

F-3

LAWSON SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share data)