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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2004

Commission file number: 0-25137

CONCUR TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

State of Incorporation: Delaware

I.R.S. Employer I.D. No.: 91-1608052

Address of principal executive offices: 6222 185th Avenue NE

Redmond, Washington 98052

Telephone number, including area code: 425-702-8808

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

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

The number of shares outstanding of the registrant’s common stock as of May 5, 2004 was 32,788,028.

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CONCUR TECHNOLOGIES, INC.

FORM 10-Q

MARCH 31, 2004

INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

Concur Technologies, Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

See accompanying notes.

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Concur Technologies, Inc.

Consolidated Balance Sheets

(In thousands, except per share amount)

(Unaudited)

See accompanying notes.

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Concur Technologies, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2004

(Unaudited)

NOTE 1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of the Company

We are a leading provider of Corporate Expense Management subscription service and software solutions. Throughout this report Concur Technologies, Inc. is referred to as “Concur”, “we”,”us”, and “our.” Our software solutions are designed to automate and streamline business processes, reduce operating costs, improve internal controls, and empower businesses to apply greater insight to their spending patterns. Our solutions include:

Our solutions are designed to accommodate a wide range of customer business needs, technical requirements, and budget objectives for businesses worldwide through flexible subscription services and license delivery models.

We market and sell our solutions worldwide through a direct sales organization as well as through indirect distribution channels.

Unaudited Interim Financial Information

The financial information as of March 31, 2004, and for the three and six months ended March 31, 2004 and 2003 is unaudited, but includes all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of our financial position at such dates and our results of operations and cash flows for the periods then ended, in conformity with accounting principles generally accepted in the United States (“GAAP”). Operating results for the three and six months ended March 31, 2004 are not necessarily indicative of results that may be expected for the entire fiscal year. The financial statements should be read in conjunction with the financial statements and notes for the fiscal year ended September 30, 2003, included in Concur’s 2003 Annual Report on Form 10-K.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

The balance sheet information at September 30, 2003 has been derived from our audited financial statements at that date but, in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”), does not include all of the information and footnotes required by GAAP for complete financial statements.

Segment Information

We operate in and report on one segment (Corporate Expense Management software and services) based upon the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 131, Disclosure about Segments of an Enterprise and Related Information.

Principles of Consolidation

The consolidated financial statements include the accounts of Concur and its wholly-owned subsidiaries. All significant intercompany accounts and transactions were eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions affecting the amounts reported in the consolidated financial statements and accompanying notes. Changes in these estimates and assumptions may have a material impact on our financial statements and accompanying notes. Examples of estimates and assumptions include the determination of certain provisions, including accounts receivable allowances, product warranties, estimating useful lives of property and equipment, valuing and estimating useful lives of intangible assets, valuing assets and liabilities acquired through business combinations, deferring certain revenues and costs, estimating expected lives of customer relationships, and tax reserves.

Reclassifications

We have made certain reclassifications to prior period amounts to conform to the current period presentation. These reclassifications include, but are not limited to, reclassifying software maintenance revenues from service revenues into subscription revenues, and presentation of amounts previously reported in cost of sales under expenses as cost of operations.

Revenue Recognition Policy

We recognize revenues in accordance with accounting standards for software and service companies including American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, Software Revenue Recognition (“SOP 97-2”), as amended by SOP 98-9, the consensus reached in Emerging Issues Task Force (“EITF”) Issue No. 00-3, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware, the consensus reached in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, the consensus reached in EITF Issue No. 03-5, Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software (“EITF 03-5”), SEC Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”), SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, and related interpretations, including AICPA Technical Practice Aids.

We generate our revenues from the delivery of subscription services (which include software maintenance services), consulting services, and the sale of software licenses.

Generally, we recognize revenue when evidence of an arrangement exists, delivery has occurred, the fees are fixed or determinable, and collection is considered probable. If collection is not considered probable, we recognize revenues when the fees are collected. If the fees are not fixed or determinable, we recognize revenues as payments become due from the customer. If non-standard acceptance periods or non-standard performance criteria are required, we recognize revenues upon the earlier of satisfaction of the acceptance/performance criteria or the expiration of the period, if applicable.

In contractual arrangements that include the provision of multiple elements, we apply the accounting guidance most applicable to the specific arrangement to address how contract consideration should be measured and allocated to the separate elements in the arrangement. Multiple element arrangements require the delivery or performance of multiple products, services and/or rights to use assets. Generally, separate contracts with the same customer that are entered into at or near the same time are presumed to have been negotiated together and, therefore, are treated as a single contractual arrangement and evaluated for multiple element status.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Subscription revenues consist of monthly fees paid for subscription services, the amortization of set-up fees in connection with those services, and fees paid for software maintenance services under software license arrangements. Subscription fees are typically recognized monthly as the service is provided to the customer. Based on the particular subscription service offering, the related set-up fees, as well as the associated direct and incremental costs, such as labor and commissions, are deferred and recognized ratably over the longer of the contractual lives, or the expected lives of the customer relationships, which generally range from two to five years. For those subscription service offerings that have been commercially available for only a short period of time, the contractual lives are used as the best estimate of the expected lives of the customer relationships. We continue to evaluate and adjust the length of these amortization periods as we gain more experience with customer contract renewals and contract cancellations. Software maintenance services include technical support and the right to receive unspecified upgrades and enhancements on a when-and-if available basis. Fees for software maintenance services are typically billed annually in advance of performance with provisions for subsequent automatic annual renewals. We defer the related revenues and recognize them ratably over the respective maintenance terms, which typically are one year. Additionally, subscription revenues are adjusted for estimated sales allowances, which are based on our historical experience, including a review of our experience related to price adjustments and sales credits issued.

Consulting revenues consist of fees for professional services, which consist of system implementation and integration, planning, data conversion, training, and documentation of procedures. Consulting service fees are typically billed and recognized as revenue on a time-and-materials basis. In some instances, we sell consulting services under milestone or fixed-fee contracts and, in such cases, recognize consulting revenues on a percentage-of-completion basis. Additionally, consulting revenues are adjusted for estimated sales allowances, which are based on our historical experience, including a review of our experience related to price adjustments and sales credits issued.

In service arrangements including both consulting and subscription services, but not a license of our software, we recognize consulting revenues as they are performed if the consulting services qualify as a separate unit of accounting within the arrangement. The consulting services qualify as a separate unit of accounting if they have value to the customer on a stand-alone basis, there is objective and reliable evidence of the fair value of the subscription services, and delivery or performance of the subscription services is considered probable and substantially within our control. We have determined that, in our service arrangements of this type, the consulting services typically qualify as a separate unit of accounting and, accordingly, the consulting revenues are recognized as the services are performed. If the consulting services do not qualify as a separate unit of accounting, the related revenues are combined with the subscription revenues, and recognized ratably over the subscription service period.

License revenues consist of fees earned from, and allocable to, granting licenses to use our software products. We recognize license revenues when evidence of a license arrangement exists, we have delivered the software, the amount of the transaction is fixed or determinable, collection is probable, and vendor-specific objective evidence of fair value exists for any undelivered elements of the arrangement. Elements included in our multiple-element software arrangements consist of various licensed software products and services such as software maintenance services, consulting services, and subscription services.

In software license arrangements that include rights to multiple elements, we allocate the total arrangement fee among each of the elements using the residual method, under which revenues are allocated to undelivered elements based on vendor-specific objective evidence of their fair value and the residual amounts of revenue are allocated to the delivered elements. Vendor-specific objective evidence is based on the price charged when an element is sold separately or, in the case of an element not yet sold separately, the price established by authorized management, if it is probable that the price, once established, will not change prior to separate market introduction. If sufficient vendor-specific objective evidence does not exist for the allocation of revenue to the various elements of the arrangement, all revenue from the arrangement is deferred until the earlier of the point at which such sufficient vendor-specific objective evidence does exist or all elements of the arrangement have been delivered. If the only undelivered element is software maintenance, the entire fee is recognized ratably.

In software license arrangements where we also provide consulting services, license revenues generally are recognized upon delivery of the software, provided that the criteria for recognition of software license revenues described above are met, payment of the license fees is not dependent upon the performance of the consulting services, and the consulting services are not essential to the functionality of the software. If we determine that the consulting services are essential to the functionality of the software, or payment of the license fees is dependent upon the performance of the consulting services, then both the license and consulting fees are recognized on a percentage-of-completion basis. We typically do not consider the consulting services we provide in such arrangements to be essential to the functionality of the software and, therefore, license revenues are typically recognized upon delivery of the software and consulting revenues are recognized as the services are performed.

In arrangements where we license our software and also host the licensed software for our customer, a software element is only considered present if our customer has the contractual right to take possession of the software at any time during the hosting

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

period without significant penalty, and it is feasible for our customer to either operate the software on its own hardware or contract with another vendor to host the software. If the arrangement meets these criteria, as well as the other criteria for recognition of license revenues described above, we recognize license revenues when the software is delivered, and the subscription hosting revenues are recognized as the hosting service is provided. The hosting set-up fees, as well as the associated direct and incremental costs, such as labor and commissions, are deferred and recognized ratably over the hosting service period. If we determine that a separate software element as described above is not present, we combine the software license fees with the subscription hosting fees and recognize them ratably over the subscription service period.

Our software license contracts typically include an industry-standard software performance warranty provision. We account for potential warranty claims in accordance with the guidance prescribed by SFAS No. 5, Accounting for Contingencies. Historically, we have experienced minimal warranty claims. Our standard license contracts typically do not include contingencies such as rights of return or conditions of acceptance.

Portions of our revenues are generated from sales made through our reseller partners. When we assume a majority of the business risks associated with performance of the contractual obligations, we record the associated revenues on a gross basis, with amounts paid to our reseller partners recognized as cost of operations. Our assumption of such business risks is evidenced when, among other things, we take responsibility for delivery of the product or service, establish pricing of the arrangement, and are the primary obligor in the arrangement. When our reseller partner assumes the majority of the business risks associated with the performance of the contractual obligations, we record the associated revenues net of the amounts paid to our reseller partner.

Stock-Based Compensation

We issue stock options to employees and outside directors pursuant to our stock option plans and provide employees with the right to purchase stock pursuant to our employee stock purchase plan (“ESPP”). We account for all our employee stock-based compensation arrangements under the intrinsic value method of accounting as defined by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations. Under this method, no employee stock-based compensation cost has been reflected in our results of operations for the three and six months ended March 31, 2004 and 2003, as all options granted under these plans had exercise prices equal to the fair market value of the underlying common stock on the date of grant, and any purchase discounts under the ESPP were within statutory limits.

SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (“SFAS 148”), requires companies that choose to continue to follow APB 25 to provide pro forma disclosure of the impact of accounting for stock-based compensation using the fair value method of SFAS 123. For purposes of these pro forma disclosures, the estimated fair value of the options is amortized over the related vesting periods. The estimated fair value of the purchases under the ESPP is amortized over the related purchase periods, ranging from 6 to 24 months. The following table illustrates the effect on net income (loss) and related per share amounts if we had accounted for our stock options and ESPP under the fair value method of accounting of SFAS 123, as amended:

We estimate the fair value of our options, including ESPP shares, using the Black-Scholes option valuation model, which is one of several methods that can be used to estimate option values. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

require the input of highly subjective assumptions, including our expected stock price volatility. Because options granted under employee stock-based compensation arrangements have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect this estimate, we believe the Black-Scholes model alone does not necessarily provide a reliable measure of the fair value of options granted under our employee stock-based compensation arrangements.

We estimated the fair value of options and rights granted under our employee stock-based compensation arrangements at the date of grant using the Black-Scholes model with the following weighted-average assumptions:

Net Income (Loss) Per Share

We calculate basic net income (loss) per share by dividing net income (loss) for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) for the period by the weighted-average number of shares of common stock outstanding during the period, plus any dilutive effect of options and rights granted under our employee stock-based compensation arrangements and warrants during the period, using the treasury stock method. The computation of basic and diluted net income (loss) per share is as follows:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Recently Issued Accounting Standards

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (“FIN 46”). In general, a variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. Variable interest entities have been commonly referred to as special-purpose entities or off-balance sheet structures. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. In July 2003, the FASB added a limited-scope project to its agenda to modify FIN 46. In December 2003, the FASB released a revised version of FIN 46 (referred to as FIN 46R) clarifying certain aspects of FIN 46 and providing certain entities with exemptions from the requirements of FIN 46. FIN 46R requires the application of either FIN 46 or FIN 46R to all Special Purpose Entities (“SPEs”) created prior to February 1, 2003 at the end of the first interim or annual reporting period ending after December 15, 2003. All entities created after January 31, 2003 were already required to be analyzed under FIN 46, unless FIN 46R were adopted early. FIN 46R is applicable to all non-SPEs created prior to February 1, 2003 at the end of the first interim or annual reporting period ending after March 15, 2004. We have no contractual or other business relationships with a variable interest entity; therefore, the adoption of FIN 46 had no impact on our financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”). SFAS 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective as of October 1, 2003. The adoption of SFAS 150 had no impact on our financial statements.

In July 2003, the EITF reached a consensus on EITF 03-5. On August 13, 2003, the FASB ratified the EITF’s consensus. EITF 03-5 addresses whether non-software deliverables included in an arrangement that contains software that is more than incidental to the products or services as a whole are included within the scope of SOP 97-2. Software-related elements include software products and services such as those listed in SOP 97-2, as well as any non-software deliverable(s) for which a software deliverable is essential to its functionality. If the software element that is more than incidental to the products or services as a whole is not essential to the functionality of any of the unrelated elements, the unrelated elements would not be considered software-related and, therefore, would be excluded from the scope of SOP 97-2. The provisions of EITF 03-5 became effective for us on October 1, 2003. In accordance with EITF 03-5, we have determined that, in software arrangements that also include services provided under our subscription delivery models, the software typically is not essential to the functionality of such services. Because we have determined that the software is not essential to the functionality of such services, the subscription set-up fees as well as the associated direct and incremental costs, such as labor and commissions, are matched with the subscription monthly revenue and recognized over the service period. Historically, in accordance with SOP 97-2, we deferred the subscription set-up fees and related costs, and then recognized them in full upon commencement of the subscription services. The application of the consensus reached in EITF 03-5 did not have a material effect on our financial statements.

NOTE 2. AMORTIZATION OF INTANGIBLE ASSET

Amortization of intangible asset represents the allocation of the acquired customer base intangible asset from our July 2002 acquisition of Captura Software, Inc. The gross and net carrying amounts of the acquired customer base intangible asset at March 31, 2004 and September 30, 2003 were as follows:

The related amortization expense reflected in our results of operations totaled $285,000 for the three months ended March 31, 2004 and 2003, respectively, and $570,000 for the six months ended March 31, 2004 and 2003, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Estimated amortization expense for the remaining six months of fiscal year 2004 and annually for the remaining estimated useful life is as follows:

NOTE 3. CONTINGENCIES

Litigation

In July 2001, we and several of our current and former officers were named as defendants in two securities class-action lawsuits filed in the United States District Court for the Southern District of New York. In April 2002, these lawsuits were consolidated. The consolidated complaint generally alleges claims against us, several of our current and former executives, and the underwriters of our initial public offering in December 1998, based on alleged errors and omissions concerning underwriting terms in the prospectus for our initial public offering. The plaintiffs in this lawsuit seek damages in unspecified amounts, which, if awarded, could be substantial. This lawsuit is one of more than 300 similar pending cases filed against companies that completed initial public offerings between 1997 and 2000 and the underwriters that took them public. In October 2002, the court dismissed the individual defendants from the consolidated lawsuit, without prejudice, pursuant to a stipulated agreement between the parties. In February 2003, the presiding judge denied a motion to dismiss all claims. In July 2003, we decided to participate in a proposed settlement being negotiated by representatives of a coalition of issuers named as defendants in similar actions and their insurers. Although we believe that the plaintiffs’ claims have no merit, we have decided to participate in the proposed settlement to avoid the cost and distraction of continued litigation. We do not believe that the proposed settlement will have any material adverse effect on our business, financial condition, or results of operations. The proposed settlement is expected to be funded by a group of insurers on behalf of the issuer defendants. The proposed settlement agreement would dispose of all remaining claims against us and the individual defendants, without any admission of wrongdoing by us or the individual defendants. The proposed settlement is subject to final approval by the parties and the court. There is no guarantee that the parties or the court will approve the proposed settlement. Should the parties and the court fail to approve the proposed settlement, we would continue to defend ourselves vigorously.

Product Warranty and Indemnification Obligations

We provide software products and related services to our customers under sales contracts, which usually include a limited warranty regarding product and service performance and a limited indemnification of customers against losses, expenses, and liabilities from damages that may be awarded against them if our software or services are found to infringe upon a patent, copyright, trademark, or other proprietary right of a third party. The contracts generally limit the scope of and remedies for such indemnification obligations in a variety of industry-standard respects, including but not limited to certain time and geography-based scope limitations and a right for us to replace an infringing product. We also enter into similar limited indemnification terms in agreements with certain strategic business partners and vendors. We account for potential warranty claims in accordance with the guidance in SFAS 5, and base our estimates on historical experience and current expectations. To date, we have experienced minimal warranty claims and have not had to reimburse any customers for any losses related to the limited indemnification described above.

NOTE 4. COMPREHENSIVE INCOME (LOSS)

SFAS No. 130, Reporting Comprehensive Income, establishes standards for the reporting and display of comprehensive income (loss) and its components in the financial statements. Items of comprehensive income (loss) that we currently report are foreign currency translation adjustments. Our components of comprehensive income (loss) are as follows:

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

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides information we believe is relevant to an assessment and understanding of our results of operations and financial condition. This discussion should be read in conjunction with our Consolidated Financial Statements and Notes that are included with this report. Also, the discussion of “Critical Accounting Policices and Estimates” in this MD&A is an integral part of the analysis of our results of operations and financial condition.

Special Note Regarding Forward-Looking Statements

This document contains forward-looking statements regarding our plans, objectives, expectations, intentions, future financial performance, future financial condition, and other statements that are not historical facts. These statements can be identified by our use of the future tense, or by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate,” “continue,” and other similar words and phrases. These forward-looking statements involve many risks and uncertainties. Examples of such risks and uncertainties are described under “Factors That May Affect Financial Condition And Results Of Operations” and elsewhere in this report, as well as in our other filings with the Securities and Exchange Commission (“SEC”). The occurrence of any of these risks and uncertainties may cause our actual results to differ materially from those anticipated in our forward-looking statements, which could have a material adverse effect on our business, results of operations, and financial condition. All forward-looking statements included in this report are based on information available to us as of the date of this report. We assume no obligation or duty to update any such forward-looking statements.

Overview

Concur Technologies, Inc. is a leading provider of Corporate Expense Management subscription service and software solutions. Our core purpose is to use innovation to drive costs out of our customers’ business. Our solutions are designed to automate and streamline business processes, reduce operating costs, improve internal controls, and empower businesses to apply greater insight to their spending patterns.

Our solutions include:

Our solutions are designed to accommodate a wide range of customer business needs, technical requirements, and budget objectives for businesses worldwide through our flexible subscription services and license delivery models.

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We market and sell our solutions worldwide through a direct sales organization as well as through indirect distribution channels via our strategic reseller and referral partners. We continue developing and maintaining our existing strategic relationships and entering into additional strategic relationships to grow our subscription revenues.

We generate our revenues from the delivery of subscription services (which include software maintenance services), consulting services, and the sale of software licenses. Subscription revenues have grown significantly as a percentage of our total revenues, to 71% of total revenue for the six months ended March 31, 2004 from 57% in the same period in fiscal 2003. This growth reflects our strategic shift to a business services delivery model that is less dependent on license sales. Our subscription services revenues are recognized over the time period we provide our services to customers, in contrast to license revenues, which typically are recognized upon software delivery to the customer. We believe that our strategic shift to the business services model will provide more stable and predictable revenues and operating results compared to prior years when our license revenues were more significant than our subscription services revenues.

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2004 AND 2003

Selected Financial Data

In the following table, we show financial data derived from our unaudited statements of operations, as a percentage of total revenues, for the periods indicated. The operating results for the periods shown are not necessarily indicative of the results that may be expected for any future period.

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Results of Operations

Revenues

Subscription Revenues. Subscription revenues consist of monthly fees paid for subscription services, the amortization of set-up fees in connection with those services, and fees paid for software maintenance services under software license arrangements. In addition to the level of fees we charge and collect, subscription revenues are affected by the number of new customers we add, the related contract durations, as well as our retention rate of existing customers.

Revenues from our subscription services offerings contributed all of the absolute dollar increase in subscription revenues in the quarter ended March 31, 2004, compared to the same period in the prior year, and approximately 90% of the absolute dollar increase for the six months ended March 31, 2004 compared to the same period in the prior year. Continued expansion of our customer base for outsourced subscription services was the main reason for these increases. The increase in our customer base reflects an ongoing trend of increased market demand for our subscription service offerings, and strong retention of existing customers. We believe this trend is, in part, related to the market’s growing acceptance of outsourced services, limited information technology capital budgets, and limited information technology resources available to manage enterprise management technologies in traditional self-hosted software license arrangements.

We expect subscription revenues to continue to grow during the remainder of fiscal 2004 as a result of the growing demand for our subscription service offerings.

Consulting Revenues. Consulting revenues consist of fees for professional services, which consist of system implementation and integration, planning, data conversion, training, and documentation of procedures. Consulting revenues are affected by the number of implementations of our solutions for new customers and implementation of upgrades and enhancements to these solutions for existing customers, and whether consulting revenues in multiple element arrangements require deferral and subsequent ratable revenue recognition treatment.

The decreases in consulting revenues for the three and six months ended March 31, 2004, compared to the same periods in the prior year, were due in part to the deferral of revenues of approximately $0.7 million relating to consulting services performed under a single strategic reseller contract, which will be recognized ratably over the remaining life of the contract. In addition, decreases in both current periods compared to the prior year were attributable to fewer new license customers added in the first three months of fiscal 2004 and fewer upgrades and enhancements for existing customers during such periods.

We anticipate future consulting revenues will fluctuate based on new sales of our solutions and the related consulting services provided, as well as the demand for and timing of upgrades and enhancements to our solutions. For the remainder of fiscal 2004, we expect consulting revenues to increase compared to the first and second quarters of fiscal 2004, based on recent levels of new customer contracts, and existing customer contracts for upgrades to our products and services.

License Revenues. License revenues consist of fees earned from granting licenses to use our software products.

The slight increase in license revenues for the quarter ended March 31, 2004 compared to the same quarter in the prior year primarily reflects the timing of new license sales. The decrease for the six months ended March 31, 2004 compared to the same period in the prior year reflects the continued shift from our licensed model to our subscription services model particularly with respect to large-market companies.

We expect the absolute dollar value of future license revenues to remain at or below the level of license revenues for the first two quarters of fiscal 2004, as customer demand is more focused on our subscription services offerings.

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International Revenues. We market our software and services through our direct sales organization in the United States, the United Kingdom, and Australia, and through strategic referral and reseller arrangements in the United States and in international markets. Revenues from customers outside the United States were $1.9 million (14% of total revenues) and $2.1 million (15%) for the quarters ended March 31, 2004 and 2003, respectively, and $4.0 million (15%) and $3.8 million (13%) for the six months ended March 31, 2004 and 2003, respectively. Historically, fluctuations in foreign currency exchange rates have not had a material effect on our operating results. As our products and services continue to gain acceptance in international markets and in particular with the expansion of international functionality within our solutions, we expect international revenues to continue to grow on a quarterly basis, both in absolute dollars and as a percentage of total revenues.

Expenses