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

FORM 10-Q

Commission file number 000-33335

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

380 ST. PETER STREET
ST. PAUL, MINNESOTA 55102
(Address of principal executive offices)

(651) 767-7000
(Registrant's telephone number, including area code)

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

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

        The number of shares of the registrant's common stock outstanding as of April 7, 2004 was 98,374,425.

LAWSON SOFTWARE, INC.
Form 10-Q
Index

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LAWSON SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

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

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

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

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LAWSON SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

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

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LAWSON SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)

1.     BASIS OF PRESENTATION

        The unaudited condensed consolidated financial statements included herein reflect all adjustments, in the opinion of management, necessary to fairly state Lawson Software, Inc.'s ("the Company's") consolidated financial position, results of operations and cash flows for the periods presented. These adjustments consist of normal, recurring items, except for those disclosed separately in the footnotes below. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts therein. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates. The unaudited interim results of operations are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending May 31, 2004. The unaudited condensed consolidated financial statements and notes are presented as permitted by the requirements for Form 10-Q and do not contain certain information included in the Company's annual financial statements and notes. The accompanying interim condensed consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended May 31, 2003.

2.     STOCK-BASED COMPENSATION

        The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and complies with the disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of Financial Accounting Standards Board ("FASB") Statement No. 123".

        The Company has adopted the disclosure-only provisions of SFAS No. 123. For purposes of the pro forma disclosures below, the estimated fair value of the Company's stock options is amortized to expense over the options' vesting period. Had compensation cost for the Company's stock options been

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recognized based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Company's net income (loss) would have been adjusted to the pro forma amounts indicated below:

3.     ACQUISITIONS

        The following acquisitions were accounted for under the purchase method of accounting, and, accordingly, the assets and liabilities acquired were recorded at their estimated fair values at the effective date of the acquisition and the results of operations have been included in the unaudited condensed consolidated statements of operations since the acquisition date. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill recorded as a result of the acquisition will be subject to an annual impairment test and will not be amortized. These acquisitions are intended to enhance the Company's focus on targeted vertical markets and to provide additional value-added products and services to its customers.

        On October 15, 2003, the Company acquired all of the outstanding capital stock of Apexion Technologies Inc. ("Apexion") for $7,985 in cash, net of cash acquired. The excess purchase price over the fair value of the net tangible assets acquired of $8,640 was allocated to the following assets: $2,900 to acquired technology, $200 to a customer list, $100 to a non-compete clause and $5,440 to goodwill. The acquired technology, customer list and non-compete clause are being amortized on a straight-line basis over their estimated useful lives of four, seven and two years, respectively. Terms of the agreement also provide for additional cash payments ranging from zero to $2,000 contingent upon the future performance of Apexion measured annually through November 30, 2005. Any contingent consideration earned will be recorded as additional goodwill. Apexion provided materials and equipment logistics solutions for the healthcare industry.

        On September 30, 2003, the Company acquired all of the outstanding capital stock of Closedloop Solutions, Inc. ("Closedloop") for $4,155 in cash, net of cash acquired. The excess purchase price over the fair value of the net tangible assets acquired of $5,022 was allocated to the following assets: $2,500

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to acquired technology, $500 to a customer list, $100 to a non-compete clause and $1,922 to goodwill. The acquired technology, customer list and non-compete clause are being amortized on a straight-line basis over their estimated useful lives of four, seven and two years, respectively. Closedloop provided collaborative budgeting, planning and forecasting solutions using real-time, transactional functionality.

        On July 24, 2003, the Company acquired all of the outstanding capital stock of Numbercraft Limited ("Numbercraft") for $3,729 in cash, net of cash acquired and $309 in notes payable. The excess purchase price over the fair value of the net tangible assets acquired of $4,829 was allocated to the following assets: $900 to acquired technology, $600 to a customer list, $300 to a non-compete clause and $3,029 to goodwill. The acquired technology, customer list and non-compete clause are being amortized on a straight-line basis over their estimated useful lives of three, four and three years, respectively. These amounts are based on preliminary estimates and are subject to refinement upon finalization of certain tax attributes. Additional cash payments ranging from zero to $8,600 are contingent upon the future performance of Numbercraft measured periodically through fiscal 2007. Any contingent consideration earned will be recorded as additional goodwill. During the nine months ended February 29, 2004, $400 of additional consideration was earned and recorded as additional goodwill. 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.

        The following table presents the consolidated results of operations of the Company including Closedloop, which was acquired on September 30, 2003 and Armature Limited and Armature Group Limited (collectively Armature), which was acquired on June 28, 2002, on an unaudited pro forma basis as if the acquisitions had taken place at the beginning of the periods presented:

        The unaudited pro forma data gives effect to actual operating results prior to the acquisitions, and adjustments to reflect interest income foregone, eliminate interest expense, increased intangible asset amortization, and income taxes. No effect has been given to cost reductions or operating synergies in this presentation. As a result, the unaudited pro forma results of operations are for comparative purposes only and are not necessarily indicative of the results that would have been obtained if the acquisitions had occurred as of the beginning of the periods presented or that may occur in the future. The pro forma data does not include Apexion or Numbercraft, as the effects of these acquisitions were not material on a pro forma basis.

4.     PER SHARE DATA

        Basic earnings per share is computed using net income (loss) and the weighted average number of common shares outstanding. Diluted earnings per share reflects the weighted average number of common shares outstanding plus any potentially dilutive shares outstanding during the period. Potentially dilutive shares consist of shares issuable upon the exercise of stock options and warrants. Diluted net loss per share does not differ from basic loss per share for the three and nine months

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ended February 28, 2003, as 23,561 of potential common shares from conversion of stock options and warrants were anti-dilutive.

5.     COMPREHENSIVE INCOME (LOSS)

        The following table presents the calculation of comprehensive income (loss):

6.     RESTRUCTURING

Fiscal 2004 Restructuring

        In September 2003, the Company approved a restructuring plan to realign projected expenses with anticipated lower revenue levels and incurred restructuring charges of $2,250 for severance and related benefits. The plan resulted in the termination of 93 employees in the second quarter of fiscal 2004, from various functions including research and development, general and administrative and sales and marketing, primarily in the United States. The Company expects to pay all remaining termination benefits during fiscal 2004.

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        The following table sets forth the restructuring reserve activity related to the fiscal 2004 restructuring plan and the remaining balances as of February 29, 2004, which are included in accrued compensation and benefits and other accrued liabilities:

Fiscal 2003 Restructuring

        During fiscal 2003, the Company approved a restructuring plan to realign projected expenses with anticipated lower revenue levels and incurred restructuring charges of $5,846, which included $4,691 of severance and related benefits and $1,155 for the closure and consolidation of facilities. The plan resulted in the termination of 244 employees in the second quarter of fiscal 2003, from various functions including administrative, professional and managerial in the United States, Canada and Europe. The Company expects to pay all remaining termination benefits during fiscal 2004. Cash payments related to lease obligations were made through October 2003. During the nine months ended February 29, 2004, the Company adjusted the reserve for $40 of employee costs, which the Company had determined would not be incurred.

        The following table sets forth the restructuring reserve activity related to the fiscal 2003 restructuring plan and the remaining balances as of February 29, 2004, which are included in accrued compensation and benefits and other accrued liabilities:

Fiscal 2002 Restructuring

        During fiscal 2002, the Company approved a restructuring plan in response to the general economic downturn and incurred restructuring charges of $3,258, which included $2,943 for severance related benefits and $315 for the closure of a leased office facility. The plan resulted in the termination and payment of severance and related benefits to 111 employees in various functions including administrative, professional, and managerial, primarily in the United States. Cash payments relating to facility closure liabilities are expected to extend through June 2005.

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        The following table sets forth the restructuring reserve activity related to the fiscal 2002 restructuring plan and the remaining balances as February 29, 2004, which are included in other accrued liabilities:

7.     COMMITMENTS AND CONTINGENCIES

        The Company has contingent consideration agreements related to acquisitions ranging in the aggregate from zero to $12,100, measured over various periods through fiscal 2007, based on the acquired company's future performance. Contingent consideration earned is recorded as additional goodwill.

        In February 2004, the Company entered into an offshore agreement with a third-party to provide software maintenance services. If the Company terminates the agreement prior to its initial twenty-four month term, a termination fee will be incurred equal to the sum of the previous six months service charges. Management is of the opinion that the agreement will not be terminated within the twenty-four month period.

        The Company is involved in various claims and legal actions in the normal course of business. Management is of the opinion that the outcome of such legal actions will not have a significant adverse effect on the Company's financial position, results of operations or cash flows. Notwithstanding management's belief, an unfavorable resolution of some or all of these matters could materially affect our future results of operations or cash flows.

        The Company had a $25,000 revolving credit facility, which expired on September 30, 2003, at which time the Company had no amounts outstanding under the revolving credit facility and was in compliance with all covenants and restrictions under the credit facility. The Company elected not to renew this agreement.

8.     SUPPLEMENTAL CASH FLOW INFORMATION

        Cash paid for acquisitions during the nine months ended February 29, 2004 and February 28, 2003:

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9.     SEGMENT AND GEOGRAPHIC AREAS

        The Company views its operations and manages its business as one segment, the development and marketing of computer software and related services. Factors used to identify the Company's single operating segment include the financial information available for evaluation by the chief operating decision maker in making decisions about how to allocate resources and assess performance.

        The Company markets its products and services through the Company's offices in the United States and its wholly-owned branches and subsidiaries operating in Canada, the United Kingdom, France and the Netherlands. The following table presents revenues and long-lived assets summarized by geographic region:

        The following table presents revenues for license fees, maintenance and consulting services:

10.   COMMON STOCK

Repurchase of Shares

        In June 2003, the Company's Board of Directors authorized the repurchase of up to $50,000 worth of the Company's common shares. Shares will be repurchased from time to time as market conditions

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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, 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 completion of the program. During the nine months ended February 29, 2004, 3,742 shares were repurchased for $30,164.

Stock Warrant

        In January 2004, a stock warrant issued in 2000, with a four-year life, was exercised by its holder. The warrant allowed the holder to purchase 1,248 shares of the Company's common stock at an exercise price of $4.64. The warrant was exercised on a net basis, resulting in the issuance of 616 shares of common stock from treasury, which resulted in a $1,428 reduction to additional paid-in capital.

11.   NEW ACCOUNTING PRONOUNCEMENTS

        In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition". SAB 104 supercedes SAB 101, "Revenue Recognition in Financial Statements". SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of Emerging Issues Task Force ("EITF 00-21"), "Accounting for Revenue Arrangements with Multiple Deliverables". Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked Questions and Answers ("the FAQ") issued with SAB 101 that had been codified in Securities and Exchange Commission Topic 13, "Revenue Recognition". Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. Since the Company's revenue recognition practices previously conformed to the interpretations codified by SAB No. 104, adoption did not have a material effect on the Company's consolidated financial position, results of operations or cash flows.

        In January 2003, the FASB issued Interpretation No. ("FIN") 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. In December 2003, the FASB issued FIN No. 46-R, "Consolidation of Variable Interest Entities", which represents a revision to FIN No. 46. The provisions of FIN No. 46-R are effective for interests in VIEs as of the first interim or annual period ending after December 15, 2003. The Company currently has no contractual relationship or other business relationship with a variable interest entity and therefore the adoption of FIN No. 46 or FIN No. 46-R did not have a material effect on its consolidated financial position, results of operations or cash flows.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

        In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in 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 based on circumstances or events, which occur in the future. Readers should carefully review the risk factors described in this report on Form 10-Q and in other documents the Company files from time to time with the Securities and Exchange Commission.

Business Overview

        We are a provider of enterprise software solutions that help services organizations in the healthcare, retail, professional services, public sector, financial services, and other emerging markets achieve competitive advantage. 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 generally 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 the license fee. Additionally, we generate a portion of our revenues from reselling our software solutions through third-party vendors. We have offices and affiliates serving North and South America, Europe, Asia, Africa and Australia.

        Management's initiatives include driving revenue growth and profitability, adding more industry specific products and expertise to improve customer experience, cost structure and productivity improvements, strategic capital investments which return new development tools and enhanced technology skills, and maintaining a strong balance sheet and financial metrics.

        We consider the following to be important in executing on the above initiatives and in understanding our operating performance and financial position:

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The demand for enterprise software solutions is affected by general economic conditions, competition, product acceptance and technology lifecycles. During the past two years, an unsettled business environment caused many customers and prospective customers to reduce overall technology spending which reduced the number of new software licenses we sold, the average sales price for these licenses and the need for our services. As a result, in each of the last two fiscal years and during the first half of this year we took measures to realign our projected expenses with anticipated revenue, and incurred restructuring charges for workforce reductions, facility closures, and consolidation charges.



•

Three strategic acquisitions completed during the first half of fiscal 2004 have enhanced our focus on targeted industry markets and will provide additional value-added products and services to our customers. We will continue to pursue acquisition opportunities that accelerate product verticalization and add highly skilled personnel.

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•

During fiscal 2004, we embarked on operational initiatives focusing on efficiency of our research and development efforts and improving productivity and customer experience through a realignment of our internal core business systems and processes. These corporate initiatives are expected to drive both quality and process improvement across the organization after the initial implementation period, which could be up to one year.

Critical Accounting Policies and Estimates

        Our discussion and analysis of financial condition and results of operations are based upon our unaudited condensed 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 Condensed Consolidated Financial Statements contained herein describes our significant accounting polices used in the preparation of the condensed consolidated financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to bad debts, 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 polices listed below affect significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

        Revenue Recognition.    We recognize revenues in accordance with the provisions of the American Institute of Certified Public Accountants Statement of Position ("SOP") 97-2, "Software Revenue Recognition", as amended by SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition" and SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions", as well as Technical Practice Aids issued from time to time by the American Institute of Certified Public Accountants, and in accordance with the Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition". 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 generally 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 services that are essential to the functionality of our software products are recognized using contract accounting using the percentage-of-completion methodology based on labor hours input. Software arrangements, which include fixed-fee service components are recognized as the services are performed and the costs to provide the related services are expensed as incurred. Our specific revenue recognition policies are as follows:

•

Software License Fees—License fee revenues from end-users are recognized 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. Provided the above criteria are met, license fee revenues from resellers are recognized when there is a sell-through by a reseller to an end-user. A sell-through is determined when we receive an order form from a reseller for a specific end-user sale. We do not generally offer rights of return, acceptance clauses or price protection to our customers. In situations where we do provide rights of return or acceptance clauses, revenue is deferred until the clause expires. Typically, our software license fees are due

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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 have fair value of all undelivered elements but not of a delivered element, we use the residual method to record revenue. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element(s) and is recognized as revenue. In software arrangements in which we do not have vendor-specific objective evidence of fair value of all 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 an allowance for doubtful accounts at an amount we estimate to be sufficient to provide adequate protection against losses resulting from extending credit to our customers. In judging the adequacy of the allowance for doubtful accounts, we consider multiple factors including historical bad debt experience, the general economic environment, the need for specific customer reserves and the aging of our receivables. This provision is included in operating expenses as a general and administrative expense. A considerable amount of judgment is required in assessing these factors and if any receivables were to deteriorate an additional provision for doubtful accounts may be required.

        Sales Returns and Allowances.    Although we do not provide a contractual right of return, in the course of arriving at practical business solutions to various warranty and other claims, we have allowed sales returns and allowances. We record a provision for estimated sales returns and allowances on license and services in the same period the related revenues are recorded or when current information indicates additional amounts are required. These estimates are based on historical experience determined by analysis of specific return activity and other known factors.

        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 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 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 the 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

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circumstances indicate that the asset might be impaired. The impairment test compares 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, which could materially adversely impact our financial position and results of operations. 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 sheet. 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 must assess the likelihood that our net 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 February 29, 2004, as we expect to be able to utilize all of our net deferred tax assets. The ability to utilize our net 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 adversely 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.

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Results of Operations

        The following table sets forth certain line items in our condensed consolidated statements of operations as a percentage of total revenues for the periods indicated:

Three Months Ended February 29, 2004 Compared To Three Months Ended February 28, 2003

Revenues

        Total Revenues.    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. Total revenues increased to $91.6 million for the three months ended February 29, 2004 from $78.4 million for the three months ended February 28, 2003, representing an increase of 16.8%. The increase consisted of an $11.0 million increase in license fees and a $2.2 million increase in services revenues.

        License Fees.    Revenues from license fees increased to $25.2 million for the three months ended February 29, 2004 from $14.2 million for the three months ended February 28, 2003, representing an increase of 77.2%. The increase reflects improvements in our sales execution, continued focus on our vertical strategy, and improved market conditions. The average overall selling price of our licensing transactions increased 43.6% along with an increase in the number of licensing transactions. Revenues from license fees as a percentage of total revenues for the three months ended February 29, 2004 and February 28, 2003 were 27.5% and 18.1%, respectively.

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        Services.    Revenues from services increased to $66.4 million for the three months ended February 29, 2004 from $64.2 million for the three months ended February 28, 2003, representing an increase of 3.5%. Maintenance revenue increased $1.8 million largely due to an expanded customer base from new contracts closed since the prior year period, combined with price increases. In addition, consulting revenues increased by $0.4 million mainly due to added consulting opportunities, offset by a decrease in average consulting rates. Services revenues as a percentage of total revenues for the three months ended February 29, 2004 and February 28, 2003 were 72.5% and 81.9%, respectively, reflecting a lower proportion of services revenues to total revenues compared to last year.

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 increased to $3.9 million for the three months ended February 29, 2004 from $3.1 million for the three months ended February 28, 2003, representing an increase of 25.8%. The increase was primarily due to a $0.4 million increase in third-party costs and a $0.4 million increase in amortization of acquired software related to our acquisitions. Cost of license fees as a percentage of total revenues for the three months ended February 29, 2004 and February 28, 2003 were 4.3% and 4.0%, respectively. Gross margin on revenues from license fees was 84.5% and 78.1% for the three months ended February 29, 2004 and February 28, 2003, respectively. Gross margin on license fees increased primarily due to an increase in the mix of our components, which carry higher margins compared with third-party components, partially offset by the amortization of acquired technology.

        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 was $34.3 million for the three months ended February 29, 2004 compared to $34.0 million for the three months ended February 28, 2003, representing an increase of 0.9%. The slight increase in cost of services was due to the net effect of a $1.1 million increase in employee costs partially offset by a $0.8 million decrease in third-party costs. The net increase in employee costs was due to an increase in employee compensation, partially offset by our workforce reductions and attrition. Cost of services as a percentage of total revenues for the three months ended February 29, 2004 and February 28, 2003 were 37.4% and 43.3%, respectively. Gross margin on services revenues was 48.4% and 47.1% for the three months ended February 29, 2004 and February 28, 2003, respectively. Gross margin on services increased primarily due 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 relating to product development, enhancements, upgrades, testing, quality assurance and documentation. Research and development expenses increased to $16.9 million for the three months ended February 29, 2004 from $14.3 million for the three months ended February 28, 2003, representing an increase of 18.5%. The increase was primarily due to a $1.4 million net increase in employee costs related primarily to incentives and merit increases and additional compensation expense due to increased headcount related to acquisitions, partially offset by our workforce reductions and attrition. We also experienced a $1.2 million increase in costs related to the integration of acquisitions and corporate initiatives designed to improve efficiency.

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Research and development expenses as a percentage of total revenues for the three months ended February 29, 2004 and February 28, 2003 were 18.5% and 18.2%, respectively.

        Sales and Marketing.    Sales and marketing expenses consist primarily of salaries and incentive compensation, employee benefits, travel and overhead costs related to our sales and marketing personnel, as well as trade show activities, advertising costs and other costs associated with marketing our company. Sales and marketing expenses decreased to $23.6 million for the three months ended February 29, 2004 from $24.0 million for the three months ended February 28, 2003, representing a decrease of 1.4%. The decrease was primarily due to a $1.0 million decrease in expenses due to cost containment initiatives, a $0.2 million net decrease in employee costs due to our workforce reductions and attrition, partially offset by an increase in incentives and merit increases. These decreases are partially offset by a $1.3 million increase in marketing program costs. Sales and marketing expenses as a percentage of total revenues for the three months ended February 29, 2004 and February 28, 2003 were 25.8% and 30.5%, 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 expenses, consulting fees and bad debt expense. General and administrative expenses increased to $9.1 million for the three months ended February 29, 2004 from $4.7 million for the three months ended February 28, 2003, representing an increase of 93.8%. General and administrative expenses in the same prior year period were unusually low due to a $1.3 million reversal of bad debt expense reflecting decreased reserve needs as a result of our collection history. For the three months ended February 29, 2004, we recorded bad debt expense of $0.6 million reflecting an increase in the accounts receivable reserve for aged receivables, which resulted in a $1.9 million increase over the comparable period last year. Other increases in the three months ended February 29, 2004 include a $0.7 million asset impairment charge related to a discontinued project, a $0.7 million increase in costs related to corporate initiatives designed to improve efficiency, a $0.3 million increase in legal fees and a $0.2 million increase in rent. In addition, net employee costs increased $0.2 million due to incentives and merit increases, partially offset by a decrease in stock compensation expense primarily resulting from the expiration of unvested options related to employee terminations resulting from workforce reductions. The remaining increase is due to the net effect of other individually insignificant items. General and administrative expenses as a percentage of total revenues for the three months ended February 29, 2004 and February 28, 2003 were 9.9% and 6.0%, respectively.

        Restructuring charges.    For the three months ended February 29, 2004, we did not incur any restructuring charges although we made cash payments of $0.3 million related to charges incurred in prior quarters for terminated employees and facility closure liabilities. See Note 6 of Notes to Condensed Consolidated Financial Statements for a summary of activity for the nine months ended February 29, 2004.

        Amortization of Acquired Intangibles.    Amortization of acquired intangibles of $0.3 million and $0.2 million for the three months ended February 29, 2004 and February 28, 2003, respectively, consisted of amortization expense related to acquired intangible assets other than acquired technology which is amortized to cost of license fees.

Other Income (Expense), Net

        Other income (expense), net, which is comprised of interest income earned from cash, marketable securities and long term investments decreased to $0.8 million for the three months ended February 29, 2004 from $1.1 million for the three months ended February 28, 2003. The reduction in interest income resulted from a realignment in our investment strategy to shorter-term lower-yielding investments.

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Provision (Benefit) for Income Taxes

        We recognized an income tax provision of $1.6 million for the three months ended February 29, 2004 compared to a benefit of $0.5 million for the three months ended February 28, 2003. Our tax provision (benefit) is based on pretax income or loss and consists primarily of federal and state income taxes. Our effective tax rate was 39.0% the three months ended February 29, 2004 and February 28, 2003.

Nine Months Ended February 29, 2004 Compared To Nine Months Ended February 28, 2003

Revenues

        Total Revenues.    Total revenues increased to $263.9 million for the nine months ended February 29, 2004 from $253.7 million for the nine months ended February 28, 2003, representing an increase of 4.0%. The increase in total revenues consisted of a $13.8 million increase in license fees partially offset by a $3.6 million decrease in services revenues.

        License Fees.    Revenues from license fees increased to $65.2 million for the nine months ended February 29, 2004 from $51.3 million for the nine months ended February 28, 2003, representing an increase of 26.9%. The revenue increase occurred primarily in the most recent three months compared to last year, as market conditions showed improvements in the level of information technology spending and our sales execution improved. The average overall selling price of our licensing transactions during the nine months ended February 29, 2004 increased 24.4%, although we experienced a decrease in the number of licensing transactions over the comparable period last year. Revenues from license fees as a percentage of total revenues for the nine months ended February 29, 2004 and February 28, 2003 were 24.7% and 20.2%, respectively, reflecting the increase in license fees in proportion to revenues from services.

        Services.    Revenues from services decreased to $198.7 million for the nine months ended February 29, 2004 from $202.3 million for the nine months ended February 28, 2003, representing a decrease of 1.8%. Consulting revenues decreased $11.0 million primarily as a result of fewer consulting and training opportunities during the first six months of fiscal 2004. This decrease in consulting revenues was due to lower license sales in the preceding fiscal quarters. This decline was partially offset by a $7.4 million increase in maintenance revenue largely due to an expanded customer base from new contracts closed since the prior year period, combined with price increases. Services revenues as a percentage of total revenues for the nine months ended February 29, 2004 and February 28, 2003 were 75.3% and 79.8%, respectively.

Cost of Revenues

        Cost of License Fees.    Cost of license fees increased to $12.0 million for the nine months ended February 29, 2004 from $9.9 million for the nine months ended February 28, 2003, representing an increase of 21.3%. The increase was largely due to a $1.1 million increase in third-party costs and a $0.8 million increase in amortization of acquired software related to our acquisitions. Cost of license fees as a percentage of total revenues for the nine months ended February 29, 2004 and February 28, 2003 were 4.6% and 3.9%, respectively. Gross margin on revenue from license fees was 81.6% and 80.7% for the nine months ended February 29, 2004 and February 28, 2003, respectively. Gross margin on license fees increased primarily due to the increase in the mix of our components, which typically carry higher margins compared with third-party components, partially offset by the amortization of acquired technology.

        Cost of Services.    Cost of services decreased to $100.1 million for the nine months ended February 29, 2004 from $107.7 million for the nine months ended February 28, 2003, representing a decrease of 7.1%. The decrease in cost of services was primarily due to a $3.7 million decrease in third-

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party costs as a result of a lower proportion of third-party services in our revenue mix, a $1.3 million decrease in expenses due to cost containment initiatives, a $0.7 million decrease in travel costs and a $1.7 million net decrease in employee costs due to our workforce reductions and attrition, offset slightly by an increase in employee costs due to an increase in employee compensation. Cost of services as a percentage of total revenues for the nine months ended February 29, 2004 and February 28, 2003 were 37.9% and 42.5%, respectively. The decrease in cost of services as a percentage of total revenues was due to the above cost containment initiatives. Gross margin on services revenues were 49.6% and 46.8% for the nine months ended February 29, 2004 and February 28, 2003, respectively. Gross margin on services increased primarily due to the increase in maintenance revenue in proportion to consulting revenue.

Operating Expenses

        Research and Development.    Research and development expenses increased to $47.1 million for the nine months ended February 29, 2004 from $43.9 million for the nine months ended February 28, 2003, representing an increase of 7.4%. The increase was primarily due to a $1.7 million net increase in employee costs mainly related to incentives and merit increases and a $1.4 million increase in costs related to the integration of acquisitions and corporate initiatives designed to improve efficiency. Research and development expenses as a percentage of total revenues for the nine months ended February 29, 2004 and February 28, 2003 were 17.9% and 17.3%, respectively.

        Sales and Marketing.    Sales and marketing expenses decreased to $68.1 million for the nine months ended February 29, 2004 from $77.3 million for the nine months ended February 28, 2003, representing a decrease of 11.8%. The decrease was primarily the result of a $4.2 million decrease in expenses due to cost containment initiatives, a $2.7 million net decrease in employee costs as a result of our workforce reductions and attrition, partially offset by an increase in incentives and merit increases and a $1.0 million decrease in marketing program costs. The remaining decrease is due to the net effect of other individually insignificant items. Sales and marketing expenses as a percentage of total revenues for the nine months ended February 29, 2004 and February 28, 2003 were 25.8% and 30.4%, respectively.

        General and Administrative.    General and administrative expenses increased to $28.4 million for the nine months ended February 29, 2004 from $21.2 million for the nine months ended February 28, 2003, representing an increase of 34.0%. The increase was primarily due to a $2.7 million increase in bad debt expense reflecting an increase in the accounts receivable reserve for aged receivables, a $2.1 million increase relating to the resolution of certain claims and other legal related expenses, a $1.3 million increase in costs related to corporate initiatives designed to improve efficiency and a $0.5 million increase in insurance costs. These increases are partially offset by a $0.7 million decrease in expenses due to a prior year period lease termination fee that did not occur in the current year to date period and a $0.4 million decrease in audit expenses due primarily to prior year costs related to the Armature acquisition that did not occur in the current year to date period. Other decreases include a $0.2 million net decrease in employee costs related to a decrease in stock compensation expense primarily resulting from the expiration of unvested options related to employee terminations resulting from workforce reductions, partially offset by incentives and merit increases. The remaining net increase is due to the net effect of other individually insignificant items. General and administrative expenses as a percentage of total revenues for the nine months ended February 29, 2004 and February 28, 2003 were 10.8% and 8.3%, respectively.

        Restructuring charges.    For the nine months ended February 29, 2004, we recorded net restructuring charges of $2.2 million including $2.3 million for the fiscal 2004 restructuring plan and a reversal of $0.04 million for the fiscal 2003 restructuring plan related to certain employee costs, which we determined would not be incurred. In September 2003, we approved the fiscal 2004 restructuring

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plan to realign projected expenses with anticipated lower revenue levels and incurred restructuring charges of $2.3 million for severance and related benefits. The plan resulted in the termination of 93 employees in the second quarter of fiscal 2004 from various functions including research and development, general and administrative and sales and marketing primarily in the United States.

        Although the fiscal 2003 and 2002 restructuring plans have been fully executed, we continue to make cash payments for continuing lease and employee related costs. During the nine months ended February 29, 2004, we made cash payments of $3.0 million, which reduced plan liabilities included in accrued compensation and benefits and other accrued liabilities. See Note 6 of Notes to Condensed Consolidated Financial Statements for a summary of activity for the nine months ended February 29, 2004.

        Amortization of Acquired Intangibles.    Amortization of acquired intangibles of $0.9 million and $0.7 million for the nine months ended February 29, 2004 and February 28, 2003 consisted of amortization expense related to acquired intangible assets other than acquired technology which is amortized to cost of license fees.

Other Income (Expense), Net

        Other income (expense), net, which is comprised of interest income earned from cash, marketable securities and long term investments decreased to $2.4 million for the nine months ended February 29, 2004 from $3.3 million for the nine months ended February 28, 2003. The reduction in interest income resulted from a realignment in our investment strategy to shorter-term lower-yielding investments and from a reduced investment base following the funding of acquisitions and stock repurchases.

Provision (Benefit) for Income Taxes

        We recognized an income tax provision of $2.9 million for the nine months ended February 29, 2004 compared to an income tax benefit of $3.9 million for the nine months ended February 28, 2003. Our income tax provision (benefit) is based on pretax income or loss and consists primarily of federal and state income taxes. Our effective tax rate was 39.0% for the nine months ended February 29, 2004 and February 28, 2003.

Acquisitions

        The following acquisitions were accounted for under the purchase method of accounting, and, accordingly, the assets and liabilities acquired were recorded at their estimated fair values at the effective date of the acquisition and the results of operations have been included in the unaudited condensed consolidated statements of operations since the acquisition date. In accordance with SFAS No. 142, goodwill recorded as a result of these acquisitions will be subject to an annual impairment test and will not be amortized. These acquisitions are intended to enhance our focus on targeted vertical markets and to provide additional value-added products and services to our customers.

        On October 15, 2003, we acquired all of the outstanding capital stock of Apexion for $8.0 million in cash, net of cash acquired. Terms of the agreement also provide for additional cash payments ranging from zero to $2.0 million contingent upon the future performance of Apexion measured annually through November 30, 2005. Any contingent consideration earned will be recorded as additional goodwill. Apexion provided materials and equipment logistics solutions for the healthcare industry.

        On September 30, 2003, we acquired all of the outstanding capital stock of Closedloop for $4.2 million in cash, net of cash acquired. Closedloop provided collaborative budgeting, planning and forecasting solutions using real-time, transactional functionality.

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        On July 24, 2003, we acquired all of the outstanding capital stock of Numbercraft for $3.7 million in cash, net of cash acquired and $0.3 million in notes payable. The final purchase price allocation is based on preliminary estimates and is subject to refinement upon finalization of certain tax attributes. Additional cash payments ranging from zero to $8.6 million are contingent upon the future performance of Numbercraft measured periodically through fiscal 2007. Any contingent consideration earned will be recorded as additional goodwill. During the nine months ended February 29, 2004, $0.4 million of additional consideration was earned and recorded as additional goodwill. 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.

Liquidity and Capital Resources

        As of February 29, 2004, we had $232.1 million in cash, cash equivalents and marketable securities and $198.7 million in working capital. Our most significant source of operating cash flows is derived from license fees and services to our customers. Days sales outstanding, which is calculated as outstanding receivables at period end divided by revenue for the quarter times 90 days in the quarter, was 64 and 70, respectively, for the three months ended February 29, 2004 and February 28, 2003. The decrease was due primarily to an increase in revenues and improved collections in the three months ended February 29, 2004 compared to the same prior year period. Our primary uses of cash from operating activities are for employee costs, third-party costs for licenses and services and facilities.

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Cash flows provided by operating activities:

        Cash flows provided by operating activities of $11.1 million for the nine months ended February 29, 2004 consisted of net income, net non-cash items of $25.3 million, offset by uses of cash for working capital, principally accounts receivable, prepaid expenses, accrued liabilities and deferred revenue and customer deposits. Accounts receivable increased $4.8 million due to an increase in products billed with payment terms that extended beyond the end of the quarter. Prepaid expenses increased $5.4 million due to tax benefits related to stock option activity, partially offset by an increase in the tax liability due to quarterly earnings. Accrued liabilities decreased $3.3 million due to the payment of fiscal 2003 bonuses and incentives. Deferred revenue and customer deposits decreased $4.4 million due primarily to decreased maintenance payments received prior to the support period and a decrease in the sales returns and allowances reserve due to the resolution of certain product claims.

        Cash flows provided by operating activities of $26.6 million for the nine months ended February 28, 2003 consisted of net non-cash items of $25.5 million, partially offset by a net loss, and changes in accounts receivable, prepaid expenses and other assets, accounts payable and accrued liabilities. The decrease in accounts receivable reflected collection from a number of customers with extended payment terms and a reduction in license fee revenues reflective of the downturn in the economic climate. Prepaid expenses increased $12.6 million due to tax benefits related to stock option activity and cumulative net losses. Accounts payable decreased $9.4 million due primarily to the Employee Stock Purchase Plan ("ESPP") purchase during the first quarter of fiscal 2003, a decrease in accounts payable due to the timing of payments and a decrease in sales tax payable due to a decrease in revenues. Accrued liabilities decreased $9.4 million due mainly to severance payouts related to the fiscal 2002 and fiscal 2003 restructuring plans and a decrease in third-party license fees due to the decline in revenues.

Cash flows provided by investing activities:

        Cash flows provided by investing activities of $0.3 million for the nine months ended February 29, 2004 consisted of net sales of marketable securities of $20.4 million, partially offset by cash usage of $16.3 million for the acquisitions of Numbercraft, Apexion and Closedloop and the purchases of property and equipment for $3.8 million. Marketable securities decreased due to a realignment in our investment strategy to shorter-term investments, coinciding with cash needed to fund acquisitions.

        Cash flows provided by investing activities of $28.5 million for the nine months ended February 28, 2003 consisted of net sales of marketable securities of $41.1 million, partially offset by cash usage of $7.8 million for the acquisition of Armature and the purchases of property and equipment for $4.8 million. Marketable securities decreased due to a realignment in our investment strategy to shorter-term investments, coinciding with cash needed to fund acquisitions and stock repurchases. We have generally funded capital expenditures through cash flows generated from operations and stockholder transactions.

Cash flows (used in) provided by financing activities:

        Cash flows used in financing activities of $18.6 million for the nine months ended February 29, 2004 reflects $30.2 million used to repurchase shares of our common stock and $0.7 million used for repayment of debt, offset by $8.6 million received from the exercise of stock options and $3.7 million from employee contributions to our employee stock purchase plan completed through the issuance of treasury shares.

        Cash flows provided by financing activities of $5.9 million for the nine months ended February 28, 2003 consisted of $6.7 million from employee contributions to our employee stock purchase plan completed through the issuance of treasury shares, $6.2 million received from the exercise of stock

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options, offset by $6.1 million for the repurchase of common stock and $0.9 million for the repayment of debt.

Contingent cash commitments

        We have contingent consideration agreements related to the acquisitions of Keyola in April 2002, Numbercraft in July 2003, and Apexion in October 2003. Under the terms of the Keyola agreement, additional cash payments ranging from zero to $1.5 million are contingent upon the future performance of Keyola, measured annually through fiscal 2005. Additional cash payments ranging from zero to $8.6 million are contingent upon future performance of Numbercraft measured periodically through fiscal 2007. Additional cash payments ranging from zero to $2.0 million are contingent upon the future performance of Apexion measured annually through November 30, 2005. Any contingent consideration earned will be recorded as additional goodwill. During the nine months ended February 29, 2004, $0.4 million of additional consideration was earned under the Numbercraft agreement and recorded as additional goodwill.

        In February 2004, we entered into an offshore agreement with a third-party to provide software maintenance services. If we terminate the agreement prior to its initial twenty-four month term, a termination fee will be incurred equal to the sum of the previous six months service charges. At this time, we do not expect to terminate the agreement within the twenty-four month period.

Repurchase of common shares

        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. During the nine months ended February 29, 2004, we repurchased 3.7 million shares for $30.2 million. The repurchased shares will be used for general corporate purposes. No time limit has been set for the repurchase program.

Disclosures about Contractual Obligations and Commercial Commitments

        The following summarizes our contractual obligations at February 29, 2004, and the effect these contractual obligations are expected to have on our liquidity and cash flows in future periods:

        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. As part of our business strategy, we may acquire companies or products from time to time to enhance our product lines. These acquisitions may be funded using available cash, equity, debt or a combination of these sources.

New Accounting Pronouncements

        In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition". SAB 104 supercedes SAB 101, "Revenue Recognition in Financial Statements". SAB 104's primary purpose is to rescind accounting guidance contained in SAB

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101 related to multiple element revenue arrangements, superceded as a result of the issuance of Emerging Issues Task Force ("EITF 00-21"), "Accounting for Revenue Arrangements with Multiple Deliverables". Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked Questions and Answers ("the FAQ") issued with SAB 101 that had been codified in Securities and Exchange Commission Topic 13, "Revenue Recognition". Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. Since our revenue recognition practices previously conformed to the interpretations codified by SAB No. 104, adoption did not have a material effect on our consolidated financial position, results of operations or cash flows.

        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. In December 2003, the FASB issued FIN No. 46-R, "Consolidation of Variable Interest Entities", which represents a revision to FIN No. 46. The provisions of FIN No. 46-R are effective for interests in VIEs as of the first interim or annual period ending after December 15, 2003. We currently have no contractual relationship or other business relationships with a variable interest entity and therefore the adoption of FIN No. 46 or FIN No. 46-R did not have a material effect on our consolidated financial position, results of operations or cash flows.

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-Q. This section should be read in conjunction with the Condensed 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-Q and Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended May 31, 2003 contained in our Annual Report on Form 10-K. Any of the 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. We 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-Q.

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

        During the first nine months of fiscal 2004, our license revenue was higher than in the same period the prior fiscal year. However, prospective customers continue 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 decline in and volatility of 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

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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 2002, 2003 and 2004, we took 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, 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. 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 financial services and other industries. A continued economic downturn, or adverse change in the regulatory environment or business prospects for one or more of the industries we service 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. This need is becoming more prevalent as the marketplace for our traditional enterprise resource planning products, known as ERP, is maturing.

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 revenue recognition policies. Our quarterly license and services 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;

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•

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;



•

existing customers may decline to renew support for our products, and market pressures may limit our ability to increase support fees or require customers to upgrade from older versions of our products;



•

prospective customers may decline or defer the purchase of new products or releases if we do not 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.

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 adversely 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;

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•

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.

Our stock price may remain volatile.

        The trading price of our common stock has fluctuated significantly in the past. Changes in our business, operations or prospects, regulatory considerations, general market and economic conditions, or other factors may affect the price of our common stock. Many of these factors are beyond our control. The future trading price of our common stock is likely to be volatile and could be subject to wide price fluctuations in response to such factors, including:

•

actual or anticipated fluctuations in revenues or operating results, including revenue or results of operations in any quarter failing to meet the expectations, published or otherwise, of the investment community;



•

announcements of technological innovations by us or our competitors;



•

introduction and success of new products or significant customer wins or losses by us or our competitors;



•

developments with respect to our intellectual property rights, including patents, or those of our competitors;



•

fluctuations in demand for and sales of our products, which will depend on, among other things, the acceptance of our products in the marketplace and the general level of spending in the software industry;



•

rumors or dissemination of false and/or misleading information, particularly through internet chat rooms, instant messaging and other means;



•

changes in management;



•

proposed and completed acquisitions or other significant transactions by us or our competitors;



•

introduction and success of new products or significant customer wins or losses by us or our competitors;



•

the mix of products and services sold by us;



•

the timing of significant orders by us;

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•

conditions and trends in the software industry, or consolidation within the technology industry that may impact our customers, partners, suppliers or competitors;



•

adoption of new accounting standards affecting the software industry;



•

acts of war or terrorism; and



•

general market conditions.

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 compensation expense using the fair value method. Note 2 of the Notes to Condensed Consolidated Financial Statements describes the pro forma impact of a change to fair market value accounting on earnings and earnings per share for the three and nine months ended February 29, 2004 and February 28, 2003.

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, People Soft, Inc. and SAP AG, all of which have larger installed customer bases. Furthermore, Oracle is capable of bundling 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

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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 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., Hyperion Solutions Corporation and other companies, 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 and marketing opportunities. Our reseller arrangements may from time to time give rise to disputes regarding marketing strategy, sales of competing products, 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.

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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.

        A significant portion of our research and development resources are devoted to product upgrades that address regulatory and maintenance requirements. The remainder of our limited research and development resources are for new products. 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. Maintaining and upgrading our products to operate on multiple hardware and database platforms reduces our resources for developing new products. 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.

        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.

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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, experience corruption of their data or encounter performance or scaling problems 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. We are currently a defendant in several lawsuits where clients have raised these types of issues with our products and services. 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 do not have substantial international operations and may not be able to develop our international operations successfully.

        We have only limited international operations. Our products do not meet the requirements of Asia and many other local markets. 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;



•

differing foreign technical standards; and



•

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

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Our limited international operations could 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 provide assurance that we will be able to make acquisitions or investments on commercially acceptable terms. If we acquire a company, we may incur losses in the operations of that company and 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. If the products of an acquired company are not successful, those remaining assets could become impaired, which may result in an impairment loss that could materially adversely impact our financial position and results of operations.

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.

        We act as an application service provider for only portions of our products acquired through recent acquisitions. Revenues from these arrangements are not material. 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. Although we occasionally sell our software to ASPs, we have limited experience selling our solutions to ASPs and

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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.

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 hold one patent and have filed three 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.

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

Our future success depends on our ability to continue to retain and attract qualified personnel.

        We believe that our future success depends upon our ability to continue to train, retain, effectively manage and attract highly skilled technical, managerial, sales and marketing personnel. If our efforts in these areas are not successful, our costs may increase, development and sales efforts may be hindered and our customer service may be degraded. There is intense competition for personnel in the software industry. From time to time, we experience difficulties in locating enough highly qualified candidates in desired geographic locations, or with required industry-specific expertise. In February 2004, we entered into an offshore agreement with a third-party to provide software maintenance services. We do not have experience with this type of outsourcing and may be unable to achieve the product development and economic efficiencies of this arrangement.

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

        In December 2003, we announced that our Chairman and a founder, H. Richard Lawson, had entered into a selling plan to sell up to 924,000 shares of our stock over a period ending August 2004. Mr. Lawson may also elect to sell or transfer other shares apart from this selling plan. Other executive officers, directors or principal stockholders could also elect to sell their shares from time to time. 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 February 29, 2004, our executive officers, directors, and affiliated entities, in the aggregate, beneficially owned 18.7% 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

37

well as other available information affecting us, our products and services, and the software industry when evaluating our prospective results of operations.

ITEM 3. 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, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133-an amendment of FASB Statement No. 133", and SFAS No. 138, "Accounting for Derivative Instruments and Certain Hedging Activities-an amendment of FASB Statement No. 133", 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 February 29, 2004, the average maturity of our investment securities was less than three months and all investment securities had maturities less than 24 months. As of February 29, 2004, we consider the reported amounts of these investments to be reasonable approximations of fair values. Changes in the market interest rates will not have a material impact on our financial position.

        Through February 29, 2004, 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 4. CONTROLS AND PROCEDURES

        As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended we conducted an evaluation under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. There was no significant change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        We are party to various legal disputes and proceedings arising during the ordinary course of business. In the opinion of management, resolution of these matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows. Notwithstanding our belief, an unfavorable resolution of some or all of these matters could materially affect our future results of operations or cash flows.

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

(c)

Exemption from Registration Claimed

        Between December 1, 2003 and February 29, 2004, we sold 158,000 shares of common stock to an employee pursuant to the exercise of outstanding stock options for an aggregate consideration of $85,889 in reliance upon Rule 701 of the Securities Act of 1933, as amended.

(d)

Use of Proceeds

        As of February 29, 2004, we held $141.6 million of net proceeds from our initial public offering in interest-bearing, investment grade securities. During the three months ended February 29, 2004, we used $1.4 million for capital expenditures and $0.3 million for repayment of debt.

(e)

Issuer Purchases of Equity Securities

        The following table provides information as of February 29, 2004 with respect to the shares of common stock repurchased by the Company during the third quarter of fiscal 2004 (in thousands except per share data):