LAWSON SOFTWARE INC - 10-Q Quarterly Report

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

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED August 31, 2004

or

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

	FOR THE TRANSITION PERIOD FROM TO

Commission file number 000-33335

LAWSON SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		41-1251159
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

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 October 5, 2004 was 98,246,276.

LAWSON SOFTWARE, INC.

Form 10-Q
Index

PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets at August 31, 2004 and May 31, 2004	3
	Condensed Consolidated Statements of Operations for the three months ended August 31, 2004 and 2003	4
	Condensed Consolidated Statements of Cash Flows for the three months ended August 31, 2004 and 2003	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Qualitative and Quantitative Disclosure about Market Risk	32
Item 4.	Controls and Procedures	32

PART II.	OTHER INFORMATION	32
Item 1.	Legal Proceedings	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Submission of Matters to a Vote of Security Holders	33
Item 5.	Other Information	33
Item 6.	Exhibits	34
SIGNATURES		35

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LAWSON SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

	August 31, 2004			May 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	112,075		$	79,996
Marketable securities	65,032			120,465
Trade accounts receivable, net	55,920			65,236
Deferred income taxes	15,311			15,311
Prepaid expenses and other assets	20,635			20,450

Total current assets	268,973			301,458

Long-term marketable securities	7,369			8,521
Property and equipment, net	15,978			17,235
Goodwill	42,606			43,042
Other intangible assets, net	38,516			40,767
Deferred income taxes	12,183			12,344
Other assets	195			231

Total assets	$	385,820		$	423,598

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	1,235		$	1,652
Accounts payable	10,836			14,391
Accrued compensation and benefits	17,745			25,086
Other accrued liabilities	9,520			11,898
Deferred revenue and client deposits	64,870			83,095
Total current liabilities	104,206			136,122
Long-term debt, less current portion	996			990
Other long-term liabilities	3,438			3,600
Total liabilities	108,640			140,712
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock	—			—
Common stock	1,106			1,099
Additional paid-in capital	330,950			327,715
Treasury stock, at cost	(74,240		)	(65,555		)
Deferred stock-based compensation	(499		)	(774		)
Retained earnings	17,055			17,471
Accumulated other comprehensive income	2,808			2,930
Total stockholders’ equity	277,180			282,886
Total liabilities and stockholders’ equity	$	385,820		$	423,598

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

LAWSON SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended
	August 31, 2004			August 31, 2003
Revenues:
License fees	$	13,251		$	22,661
Services	69,434			65,341
Total revenues	82,685			88,002
Cost of revenues:
Cost of license fees	2,375			4,091
Cost of services	36,456			32,101
Total cost of revenues	38,831			36,192

Gross profit	43,854			51,810

Operating expenses:
Research and development	15,647			14,935
Sales and marketing	20,957			22,998
General and administrative	8,250			9,225
Restructuring	(75		)	(40		)
Amortization of acquired intangibles	385			245
Total operating expenses	45,164			47,363

Operating (loss) income	(1,310		)	4,447

Other income:
Interest income	657			882
Interest expense	(13		)	(18		)
Total other income	644			864

(Loss) income before income taxes	(666		)	5,311
(Benefit) provision for income taxes	(249		)	2,071
Net (loss) income	$	(417	)	$	3,240

Net (loss) income per share:
Basic	$	0.00		$	0.03
Diluted	$	0.00		$	0.03
Shares used in computing net (loss) income per share:
Basic	98,294			98,465
Diluted	98,294			107,108

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

LAWSON SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended
	August 31, 2004			August 31, 2003
Cash flows from operating activities:
Net (loss) income	$	(417	)	$	3,240
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization	4,232			2,708
Deferred income taxes	161			—
Provision for doubtful accounts	625			1,204
Tax benefit from stockholder transactions	1,067			2,126
Tax commitment from exercise of stock options	(651		)	(587		)
Amortization of stock-based compensation	22			699
Amortization of discounts on notes payable	22			—
Amortization of discount and accretion of premium on marketable securities	58			380
Restructuring	(75		)	(40		)
Changes in operating assets and liabilities, net of effect from acquisitions:
Trade accounts receivable	8,691			(1,702		)
Prepaid expenses and other assets	(164		)	2,158
Accounts payable	(3,555		)	(4,152		)
Accrued and other liabilities	(8,587		)	(4,451		)
Income taxes payable	(988		)	—
Deferred revenue and client deposits	(18,385		)	(416		)
Net cash (used in) provided by operating activities	(17,944		)	1,167

Cash flows from investing activities:
Cash paid in conjunction with acquisitions, net of cash acquired	—			(3,739		)
Purchases of marketable securities	(14,400		)	(7,629		)
Sales and maturities of marketable securities	70,968			40,245
Purchases of property and equipment	(833		)	(1,320		)
Net cash provided by investing activities	55,735			27,557

Cash flows from financing activities:
Principal payments on debt	(105		)	(272		)
Exercise of stock options	2,025			2,444
Issuance of treasury shares for employee stock purchase plan	2,368			2,175
Repurchase of common stock	(10,000		)	(5,288		)
Net cash used in financing activities	(5,712		)	(941		)
Increase in cash and cash equivalents	32,079			27,783
Cash and cash equivalents at beginning of period	79,996			153,071
Cash and cash equivalents at end of period	$	112,075		$	180,854

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

LAWSON SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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. 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 results of operations for the period ended August 31, 2004 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending May 31, 2005. 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, 2004.

2. STOCK-BASED COMPENSATION

The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and complies with the disclosure provisions of Statement of Financial Accounting Standard (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 options is amortized to expense over the options’ vesting period. Had compensation cost for the Company’s stock options been recognized based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Company’s net (loss) income would have been adjusted to the pro forma amounts indicated below (in thousands, except per share amounts):

		Three Months Ended August 31,
		2004			2003
Net (loss) income:
	As reported	$	(417	)	$	3,240
Add:	Stock-based employee compensation expense included in reported net (loss) income, net of taxes	14			426
Deduct:	Total stock-based compensation expense determined under fair value based method for all rewards, net of taxes	(1,993		)	(1,584		)
Pro forma net (loss) income		$	(2,396	)	$	2,082
Net (loss) income per share:
Basic:
As reported		$	0.00		$	0.03
Pro forma		$	(0.02	)	$	0.02
Diluted:
As reported		$	0.00		$	0.03
Pro forma		$	(0.02	)	$	0.02

3. PER SHARE DATA

Basic earnings per share is computed using the net (loss) income and the weighted average number of shares of common stock outstanding. Diluted earnings per share reflects the weighted average number of shares of common stock 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 (in thousands, except per share amounts).

	Three Months Ended August 31,
	2004			2003
Basic earnings per share computation:

Net (loss) income	$	(417	)	$	3,240
Weighted average common shares – basic	98,294			98,465
Basic net (loss) income per share	$	0.00		$	0.03

Diluted earnings per share computation:

Net (loss) income	$	(417	)	$	3,240
Shares calculation:
Weighted average common shares	98,294			98,465
Effect of dilutive stock options	—			8,021
Effect of dilutive warrants	—			622
Weighted average common shares – diluted	98,294			107,108
Diluted net (loss) income per share	$	0.00		$	0.03

Potential dilutive shares of common stock excluded from the diluted net (loss) income per share computations were 19.6 million and 0.2 million as of August 31, 2004 and 2003, respectively. Certain potential dilutive shares of common stock were excluded from the diluted earnings per share computation because their exercise prices were greater than the average market price of the common shares during the period and were therefore not dilutive. In addition, potential dilutive shares of common stock were excluded from periods with a net loss because they were anti-dilutive.

4. NEW ACCOUNTING PRONOUNCEMENT

In November 2003 and March 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. The consensus reached requires companies to apply new guidance for evaluating whether an investment is other-than-temporarily impaired and also requires quantitative and qualitative disclosures of debt and equity securities, classified as available-for-sale or held-to-maturity, that are determined to be only temporarily impaired at the balance sheet date. The Company incorporated the required disclosures for investments accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” as required in the fourth quarter of fiscal year 2004, and chose to early adopt the guidance related to evaluating other-than-temporary impairment. Disclosures for all investments outside the scope of SFAS No. 115 (cost and equity method investments), of which the Company has none, are required in the fourth quarter of fiscal 2005. Adoption of EITF Issue No. 03-01 will not have an impact on the Company’s statements of consolidated operations, financial position or cash flows.

5. COMPREHENSIVE (LOSS) INCOME

The following table presents the calculation of comprehensive (loss) income (in thousands, except per share amounts):

	Three Months Ended August 31,
	2004			2003
Net (loss) income	$	(417	)	$	3,240
Unrealized gain (loss) on available-for-sale investments, net of taxes	26			(60		)
Foreign currency translation adjustment	(148		)	(770		)
Other comprehensive loss	(122		)	(830		)
Comprehensive (loss) income	$	(539	)	$	2,410

6. RESTRUCTURING

During the three months ended August 31, 2004 and 2003, the Company recorded reversals of restructuring charges of $0.08 million and $0.04 million, respectively, for certain employee costs it determined would not be incurred.

Fiscal 2004 Restructuring

During fiscal 2004, the Company approved a restructuring plan to realign projected expenses with anticipated lower revenue levels and incurred restructuring charges of $2.3 million for severance and related benefits. The fiscal 2004 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 2005.

The following table sets forth the restructuring reserve activity related to the fiscal 2004 restructuring plan and the remaining balances as of August 31, 2004, which are included in accrued compensation and benefits (in thousands):

	Severance and related benefits
Balance May 31, 2004	$	57
Adjustment to provision	(26		)
Balance, August 31, 2004	$	31

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 $5.8 million, which included $4.7 million of severance and related benefits and $1.1 million for the closure and consolidation of facilities. The plan included the termination of 244 employees in various functions including administrative, professional and managerial in the United States, Canada and Europe, all of which were terminated during the second quarter of fiscal 2003. The Company expects to pay all remaining termination benefits during fiscal 2005.

The following table sets forth the restructuring reserve activity related to the fiscal 2003 restructuring plan and the remaining balances as of August 31, 2004, which are included in other accrued liabilities (in thousands):

	Severance and related benefits
Balance, May 31, 2004	$	128
Cash payments	(29		)
Adjustment to provision	(49		)
Balance, August 31, 2004	$	50

Fiscal 2002 Restructuring

During fiscal 2002, the Company approved a restructuring plan in response to the general economic downturn and incurred restructuring charges of $3.3 million, which included $3.0 million for severance related benefits and $0.3 million for the closure of a leased office facility. The plan included the termination and payment of severance related benefits for 111 employees in various functions including administrative, professional, and managerial, primarily in the U.S. All terminations and related payments were completed during the first quarter of fiscal 2003. Cash payments relating to facility closure liabilities are expected to extend through June 2005.

The following table sets forth the restructuring reserve activity related to the fiscal 2002 restructuring plan and the remaining balances as of August 31, 2004, which are included in other accrued liabilities (in thousands):

	Facilities
Balance, May 31, 2004	$	179
Cash payments	(26		)
Balance, August 31, 2004	$	153

7. GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the three months ended August 31, 2004 are as follows (in thousands):

Balance as of May 31, 2004	$	43,042
Goodwill acquired during the period	—
Contingent consideration adjustment	(289		)
Currency translation effect	(147		)
Balance as of August 31, 2004	$	42,606

Acquired intangible assets subject to amortization were as follows (in thousands):

	August 31, 2004						May 31, 2004
	Gross Carrying Amounts		Accumulated Amortization		Net		Gross Carrying Amounts		Accumulated Amortization		Net
Maintenance contracts	$	22,940	$	1,309	$	21,631	$	22,940	$	324	$	22,616
Acquired technology	14,225		5,977		8,248		14,272		5,183		9,089
Client lists	11,208		2,908		8,300		11,254		2,594		8,660
Non-compete agreements	627		290		337		632		230		402
	$	49,000	$	10,484	$	38,516	$	49,098	$	8,331	$	40,767

Intangible assets are amortized on a straight-line basis over the estimated periods benefited, generally three to five years for acquired technology, four to ten years for client lists, and the term of the agreement for non-compete agreements and maintenance contracts. For the three months ended August 31, 2004 and 2003, amortization expense for intangible assets was $2.2 million and $0.7 million, respectively.

The estimated future amortization expense for identified intangible assets is as follows (in thousands):

2005	$	6,499
2006	8,613
2007	6,941
2008	4,660
2009	3,633
Thereafter	8,170
	$	38,516

8. COMMITMENTS AND CONTINGENCIES

The Company has contingent consideration agreements related to acquisitions ranging in the aggregate from zero to $9.8 million, measured over various periods through fiscal 2007, based on the acquired company’s future performance. Contingent consideration is recorded as additional goodwill. During the three months ended August 31, 2004 no additional consideration had been earned under these agreements.

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 the Company’s future results of operations and cash flows.

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.

9. SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for the acquisition of Numbercraft Limited (“Numbercraft”) during the three months ended August 31, 2003 (in thousands):

	Three Months Ended
	August 31, 2003
Details of acquisition:
Fair value of assets	$	5,580
Less liabilities assumed	(1,715		)
Cash paid	3,865
Less cash acquired	(126		)
Net cash paid for acquisition	$	3,739

10. 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 (in thousands):

	Three Months Ended August 31,
	2004		2003
Revenues:
Domestic operations	$	77,971	$	82,653
International operations	4,714		5,349
Consolidated	$	82,685	$	88,002

	August 31, 2004		May 31, 2004
Long-lived assets:
Domestic operations	$	81,569	$	84,482
International operations	15,531		16,562
Consolidated	$	97,100	$	101,044

The following table presents revenues for license fees, maintenance and consulting services (in thousands):

	Three Months Ended August 31,
	2004		2003
Components of revenues:
License fees	$	13,251	$	22,661
Services:
Maintenance	40,682		37,224
Consulting	28,752		28,117
Total services	69,434		65,341
Total revenues	$	82,685	$	88,002

11. COMMON STOCK REPURCHASES

In June 2003, the Company’s Board of Directors authorized the repurchase, from time to time, up to $50.0 million of the Company’s common shares. Shares were repurchased as market conditions warranted either through open market transactions, block purchases, private transactions or other means. During the three months ended August 31, 2004, the Company completed the authorized stock repurchase plan by purchasing the remaining 1.4 million shares for $10.0 million in cash. Cash proceeds obtained from the maturities of marketable securities, the exercise of employee stock options and contributions to the employee stock purchase plan, largely funded the share repurchases. The repurchased shares, which remain in treasury, will be used for general corporate purposes.

12. INCOME TAXES

The annual effective tax rate is forecasted quarterly using actual historical information and forward-looking estimates. The Company’s effective tax rate was 37.4% for the three months ended August 31, 2004, 47.8% for fiscal 2004, and 39.0% for the three months ended August 31, 2003. The change in the effective tax rate from the three months ended August 31, 2003 was primarily due to the impact of changes in actual and forecasted permanent book to tax differences. The change in the effective tax rate from fiscal 2004 was primarily a result of the Company recording a $1.2 million valuation allowance for net deferred tax assets in fiscal 2004. The Company determined no additional valuation allowance was necessary during the three months ended August 31, 2004.

The Company reviews its annual effective tax rate on a quarterly basis and makes necessary changes. The estimated annual effective tax rate may fluctuate due to changes in forecasted annual operating income; changes to the valuation allowance for net deferred tax assets; changes to actual or forecasted permanent book to tax differences; impacts from future tax settlements with state, federal or foreign tax authorities; or impacts from tax law changes.

13. SUBSEQUENT EVENT

On September 28, 2004, the Company’s Board of Directors approved management’s plan, developed in late September 2004, that is designed to enhance the Company’s operating effectiveness and profitability. Under the plan, the Company will streamline structure, consolidate leadership and reduce long-term costs to realign projected expenses with anticipated revenue levels. The plan includes a reduction of approximately 100 employees in the United States and the United Kingdom, which will result in a charge for severance and related benefits of approximately $2.5 million in the second quarter ending November 30, 2004. The reduction includes employees who work in operations, marketing, sales, research and development, maintenance and services. All terminations and related payments are expected to be completed during fiscal 2005.

Management of the Company is continuing to evaluate other cost reduction opportunities that may result in additional charges in the second quarter ending November 30, 2004 and during the remainder of fiscal 2005. Management has not completed its evaluation and plan, and therefore the probability, nature, amount and timing of any additional charges are not currently determinable.

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

Forward-Looking Statements

In addition to historical information, this 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. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “should” and similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements include, among others, statements about our future performance, the continuation of historical trends, the sufficiency of our sources of capital for future needs, the effects of acquisitions and the expected impact of recently issued accounting pronouncements. 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. We undertake 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 we file from time to time with the Securities and Exchange Commission.

Business Overview

We provide business application software, services and support that help services organizations to manage, analyze and improve their businesses. The markets we serve include healthcare, government and education, retail, financial services (including banking, insurance and other financial services), and professional services. We derive revenues from licensing business application software and providing comprehensive professional services, including consulting, training and implementation services, as well as ongoing client support. 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 business application software through third-party vendors. We have offices and affiliates serving North and South America, Europe, Asia, Africa and Australia.

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 the Condensed Consolidated Financial Statements contained herein describe our significant accounting polices used in the preparation of the consolidated financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to bad debt, 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.

We believe the critical accounting polices listed below reflect our more significant judgments, estimates and assumptions used in the preparation of our condensed consolidated financial statements.

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

The significant judgments for revenue recognition typically involve whether collectibility can be considered probable and whether fees are fixed or determinable. In addition, our transactions often consist of multiple element arrangements, which must be analyzed to determine the relative fair value of each element, the amount of revenue to be recognized upon shipment, if any, and the period and conditions under which deferred revenue should be recognized.

We recognize revenues in accordance with the provisions of the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, “Software Revenue Recognition”, as amended by SOP 98-4, “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 AICPA, 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 client support. 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 fixed-fee service components are recognized as the services are performed and the costs to provide the related services are expensed as incurred. Software arrangements which include services that are essential to the functionality of our software products are recognized using contract accounting and the percentage-of-completion methodology based on labor hours input. The amount of judgment involved in addressing significant assumptions, risks and uncertainties in applying the application of the percentage-of-completion methodology can impact the amounts of revenue and related expenses reported in the consolidated financial statements. 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 clients. 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 within a twelve-month period from the date of shipment. If the fee due from the client 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, support 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 for which we do not have vendor-specific objective evidence of fair value, have been delivered.

• Services—Revenues from training and consulting services are recognized as services are provided to clients. Revenues from support contracts are deferred and recognized ratably over the term of the support agreements. Revenues for client support 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 clients. 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 client 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. If the factors utilized in determining the allowance do not reflect future performance, then a change in the allowance for doubtful accounts would be necessary in the period such determination has been made impacting future results of operations.

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. If the historical data we utilize does not reflect future performance, then a change in the allowances would be necessary in the period such determination has been made impacting future results of operations.

Valuation of Long-Lived and Intangible Assets and Goodwill. We review identifiable intangible and other long-lived assets for impairment whenever 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 first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. We operate as one reporting unit and therefore compare our book value to market value (market capitalization plus a control premium). If our market value exceeds our book value, goodwill is considered not impaired, thus the second step of the impairment test is not necessary. If our book value exceeds our market value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of the goodwill with the book value of the goodwill. If the carrying value of the goodwill exceeds the implied fair value of the goodwill, an impairment loss would be recognized in an amount equal to the excess. Any loss recognized cannot exceed the carrying amount of goodwill. After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill is the new accounting basis. A subsequent reversal of a previously recognized goodwill impairment loss is prohibited once the measurement of that loss is completed.

Income 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 for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included within our condensed consolidated balance sheets. Although we believe our assessments are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in our historical income tax provisions, benefits and accruals. Such differences could have a material effect on our income tax provision and net (loss) 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. As of May 31, 2004, the condensed consolidated balance sheet includes net deferred tax assets in the amount of $27.7 million. For the year ended May 31, 2004, we recorded a valuation allowance of $1.2 million associated primarily with federal contribution carryforwards, state net operating loss carryforwards and certain federal tax credit carryforwards that are estimated to expire prior to our utilization.

As of August 31, 2004, the condensed consolidated balance sheet includes net deferred tax assets in the amount of $27.5 million. For the three months ended August 31, 2004, we determined that no additional valuation allowance was necessary.

Our methodology for determining the realizability of our deferred tax assets involves estimates of future taxable income from our core business, the estimated impact of future stock option deductions from outstanding stock options, and the expiration dates and amounts of net operating loss carryforwards and other tax credits. These estimates are projected through the life of the related deferred tax assets based on assumptions which management believes to be reasonable and consistent with current operating results.

Although we had cumulative pre-tax income for financial reporting purposes for the three years ended May 31, 2004, we did not pay any significant income taxes over that period because tax deductions from the exercise of stock options granted prior to our initial public offering generated tax operating losses for the years ended May 31, 2004, 2003 and 2002. In assessing the realizability of our deferred tax assets as of May 31, 2004, we considered evidence regarding our ability to generate sufficient future taxable income to realize our deferred tax assets. The primary evidence considered included the cumulative tax operating loss for the past three years; the cumulative pre-tax income for financial reporting purposes for the past three years; the estimated impact of future tax deductions from the exercise of stock options outstanding as of May 31, 2004; and the estimated future taxable income based on historical operating results.

After giving consideration to these factors, we concluded that it was more likely than not that tax loss carryforwards and other tax credits that expire within the next ten years will not be utilized primarily due to the estimated future tax deductions from the exercise of stock options outstanding as of May 31, 2004. As a result, for the year ended May 31, 2004, we established a valuation allowance through the provision for income taxes of $1.2 million for certain deferred tax assets associated primarily with federal contribution carryforwards, state net operating loss carryforwards and certain federal tax credit carryforwards.

As of August 31, 2004, we updated our analysis to reflect the necessary changes in estimates and determined that no additional valuation allowance was necessary.

We also concluded that it was more likely than not that the net deferred tax assets of $27.5 million as of August 31, 2004 as well as the estimated future tax deductions from the exercise of stock options outstanding as of August 31, 2004 would be utilized prior to expiring in greater than ten years. Based on this conclusion, we would require approximately $105 million in cumulative future taxable income to be generated at various times over the next twenty years to realize the related net deferred tax assets of $27.5 million as of August 31, 2004 as well as the estimated future tax deductions from the exercise of stock options outstanding and in-the-money as of August 31, 2004. Additionally, we determined that it is likely the net deferred tax assets will continue to increase for the next several years prior to utilization of the tax loss carryforwards and could reach in excess of $40 million if the stock options outstanding and in-the-money as of August 31, 2004 are exercised.

In the event that we adjust estimates of future taxable income or tax deductions from the exercise of stock options, or our stock price increases significantly without a corresponding increase in taxable income, we may need to establish an additional valuation allowance, which could materially impact our financial position and results of operations.

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

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 August 31,
	2004		2003

Revenues:
License fees	16.0	%	25.8	%
Services	84.0		74.2
Total revenues	100.0		100.0

Cost of revenues:
Cost of license fees	2.9		4.6
Cost of services	44.1		36.5
Total cost of revenues	47.0		41.1

Gross margin	53.0		58.9

Operating expenses:
Research and development	18.9		17.0
Sales and marketing	25.3		26.1
General and administrative	10.0		10.5
Restructuring	(0.1	)	(0.1	)
Amortization of acquired intangibles	0.5		0.3
Total operating expenses	54.6		53.8

Operating (loss) income	(1.6	)	5.1

Other income	0.8		0.9
(Loss) income before income taxes	(0.8	)	6.0
(Benefit) provision for income taxes	(0.3	)	2.3
Net (loss) income	(0.5	)%	3.7	%

Three Months Ended August 31, 2004 Compared To Three Months Ended August 31, 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 client support. Total revenues decreased to $82.7 million for the three months ended August 31, 2004 from $88.0 million for the three months ended August 31, 2003, representing a decrease of 6.0%. The $5.3 million decline in total revenue was attributed to a $9.4 million decline in license fees that was partially offset by a $4.1 million increase in services.

License Fees. Revenues from license fees decreased to $13.3 million for the three months ended August 31, 2004 from $22.7 million for the three months ended August 31, 2003, representing a decrease of 41.5%. The $9.4 million decline in license fees was due to lower business activity and longer customer decision cycles as a result of issues affecting our industry, including the prospect of industry consolidation and priorities

such as Sarbanes-Oxley reducing capital spending on software. The average overall selling price of our licensing transactions decreased 23.1% while the number of licensing transactions decreased 20.3% as compared to fiscal 2004. Revenues from license fees as a percentage of total revenues for the three months ended August 31, 2004 and 2003 were 16.0% and 25.8%, respectively. Although general economic indicators show signs of an improving economy, we are not experiencing the sequential growth each quarter as a result of the issues impacting the software industry.

Services. Revenues from services increased to $69.4 million for the three months ended August 31, 2004 from $65.3 million for the three months ended August 31, 2003, representing an increase of 6.3%. The $4.1 million increase in services was due to a $3.5 million increase in support revenue and a $0.6 million increase in consulting revenue. The $3.5 million increase in support revenue was primarily due to increased revenue earned on support contracts purchased in April 2004. The $0.6 million increase in consulting revenue was primarily due to a greater use of third-party providers as staffing levels were not able to meet the demand of service opportunities. Services as a percentage of total revenues for the three months ended August 31, 2004 and 2003 were 84.0% and 74.2%, respectively.

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 profits vary depending on the proportion of third-party product sales in our revenue mix.

Cost of license fees decreased to $2.4 million for the three months ended August 31, 2004 from $4.1 million for the three months ended August 31, 2003, representing a decrease of 41.9%. The $1.7 million decrease was primarily due to a 41.5% decline in license fees as well as a decline in the proportion of third-party product sales in our revenue mix. Cost of license fees as a percentage of total revenues for the three months ended August 31, 2004 and 2003 were 2.9% and 4.6%, respectively. Gross margin on revenue from license fees was 82.1% and 81.9% for the three months ended August 31, 2004 and 2003, respectively.

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 as well as intangible asset amortization on support contracts purchased in April 2004. Cost of services increased to $36.5 million for the three months ended August 31, 2004 from $32.1 million for the three months ended August 31, 2003, representing an increase of 13.6%. The $4.4 million increase in cost of services was primarily due to a $2.1 million increase in third-party consulting costs as a result of a higher proportion of third-party services in our revenue mix; a $0.7 million increase in employee related costs primarily due to hiring employees during the quarter to meet future service opportunities; a $1.0 million increase in amortization related to support contracts purchased in April 2004; and a $0.4 million increase in third party maintenance costs. Cost of services as a percentage of total revenues for the three months ended August 31, 2004 and 2003 were 44.1% and 36.5%, respectively. Gross margin on services revenues were 47.5% and 50.9% for the three months ended August 31, 2004 and 2003, respectively.

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 $15.6 million for the three months ended August 31, 2004 from $14.9 million for the three months ended August 31, 2003, representing an increase of 4.8%. The $0.7 million increase in research and development was primarily due to $1.0 million in costs associated with corporate initiatives, including $0.5 million related to the third-party offshore software support services agreement we entered in to in February 2004. The increase was partially offset by a $0.7 million decrease in incentive compensation. Research and development expenses as a percentage of total revenues for the three months ended August 31, 2004 and 2003 were 18.9% and 17.0%, respectively.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries and incentive compensation, employee benefits and travel and overhead costs related to our sales and marketing personnel, as well as trade show activities and advertising costs. Sales and marketing expenses decreased to $21.0 million for the three months ended August 31, 2004 from $23.0 million for the three months ended August 31, 2003, representing a decrease of 8.9%.

The $2.0 million decrease in sales and marketing expenses was due to a $1.7 million decrease in salaries as a result of a decrease in the number of employees; a $1.8 million decrease in incentive compensation primarily due to the decline in license fees; and a $0.3 million decrease in our sales rewards program. The decrease was partially offset by a $2.0 million increase in costs associated with marketing initiatives, including trade show activities and advertising costs. Sales and marketing expenses as a percentage of total revenues for the three months ended August 31, 2004 and 2003 were 25.3% and 26.1%, respectively.

General and Administrative. General and administrative expenses consist primarily of salaries, employee benefits and related overhead costs for administrative employees, as well as legal and accounting expenses, consulting fees, bad debt expense and corporate insurance policies, including property and casualty, general liability and other insurance. General and administrative expenses decreased to $8.3 million for the three months ended August 31, 2004 from $9.2 million for the three months ended August 31, 2003, representing a decrease of 10.6%.

The $0.9 million decrease in general and administrative expenses was primarily due to a $0.6 million decline in bad debt expense reflecting a general decrease in accounts receivable; a $0.8 million decrease in incentive compensation; and a $0.5 million decrease in legal related costs. The decrease in costs were partially offset by an increase in costs of $0.6 million for corporate initiatives designed to improve efficiencies. General and administrative expenses as a percentage of total revenues for the three months ended August 31, 2004 and 2003 were 10.0% and 10.5%, respectively.

Restructuring. During the three months ended August 31, 2004 and 2003, we recorded reversals of restructuring charges of $0.08 million and $0.04 million, respectively, for certain employee costs that we determined will not be incurred. See Note 6 of Notes to Condensed Consolidated Financial Statements for a summary of activity for the three months ended August 31, 2004.

Amortization of Acquired Intangibles. Amortization of acquired intangibles increased to $0.4 million for the three months ended August 31, 2004 from $0.2 million for the three months ended August 31, 2003. The $0.2 million increase in amortization expense is primarily due to increases in amortization of intangibles on companies acquired since the prior year period. The companies acquired include, Numbercraft Limited acquired in July 2003, Closedloop Solutions, Inc. acquired in September 2003 and Apexion Technologies, Inc. acquired in October 2003.

Other Income, Net

Other income, net, which is primarily comprised of interest income earned from cash, marketable securities and long term investments decreased to $0.6 million for the three months ended August 31, 2004 from $0.9 million for the three months ended August 31, 2003. The $0.3 million decrease in interest income is due to an approximate $50 million decrease in average invested balances compared to the same prior year period.

(Benefit) Provision for Income Taxes

We recognized an income tax (benefit) of $0.2 million for the three months ended August 31, 2004 compared to an income tax provision of $2.1 million for the three months ended August 31, 2003. Our income tax (benefit) provision is based on pretax (loss) income and consists primarily of federal and state income taxes. Our effective tax rate was 37.4% and 39.0% for the three months ended August 31, 2004 and 2003, respectively. The decrease in the effective tax rate was primarily due to the impact of changes in actual and forecasted permanent book to tax differences. We review our effective tax rate on a quarterly basis and make necessary changes.

Liquidity and Capital Resources

As of August 31, 2004, we had $184.5 million in cash, cash equivalents and marketable securities and $164.8 million in working capital. Our most significant source of operating cash flows is derived from license fees and services to our clients. Days sales outstanding, which is calculated on net receivables at period end divided by revenue for the quarter times 90 days in the quarter, was 61 and 59 as of August 31, 2004 and May 31, 2004, respectively. The increase was due primarily to a decline in revenue for the three months ended August 31, 2004 compared to the previous quarter. Our primary uses of cash from operating activities are for employee costs, third-party costs for licenses and services and facilities.

We believe that cash, cash equivalents and marketable securities will be sufficient to meet our cash requirements for working capital, capital expenditures and investments for at least the next twelve months.

Cash flows from operating activities:

Net cash used in operating activities was $17.9 million for the three months ended August 31, 2004 compared with $1.2 million in cash provided by operating activities for the three months ended August 31, 2003. The decrease in cash flows from operations for the three months ended August 31, 2004 primarily related to a decrease in cash received on support billings as a result of a change in client billing cycles and other delayed collections. The change resulted in initially smaller client invoices due to pro-rated billings in an effort to get individual multiple client support billings to a common renewal date. Cash levels generated by this change are expected to be restored in subsequent periods over the next twelve months as billing cycles become synchronized.

Other significant activity in cash from operating activities for the three months ended August 31, 2004 included an $8.7 million increase in cash from trade accounts receivable as a result of collection efforts; an $8.6 million decrease in cash related to accrued expenses due primarily to the payment of fiscal 2004 incentive compensation; and a $3.6 million decrease in cash related to accounts payable primarily due to the semi-annual purchase of common shares under the Employee Stock Purchase Plan.

Cash flows from investing activities:

Net cash provided by investing activities was $55.7 million for the three months ended August 31, 2004 compared with $27.6 million for the three months ended August 31, 2003. The increase in cash from investing activities for the three months ended August 31, 2004 primarily related to $56.6 million of cash received from net maturities of marketable securities. We have generally used proceeds from the maturities and sales of marketable securities to augment cash flows from operations and to fund capital expenditures, share repurchases, and to repay debt.

Cash flows from financing activities:

Net cash used in financing activities was $5.7 million for the three months ended August 31, 2004 compared with $0.1 million for the three months ended August 31, 2003. The decrease in cash from financing activities for the three months ended August 31, 2004 primarily related to $10.0 million used to repurchase shares of our common stock. Other significant activity included $2.4 million in cash received from employee contributions to our employee stock purchase plan and $2.0 million in cash received from the exercise of stock options.

Repurchase of Common Shares

In June 2003, our Board of Directors authorized us to repurchase, from time to time, up to $50.0 million of our common shares. Shares were repurchased as market conditions warranted either through open market transactions, block purchases, private transactions or other means. During the three months ended August 31, 2004, we completed the authorized stock repurchase plan by purchasing the remaining 1.4 million shares for $10.0 million in cash. Cash proceeds obtained from maturities of marketable securities, the exercise of employee stock options and the employee stock purchase plan largely funded the share repurchase. The repurchased shares, which remain in treasury, will be used for general corporate purposes.

New Accounting Pronouncement

In November 2003 and March 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. The consensus reached requires companies to apply new guidance for evaluating whether an investment is other-than-temporarily impaired and also requires quantitative and qualitative disclosures of debt and equity securities, classified as available-for-sale or held-to-maturity, that are determined to be only temporarily impaired at the balance sheet date. We incorporated the required disclosures for investments accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” as required in the fourth quarter of fiscal year 2004, and chose to early adopt the guidance related to evaluating other-than-temporary impairment. Disclosures for all investments outside the scope of SFAS No. 115 (cost and equity method investments), of which we have none, are required in the fourth quarter of fiscal 2005. Adoption of EITF Issue No. 03-01 will not have an impact on our statements of consolidated operations, financial position or cash flows.

Restructuring Charges Subsequent to the First Quarter of Fiscal 2005

On September 28, 2004, our Board of Directors approved management’s plan, developed in late September 2004, that is designed to enhance our operating effectiveness and profitability. Under the plan, we will streamline structure, consolidate leadership and reduce long-term costs to realign projected expenses with anticipated revenue levels. The plan includes a reduction of approximately 100 employees in the United States and the United Kingdom, which will result in a charge for severance and related benefits of approximately $2.5 million in the second quarter ending November 30, 2004. The reduction includes employees who work in operations, marketing, sales, research and development, support and services. All terminations and related payments are expected to be completed during fiscal 2005.

Management is continuing to evaluate other cost reduction opportunities that may result in additional charges in the second quarter ending November 30, 2004 and during the remainder of fiscal 2005. Management has not completed its evaluation and plan, and therefore the probability, nature, amount and timing of any additional charges are not currently determinable.

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

We operate in a rapidly changing environment that involves numerous uncertainties and risks. 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. 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.

Economic, political and market conditions can adversely affect our revenue growth and operating results.

Our revenue growth and profitability depend on the overall demand for computer software and services, particularly in the industries in which we sell our products and services. Demand for enterprise software and demand for our solutions are affected by general economic conditions, competition, product acceptance and technology lifecycles. A general weakening of the economy and weakening of business conditions, particularly in information technology and the industries we serve, as well as governmental budgetary constraints, could result in delays and decreases of client purchases. In addition to sales of new software licenses, we derive a significant portion of our revenues from software support and professional services. A general weakening of the economy and weakening of business conditions could result in decreases in our renewal rates for software

support and a reduced demand for services. Despite an improving economic environment, some governmental spending remains constrained by budgetary limits. According to general economic indicators, corporate spending has begun to increase. However, clients and prospective clients continue to be cautious about technology spending, and may elect to delay, reduce or cancel their information technology projects. For example, we believe that clients and prospects that are subject to the requirements of the Sarbanes-Oxley Act may delay or cancel information technology projects and instead focus on compliance with that Act. If demand for our software and related services does not continue to strengthen, our revenue growth and profitability will be adversely affected. In addition, the war on terrorism and the potential for other hostilities in various parts of the world continue to contribute to a climate of economic and political uncertainty that could adversely affect our revenue growth and results. Because of these factors, we believe the level of demand for our products and services, and projections of future revenue and operating results, will continue to be 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. In late September 2004, we took additional measures to realign our projected expenses with anticipated revenue, and recorded a $2.5 million restructuring charge for severance and related benefits in the second quarter of fiscal 2005. Management is continuing to evaluate other cost reduction opportunities that may result in additional charges in the second quarter ending November 30, 2004 and during the remainder of fiscal 2005. There is no assurance that these cost reduction measures will be sufficient to offset any future revenue declines.

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 client bases, greater name recognition, long operating and product development history, greater international presence and substantially greater financial, technical and marketing resources. These competitors include well-established companies such as Oracle Corporation, PeopleSoft, Inc. and SAP AG, all of which have larger installed client bases. If clients or prospects want to reduce the number of their software vendors, they may elect to purchase competing products from Oracle, Peoplesoft or SAP since those larger vendors offer a wider range of products. 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 favorable terms. We expect competition to persist and intensify, which could negatively impact our operating results and market share.

Because our clients 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, government and education 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. In addition, we must continue to develop industry specific functionality for our solutions, which satisfies the changing, specialized

requirements of prospective clients in our target industries. This need is becoming more prevalent as the marketplace for our traditional products 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 clients’ 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;

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

• the uncertainty caused by Oracle Corporation’s offer to purchase PeopleSoft, Inc., or by other announced potential business combinations in the software industry may cause clients and prospective clients to cancel, postpone or reduce capital spending projects on software;

• client evaluations and purchasing processes vary significantly from company to company, and a client’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 clients may decline to renew support for our products, and market pressures may limit our ability to increase support fees or require clients to upgrade from older versions of our products;

• prospective clients may decline or defer the purchase of new products or releases if we do not have sufficient client references for those products; or

• 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 clients often take significant time evaluating our products before licensing them. The period between initial client contact and a purchase by a client may vary from nine months to more than one

year. During the evaluation period, prospective clients 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 clients routinely require education regarding the use and benefits of our products. This may also lead to delays in receiving clients’ orders.

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 and competing products.

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 client needs; or

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

A significant portion of our research and development resources is devoted to product upgrades that address regulatory and support 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 client 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.

Our future revenue is dependent in part on our installed client base continuing to renew support agreements, license additional products, and purchase additional professional services.

Our installed client base has traditionally generated additional support, license and professional service revenues. In future periods, clients may not necessarily make these purchases. Support is generally renewable

annually at a client’s option, and there are no mandatory payment obligations or obligations to license additional software. If our clients decide not to renew their support agreements or license additional products or contract for additional services, or if they reduce the scope of the support agreements, our revenues could decrease and our operating results could be adversely affected.

We may need to change our pricing models to compete successfully.

The intensely competitive markets in which we compete can put pressure on us to reduce our prices. If our competitors offer deep discounts on certain products or services in an effort to recapture or gain market share or to sell other products or services, we may need to lower prices or offer other favorable terms in order to compete successfully. Any such changes would be likely to reduce margins and could adversely affect operating results.

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 support service revenues in future periods.

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

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

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

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

• the transaction includes acceptance criteria;

• the transaction includes contingent payment terms or fees;

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

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

• we are required to accept extended payment terms of more than one year or for which we do not have adequate support of historical collectibility.

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.

Future adjustments in our net deferred tax assets may be materially adverse to our financial results.

On August 31, 2004, the condensed consolidated balance sheet includes net deferred tax assets in the amount of $27.5 million. Each quarter, 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. For the year ended May 31, 2004, we recorded a valuation allowance of $1.2 million associated primarily with federal contribution carryforwards, state net operating loss carryforwards and certain federal tax credit carryforwards that are estimated to expire prior to utilization. No additional valuation allowance was determined to be necessary for the three months ended August 31, 2004.

In the event that we adjust our estimates of future taxable income or tax deductions from the exercise of stock options; or our stock price increases significantly without a corresponding increase in taxable income, we may need to establish an additional valuation allowance, which could materially impact our financial position and results of operations.

We may experience fluctuations in quarterly results that could adversely impact our annual effective tax rate.

Our revenues and operating results are difficult to predict and may fluctuate substantially from quarter to quarter. Since we must estimate our annual effective tax rate each quarter based on a combination of actual results and forecasted results of subsequent quarters, any significant change in our actual quarterly or forecasted annual results may adversely impact the computation of the estimated effective tax rate for the year. Our estimated annual effective tax rate may fluctuate for a variety of reasons, including the following:

• changes in forecasted annual operating income;

• changes to the valuation allowance on net deferred tax assets;

• changes to actual or forecasted permanent differences between book and tax reporting;

• impacts from future tax settlements with state, federal or foreign tax authorities; or

• impacts from tax law changes.

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;

• 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 client wins or losses by us or our competitors;

• the mix of products and services sold by us;

• the timing of significant orders by us;

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

• adoption of new accounting standards affecting the software industry;

• acts of war or terrorism; and

• general market conditions.

We have adopted anti-takeover defenses that could make it difficult for another company to acquire control of Lawson or limit the price investors might be willing to pay for our stock.

Provisions in our amended and restated certificate of incorporation and bylaws, our stockholder rights plan and under Delaware law could make it more difficult for other companies to acquire us, even if doing so would benefit our stockholders. Our amended and restated certificate of incorporation and bylaws contain the following provisions, among others, which may inhibit an acquisition of our company by a third party:

• advance notification procedures for matters to be brought before stockholder meetings;

• a limitation on who may call stockholder meetings;

• a prohibition on stockholder action by written consent; and

• the ability of our board of directors to issue shares of preferred stock without a stockholder vote.

The issuance of stock under our stockholder rights plan could delay, deter or prevent a takeover attempt that stockholders might consider in their best interests. We are also subject to provisions of Delaware law that prohibit us from engaging in any business combination with any “interested stockholder,” meaning generally that a stockholder who beneficially owns more than 15% of our stock cannot acquire us for a period of three years from the date this person became an interested stockholder unless various conditions are met, such as approval of the transaction by our board of directors. Any of these restrictions could have the effect of delaying or preventing a change in control.

If requirements of a current proposal relating to the accounting treatment for employee stock purchases and stock options are adopted, or if the Board adopts a policy changing such accounting treatment, our earnings will be affected and we may be forced to change our business practices

We currently account for the issuance of stock options under APB Opinion No. 25, “Accounting for Stock Issued to Employees”. The FASB has issued an Exposure Draft, “Share-Based Payment” that would, if adopted, change the accounting treatment for grants of options, sale of shares under our employee stock purchase plan and other equity instruments issued to employees. The exposure draft would require us to value equity instruments issued to employees and liability-classified awards at grant date fair value or based upon certain valuation methods that approximate grant date fair value, and to record those values as compensation expense in our statement of operations. If adopted as drafted, the Statement would be effective for us June 1, 2005. In the future, the Board of Directors could also elect to adopt a policy that we treat the value of stock options granted to employees and directors as compensation expense. If the Board adopts such a policy, or if the exposure draft is adopted, our earnings will be negatively impacted. As a result, we may decide to terminate our employee stock purchase plan, reduce the number of stock options granted to employees or to grant options to fewer employees. This could affect our ability to retain existing employees and attract qualified candidates, and also could increase the cash compensation we would have to pay to them. Note 2 of Notes to the Condensed Consolidated Financial

Statements describes the pro forma impact of a change to fair value accounting on earnings and earnings per share for the three months ended August 31, 2004 and 2003.

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, Business Objects, Hyperion Solutions Corporation and other companies, that allow 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 profits 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. 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 client relationships, which could negatively affect our business or result in costly litigation.

Our current and potential clients 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 clients. 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.

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 clients 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 clients 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 client 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 clients;

• damage to our brand reputation;

• failure to attract new clients or achieve market acceptance;

• diversion of development and services resources; and

• legal actions by our clients 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.

If our clients lose confidence in the security of data on the Internet, our revenues could be adversely affected.

Maintaining the security of computers and computer networks is an issue of critical importance for our clients. Attempts by experienced computer programmers, or hackers, to penetrate client network security or the security of web sites to misappropriate confidential information are currently an industry-wide phenomenon that affects computers and networks across all platforms. Despite efforts to address these risks, actual or perceived security vulnerabilities in our products (or the Internet in general) could lead some clients to seek to reduce or delay future purchases or to purchase competitors’ products which are not Internet-based applications. Clients may also increase their spending to protect their computer networks from attack, which could delay adoption of new technologies. Any of these actions by clients could adversely affect our revenues.

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.

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.

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 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 clients 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 several 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 clients, we provide source code for many of our products. We may also permit clients to obtain access to our other source code through a source code escrow arrangement. This access to our source code may increase the likelihood of misappropriation or other misuse of our intellectual property. In addition, the laws of some countries in which our software products are or may be licensed do not protect our software products and intellectual property rights to the same extent as the laws of the United States. Defending our rights could be costly.

Business disruptions may interfere with our ability to conduct business.

Business disruptions could affect our future operating results. Our operating results and financial condition could be adversely affected in the event of a security breach, major fire, war, terrorist attack or other catastrophic event. Impaired access or significant damage to our data center at our headquarters in St. Paul, Minnesota due to such an event could cause a disruption of our information, research and development, and client support systems and loss of financial data and certain client 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 client 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.

We have limited experience with offshore outsourcing.

To help improve margins and gain operational efficiencies, many software companies have outsourced portions of their support or development efforts to companies located in India or other parts of the world. In February 2004, we entered into an offshore agreement with a third-party to provide certain software support services for our products. We have limited experience with this type of outsourcing and may be unable to achieve the anticipated economic efficiencies expected of this arrangement.

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

In January 2004, we announced that our Chief Executive Officer and Chief Financial Officer had each entered into selling plans, to sell up to 335,000 and 194,000 shares, respectively, over a period ending November 2004. These executive officers may also elect to sell or transfer other shares apart from the selling plans. 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, a pre-initial public offering investor, 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 August 31, 2004, our executive officers, directors, and affiliated entities, in the aggregate, beneficially owned 19.0% of our outstanding common stock. These stockholders, if acting together, would be able to significantly influence all matters requiring approval by stockholders, including the election of directors and the approval of mergers or other business combinations.

Financial outlook.

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

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in market risk for the Company in the period covered by this report. See the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004 for a discussion of market risk for the Company.

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 our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of our 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 our 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 the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are, and from time to time may become, involved in litigation in the normal course of business concerning our products and services. While the outcome of these claims cannot be predicted with certainty, we do not believe that the outcome of any one of these legal matters will have a material adverse effect on our

consolidated financial position, results of operations or cash flows. However, depending on the amount and the timing, an unfavorable resolution of some or all of these matters could materially affect our future results of operations or cash flows in a particular period.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(b) Use of Proceeds

As of August 31, 2004, we held $120.0 million of net proceeds from our initial public offering in interest-bearing, investment grade securities. During the three months ended August 31, 2004, we used approximately $0.8 million for capital expenditures and $0.1 million for the repayment of debt.

The following table provides information as of August 31, 2004 with respect to the shares of common stock repurchased by the Company during the first quarter of fiscal 2005 (in thousands, except per share data):

Period	Total Number of Common Shares Purchased	Average Price Paid per Share		Total Number of Common Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
June 1, 2004 to June 30, 2004	—	—		—	$	10,000
July 1, 2004 to July 31, 2004	1,035	$	6.87	1,035	2,890
August 1, 2004 to August 31, 2004	413	$	6.99	413	—
Total	1,448			1,448	—

(1) In June 2003, the Company’s Board of Directors authorized the repurchase of up to $50.0 million of the Company’s common shares. The repurchase plan was completed during the three months ended August 31, 2004.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

(a)	Exhibits


	31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act- John J. Coughlan.

	31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act- Robert G. Barbieri.

	32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act- John J. Coughlan.

	32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act- Robert G. Barbieri.

SIGNATURES

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

Date: October 8, 2004

	LAWSON SOFTWARE, INC.

	By:	/s/ ROBERT G. BARBIERI
		Robert G. Barbieri Executive Vice President and Chief Financial and Performance Officer (principal financial and accounting officer)

EXHIBIT INDEX

EXHIBIT NUMBER		DESCRIPTION OF DOCUMENTS
31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act- John J. Coughlan.

31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act- Robert G. Barbieri.

32.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act- John J. Coughlan.

32.2		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act- Robert G. Barbieri.