Use these links to rapidly review the documentLAWSON SOFTWARE, INC. Form 10-K Index Part IV



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

---

FORM 10-K

|ý                                                                | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|FOR THE FISCAL YEAR ENDED MAY 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(State or other jurisdiction of
incorporation or organization)                 |  | 41-1251159(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)                    

---

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

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

---

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

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

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant, based upon the closing sale
price of Common Stock on November 28, 2003 as reported on the Nasdaq National Market, was approximately $682,771,900.

The
number of shares of the registrant's common stock outstanding on July 19, 2004 was 98,144,729.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for Registrant's 2004 Annual Meeting of Stockholders to be held October 28, 2004 are incorporated by reference in
Part III of this Form 10-K Report.



---



LAWSON SOFTWARE, INC.  Form 10-K  Index



|PART I.   
|----------
|Item 1.   
|Item 2.   
|Item 3.   
|Item 4.   
|PART II.  
|Item 5.   
|Item 6.   
|Item 7.   
|Item 7A.  
|Item 8.   
|Item 9.   
|Item 9A.  
|PART III. 
|Item 10.  
|Item 11.  
|Item 12.  
|Item 13.  
|Item 14.  
|PART IV.  
|Item 15.  
|SIGNATURES

---





Forward-Looking Statements

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

Part I

Item 1. Business

General

We provide business application software, services and support to specific service industries. Our software includes financials, human resources, procurement,
healthcare supply chain, distribution, retail operations, service process optimization, and enterprise performance management applications designed to help manage, analyze and improve our clients'
businesses. Our applications automate and integrate critical business processes, facilitating collaboration among our clients and their partners, suppliers and employees. Our consulting services
primarily help our clients implement their Lawson applications. Our support services provide ongoing maintenance and assistance to our clients.

Founded
in 1975, we have more than 2,000 clients, primarily in the following markets: healthcare, government and education, retail, financial services (including banking, insurance and
other financial services), and professional services.

We
generate revenue through license fees and fees for consulting, training and implementation services and client support and maintenance. We market and sell our software and services
primarily through a direct sales force, which is augmented by channel partners and resellers.

Lawson
Software is a Delaware corporation. In February 2001, we were reincorporated through a merger with our predecessor, Lawson Associates, Inc., a Minnesota corporation,
which was incorporated in 1975. Our principal executive office is located at 380 Saint Peter Street, St. Paul, Minnesota 55102-1302. Our telephone number is
(651) 767-7000, and our website is www.lawson.com.

Our Software

We provide business application software that automates and improves the business processes of our clients. The open architecture of our software gives clients a
choice to deploy a pre-configured,

1

---



industry-tailored
application or customize the application quickly and easily to conform to the client's unique business processes. The benefits of our software include:



Products

Our software is comprised of:



Ourcore business applicationsautomate tasks related to financial management, human resources, procurement, healthcare supply chain,
distribution, retail operations, and service-related projects or processes. These core business applications include components in each functional area, which we license separately or bundle together
as suites designed for our targeted markets.

2

---



Ourenterprise performance management applicationstrack pre-configured business metrics, including industry-specific metrics
that enable users to view and analyze key operational performance measurements and use graphical, end-user interfaces to navigate through relevant information stored in a client's
transactional system.

Our software extension toolscan be added to almost any Lawson application to tailor the application to a client's specific needs. These
include User Productivity Tools, Data Integration Tools, Development Tools, and System Tools.

Core Business Applications

Our core business applications include: financials, human resources, procurement, healthcare supply chain, distribution, retail operations, and service process
optimization. Our applications enable organizations to execute standard business processes in each of the following areas, as well as provide functionality specific to the industries we target. The
following list details the primary components within each core business application.

Lawson Financials Suite.Lawson Financials applications enable our clients to create and track
financial and accounting data across multiple companies, languages, currencies and books of accounts. These applications provide extensive analytical capabilities and integrate our clients' financial
management processes with other core business applications. Principal components include:



Lawson Human Resources Suite.Lawson Human Resources applications assist in recruiting, developing
and managing employees. These applications are integrated with our financials applications

3

---



to
automatically update the financial reporting functions for changes in employment and payroll. Principal components include:



Lawson Procurement Suite.Lawson Procurement applications automate the operational and administrative
procurement process, promote adherence to purchasing policies, assist businesses in
negotiating pricing for supplies, lower materials and services costs and improve inventory practices. Principal components include:



Healthcare Supply Chain Management.Lawson's healthcare-specific software streamlines and optimizes
the supply chain operations from start to finish for one hospital or an entire network.

4

---



Healthcare
Supply Chain software helps standardize buying processes, manage supply costs, improve contract utilization, and ensure consistent supply availability. Principal components include:



Lawson Distribution Suite.Lawson Distribution applications provide sales order management, warehouse
fulfillment, client invoicing and accounts receivable in an integrated solution. Principal components include:



Software for Retailers.Lawson's retail-specific software includes Retail Operations and Retail
InSight applications. Retail Operations applications are built for high-volume retail enterprises to manage item information, category planning and review, assortment, pricing, promotions,
warehouse replenishment, multi-channel ordering, store replenishment, forecasting and order determination. Retail InSight applications help retailers select store locations, find the right product
mix, and run successful promotions.

Principal
components of Retail Operations include:



5

---





Principal
components of Retail InSight include:



Lawson Service Process Optimization Suite.Lawson Service Process Optimization includes Services
Automation, Portfolio Management, and Time and Expense.



Enterprise Performance Management Applications

Lawson Enterprise Performance Management (EPM) is an integrated suite of capabilities and applications designed to optimize corporate performance and corporate
governance. It can access common data sources in an organizationincluding relational, OLAP (On Line Analytical Processing), XLS, XML, and flat filesand application data
directly from Lawson and non-Lawson sources. As a result, Lawson EPM provides actionable, role-based self-service information from a single data source to help
empower the key decision makers throughout an enterprise. Principal components include:



6

---





Software Extension Tools

Lawson Software Extension Tools are adaptable building blocks that can be added to almost any Lawson application. These tools allow our clients to tailor their
Lawson applications to meet their specific needs.



Services

We offer comprehensive consulting, training and implementation services and ongoing client support and maintenance, which support our software applications.
Generally, we charge our clients for these services on a fee-for-service basis, with training services billed based on attendance. Client support and maintenance typically is
charged as a percentage of license fees and can be renewed annually at the election of our clients based on available support offerings. Our in-house services organization also educates
third-party system integrators on the use of our software to assist them in providing services to our clients. Given our current base of more than 2,000 clients, our services organization is a large
and important part of our overall business. As of May 31, 2004, our services organization consisted of 668 employees.

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

Client Support and Maintenance.We provide our clients with software updates, new releases, new versions and corrections as
part of our support services. We offer help desk support through our Global Support Center (GSC), which provides technical and product error reporting and resolution support. Clients can access the
GSC by various methods, including online interactive support. We enable clients to monitor the progress of their requests for assistance, and offer a wide variety of up-to-date
Lawson-specific product knowledge, including release planning, application descriptions, publications and

7

---



training
course dates, with intuitive search capabilities on our company-wide intranet, a portion of which is accessible by our partners and clients.

Technology Architecture

Lawson's technology architectural foundation is based on the concept of separation of concerns, in which there is a clear separation of the various layers of
Lawson's technology stack: the user access layer, the Web server layer, the application server layer, the database server layer, and the connection to external systems. This approach gives Lawson the
flexibility to deliver releases for the various layers on different schedules, adopt new technologies and standards more readily, and develop industry-specific applications. This approach also helps
protect client investment and eases their transition to new releases. Lawson's technology architecture adheres to the following principles:



Architecture Model

There are nine elements in Lawson's architectural model.





8

---





Trademarks

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

Strategic Partners

We have relationships with other technology companies that allow us to expand and complement our technology, product and services offerings.



9

---







Sales and Marketing

We market and sell our software and services solutions through a combination of a direct sales force, strategic alliances with systems integrators and resellers.

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

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

Through
our alliances, we believe we are able to expand our market presence through increased awareness of our software applications within their organizations and client base and
through their personnel who are trained to implement our software. Our channel partners and resellers market and promote our software products and typically provide implementation services to their
end users. Channel partners generate sales leads, make initial client contacts and assess needs prior to our introduction. In addition, some of our channel partners engage in client support and
localization of our products. We also engage in joint marketing programs, presentation of seminars, attendance at trade shows and the hosting of conferences with many of our business partners.

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

Research and Development

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

Our
total research and development expenses were $64.9 million, $59.1 million and $66.9 million in fiscal 2004, 2003 and 2002, respectively. As of May 31,
2004, our research and development organization consisted of 404 employees.

Competition

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



10

---





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

Many
of our competitors may have an advantage over us due to their larger client bases, greater name recognition, 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. We also compete with numerous other software companies including Internet software vendors, single-industry software vendors and those companies that offer a specific solution that directly
competes with a portion of our comprehensive product offering.

Intellectual Property and Product Liability

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

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

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

Our
license agreements with our clients contain provisions designed to limit the exposure to potential product liability claims. It is possible, however, that the limitation of liability
provisions

11

---



contained
in these license agreements may not be valid as a result of future federal, state or local laws or ordinances or unfavorable judicial decisions.

The
license and support of our software for use in mission critical applications creates the risk of a claim being successfully pursued against us. Damages or injunctive relief resulting
under such a successful claim could seriously harm our business.

Employees

As of May 31, 2004, we had 1,579 employees, including 300 in sales and marketing, 404 in research and development, 668 in services and client support and
207 in administration. Our performance depends in significant part on our ability to attract, train and retain highly qualified personnel. None of our employees is represented by a labor union and we
believe our relations with our employees are good.

Our
executive officers are:

|Name                |  | Age |  | Position                                                                   
|------------------- |  | --- |  | ---------------------------------------------------------------------------
|H. Richard Lawson   |  | 60  |  | Chairman                                                                   
|John J. Coughlan    |  | 45  |  | President, Chief Executive Officer, Director                               
|Robert G. Barbieri  |  | 49  |  | Executive Vice President, Chief Financial & Performance Officer            
|Dean J. Hager       |  | 37  |  | Executive Vice President, Chief Product Officer                            
|Eric C. Morgan      |  | 44  |  | Executive Vice PresidentHealthcare and Retail                             
|Samuel H. Adams     |  | 44  |  | Senior Vice PresidentGovernment & Education                               
|Joanne L. Byrd      |  | 49  |  | Senior Vice PresidentIndustry Markets & International                     
|Scott D. Meyer      |  | 54  |  | Chief Marketing & Human Resources Officer, and Senior Vice President       
|Bruce B. McPheeters |  | 49  |  | Chief Legal Counsel & General Counsel, Secretary, and Senior Vice President

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

John J. Coughlanhas served as our chief executive officer since February 2001, our president since March 2000 and one of
our directors since April 2000. From March 2000 until February 2001, Mr. Coughlan also served as our chief operating officer. From 1987 until March 2000,
Mr. Coughlan
worked for us in various capacities, most recently as executive vice president of field operations and marketing. Mr. Coughlan is a director of Minnesota Mutual Companies, a financial services
company.

Robert G. Barbierihas served as our executive vice president and chief financial officer since August 2000, as our executive vice
president of operations from June 2003 to June 2004, and as our chief financial and performance officer since June 2004. From January 1997 until August 2000,
Mr. Barbieri was employed by Apogee Enterprises, Inc., a publicly traded glass, coatings and service technologies company, serving most recently as vice president and chief financial
officer. From 1984 until joining Apogee, Mr. Barbieri was employed by Air Products and Chemicals, Inc., a global gases and chemicals company, where he held several senior financial
management positions, serving most recently as controller for the general industries division of the gases group. Mr. Barbieri is a certified management accountant.

12

---



Dean J. Hagerhas served as an executive vice president since June 2000, and as our chief product officer since June 2004.
Mr. Hager has worked in various capacities since joining us in May 1998. Mr. Hager served as our executive vice president emerging markets from June 2003 until
June 2004, our executive vice president global products division from February 2001 until May 2002, our executive vice president worldwide marketing from June 2000 to
February 2001, our vice president, e-business marketing from June 1999 until June 2000, and our director of marketing for our former AS/400 business unit from
May 1998 until June 1999. From March 1989 to May 1998, Mr. Hager was employed by IBM, where he held several senior management positions, serving most recently as
senior program manager with its server products division.

Eric C. Morganhas served as an executive vice president since February 2001. Since June 2002, he has been responsible for
the healthcare industry practice and since June 2004 he has been responsible for the healthcare and retail industry practices. Mr. Morgan has worked in various capacities since joining
us in 1991 as an account executive. Mr. Morgan served as our executive vice president, strategic market development from February 2001 until May 2002, vice president and general
manager, healthcare, from September 1999 until February 2001, and our vice president of sales, healthcare, from March 1999 until September 1999. From 1988 to 1991,
Mr. Morgan was employed by Global Turnkey Systems, an enterprise resource planning vendor for small- to medium-sized companies, serving in a variety of sales positions. From 1983 to 1988,
Mr. Morgan was an account executive for NCR, a diversified hardware and software provider.

Samuel H. Adamshas served as senior vice president of our government and education practice since June 2004, senior vice president
of public sector from September 2003 until June 2004 and senior vice president of emerging markets from June 2001 until September 2003. Mr. Adams joined us as an
account executive in 1995 and has held several positions, including vice president of healthcare sales from 1999 until June 2001 and national director of healthcare major accounts from 1997
until 1999. Before joining us, Mr. Adams served in sales and sales management positions with Burroughs Computer Corporation,
Concord Management Systems, Ross Systems, JD Edwards, and as director of corporate marketing for Concord Management Systems.

Joanne L. Byrdhas served as senior vice president of industry markets and international since June 2004, senior vice president of
field operations from June 2002 until June 2004 and senior vice president of global consulting services from June 2000 until June 2002. Ms. Byrd joined us in 1996 as
a regional sales manager in our healthcare group and served as vice president of sales and services for healthcare from June 1999 until June 2000. Before joining us, Ms. Byrd
worked 17 years for Shared Medical Systems (later acquired by Siemens), where she held various management positions in sales and services.

Scott D. Meyerhas served as our senior vice president and chief marketing officer since December 2003 and as our chief marketing
and human resources officer since June 2004. Before joining us in December 2003, Mr. Meyer was chief strategy officer of Weber Shandwick Worldwide from June 2002 until
October 2003, and chief executive officer of Shandwick International from January 1997 until June 2002. In 1986, Mr. Meyer co-founded the Minneapolis-based
public relations firm of Mona Meyer McGrath & Gavin, and served that firm in various capacities until the sale of the firm to Shandwick International in 1989.

Bruce B. McPheetershas served as our chief legal officer since June 2004, our senior vice president of administration since
June 2002, our general counsel since April 2000, our corporate secretary since October 1999, and our vice president of administration from April 2000 until May 2002.
Mr. McPheeters joined us as corporate counsel in September 1999. From 1981 until September 1999, Mr. McPheeters was a business lawyer in private practice, focusing
primarily in the areas of intellectual property, securities, and mergers and acquisitions of privately and publicly held companies. From

13

---



December 1995
until September 1999, he was employed by the law firm of Gray, Plant, Mooty, Mooty & Bennett, P.A.

Available Information

We make available, free of charge, on our website (www.lawson.com) our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 as soon as reasonably practicable after we have electronically filed or furnished such materials to the Securities and Exchange Commission. The information posted on our website is not
incorporated into this Annual Report on Form 10-K.

Financial Information About Geographic Areas

For financial information about geographic areas see Note 19 "Segment and Geographic Areas," of Notes to Consolidated Financial Statements filed as part of
this Annual Report.

Item 2. Properties

Our corporate headquarters and executive offices are in St. Paul, Minnesota, where we lease approximately 300,000 square feet of space. The lease on this
facility expires July 31, 2015. We also lease approximately 140,000 square feet of space, primarily for regional sales and support offices, elsewhere in the United States. Additionally, we
lease approximately 43,000 square feet of office space in countries outside the United States, used primarily as sales and services offices. Expiration dates of leases on these offices range from 2004
to 2017. We believe that our current domestic and international facilities will be sufficient to meet our needs for at least the next 12 months and that, if required, suitable additional or
alternative space will be available on commercially reasonable terms to accommodate expansion of our operations.

Item 3. Legal Proceedings

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 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended May 31, 2004.

14

---



Part II

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a)   Our
common stock is traded in the Nasdaq National Market (Nasdaq) under the symbol LWSN. The following table lists the high and low closing prices by quarter as reported
by Nasdaq.

High

LowFiscal 2004:Fourth Quarter

$
9.20

$
6.79Third Quarter

$
10.26

$
7.61Second Quarter

$
8.76

$
7.07First Quarter

$
7.98

$
5.45Fiscal 2003:Fourth Quarter

$
5.59

$
4.25Third Quarter

$
7.09

$
4.38Second Quarter

$
5.00

$
3.25First Quarter

$
6.28

$
4.40


We
have never declared or paid any cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. We intend to retain future earnings to fund
the development and growth of our business.

As
of July 19, 2004, the approximate number of stockholders of record was 190.

Between
March 1, 2004 and May 31, 2004 we issued 173,476 shares of common stock pursuant to the exercise of outstanding stock options for an aggregate consideration of
$135,005 in reliance upon Rule 701 of the Securities Act of 1933, as amended.



|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
|------------------------------- | ----- | --------------------------------------- | ------- | ---------------------------- | ---- | ------------------------------------------------------------------------------------------ | ----- | ----------------------------------------------------------------------------------------
|March 1, 2004 to March 31, 2004 |       | 655.8                                   |         | $                            | 8.54 |                                                                                            | 655.8 |                                                                                         
|April 1, 2004 to April 30, 2004 |       | 509.4                                   |         |                              | 8.31 |                                                                                            | 509.4 |                                                                                         
|May 1, 2004 to May 31, 2004     |       |                                        |         |                              |     |                                                                                            |      |                                                                                         
|                                |       |                                         |         |                              |      |                                                                                            |       |                                                                                         
|                                | Total |                                         | 1,165.2 |                              |      |                                                                                            |       | 1,165.2                                                                                 
|                                |       |                                         |         |                              |      |                                                                                            |       |                                                                                         

---

15

---



Item 6. Selected Consolidated Financial Data

|                                                      |                                      | Year Ended May 31,        |        
|----------------------------------------------------- | ------------------------------------ | ------------------------- | -------
|
|
|Consolidated Statement of Operations Data:            |                                      |                           |        
|Revenues:                                             |                                      |                           |        
|                                                      | License fees                         |                           | $      
|                                                      | Services(1)                          |                           |        
|                                                      |                                      |                           |        
|                                                      |                                      | Total revenues(1)         |        
|Cost of Revenues:                                     |                                      |                           |        
|                                                      | Cost of License Fees                 |                           |        
|                                                      | Cost of Services(1)                  |                           |        
|                                                      |                                      |                           |        
|                                                      |                                      | Total Cost of Revenues(1) |        
|Gross profit                                          |                                      |                           | 211,336
|Operating expenses:                                   |                                      |                           |        
|                                                      | Research and development             |                           |        
|                                                      | Sales and marketing                  |                           |        
|                                                      | General and administrative           |                           |        
|                                                      | Other general expenses               |                           |        
|                                                      | Restructuring charges                |                           |        
|                                                      | Amortization of acquired intangibles |                           |        
|                                                      |                                      |                           |        
|                                                      |                                      | Total operating expenses  |        
|                                                      |                                      |                           |        
|Operating income (loss)                               |                                      |                           | 12,105 
|Other income (expense), net(2)                        |                                      |                           | 3,209  
|                                                      |                                      |                           |        
|Income (loss) before income taxes                     |                                      |                           | 15,314 
|Provision (benefit) for income taxes                  |                                      |                           | 7,323  
|                                                      |                                      |                           |        
|Net income (loss)                                     |                                      |                           | 7,991  
|Accretion on and conversion of preferred stock(3)     |                                      |                           |       
|                                                      |                                      |                           |        
|Net income (loss) applicable to common stockholders   |                                      | $                         | 7,991  
|Net income (loss) per share:                          |                                      |                           |        
|                                                      | Basic                                |                           | $      
|                                                      |                                      |                           |        
|                                                      | Diluted                              |                           | $      
|                                                      |                                      |                           |        
|Shares used in computing net income (loss) per share: |                                      |                           |        
|                                                      | Basic                                |                           |        
|                                                      |                                      |                           |        
|                                                      | Diluted                              |                           |        
|                                                      |                                      |                           |        

---

16

---





|                                                 |  | May 31, |        
|------------------------------------------------ |  | ------- | -------
|
|
|Consolidated Balance Sheet Data:                 |  |         |        
|Cash, cash equivalents and marketable securities |  | $       | 208,982
|Working capital                                  |  |         | 165,336
|Total assets                                     |  |         | 423,598
|Mandatorily redeemable common stock warrants     |  |         |       
|Senior subordinated convertible notes            |  |         |       
|Other long-term debt, net of current portion     |  |         | 990    
|Series A convertible preferred stock             |  |         |       
|Mandatorily redeemable common stock              |  |         |       
|Stockholders' equity (deficit)                   |  |         | 282,886

17

---





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

The following should be read in conjunction with our consolidated financial statements and the notes to those statements and other
financial information appearing elsewhere in this Annual Report on Form 10-K.

Forward-Looking Statements

In addition to historical information, this Form 10-K 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-K 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 and maintenance. Consulting, training and implementation services are
generally not essential to the functionality of our software products, are sold separately and also are available from a number of third-party service providers. Accordingly, revenues from these
services are generally recorded separately from the license fee. Additionally, we generate a portion of our revenues from reselling our 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 audited consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period, and related disclosures of
contingent assets and liabilities. The Notes to Consolidated Financial Statements contained herein describe our significant accounting polices used in the preparation of the consolidated financial
statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to bad debt, intangible assets and contingencies. We base our estimates on
historical experience and on various other assumptions that we believe to be

18

---



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 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 and maintenance.
Consulting, training and implementation services are generally not essential to the functionality of our software products, are sold separately and also are available from a number of third-party
service providers. Accordingly, revenues from these services are generally recorded separately from license fees. Software arrangements which include 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:



19

---





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

20

---



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.

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

We
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 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.

Our
methodology for determining the realizability of our deferred tax assets involves estimates of future taxable income from its 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 its 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.

We
also concluded that it was more likely than not that the net deferred tax assets of $27.7 million as of May 31, 2004 and as well as the estimated future tax deductions
from the exercise of stock

21

---



options
outstanding as of May 31, 2004 would be utilized prior to expiring in greater than ten years. Based on this conclusion, we would require approximately $150 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 $27.7 million as of May 31, 2004 as well as the
estimated future tax deductions from the exercise of stock options outstanding and in-the-money as of May 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 $50 million if the stock options outstanding and
in-the-money as of May 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 its 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.

Initial Public Offering and Other Equity Transactions

In fiscal 2002, we closed our initial public offering on December 12, 2001, at which time we issued 13.7 million shares of common stock from the
primary offering, 10.3 million shares of common stock upon conversion of all of the outstanding shares of Series A Preferred Stock, 1.7 million shares of common stock as part of
the over-allotment option exercise and 0.4 million shares of common stock issued upon the exercise of warrants and sold as part of the over-allotment option exercise. We
received proceeds, net of commissions and expenses, of $197.3 million in the initial public offering including exercise of the over-allotment option in full. We used
$10.2 million of the proceeds from the offering to repay senior subordinated convertible notes. The remaining proceeds are invested in interest-bearing, investment grade securities. Due to the
repayment of the notes prior to the scheduled maturity date, we recorded a charge in the third quarter of fiscal 2002 for the total amount of the unamortized debt issuance costs and the discount on
the notes of $2.3 million. Additionally, as a result of the conversion of A Preferred Stock to common stock, which accelerated the amortization of the beneficial conversion feature, we
recognized a $30.0 million non-cash charge to net income available to common stockholders for the unamortized value of the beneficial conversion feature of our preferred stock in
the third quarter of fiscal 2002. We also recognized accretion on the preferred stock of $0.1 million for the year ended May 31, 2002. The charges related to preferred stock adversely
affected basic and diluted earnings per share by $0.38. However, they had no impact on net income (loss).

Purchase of Client Maintenance Contracts

On April 30, 2004, we acquired assets consisting of client maintenance contracts and client lists from Siemens Medical Solutions Health Services
Corporation ("Siemens") for $24.1 million, consisting of $19.8 million in cash and $4.3 million in other consideration. Of the total purchase price, $22.9 million was
allocated to the maintenance contracts and is being amortized over the remaining life of the contracts based on estimated periodic contractual revenue recognized. The purchase price allocated to the
client list of $1.0 million is being amortized on a straight-line basis over 7 years. The remaining purchase price of $0.2 million in transitional support costs was
charged to cost of services as the services were performed in 2004.

The
asset purchase agreement is part of an overall restructuring of a 10-year partner agreement between us and Siemens. As part of the agreement, Siemens becomes our
preferred partner for hosting our software applications within the United States healthcare market, and we become Siemens' preferred Enterprise Resource Planning ("ERP") software vendor for
healthcare. Under the asset purchase agreement, we assumed responsibility for supporting clients who use our software applications

22

---



previously
supported by Siemens. The asset purchase agreement did not qualify as a business combination under the criteria established in SFAS No. 141 "Business Combinations".

Acquisitions

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

On
October 15, 2003, we acquired all of the outstanding capital stock of Apexion for $8.0 million in cash, net of cash acquired. Terms of the agreement also provide for
additional cash payments ranging from zero to $2.0 million contingent upon the future performance of Apexion measured annually through November 30, 2005. Any contingent consideration
earned will be recorded as additional
goodwill. As of May 31,2004, no additional consideration had been earned or recorded under this agreement. Apexion provided materials and equipment logistics solutions for the healthcare
industry.

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

On
July 24, 2003, we acquired all of the outstanding capital stock of Numbercraft for $3.7 million in cash, net of cash acquired and $0.3 million in notes payable.
Additional cash payments ranging from zero to $7.0 million are contingent upon the future performance of Numbercraft measured periodically through fiscal 2007. Any contingent consideration
earned will be recorded as additional goodwill. During the fiscal year ended May 31, 2004, $1.1 million of additional consideration was earned and recorded as additional goodwill.
Numbercraft provided solutions for retailers and consumer packaged goods companies, which enable a quantitative understanding of consumer dynamics, product and offer performance, and client trends.

On
June 28, 2002, we acquired certain assets of Armature Holdings Ltd. for $7.8 million in cash, net of cash acquired. Acquired assets included all software
applications, related trademarks and technologies. Armature provided merchandising/category management and supply chain management solutions for retailers, consumer goods manufacturers and
wholesalers.

On
April 17, 2002, we acquired all of the outstanding capital stock of Keyola Corporation for $5.0 million in cash. Additional cash payments ranging from zero to
$0.8 million are contingent upon the future performance of Keyola measured through fiscal 2005. Any contingent consideration earned will be recorded as additional goodwill. As of May 31,
2004, no additional consideration had been earned or recorded under this agreement. Keyola developed innovative business intelligence technology to automatically deliver event-driven notifications to
organizations.

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

23

---



Results of Operations

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

Year Ended May 31,2004

2003

2002Revenues:License fees

25.4
%
22.5
%
35.1
%Services

74.6

77.5

64.9Total revenues

100.0

100.0

100.0Cost of revenues:Cost of license fees

4.4

4.2

7.2Cost of services

37.5

41.1

35.9Total cost of revenues

41.9

45.3

43.1Gross profit

58.1

54.7

56.9Operating expenses:Research and development

17.8

17.2

15.6Sales and marketing

25.6

29.9

29.1General and administrative

10.4

8.7

7.5Other general expenses





0.2Restructuring charges

0.6

1.7

0.8Amortization of acquired intangibles

0.4

0.3

0.1Total operating expenses

54.8

57.8

53.3Operating income (loss)

3.3

(3.1
)
3.6Other income (expense), net

0.9

1.3

(0.3
)Income (loss) before income taxes

4.2

(1.8
)
3.3Provision (benefit) for income taxes

2.0

(0.7
)
1.3Net income (loss)

2.2
%
(1.1
)%
2.0
%


Fiscal Year Ended May 31, 2004 Compared With Fiscal Year Ended May 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 and maintenance. Total revenues increased to $363.6 million in fiscal 2004 from
$344.3 million in fiscal 2003, or 5.6%. The increase consisted of a $14.7 million increase in license fees and a $4.5 million increase in services revenues.

License Fees.Revenues from license fees increased to $92.3 million in fiscal 2004 from $77.6 million in fiscal
2003, or 19.0%. The revenue increase occurred primarily in the most recent six months compared to last year, as market conditions showed improvements in the level of information technology spending.
The increase of $14.7 million in revenue is a result of a 4.4% increase in licensing activity, along with a higher percentage of recognizable revenue as a result of fewer terms and conditions
that prevented revenue recognition upon shipment, and a reduction in the amount required for sales returns and allowances. The average overall selling price of our licensing transactions increased
5.5% while the number of licensing transactions decreased 1.1% as compared to fiscal 2003.

24

---



Revenues
from license fees as a percentage of total revenues for fiscal 2004 were 25.4%, compared with 22.5% in fiscal 2003, reflecting the increase in license fees in proportion to revenues from
services.

Services.Service revenues consist of consulting, maintenance and training services provided to clients. Revenues from
services increased to $271.2 million for fiscal 2004 from $266.7 million in fiscal 2003, or 1.7%. Consulting revenues decreased $7.8 million or 6.2%, from $124.1 million to
$116.3 million, primarily due to the decline in new license activity in fiscal 2003 which resulted in fewer consulting and training opportunities in fiscal 2004. New consulting and training
opportunities typically lagged behind new licensing activity by several quarters. The decline in consulting was more than offset by a $12.3 million or 8.6% increase in maintenance revenue, from
$142.6 million to $154.9 million. The increase was primarily due to an expanded client base from new licensing activity since the prior year period combined with price increases.
Services revenues as a percentage of total revenues for fiscal 2004 and 2003 were 74.6% and 77.5%, 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 the sale of our products. In addition, we resell
third-party products in conjunction with the license of our software solutions. The cost of license fees is higher when we resell products of third-party vendors. As a result, gross margins vary
depending on the proportion of third-party product sales in our revenue mix. Cost of license fees increased to $15.9 million for fiscal 2004 from $14.4 million for fiscal 2003, or 11.0%.
The increase was largely due to a $1.2 million increase in amortization of acquired software related to our acquisitions and a $0.2 million increase in third-party costs. Cost of license
fees as a percentage of total revenues for fiscal 2004 and 2003 were 4.4% and 4.2%, respectively. Gross margin on revenue from license fees was 82.7% and 81.5% for fiscal 2004 and 2003, respectively.
Gross margin on license fees increased primarily due to the increase in the mix of Lawson products sold versus third-party products, as Lawson products typically carry higher margins than third-party
components. This is partially offset by the increased amortization of acquired technology and to the increase in the mix of embedded third-party products in relation to total third-party products.

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 our clients. Cost of services decreased to $136.3 million for fiscal 2004 from $141.7 million for fiscal 2003, or
3.8%. The decrease in cost of services was primarily due to a $2.6 million decrease in third-party consulting costs as a result of a lower proportion of third-party services in our revenue mix
offset by improved third-party margins, a $2.3 million net decrease in expenses due primarily to cost containment initiatives and a $1.5 million net decrease in employee costs from
workforce reductions and attrition. Partially offsetting these decreases is a $0.5 million increase in transition services and amortization expense related to the purchase of client maintenance
contracts from Siemens Medical Solutions and a $0.4 million increase in other third-party maintenance costs primarily due to an overall increase in maintenance revenues, which are partially
reduced by less third-party maintenance in our revenue mix. Cost of services as a percentage of total revenues for fiscal 2004 and 2003 were 37.5% and 41.1%, respectively. Gross margin on services
revenues was 49.8% and 46.9% for fiscal 2004 and 2003, respectively. Gross margin on services increased primarily due to the increase in maintenance revenue in proportion to consulting revenue.

Operating Expenses

Research and Development.Research and development expenses consist primarily of salaries, employee benefits, related
overhead costs and consulting fees associated with product development, enhancements, upgrades, testing, quality assurance and documentation. Research and development

25

---



expenses
increased to $64.9 million for fiscal 2004 from $59.1 million for fiscal 2003, or 9.8%. The increase was primarily due to a $3.7 million increase in costs related to the
integration of acquisitions in the amount of $1.8 million, corporate initiatives of $1.1 million designed to improve future efficiencies and enhance future functionality and a
$2.3 million net increase in employee costs mainly related to incentives and merit increases. Research and development expenses as a percentage of total revenues for fiscal 2004 and 2003 were
17.8% and 17.2%, respectively.

Sales and Marketing.Sales and marketing expenses consist primarily of salaries and incentive compensation, employee
benefits, travel and overhead costs related to our sales and marketing personnel, as well as trade show activities, advertising costs and other costs associated with marketing our company. Sales and
marketing expenses decreased to $93.1 million for fiscal 2004 from $103.0 million for fiscal 2003, or 9.5%. The decrease was primarily the result of a $5.9 million net decrease in
employee costs as a result of our workforce reductions and attrition covering 66 employees, a $5.0 million decrease in expenses due to cost containment initiatives, and a $0.9 million
decrease in marketing costs. This is partially offset by an increase in corporate initiative spending of $2.5 million to enhance product development and emphasize creation of value for our
clients. Sales and marketing expenses as a percentage of total revenues for fiscal 2004 and 2003 were 25.6% and 29.9%, respectively.

General and Administrative.General and administrative expenses consist primarily of salaries, employee benefits and related
overhead costs for administrative employees, as well as legal and accounting expenses, consulting fees and bad debt expense. General and administrative expenses increased to $37.7 million for
fiscal 2004 from $30.0 million for fiscal 2003, or 25.9%. For the fiscal year ended May 31, 2004, bad debt expense increased by $2.9 million reflecting an increase in the accounts
receivable reserve for aged receivables. Other increases include a $2.0 million increase in costs related to corporate initiatives and consulting designed to improve efficiency, a
$2.0 million increase relating to the resolution of certain claims and other legal related expenses, a $0.5 million increase in insurance costs and a $0.4 million increase in
foreign currency translation. These increases are partially offset by a $1.3 million decrease in employee costs related to lower stock compensation expense. This resulted primarily from
decreased amortization of the remaining initial public offering deferred stock compensation balance and the expiration of unvested options related to employee terminations resulting from workforce
reductions. Other decreases include a $0.9 million decrease in expenses due to a prior year lease termination fee that did not occur in the current year and a $0.4 million decrease in
audit expenses due primarily to prior year costs related to the Armature acquisition that did not occur again in the current year. The remaining net increase is due to the net effect of other
individually insignificant items. General and administrative expenses as a percentage of total revenues or fiscal 2004 and 2003 were 10.4% and 8.7%, respectively.

Restructuring charges.During fiscal 2004, we recorded net restructuring charges of $2.2 million including
$2.3 million for the fiscal 2004 restructuring plan, net of a $0.1 million reversal related to certain
employee costs which we determined would not be incurred for the fiscal 2003 restructuring plan. In September 2003, we approved the fiscal 2004 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 plan resulted in the termination of 93 employees in the second
quarter of fiscal 2004 from various functions including research and development, general and administrative, and sales and marketing primarily in the United States.

Although
the fiscal 2003 and 2002 restructuring plans have been fully executed, we continue to make cash payments for continuing lease and employee related costs. During the fiscal year
ended May 31, 2004, we made cash payments of $3.1 million which reduced liabilities included in accrued compensation and benefits and other accrued liabilities. See Note 5 of
Notes to Consolidated Financial Statements for a summary of activity for the fiscal year ended May 31, 2004.

26

---



Amortization of Acquired Intangibles.Amortization of acquired intangibles of $1.3 million and $0.9 million for
fiscal 2004 and fiscal 2003, respectively, consisted of acquired intangible assets other than acquired technology and amortization of Siemens maintenance contracts which are amortized to cost of
license fees and cost of services, respectively.

Other Income (Expense), net

Other income (expense), net, which is comprised of interest income earned from cash, marketable securities and long term investments was $3.2 million for
fiscal 2004 compared with $4.5 million for fiscal 2003. The reduction in interest income resulted from a realignment in our investment strategy during the year to shorter-term
lower-yielding investments, and from a reduced investment base resulting from the funding of acquisitions and stock repurchases.

Provision (Benefit) for Income Taxes

We recognized an income tax provision of $7.3 million for fiscal 2004 compared with a tax benefit of $2.4 million for fiscal 2003. As of
May 31, 2004 we recognized a deferred tax valuation allowance of $1.2 million that is included in the current year provision. The valuation allowance is associated primarily with federal
contribution carryforwards, state net operating loss carryforwards and certain federal tax credit carryforwards not considered likely to be realized before they expire within the next ten years. Our
income tax provision (benefit) is based on pretax income or loss and consists primarily
of federal and state income taxes. Our effective rate including the valuation allowance was 47.8% and 39.0% for fiscal 2004 and 2003, respectively.

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

Revenues

Total Revenues.Total revenues decreased to $344.3 million in fiscal 2003 from $428.3 million in fiscal 2002,
or 19.6%. The decrease was primarily due to a decline in revenues from license fees. The general economic slowdown during fiscal 2002 in information technology spending continued to negatively impact
the sales of our products to clients and prospective clients.

License Fees.Revenues from license fees decreased to $77.6 million in fiscal 2003 from $150.2 million in
fiscal 2002, or 48.3%. The decrease was principally the result of a continued economic slowdown in information technology spending. Clients continued to delay purchasing new products, or purchased
individual products, rather than multi-product suites or systems, resulting in a lower average sales price of the mix of products sold. The average overall selling price of our licensing transactions
decreased 41% while the number of licensing transactions was consistent with prior periods. Revenues from license fees as a percentage of total revenues were primarily a result of the decrease in
license fees in proportion to revenues from services.

Services.Revenues from services decreased to $266.7 million for fiscal 2003 from $278.1 million for fiscal
2002, or 4.1%. Consulting revenues decreased $19.1 million largely reflecting the overall decline in licensing activity, which resulted in less consulting and training opportunities. The
decline in total services revenue included a partially offsetting increase in maintenance revenue of $7.7 million, which was primarily due to a slightly expanded client base and increased
maintenance prices. Services revenues as a percentage of total revenues for fiscal 2003 and 2002 were 77.5% and 64.9%, respectively.

Cost of Revenues

Cost of License Fees.Cost of license fees decreased to $14.4 million for fiscal 2003 from $30.9 million for
fiscal 2002, or 53.5%. This decline reflects an overall decrease in license fees and third

27

---



party
products sold in relation to total sales due, in part, to the termination of our Siebel Systems reseller agreement in the fourth quarter of fiscal 2002. The decrease was partially offset by an
increased expense of $0.6 million related to amortization of acquired software from our acquisitions of Armature in fiscal 2003 and Account4 and Keyola in fiscal 2002. Costs of license fees as
a percentage of total revenues for fiscal 2003 and 2002 were 4.2% and 7.2%, respectively. Gross margin on revenue from license fees was 81.5% and 79.5% for fiscal 2003 and 2002, respectively. The
increase in gross margin on license fees was primarily attributable to the decrease in sales of third party products, which typically carry lower margins, partially offset by amortization of acquired
software.

Cost of Services.Cost of services decreased to $141.7 million for fiscal 2003 from $153.8 million for fiscal
2002, or 7.9%. The decrease in cost of services was primarily due to $10.8 million of lower employee costs, a $1.3 million in related travel expenses as a result of our May 2002
and September 2002 workforce reductions, and a $4.7 million reduction in the use of third-party consultants' services in our revenue mix. These decreases were partially offset by an
increase in expenses due to the additional headcount resulting from the Armature acquisition. Cost of services as a percentage of total revenues for fiscal 2003 and 2002 were 41.1% and 35.9%,
respectively. The increase in cost of services as a percentage of total revenues was due to the decrease in total revenues. Gross margin on services revenues was 46.9% and 44.7% for fiscal 2003 and
2002, respectively. The gross margin improvement on services was primarily attributable to the increase in maintenance revenue in proportion to consulting and other service revenue.

Operating Expenses

Research and Development.Research and development expenses decreased to $59.1 million for fiscal 2003 from
$66.9 million for fiscal 2002, or 11.6%. The decrease in expenses was primarily attributed to a $4.3 million decrease from workforce reductions, a $1.0 million decrease in
non-cash stock based compensation, and an aggregate decrease of $0.9 million in lease, travel and telephone costs. These decreases were partially offset by an increase in headcount
as a result of the Armature acquisition. Research and development expenses as a percentage of total revenues for fiscal 2003 and
2002 were 17.2% and 15.6%, respectively. The increase reflects the lower total revenue in fiscal 2003 compared with fiscal 2002 and our continued commitment to reinvest in research and development.

Sales and Marketing.Sales and marketing expenses decreased to $103.0 million for fiscal 2003 from
$124.6 million for fiscal 2002, or 17.4%. The decrease in expenses was largely the result of our two workforce reductions totaling $12.0 million, a reduction in marketing activities
totaling $4.4 million and a decrease in non-cash stock-based compensation expense of $1.5 million. Travel expenses also decreased $2.2 million resulting from reduced
headcount. Sales and marketing expenses as a percentage of total revenues for fiscal 2003 and 2002 were 29.9% and 29.1%, respectively.

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

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

28

---



Restructuring Charges.During fiscal 2003, we recorded a total of $6.0 million of restructuring
charges for our 2003
restructuring plan and adjustments to the 2002 plan. In the second quarter of fiscal 2003, we approved a $5.8 million restructuring plan to realign projected expenses with anticipated lower
revenue levels resulting from the continued economic downturn. The plan included the termination and payment of severance-related benefits of $4.7 million for 244 employees in various functions
including administrative, professional, and managerial, in the United States, Canada and Europe. The charges also included expenses totaling $1.1 million related to the closure and
consolidation of facilities. All remaining termination benefits are expected to be paid in fiscal 2005. Cash payments related to remaining facility closure liabilities ceased in October 2003.
Adjustments to the charges were recorded upon finalization of lease termination agreements and severance related benefits. For a summary of the activity for the year, see Note 5 of Notes to
Consolidated Financial Statements.

In
the fourth quarter of fiscal 2002, we approved a restructuring plan in response to the general economic downturn and incurred restructuring charges of $3.3 million. The plan
included the termination and payment of severance-related benefits of $2.9 million for 111 employees in various functions including administrative, professional, and managerial, primarily in
the United States. All terminations and associated payments were completed during the first quarter of fiscal 2003. The charges also included expenses of $0.3 million related to closing a
leased office facility. An additional $0.2 million provision was recorded in 2003 related to the closed facility based on finalization of lease termination agreements. Cash payments related to
remaining facility closure liabilities are expected to continue through June 2005. For a summary of the activity for the year, see Note 5 of Notes to Consolidated Financial Statements.

Amortization of Acquired Intangibles.Amortization of acquired intangibles of $0.9 million and $0.6 million for
fiscal 2003 and fiscal 2002, respectively, consisted of amortization expense related to our acquisitions other than acquired technology which is amortized to cost of license fees.

Other Income (Expense), net

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

(Benefit) Provision for Income Taxes

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

29

---



Liquidity and Capital Resources

As of May 31, 2004, we had $209.0 million in cash, cash equivalents and marketable securities and $165.3 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 59 and 62 as of May 31, 2004 and May 31, 2003, respectively. The decrease was due primarily to an increase in revenues and improved
collections in the three months ended May 31, 2004 compared to the same prior year period. Our primary uses of cash from operating activities are for employee costs, third-party costs for
licenses and services and facilities.

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

Cash flows from operating activities:

Cash flows provided by operating activities of $17.8 million for the year ended May 31, 2004 consisted of net income, net non-cash items
of $25.8 million, offset by uses of cash for working capital, principally accounts receivable, prepaid expenses, accrued liabilities and deferred revenue and client deposits. Accounts
receivable increased $8.2 million due primarily due to an increase of $5.7 in products billed with payment terms that extended beyond the end of the period and $2.7 million from
increased licensing activity. Prepaid expenses decreased $2.3 million due primarily to the reclassification of tax benefits to taxes payable due to annual earnings. Accrued expenses decreased
by $5.4 million primarily due to lower accruals for third party maintenance services, payment of acquisition related liabilities and payment of restructuring charges. Deferred revenue and
client deposits decreased $6.5 million due primarily to decreased maintenance payments received prior to the support period and a decrease in the sales returns and allowances reserve due to the
resolution of certain product claims.

Cash
flows provided by operating activities of $47.9 million for the year ended May 31, 2003 consisted of net non-cash items of $29.3 million, partially
offset by a net loss, and changes in accounts receivable, prepaid expenses and other assets, accounts payable and accrued liabilities. The decrease in accounts receivable reflected collection from a
number of clients with extended payment terms and a reduction in license fee revenues reflective of the downturn in the economic climate. Prepaid expenses increased $3.9 million due to tax
benefits related to stock option activity and cumulative net losses. Accounts payable decreased $6.9 million due primarily to the Employee Stock Purchase Plan ("ESPP") purchase during the first
quarter of fiscal 2003, a decrease in accounts payable due to the timing of payments and a decrease in sales tax payable due to a decrease in revenues. Accrued liabilities decreased
$4.8 million due mainly to severance payouts related to the fiscal 2002 and fiscal 2003 restructuring plans and a decrease in third-party license fees due to the decline in revenues.

Cash flows from investing activities:

Cash flows used in investing activities of $63.1 million for the year ended May 31, 2004 consisted of $22.5 million of net purchases of
marketable securities, $35.6 million for the acquisitions of Numbercraft, Apexion and Closedloop, and the purchase of Siemens maintenance contracts, and the purchases of property and equipment
for $4.9 million.

Cash
flows provided by investing activities of $34.8 million for the year ended May 31, 2003 consisted of net sales of marketable securities of $48.8 million,
partially offset by cash usage of $7.8 million for the acquisition of Armature and the purchases of property and equipment for $6.1 million. Marketable securities decreased due to a
realignment in our investment strategy to shorter-term investments, coinciding with cash needed to fund acquisitions and stock repurchases. We

30

---



have
generally funded capital expenditures through cash flows generated from operations and stockholder transactions.

Cash flows from financing activities:

Cash flows used in financing activities of $27.8 million for the year ended May 31, 2004 reflects $40.0 million used to repurchase shares of
our common stock and $0.9 million used for repayment of debt, offset by $9.4 million received from the exercise of stock options and $3.7 million from employee contributions to
our employee stock purchase plan completed through the issuance of treasury shares.

Cash
flows used in financing activities of $2.8 million for the year ended May 31, 2003 reflects $15.0 million used to repurchase shares of our common stock and
$1.4 million for the repayment of debt, partially offset by $7.0 million received from the exercise of stock options and $6.6 million from employee contributions to our employee
stock purchase plan completed through the issuance of treasury shares.

Contingent cash commitments

We have contingent consideration agreements related to the acquisitions of Keyola in April 2002, Numbercraft in July 2003, and Apexion in
October 2003. Under the terms of the Keyola agreement, additional cash payments ranging from zero to $0.8 million are contingent upon the future performance of Keyola, measured annually
through fiscal 2005. Additional cash payments ranging from zero to $7.0 million are contingent upon future performance of Numbercraft measured periodically through fiscal 2007. Additional cash
payments ranging from zero to $2.0 million are contingent upon the future performance of Apexion measured annually through November 30, 2005. Any contingent consideration earned will be
recorded as additional goodwill. During the fiscal year ended May 31, 2004, $1.1 million of additional consideration was earned under the Numbercraft agreement and recorded as additional
goodwill. This amount and certain elements of the initial purchase price have been included in notes payable to the former principals of Numbercraft.

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

Repurchase of common shares

In June 2003, our Board of Directors authorized us to repurchase, from time to time, up to $50.0 million of our common shares. Shares will be
repurchased from time to time as market conditions warrant either through open market transactions, block purchases, private transactions or other means. During the year ended May 31, 2004, we
repurchased 4.9 million shares for $40.0 million in cash and $0.1 million in non-cash transactions. Cash proceeds obtained from current operations, 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. No time
limit has been set for the completion of the program.

In
December 2002, our Board of Directors authorized us to repurchase, from time to time, up to $15.0 million of our common shares. We repurchased a total of
2.9 million shares for $15.0 million during fiscal 2003. Cash proceeds obtained from 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.

31

---



Disclosures about Contractual Obligations and Commercial Commitments

The following summarizes our contractual obligations at May 31, 2004, and the effect these contractual obligations are expected to have on our liquidity
and cash flows in future periods (in thousands):

Total

1 Year or Less

1-3 Years

3-5 Years

More than 5
YearsOperating leases

$
78,506

$
9,694

$
14,781

$
14,537

$
39,494Debt


2,642


1,652


990





Purchase Obligations(1)


8,494


4,239


4,087


168


Total

$
89,642

$
15,585

$
19,858

$
14,705

$
39,494


---

We
believe that cash flows from operations, together with our cash, cash equivalents and marketable securities will be sufficient to meet our cash requirements for working capital,
capital expenditures and investments for the foreseeable future. As part of our business strategy, we may acquire companies or products from time to time to enhance our product lines. These
acquisitions may be funded using available cash, equity, debt or a combination of these sources.

Recent Accounting Pronouncements

In November 2003 and March 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 03-1, "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 disclosure 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 have 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 have
chosen 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) are required in the fourth quarter of fiscal year 2005. Adoption will not have an impact on our statements of consolidated earnings, financial position or cash flows.

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-K. This section should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report on Form 10-K. Any of the following
factors could materially harm our business, operating results and financial condition. Additional factors and uncertainties not currently known to us or that we currently consider immaterial could
also harm our business, operating results and financial condition. The Company may make forward-looking statements from time to time, both written and oral. We undertake no obligation to revise or
publicly release the results of any revisions to these forward-looking statements based on circumstances or events which occur in the future. The actual results may differ materially from those
projected in any such forward-looking statements due to a number of factors, including those set forth below and elsewhere in this report on Form 10-K.

32

---



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 maintenance and professional services. A general weakening
of the economy and weakening of business conditions could result in decreases in our renewal rates for software maintenance 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. 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. We may need to make further expense reductions
to address shortfalls in revenue caused by these or other conditions and we cannot assure you those reductions will be available or sufficient to offset revenue declines.

Because our 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, and public
sector and financial services industries. Because the healthcare marketplace for our products is maturing, we will need to expand our product offerings to achieve long-term revenue growth.
Many state and local governments are facing budget shortfalls and are reducing capital spending, including spending on software and services. 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:



33

---





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:



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.

34

---



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:



A
significant portion of our research and development resources is devoted to product upgrades that address regulatory and maintenance requirements. The remainder of our limited research
and development resources are for new products. New products require significant development investment. We face uncertainty when we develop or acquire new products because there is no assurance that
a sufficient market will develop for those products. For example, we have made a significant investment in the acquisition and development of services automation and retail merchandising software
products. If we do not attract sufficient 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 maintenance agreements, license additional products, and
purchase additional professional services.

Our installed client base has traditionally generated additional maintenance, license and professional service revenues. In future periods, clients may not
necessarily make these purchases. Maintenance 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 maintenance agreements or license additional products or contract for additional services, or if they reduce the scope of the maintenance agreements, our revenues
could decrease and our operating results could be adversely affected.

35

---



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 maintenance service revenues in future periods.

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

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



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.

Our May 31, 2004, the consolidated balance sheet includes net deferred tax assets in the amount of $27.7 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.

In
the event that the Company adjusts its estimates of future taxable income or tax deductions from the exercise of stock options; or the Company's stock price increases significantly
without a

36

---



corresponding
increase in taxable income, the Company may need to establish an additional valuation allowance, which could materially impact its financial position and results of operations.

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:



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:



37

---









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.

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. 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:



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.

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 Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees". The Financial Accounting Standards Board ("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

38

---



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 Consolidated financial Statements describes the pro forma impact of a change to
fair value accounting on earnings and earnings per share for each of the past three fiscal years.

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 margins could significantly decrease. We rely on existing
relationships with software vendors who are also competitors. If these vendors change their business practices, we may be compelled to find alternative vendors with complementary software, which may
not be available on attractive terms or at all, or may not be as widely accepted or as effective as the software provided by our existing vendors. Our relationships with these and other third-
party vendors are an important part of our business, and a deterioration of these relationships could adversely impact our business and operating results.

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

Our ability to achieve revenue growth will depend in large part on adding new partners to expand our sales channels, as well as leveraging our relationships with
existing partners. 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

39

---



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:



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 competitive 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.

40

---



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:



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:



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

41

---



impaired,
which may result in an impairment loss that could materially adversely impact our financial position and results of operations.

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

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

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

We act as an application service provider for only portions of our products acquired through recent acquisitions. Revenues from these arrangements are not
material. Some businesses choose to access enterprise software applications through application service providers, or ASPs, which are businesses that host applications and provide access to software
on a subscription basis. Although we occasionally sell our software to ASPs, we have limited experience selling our solutions to ASPs and 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.

42

---



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. In February 2004, we entered into an offshore agreement with a third-party to provide software maintenance services. We do not have experience with this
type of outsourcing and may be unable to achieve the product development and economic efficiencies of this arrangement.

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

In December 2003, we announced that our Chairman and a founder, H. Richard Lawson, had entered into a selling plan to sell up to 924,000 shares of our
stock over a period ending August 2004. 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, 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.

43

---



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

As of June 15, 2004, our executive officers, directors, and affiliated entities, in the aggregate, beneficially owned 18.7% of our outstanding common
stock. These stockholders, if acting together, would be able to significantly influence all matters requiring approval by stockholders, including the election of directors and the approval of mergers
or other business combinations.

Financial outlook.

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

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

Currently, we have minimal monetary assets, liabilities and operating expenses denominated in foreign currencies. If our international operations expand and we
decide to enter into hedging transactions to minimize foreign currency rate risk, the adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by
SFAS Nos. 137, "Accounting for Derivative Instruments and Hedging ActivitiesDeferral of the Effective Date of FASB Statement No. 133an amendment of FASB
Statement No. 133", and SFAS No. 138, "Accounting for Derivative Instruments and Certain Hedging Activitiesan amendment of FASB Statement No. 133", could have a
material impact on our operating results.

We
do not utilize any derivative security instruments. Our investments are consistent with the Company's investment policies. We invest our cash in financial instruments consisting
primarily of tax-exempt money market funds and highly liquid debt securities of corporations and municipalities. These investments are denominated in U.S. dollars. Investments with
original maturities of three months or less are classified as cash and cash equivalents. As of May 31, 2004, the average maturity of our investment securities was less than five months and all
investment securities had maturities less than 24 months. As of May 31, 2004, we consider the reported amounts of these investments to be reasonable approximations of fair values.
Changes in the market interest rates will not have a material impact on our financial position.

Through
May 31, 2004, interest expense was not sensitive to the general levels of United States interest rates because all of our notes payable bear fixed interest rates.

Item 8. Consolidated Financial Statements and Supplementary Data.

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

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

None.

44

---



Item 9A. Controls and Procedures.



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



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

45

---



Part III

The information required by Items 10 through 13 is incorporated by reference from our definitive Proxy Statement pursuant to general
instruction G (3), with the exception of the executive officers section of Item 10, which is included in Part I of this Form 10-K. We will file our
definitive 2004 Proxy Statement pursuant to Regulation 14A no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

Item 10. Directors and Executive Officers of the Registrant.

The information concerning our officers required by this item is included in Part I hereof under the heading "Employees". The information called for by
Item 10, as to compliance with Section 16(a) of the Securities Exchange Act of 1934, is incorporated by reference in the Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A in connection with our 2004 Annual Meeting of Stockholders under the heading "Section 16(a) Beneficial Ownership Reporting Compliance." The
information called for by Item 10, as to the audit committee and the audit committee financial expert, is incorporated by reference to our Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A in connection with our 2004 Annual Meeting of Stockholders under the headings "Item 1: Election of Directors" and "Audit Committee Report".

We
have adopted a Global Business Code of Conduct that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons
performing similar functions, and all of our other employees and non-employee directors. This Global Business Code of Conduct is posted on our website (www.lawson.com). We intend to
satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of the Global Business Code of Conduct that applies to our
principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by posting such information on our website, at the
address specified above.

Our
Corporate Governance Policy and charters for each Committee of our Board of Directors are also available on our website. Our Global Business Code of Conduct, Corporate Governance
Policy and charters are also available in print to any stockholder who submits a request to: Lawson Software, Inc., Attn: Corporate Secretary, 380 St. Peter Street,
St. Paul, Minnesota 55102.

Information
on our website is not deemed to be incorporated by reference into this Annual Report on Form 10-K.

Item 11. Executive Compensation.

Information required under this item is contained in the sections entitled "Executive Compensation and other Information" and "Employment Agreements" in our 2004
Proxy Statement and is incorporated herein by reference.

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

Information required under this item is contained in the sections entitled "Securities Authorized for Issuance Under Equity Compensation Plans" and "Security
Ownership of Principal Stockholders and Management" in our 2004 Proxy Statement and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

Information required under this item is contained in the section entitled "Certain Transactions" in our 2004 Proxy Statement and is incorporated herein by
reference.

46

---



Item 14. Principal Accounting Fees and Services.

The information required by this item is incorporated by reference to the Proxy Statement under the heading

"Ratification
of Selection of Independent Auditors".

47

---





Part IV

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



Reports
on Form 8-K filed during the fourth quarter of fiscal 2004.

On
March 10, 2004, the Company furnished a Current Report on Form 8-K, reporting under Item 12 that it issued a press release relating to preliminary
fiscal 2004 third quarter financial results. The full text of the press release was set forth in an attached exhibit.

On
March 18, 2004, the Company furnished a Current Report on Form 8-K, reporting under Items 7 and 12 that it issued a press release relating to fiscal
2004 third quarter financial results. The full text of the press release was set forth in an attached exhibit.

On
May 3, 2004 the Company filed a Current Report on Form 8-K under Item 5 reporting that it issued a press release announcing a new partnership
agreement with Siemens Medical Solutions Health Services Corporation and the purchase of certain assets. The full text of the press release was set forth in an attached exhibit.

Index To Financial Statements and Financial Statement Schedules (Item 15-(a1))



|Report of Independent Registered Public Accounting Firm                                                                                  
|-----------------------------------------------------------------------------------------------------------------------------------------
|Consolidated Balance Sheets at May 31, 2004 and 2003                                                                                     
|Consolidated Statements of Operations for the years ended May 31, 2004, 2003 and 2002                                                    
|Consolidated Statements of Stockholders' (Deficit) Equity and Comprehensive Income (Loss) for the years ended May 31, 2004, 2003 and 2002
|Consolidated Statements of Cash Flows for the years ended May 31, 2004, 2003 and 2002                                                    
|Notes to Consolidated Financial Statements                                                                                               
|Supplemental Quarterly Financial Information                                                                                             

Index to Exhibits (Item 15(a3))

|Number |     | Description                                                                                                                                                                      
|------ | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.2    | (2) | Merger Agreement between Lawson Software, Inc., Everest Acquisition, Inc., Apexion Technologies, Inc., and Maher Hakim, Muwaffa Lahham and Gene Barduson.                        
|2.3    | (5) | Asset Purchase and Sale Agreement dated April 30, 2004 among Siemens Medical Solutions Health Services Corporation, Siemens Medical Solutions USA, Inc. and Lawson Software, Inc.
|3.1    | (1) | Certificate of Incorporation of the Company.                                                                                                                                     
|3.2    | (1) | Bylaws of the Company.                                                                                                                                                           
|       |     |                                                                                                                                                                                  

48

---



|4.1   | (1) | Form of Certificate of Common Stock of the Company.                                                                                                
|----- | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|4.2   | (4) | Rights Agreement dated July 28, 2004                                                                                                               
|4.3   | (4) | Certificate of Designations of Series B Junior Participating Preferred Stock of the Company                                                        
|10.1  | (1) | Amended and Restated 1996 Stock Incentive Plan.                                                                                                    
|10.2  | (1) | 2001 Stock Incentive Plan.                                                                                                                         
|10.3  |     | [Reserved]                                                                                                                                         
|10.4  | (1) | 2001 Employee Stock Purchase Plan.                                                                                                                 
|10.5  |     | [Reserved]                                                                                                                                         
|10.6  | (3) | Value Added Reseller Agreement, effective January 29, 2004, between the Company and Micro Focus International Holdings LTD, Inc. and its Affiliates
|10.7  | (3) | Master Offshore Agreement, effective February 1, 2004, between the Company and Xansa (India) Ltd.                                                  
|10.8  |     | [Reserved]                                                                                                                                         
|10.9  | (1) | Warrant Purchase Agreement, dated July 18, 2000, between the Company and CIS Holdings, Inc.                                                        
|10.10 | (1) | Warrant issued to CIS Holdings, Inc.                                                                                                               
|10.11 | (1) | Employment Agreement, dated February 15, 2001, between the Company and Jay Coughlan.                                                               
|10.12 | (1) | Employment Agreement, dated February 15, 2001, between the Company and Robert Barbieri.                                                            
|10.13 | (1) | Director Indemnification Agreement, dated March 19, 2001, between the Company and David S. B. Lang.                                                
|10.14 | (1) | Stock Purchase and Exchange Agreement, dated February 23, 2001, between the Company and the investors named therein.                               
|10.15 | (1) | Registration Rights Agreement, dated February 23, 2001, between the Company and the stockholders, investors and founders named therein.            
|10.16 | (1) | Stockholders' Agreement, dated February 23, 2001, between the Company and the stockholders, investors and founders named therein.                  
|10.17 | (2) | Form of Change of Control Agreement dated August 11, 2003 with Certain Executive Officers.                                                         
|10.18 | (1) | [Reserved]                                                                                                                                         
|10.19 | (1) | [Reserved]                                                                                                                                         
|10.20 | (1) | [Reserved]                                                                                                                                         
|10.21 | (1) | Lease of real property located at 380 St. Peter St., St. Paul, MN 55102.                                                                           
|10.22 |     | [Reserved]                                                                                                                                         
|10.23 |     | [Reserved]                                                                                                                                         
|      |     |                                                                                                                                                    

49

---



|10.24 |     | [Reserved]                                                                                                                                                            
|----- | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.25 | (1) | Application Partner Agreement, dated December 31, 1996, between the Company and Arbor Software Corporation (n/k/a Hyperion Solutions Corporation), as amended to date.
|21.1  |     | Subsidiaries of Lawson Software, Inc.                                                                                                                                 
|23.1  |     | Consent of PricewaterhouseCoopers LLP.                                                                                                                                
|24.1  |     | Powers of Attorney (included on signature page).                                                                                                                      
|31.1  |     | Certification Pursuant to Section 302 of Sarbanes-Oxley ActJohn J. Coughlan                                                                                          
|31.2  |     | Certification Pursuant to Section 302 of Sarbanes-Oxley ActRobert G. Barbieri                                                                                        
|32.1  |     | Certification Pursuant to Section 906 of Sarbanes-Oxley ActJohn J. Coughlan                                                                                          
|32.2  |     | Certification Pursuant to Section 906 of Sarbanes-Oxley ActRobert G. Barbieri                                                                                        

---

50

---





SIGNATURES

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

| |  | LAWSON SOFTWARE, INC.
| |  | ---------------------
| |  | By:                  

Dated: July 29, 2004

POWER OF ATTORNEY

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

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

|Signature                                |  | Title                                                                                                            |  | Date         
|---------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | -------------
|                                         |  |                                                                                                                  |  |              
|/s/ H. RICHARD LAWSONH. Richard Lawson   |  | Chairman                                                                                                         |  | July 29, 2004
|/s/ JOHN J. COUGHLANJohn J. Coughlan     |  | President and Chief Executive Officer and Director(principal executive officer)                                  |  | July 29, 2004
|/s/ ROBERT G. BARBIERIRobert G. Barbieri |  | Executive Vice President and Chief Financial and Performance Officer(principal financial and accounting officer) |  | July 29, 2004
|/s/ DAVID J. ESKRADavid J. Eskra         |  | Director                                                                                                         |  | July 29, 2004
|/s/ DAVID R. HUBERSDavid R. Hubers       |  | Director                                                                                                         |  | July 29, 2004
|                                         |  |                                                                                                                  |  |              

51

---



|/s/ THOMAS G. HUDSONThomas G. Hudson     |  | Director |  | July 29, 2004
|---------------------------------------- |  | -------- |  | -------------
|/s/ RICHARD D. KREYSARRichard D. Kreysar |  | Director |  | July 29, 2004
|/s/ MICHAEL A. ROCCAMichael A. Rocca     |  | Director |  | July 29, 2004

52

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

In
our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity (deficit) and comprehensive income (loss) and
of cash flows present fairly, in all material respects, the financial position of Lawson Software, Inc. and its subsidiaries at May 31, 2004 and 2003, and the results of their operations
and their cash flows for each of the three years in the period ended May 31, 2004, in conformity with accounting principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

| |  | /s/ PRICEWATERHOUSECOOPERS LLP |  | 
| |  | ------------------------------ |  | 

Minneapolis,
Minnesota
June 18, 2004, except as to Note 21, which is as of July 26, 2004

F-1

---





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

|                                               |                                                                                                                                                         | May 31,
2004                               |        | May 31,
2003 |        
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------ | -------
|ASSETS                                         |                                                                                                                                                         |                                            |        |              |        
|Current assets:                                |                                                                                                                                                         |                                            |        |              |        
|                                               | Cash and cash equivalents                                                                                                                               |                                            | $      | 79,996       |        
|                                               | Marketable securities                                                                                                                                   |                                            |        | 120,465      |        
|                                               | Trade accounts receivable, net                                                                                                                          |                                            |        | 65,236       |        
|                                               | Deferred income taxes                                                                                                                                   |                                            |        | 15,311       |        
|                                               | Prepaid expenses and other assets                                                                                                                       |                                            |        | 20,450       |        
|                                               |                                                                                                                                                         |                                            |        |              |        
|                                               |                                                                                                                                                         | Total current assets                       |        |              | 301,458
|Long-term marketable securities                |                                                                                                                                                         |                                            | 8,521  |              |        
|Property and equipment, net                    |                                                                                                                                                         |                                            | 17,235 |              |        
|Goodwill                                       |                                                                                                                                                         |                                            | 43,042 |              |        
|Other intangible assets, net                   |                                                                                                                                                         |                                            | 40,767 |              |        
|Deferred income taxes                          |                                                                                                                                                         |                                            | 12,344 |              |        
|Other assets                                   |                                                                                                                                                         |                                            | 231    |              |        
|                                               |                                                                                                                                                         |                                            |        |              |        
|                                               |                                                                                                                                                         | Total assets                               |        | $            | 423,598
|                                               |                                                                                                                                                         |                                            |        |              |        
|LIABILITIES AND STOCKHOLDERS' EQUITY           |                                                                                                                                                         |                                            |        |              |        
|Current liabilities:                           |                                                                                                                                                         |                                            |        |              |        
|                                               | Current portion of long-term debt                                                                                                                       |                                            | $      | 1,652        |        
|                                               | Accounts payable                                                                                                                                        |                                            |        | 14,391       |        
|                                               | Accrued compensation and benefits                                                                                                                       |                                            |        | 25,086       |        
|                                               | Other accrued liabilities                                                                                                                               |                                            |        | 11,898       |        
|                                               | Deferred revenue and client deposits                                                                                                                    |                                            |        | 83,095       |        
|                                               |                                                                                                                                                         |                                            |        |              |        
|                                               |                                                                                                                                                         | Total current liabilities                  |        |              | 136,122
|Long-term debt, less current portion           |                                                                                                                                                         |                                            | 990    |              |        
|Other long-term liabilities                    |                                                                                                                                                         |                                            | 3,600  |              |        
|                                               |                                                                                                                                                         |                                            |        |              |        
|                                               |                                                                                                                                                         | Total liabilities                          |        |              | 140,712
|                                               |                                                                                                                                                         |                                            |        |              |        
|Commitments and contingencies (Notes 6 and 18) |                                                                                                                                                         |                                            |        |              |        
|Stockholders' equity:                          |                                                                                                                                                         |                                            |        |              |        
|                                               | Preferred stock; $0.01 par value; 42,562 shares authorized; no shares issued or outstanding                                                             |                                            |        |             |        
|                                               | Common stock; $0.01 par; 750,000 shares authorized; 110,074 and 105,947 shares issued, respectively; 98,346 and 97,696 shares outstanding, respectively |                                            |        | 1,099        |        
|                                               | Additional paid-in capital                                                                                                                              |                                            |        | 327,715      |        
|                                               | Treasury stock; at cost; 11,728 and 8,251 shares, respectively                                                                                          |                                            |        | (65,555      | )      
|                                               | Deferred stock-based compensation                                                                                                                       |                                            |        | (774         | )      
|                                               | Retained earnings                                                                                                                                       |                                            |        | 17,471       |        
|                                               | Accumulated other comprehensive income                                                                                                                  |                                            |        | 2,930        |        
|                                               |                                                                                                                                                         |                                            |        |              |        
|                                               |                                                                                                                                                         | Total stockholders' equity                 |        |              | 282,886
|                                               |                                                                                                                                                         |                                            |        |              |        
|                                               |                                                                                                                                                         | Total liabilities and stockholders' equity |        | $            | 423,598
|                                               |                                                                                                                                                         |                                            |        |              |        

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

F-2

---



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

|                                                      |                                      | Year Ended May 31,           |        
|----------------------------------------------------- | ------------------------------------ | ---------------------------- | -------
|
|Revenues:                                             |                                      |                              |        
|                                                      | License fees                         |                              | $      
|                                                      | Services                             |                              |        
|                                                      |                                      |                              |        
|                                                      |                                      | Total revenues               |        
|                                                      |                                      |                              |        
|Cost of revenues:                                     |                                      |                              |        
|                                                      | Cost of license fees                 |                              |        
|                                                      | Cost of services                     |                              |        
|                                                      |                                      |                              |        
|                                                      |                                      | Total cost of revenues       |        
|                                                      |                                      |                              |        
|Gross profit                                          |                                      |                              | 211,336
|                                                      |                                      |                              |        
|Operating expenses:                                   |                                      |                              |        
|                                                      | Research and development             |                              |        
|                                                      | Sales and marketing                  |                              |        
|                                                      | General and administrative           |                              |        
|                                                      | Other general expenses (see Note 4)  |                              |        
|                                                      | Restructuring charges (see Note 5)   |                              |        
|                                                      | Amortization of acquired intangibles |                              |        
|                                                      |                                      |                              |        
|                                                      |                                      | Total operating expenses     |        
|                                                      |                                      |                              |        
|Operating income (loss)                               |                                      |                              | 12,105 
|                                                      |                                      |                              |        
|Other income (expense):                               |                                      |                              |        
|                                                      | Interest income                      |                              |        
|                                                      | Interest expense                     |                              |        
|                                                      | Early extinguishment of debt expense |                              |        
|                                                      |                                      |                              |        
|                                                      |                                      | Total other income (expense) |        
|                                                      |                                      |                              |        
|Income (loss) before income taxes                     |                                      |                              | 15,314 
|Provision (benefit) for income taxes                  |                                      |                              | 7,323  
|                                                      |                                      |                              |        
|Net income (loss)                                     |                                      |                              | 7,991  
|                                                      |                                      |                              |        
|Accretion on and conversion of preferred stock        |                                      |                              |       
|                                                      |                                      |                              |        
|Net income (loss) applicable to common stockholders   |                                      | $                            | 7,991  
|                                                      |                                      |                              |        
|Net income (loss) per share:                          |                                      |                              |        
|                                                      | Basic                                |                              | $      
|                                                      |                                      |                              |        
|                                                      | Diluted                              |                              | $      
|                                                      |                                      |                              |        
|Shares used in computing net income (loss) per share: |                                      |                              |        
|                                                      | Basic                                |                              |        
|                                                      |                                      |                              |        
|                                                      | Diluted                              |                              |        
|                                                      |                                      |                              |        

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

F-3

---





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

|                                                                                                                             |  | Common Stock |   |   |       |  |   |         |   |   |         | Accumulated
Other
Comprehensive
Loss (Income) |   | Adjustment for
Mandatorily
Redeemable
Common Stock |   | Total
Stockholders'
(Deficit)
Equity |         |   |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------ | - | - | ----- |  | - | ------- | - | - | ------- | --------------------------------------------- | - | -------------------------------------------------- | - | ------------------------------------ | ------- | - | -
|
|
|Balance at May 31, 2001                                                                                                      |  | 66,416       |   | $ | 664   |  | $ | 26,783  |   | $ | (15,344 | )                                             | $ | (15,093                                            | ) | $                                    | 35,025  |   | $
|                                                                                                                             |  |              |   |   |       |  |   |         |   |   |         |                                               |   |                                                    |   |                                      |         |   |  
|Proceeds from initial public offering, net                                                                                   |  | 15,336       |   |   | 153   |  |   | 197,154 |   |   |        |                                               |   |                                                   |   |                                      |        |   |  
|Deferred stock-based compensation                                                                                            |  |             |   |   |      |  |   | 1,579   |   |   |        |                                               |   | (1,579                                             | ) |                                      |        |   |  
|Amortization of stock-based compensation                                                                                     |  |             |   |   |      |  |   |        |   |   |        |                                               |   | 8,343                                              |   |                                      |        |   |  
|Exercise of stock options                                                                                                    |  | 3,029        |   |   | 30    |  |   | (1,105  | ) |   |        |                                               |   |                                                   |   |                                      |        |   |  
|Tax benefit from stockholder transactions                                                                                    |  |             |   |   |      |  |   | 10,594  |   |   |        |                                               |   |                                                   |   |                                      |        |   |  
|Repurchase of common stock                                                                                                   |  | (103         | ) |   | 67    |  |   | (258    | ) |   | (387    | )                                             |   |                                                   |   |                                      |        |   |  
|Repurchase of ESOP shares                                                                                                    |  | (72          | ) |   |      |  |   |        |   |   | (1,243  | )                                             |   |                                                   |   |                                      |        |   |  
|Beneficial conversion feature associated with preferred stock                                                                |  |             |   |   |      |  |   | 29,998  |   |   |        |                                               |   |                                                   |   |                                      | (29,998 | ) |  
|Exercise of warrants                                                                                                         |  | 439          |   |   | 3     |  |   | 3,556   |   |   |        |                                               |   |                                                   |   |                                      |        |   |  
|Accretion on preferred stock                                                                                                 |  |             |   |   |      |  |   |        |   |   |        |                                               |   |                                                   |   |                                      | (100    | ) |  
|Decrease in redemption value of mandatorily redeemable common stock                                                          |  |             |   |   |      |  |   |        |   |   |        |                                               |   |                                                   |   |                                      |        |   |  
|Conversion of preferred stock to common stock                                                                                |  | 10,316       |   |   | 103   |  |   | 29,747  |   |   |        |                                               |   |                                                   |   |                                      |        |   |  
|Change in net unrealized gains/losses on investments, net of taxes                                                           |  |             |   |   |      |  |   |        |   |   |        |                                               |   |                                                   |   |                                      |        |   |  
|Translation adjustment                                                                                                       |  |             |   |   |      |  |   |        |   |   |        |                                               |   |                                                   |   |                                      |        |   |  
|Net income                                                                                                                   |  |             |   |   |      |  |   |        |   |   |        |                                               |   |                                                   |   |                                      | 8,378   |   |  
|                                                                                                                             |  |              |   |   |       |  |   |         |   |   |         |                                               |   |                                                    |   |                                      |         |   |  
|Balance at May 31, 2002                                                                                                      |  | 95,361       |   |   | 1,020 |  |   | 298,048 |   |   | (16,974 | )                                             |   | (8,329                                             | ) |                                      | 13,305  |   |  
|                                                                                                                             |  |              |   |   |       |  |   |         |   |   |         |                                               |   |                                                    |   |                                      |         |   |  
|Deferred stock-based compensation                                                                                            |  |             |   |   |      |  |   | (1,650  | ) |   |        |                                               |   | 1,650                                              |   |                                      |        |   |  
|Amortization of stock-based compensation                                                                                     |  |             |   |   |      |  |   |        |   |   |        |                                               |   | 3,562                                              |   |                                      |        |   |  
|Exercise of stock options                                                                                                    |  | 3,846        |   |   | 38    |  |   | 5,206   |   |   |        |                                               |   |                                                   |   |                                      |        |   |  
|Tax benefit from stockholder transactions                                                                                    |  |             |   |   |      |  |   | 4,594   |   |   |        |                                               |   |                                                   |   |                                      |        |   |  
|Employee stock purchase plan                                                                                                 |  | 1,370        |   |   |      |  |   | 3,439   |   |   | 3,179   |                                               |   |                                                   |   |                                      |        |   |  
|Repurchase ESOP shares                                                                                                       |  | (6           | ) |   |      |  |   |        |   |   | (27     | )                                             |   |                                                   |   |                                      |        |   |  
|Repurchase of common stock                                                                                                   |  | (2,875       | ) |   |      |  |   |        |   |   | (15,002 | )                                             |   |                                                   |   |                                      |        |   |  
|Increase in redemption value of mandatorily redeemable common stock, net of cancellation of mandatorily redeemable provision |  |             |   |   |      |  |   |        |   |   |        |                                               |   |                                                   |   |                                      |        |   |  
|Change in net unrealized gains/losses on investments, net of taxes                                                           |  |             |   |   |      |  |   |        |   |   |        |                                               |   |                                                   |   |                                      |        |   |  
|Translation adjustment                                                                                                       |  |             |   |   |      |  |   |        |   |   |        |                                               |   |                                                   |   |                                      |        |   |  
|Net loss                                                                                                                     |  |             |   |   |      |  |   |        |   |   |        |                                               |   |                                                   |   |                                      | (3,825  | ) |  
|                                                                                                                             |  |              |   |   |       |  |   |         |   |   |         |                                               |   |                                                    |   |                                      |         |   |  
|Balance at May 31, 2003                                                                                                      |  | 97,696       |   |   | 1,058 |  |   | 309,637 |   |   | (28,824 | )                                             |   | (3,117                                             | ) |                                      | 9,480   |   |  
|                                                                                                                             |  |              |   |   |       |  |   |         |   |   |         |                                               |   |                                                    |   |                                      |         |   |  
|Deferred stock-based compensation                                                                                            |  |             |   |   |      |  |   | (966    | ) |   |        |                                               |   | 112                                                |   |                                      |        |   |  
|Amortization of stock-based compensation                                                                                     |  |             |   |   |      |  |   |        |   |   |        |                                               |   | 2,231                                              |   |                                      |        |   |  
|Exercise of stock options and warrants                                                                                       |  | 4,901        |   |   | 41    |  |   | 5,348   |   |   | 1,795   |                                               |   |                                                   |   |                                      |        |   |  
|Tax benefit from stockholder transactions                                                                                    |  |             |   |   |      |  |   | 11,581  |   |   |        |                                               |   |                                                   |   |                                      |        |   |  
|Employee stock purchase plan                                                                                                 |  | 665          |   |   |      |  |   | 2,115   |   |   | 1,544   |                                               |   |                                                   |   |                                      |        |   |  
|Repurchase of common stock                                                                                                   |  | (4,916       | ) |   |      |  |   |        |   |   | (40,070 | )                                             |   |                                                   |   |                                      |        |   |  
|Change in net unrealized gains/losses on investments, net of taxes                                                           |  |             |   |   |      |  |   |        |   |   |        |                                               |   |                                                   |   |                                      |        |   |  
|Translation adjustment                                                                                                       |  |             |   |   |      |  |   |        |   |   |        |                                               |   |                                                   |   |                                      |        |   |  
|Net income                                                                                                                   |  |             |   |   |      |  |   |        |   |   |        |                                               |   |                                                   |   |                                      | 7,991   |   |  
|                                                                                                                             |  |              |   |   |       |  |   |         |   |   |         |                                               |   |                                                    |   |                                      |         |   |  
|Balance at May 31, 2004                                                                                                      |  | 98,346       |   | $ | 1,099 |  | $ | 327,715 |   | $ | (65,555 | )                                             | $ | (774                                               | ) | $                                    | 17,471  |   | $
|                                                                                                                             |  |              |   |   |       |  |   |         |   |   |         |                                               |   |                                                    |   |                                      |         |   |  

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

F-4

---



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

|                                                 |                                                                                          | Year Ended May 31,                                                            |                                     
|------------------------------------------------ | ---------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------
|
|Cash flows from operating activities:            |                                                                                          |                                                                               |                                     
|                                                 | Net income (loss)                                                                        |                                                                               | $                                   
|                                                 | Adjustments to reconcile net income (loss) to net cash provided by operating activities: |                                                                               |                                     
|                                                 |                                                                                          | Depreciation and amortization                                                 |                                     
|                                                 |                                                                                          | Deferred income taxes                                                         |                                     
|                                                 |                                                                                          | Provision for doubtful accounts                                               |                                     
|                                                 |                                                                                          | Loss on the disposal of assets                                                |                                     
|                                                 |                                                                                          | Early extinguishment of debt expense                                          |                                     
|                                                 |                                                                                          | Tax benefit from stockholder transactions                                     |                                     
|                                                 |                                                                                          | Tax commitment from exercise of stock options                                 |                                     
|                                                 |                                                                                          | Accretion on put warrants                                                     |                                     
|                                                 |                                                                                          | Amortization of stock-based compensation                                      |                                     
|                                                 |                                                                                          | Amortization of discounts on notes payable                                    |                                     
|                                                 |                                                                                          | Amortization of discount and accretion of premium on marketable securities    |                                     
|                                                 |                                                                                          | Restructuring charges                                                         |                                     
|                                                 |                                                                                          | Changes in operating assets and liabilities, net of effect from acquisitions: |                                     
|                                                 |                                                                                          |                                                                               | Trade accounts receivable           
|                                                 |                                                                                          |                                                                               | Prepaid expenses and other assets   
|                                                 |                                                                                          |                                                                               | Accounts payable                    
|                                                 |                                                                                          |                                                                               | Accrued and other liabilities       
|                                                 |                                                                                          |                                                                               | Income taxes payable                
|                                                 |                                                                                          |                                                                               | Deferred revenue and client deposits
|                                                 |                                                                                          |                                                                               |                                     
|                                                 | Net cash provided by operating activities                                                |                                                                               |                                     
|                                                 |                                                                                          |                                                                               |                                     
|Cash flows from investing activities:            |                                                                                          |                                                                               |                                     
|                                                 | Cash paid in conjunction with acquisitions, net of cash acquired                         |                                                                               |                                     
|                                                 | Purchase of maintenance contracts                                                        |                                                                               |                                     
|                                                 | Purchases of marketable securities                                                       |                                                                               |                                     
|                                                 | Sales and maturities of marketable securities                                            |                                                                               |                                     
|                                                 | Purchases of property and equipment                                                      |                                                                               |                                     
|                                                 |                                                                                          |                                                                               |                                     
|                                                 | Net cash (used in) provided by investing activities                                      |                                                                               |                                     
|                                                 |                                                                                          |                                                                               |                                     
|Cash flows from financing activities:            |                                                                                          |                                                                               |                                     
|                                                 | Proceeds from initial public offering, net of offering costs                             |                                                                               |                                     
|                                                 | Principal payments on long-term debt                                                     |                                                                               |                                     
|                                                 | Payments on senior subordinated convertible notes                                        |                                                                               |                                     
|                                                 | Exercise of stock options                                                                |                                                                               |                                     
|                                                 | Issuance of treasury shares for employee stock purchase plan                             |                                                                               |                                     
|                                                 | Repurchase of common stock                                                               |                                                                               |                                     
|                                                 |                                                                                          |                                                                               |                                     
|                                                 | Net cash (used in) provided by financing activities                                      |                                                                               |                                     
|                                                 |                                                                                          |                                                                               |                                     
|(Decrease) increase in cash and cash equivalents |                                                                                          |                                                                               | (73,075                             
|Cash and cash equivalents at beginning of year   |                                                                                          |                                                                               | 153,071                             
|                                                 |                                                                                          |                                                                               |                                     
|Cash and cash equivalents at end of year         |                                                                                          | $                                                                             | 79,996                              
|                                                 |                                                                                          |                                                                               |                                     
|                                                 | Supplemental disclosures:                                                                |                                                                               |                                     
|                                                 |                                                                                          | Interest paid                                                                 |                                     
|                                                 |                                                                                          | Income taxes (refunded) paid                                                  |                                     

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

F-5

---





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

1.     Business Description

Lawson Software, Inc. (the "Company") provides business application software, services and support to specific service industries. The Company's software
includes financials, human resources, procurement, healthcare supply chain, distribution, retail operations, service process optimization, and enterprise performance management applications designed
to help manage, analyze and improve its clients' businesses. The Company's applications automate and integrate critical business processes, facilitating collaboration among its clients and their
partners, suppliers and employees. The Company also provides professional services that optimize and support the selection, implementation and execution of a customer's e-business
technology infrastructure, as well as offering on-going maintenance and other support services.

The
Company is subject to risks and uncertainties including dependence on information technology spending by clients, well-established competitors, concentration of clients
in a limited number of industries, fluctuations of quarterly results, a lengthy and variable sales cycle, dependence on principal products and third-party technology, rapid technological change,
development of products that gain market acceptance and international expansion.

2.     Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned branches and subsidiaries operating in Canada, the United Kingdom,
France, Germany and the Netherlands. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company's financial instruments consist primarily of cash, marketable securities, trade accounts receivable and accounts payable for which the current
carrying amounts approximate fair market value. Additionally, the borrowing rates currently available to the Company approximate current rates for debt agreements with similar terms and average
maturities.

Cash Equivalents

All highly liquid investments with a maturity of three months or less are considered to be cash equivalents. The Company's cash equivalents consist primarily of
tax-exempt money market instruments and highly liquid debt securities of corporations and municipalities. These investments are denominated in U.S. dollars. The carrying amount of cash
equivalents approximates fair value due to the short maturity of these instruments.

F-6

---



Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are initially recorded at fair value upon the sale of software licenses or services to clients. The Company maintains an allowance for
doubtful accounts at an amount estimated to be sufficient to provide adequate protection against losses resulting from extending credit to the Company's clients. In judging the adequacy of the
allowance for doubtful accounts, the Company considers multiple factors including historical bad debt experience, the general economic environment, the need for specific client reserves and the aging
of the Company's receivables. This provision is included in operating expenses as a general and administrative expense in the Consolidated Statements of Operations. 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.

Marketable Securities

The Company accounts for marketable securities in accordance with provisions of "Statement of Financial Accounting Standards SFAS No. 115", "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 addresses the accounting and reporting for investments in fixed maturity securities and for equity securities with readily
determinable fair values. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Currently, all
marketable securities held by the Company are classified as available-for-sale. Available-for-sale securities are carried at fair value as determined by
quoted market prices, with unrealized gains and losses, net of tax, reported as a separate component of stockholders' (deficit) equity. If an unrealized loss for any investment is considered to be
other-than-temporary, the loss will be recognized in the Consolidated Statements of Operations in the period the determination is made. The cost basis of securities sold is
determined using the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. As of May 31,
2004, $120.5 million of total investments mature within one year and $8.5 million mature beyond one year and within two years.

As
of May 31, 2004 and 2003, the Company's debt and marketable equity securities were as follows (in thousands):

|                                    |  | May 31, 2004 |         | May 31, 2003
|----------------------------------- |  | ------------ | ------- | ------------
|
|State and local municipalities debt |  | $            | 129,033 |             
|US Agency                           |  |              |        |             
|Corporate debt                      |  |              |        |             
|                                    |  |              |         |             
|                                    |  | $            | 129,033 |             
|                                    |  |              |         |             

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight-line over the estimated useful lives
of the assets, which generally range from

F-7

---



three
to seven years. Depreciation expense was $9.0 million, $11.6 million, and $11.4 million for the years ended May 31, 2004, 2003, and 2002, respectively.

Revenue Recognition

The Company recognizes 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". The Company licenses
software under non-cancelable license agreements and provides related professional services, including consulting, training, and implementation services, as well as ongoing client support
and maintenance. Consulting, training, and implementation services are generally not essential to the functionality of the Company's 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 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 the Company's software products are recognized using contract accounting using the percentage-of-completion methodology based on labor hours input. The
specific revenue recognition policies of the Company are as follows:



F-8

---





Sales Returns and Allowances

Although the Company does not provide a contractual right of return, in the course of arriving at practical business solutions to various warranty and other
claims, the Company has allowed sales returns and allowances. The Company records 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.

Research and Development

Expenditures for software research and development are expensed as incurred. Such costs are required to be expensed until the point that technological feasibility
of the software is established. Technological feasibility is determined after a working model has been completed. The Company's software research and development costs primarily relate to software
development during the period prior to technological feasibility and are charged to operations as incurred.

Advertising Expense

The Company expenses advertising costs as incurred. Advertising expenses of $9.9 million, $8.8 million, and $14.6 million were charged to
sales and marketing expenses during the years ended May 31, 2004, 2003, and 2002, respectively.

Income Taxes

The Company provides for income taxes using the liability method under SFAS No. 109, "Accounting for Income Taxes," which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this statement, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to
reverse. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some component or all of the deferred tax assets will not be realized. Tax rate changes are
reflected in income during the period such changes are enacted.

Concentrations of Credit Risks

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts
receivable. Cash equivalents consist primarily of tax-exempt money market instruments and highly liquid debt securities of
corporations and municipalities, with a maturity of three months or less and are readily convertible into cash.

The
Company grants credit to clients in the ordinary course of business. Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of
clients comprising

F-9

---



the
Company's client base and their dispersion across different industries and geographic areas. No single client accounted for ten percent or more of revenues for fiscal 2004, 2003 or 2002 or of
trade accounts receivable at May 31, 2004 or 2003.

Long-Lived Assets

In accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company reviews 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 undiscounted cash flows method is used to determine whether
the asset is impaired. Cash flows would include the estimated terminal value of the asset and exclude any interest charges. To the extent the carrying value of the asset exceeds the undiscounted cash
flows over the estimated remaining life of the asset, the impairment is measured using the discounted cash flows. The discount rate utilized would be based on management's best estimate of the related
risks and return at the time the impairment assessment is made.

Goodwill and Other Intangible Assets

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

Balance as of May 31, 2003

$
31,410Goodwill acquired during the year


9,699Contingent consideration earned


1,075Currency translation effect


858Balance as of May 31, 2004

$
43,042


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

|                       |  | May 31, 2004 |        | May 31, 2003
|---------------------- |  | ------------ | ------ | ------------
|
|Maintenance contracts  |  | $            | 22,940 |             
|Acquired technology    |  |              | 14,272 |             
|Customer lists         |  |              | 11,254 |             
|Non-compete agreements |  |              | 632    |             
|                       |  |              |        |             
|                       |  | $            | 49,098 |             
|                       |  |              |        |             

Intangible
assets are amortized on a straight-line basis over the estimated periods benefited, generally four to five years for acquired technology, seven to ten years for
client lists, and the term of the agreement for non-compete agreements and maintenance contracts. For the years ended May 31, 2004, 2003 and 2002, amortization expense for
intangible assets was $4.3 million, $2.4 million and $1.5 million.

F-10

---



The
estimated future annual amortization expense for identified intangible assets is as follows:

2005

$
8,7502006


8,6132007


6,9412008


4,6602009


3,633Thereafter


8,170$
40,767


The
Company accounts for goodwill and other intangible assets in accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets". Under
SFAS No. 142, goodwill and intangible assets with indefinite lives are not amortized to expense and must be reviewed for impairment annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired. 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. The Company operates as one reporting unit and therefore compares the book value to the market value (market capitalization plus a control premium). If the market
value exceeds the book value, goodwill is considered not impaired, thus the second step of the impairment test is not necessary. If the Company's book value exceeds the 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 its new accounting basis. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited once the measurement of that loss is completed. The Company completed the annual
goodwill impairment assessment as of May 31, 2004 and 2003, upon which no impairment was recorded.

Stock Split

Effective August 8, 2001, the Company's Board of Directors authorized a 1.387-for-1 stock split of the then issued and outstanding
shares of common stock. All references to common stock amounts, shares and per share data included in the financial statements and related notes have been adjusted to give retroactive effect to the
stock split.

Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and complies with the disclosure provisions of 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

F-11

---



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

Year Ended May 31,2004

2003

2002Net income (loss):As reported

$
7,991

$
(3,825
)
$
(21,720
)Add: Stock-based employee compensation expense
    included in reported net income (loss), net of
    taxes


840


2,173


5,132Deduct: Total stock-based compensation expense
    determined under fair value based method for all
    rewards, net of taxes


(7,015
)

(6,744
)

(5,832
)Pro forma net income (loss)

$
1,816

$
(8,396
)
$
(22,420
)Net income (loss) per share:Basic:As reported

$
0.08

$
(0.04
)
$
(0.27
)Pro forma

$
0.02

$
(0.09
)
$
(0.28
)Diluted:As reported

$
0.07

$
(0.04
)
$
(0.27
)Pro forma

$
0.02

$
(0.09
)
$
(0.28
)


Foreign Currency Translation

All assets and liabilities of the Company's foreign branches and subsidiaries are translated from local currencies to United States dollars at period end rates of
exchange, while revenues and expenses are translated at the average exchange rate during the period. The functional currency for each of the Company's foreign branches and subsidiaries is the
respective local currency. Translation adjustments arising from the translation of net assets located outside of the United States into United States dollars are recorded as a separate component of
stockholders' (deficit) equity. Gains or losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity's local currency) are included in the
Consolidated Statements of Operations and are not significant.

Comprehensive Income (Loss)

Comprehensive income (loss) as defined by SFAS No. 130, "Reporting Comprehensive Income", includes net income (loss) and items defined as other
comprehensive income (loss). SFAS No. 130 requires that items defined as other comprehensive income (loss), such as foreign currency translation adjustments and unrealized gains and losses on
certain marketable securities, be separately classified in the financial statements. Such items are reported in the Consolidated Statements of Stockholders' (Deficit) Equity as comprehensive income
(loss).

F-12

---





The following table summarizes the components of accumulated other comprehensive income (loss), net of income taxes (in thousands):

Year Ended May 31,2004

2003

2002Foreign currency translation adjustment

$
2,958

$
1,003

$
(1,228
)Unrealized gains/losses on investments


(28
)

162


16Accumulated other comprehensive income (loss)

$
2,930

$
1,165

$
(1,212
)


Per Share Data

Net income (loss) per share is computed under the provisions of SFAS No. 128, "Earnings Per Share". Basic earnings per share is computed using net income
(loss) and the weighted average number of common shares outstanding. Diluted earnings per share reflect the weighted average number of
common shares outstanding plus any potentially dilutive shares outstanding during the period. Potentially dilutive shares consist of shares issuable upon the exercise of stock options and warrants.

The
following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share and share amounts):

|                                        |                                                     | Year Ended May 31, |     
|--------------------------------------- | --------------------------------------------------- | ------------------ | ----
|
|Basic earnings per share computation:   |                                                     |                    |     
|                                        | Net income (loss) applicable to common stockholders |                    | $   
|                                        |                                                     |                    |     
|                                        | Weighted average common sharesbasic                |                    |     
|                                        |                                                     |                    |     
|                                        | Basic net income (loss) per share                   |                    | $   
|                                        |                                                     |                    |     
|Diluted earnings per share computation: |                                                     |                    |     
|                                        | Net income (loss) applicable to common stockholders |                    | $   
|                                        |                                                     |                    |     
|Shares computation:                     |                                                     |                    |     
|                                        | Weighted average common shares                      |                    |     
|                                        | Effect of dilutive stock options and warrants       |                    |     
|                                        |                                                     |                    |     
|                                        | Weighted average common sharesdiluted              |                    |     
|                                        |                                                     |                    |     
|Diluted net income (loss) per share     |                                                     | $                  | 0.07
|                                        |                                                     |                    |     

Potential
dilutive shares of common stock excluded from the diluted net income (loss) per share computations were 0.6 million, 23.1 million and 24.8 million for the
years ended May 31, 2004, 2003 and 2002, 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. Potential dilutive shares of common stock were excluded from periods with net
loss because they were anti-dilutive.

New Accounting Pronouncements

In November 2003 and March 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 03-1, "The Meaning
of Other-Than-Temporary Impairment and Its Application to

F-13

---



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 disclosure 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 has 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 has chosen 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) are required in the fourth quarter of fiscal year 2005. Adoption will not have
an impact on the Company's statements of consolidated earnings, financial position or cash flows.

3.     Reclassification of Early Extinguishment of Debt Expense

The Company adopted SFAS No. 145 effective June 1, 2002. Among other matters, SFAS 145 rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", which required all gains and
losses from extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. In connection with its adoption, gains and losses from
extinguishments of debt are no longer classified as extraordinary items in the Company's Consolidated Statements of Operations. In addition, prior period financial statements were reclassified to
reflect the new standard. As such, the Company reclassified the $2.3 million extraordinary loss on early extinguishment of debt recorded in the third quarter of fiscal 2002 as a separate
component of other income (expense) in its Consolidated Statements of Operations.

4.     Other General Expenses

During fiscal year ended May 31, 2002 the Company recognized $0.7 million in expenses related to business process improvement initiatives designed
to prepare the Company for an initial public offering. These costs did not recur in fiscal 2004 or 2003. Business process improvement initiatives consisted of consulting fees to improve the Company's
budgeting, forecasting and financial reporting. Such costs were expensed as incurred.

5.     Restructuring

During fiscal 2004, the Company recorded net restructuring charges of $2.2 million, including $2.3 million for the fiscal 2004 restructuring plan,
net of a reversal of $0.1 million for the fiscal 2003 restructuring plan.

Fiscal 2004 Restructuring

In September 2003, the Company approved a restructuring plan to realign projected expenses with anticipated lower revenue levels and incurred restructuring
charges of $2.3 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 as of
May 31, 2004 during fiscal 2005.

F-14

---



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

Severance
and related
benefitsFiscal 2004 provision for restructuring

$
2,250Cash payments


(2,193
)Balance, May 31, 2004

$
57


Fiscal 2003 Restructuring

In September 2002, 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 resulted in the
termination of 244 employees in the second quarter of fiscal 2003, from various functions including administrative, professional and managerial in the United States, Canada and Europe. The Company
expects to pay all remaining termination benefits as of May 31, 2004 during fiscal 2005. Cash payments related to lease obligations were made through October 2003. During the year ended
May 31, 2004, the Company adjusted the reserve for $40,000 for employee costs, which the Company had determined would not be incurred.

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

Severance
and related
benefits

Facilities

TotalBalance, May 31, 2003

$
299

$
604

$
903Cash payments


(131
)

(604
)

(735
)Adjustments to provision


(40
)




(40
)Balance, May 31, 2004

$
128

$


$
128


Fiscal 2002 Restructuring

In May 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 resulted in the termination and
payment of severance and related benefits to 111 employees in various functions including administrative, professional, and managerial, primarily in the United States. Cash payments relating to
facility closure liabilities are expected to extend through June 2005.

F-15

---



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

FacilitiesBalance, May 31, 2003

$
324Cash payments


(145
)Balance, May 31, 2004

$
179


6.     Acquisitions

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

On
October 15, 2003, the Company acquired all of the outstanding capital stock of Apexion Technologies Inc. ("Apexion") for $8.0 million in cash, net of cash
acquired. The excess purchase price over the fair value of the net tangible assets acquired of $8.6 million was allocated to the following assets: $2.9 million to acquired technology,
$0.2 million to a client list, $0.1 million to a non-compete clause and $5.4 million to goodwill. The amount of goodwill recognized is not tax deductible. The acquired
technology, client list and non-compete clause are being amortized on a straight-line basis over their estimated useful lives of four, seven and two years, respectively. Terms
of the agreement also provide for additional cash payments ranging from zero to $2.0 million contingent upon the future performance of Apexion measured annually through November 30,
2005. Any contingent consideration earned will be recorded as additional goodwill. As of May 31, 2004, no additional consideration had been earned or recorded under this agreement. Apexion
provided materials and equipment logistics solutions for the healthcare industry.

On
September 30, 2003, the Company acquired all of the outstanding capital stock of Closedloop Solutions, Inc. ("Closedloop") for $4.2 million in cash, net of cash
acquired. The excess purchase price over the fair value of the net tangible assets acquired of $5.0 million was allocated to the following assets: $2.5 million to acquired technology,
$0.5 million to a client list, $0.1 million to a non-compete clause and $1.9 million to goodwill. The amount of goodwill recognized is tax deductible. The acquired
technology, client list and non-compete clause are being amortized on a straight-line basis over their estimated useful lives of four, seven and two years, respectively.
Closedloop provided collaborative budgeting, planning and forecasting solutions using real-time, transactional functionality.

F-16

---



The
following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition (in thousands):

September 30,
2003Current assets

$
927Intangible assets


3,100Goodwill


1,922Total assets acquired


5,949Total liabilities assumed


(1,709
)Net assets acquired


4,240Less cash acquired


(85
)Net cash paid

$
4,155


On
July 24, 2003, the Company acquired all of the outstanding capital stock of Numbercraft Limited ("Numbercraft") for $3.7million in cash, net of cash acquired and
$0.3 million in notes payable. The excess purchase price over the fair value of the net tangible assets acquired of $4.1 million was allocated to the following assets:
$0.9 million to acquired technology, $0.6 million to a client list, $0.3 million to a non-compete clause and $2.3 million to goodwill. The amount of goodwill
recognized is tax deductible. The acquired technology, client list and non-compete clause are being amortized on a straight-line basis over their estimated useful lives of
three, four and three years, respectively. Additional cash payments ranging from zero to $7.0 million are contingent upon the future performance of Numbercraft measured periodically through
2007. Any contingent consideration earned will be recorded as additional goodwill. During the fiscal year ended May 31, 2004, $1.1 million of additional consideration was earned and
recorded as additional goodwill. This amount and certain elements of the initial purchase price have been included in notes payable to the former principals of Numbercraft. Numbercraft provided
solutions for retailers and consumer packaged goods companies that enable a quantitative understanding of consumer dynamics, product and offer performance, and client trends.

On
June 28, 2002, Lawson Software Limited, a wholly owned subsidiary of Lawson Software, Inc. acquired certain assets of Armature Limited and Armature Group Limited
(collectively, Armature) for approximately $8.1 million. These assets consist of all software applications, related trademarks, technologies, intangibles and certain fixed assets used in
Armature's business. The excess purchase price over the fair value of the net tangible assets acquired of $7.8 million was allocated to the following assets: $1.6 million to acquired
technology, $1.8 million to a client list and $4.4 million to goodwill. The amount of goodwill recognized is tax deductible. The acquired technology and client list are being amortized
on a straight-line basis over their estimated useful lives of five and ten years, respectively. Armature provided merchandising/category management and supply chain management solutions
for retailers, consumer goods manufacturers and wholesalers.

In
connection with the acquisition of Armature, the Company accrued severance costs of $0.3 million for one terminated employee. Such severance costs were fully paid as of
May 31, 2003.

On
April 17, 2002, the Company acquired all of the outstanding capital stock of Keyola Corporation (Keyola) for $5.0 million. The excess purchase price over the fair value
of the net tangible assets acquired of $5.7 million was allocated to the following assets: $1.4 million to acquired

F-17

---



technology,
$0.1 million to a non-compete clause and $4.2 million to goodwill. The amount of goodwill recognized is not tax deductible. The acquired technology and
non-compete clause are being amortized on a straight-line basis over their estimated useful lives of five and three years, respectively. Additional cash payments ranging
from zero to $0.8 million are contingent upon the future performance of Keyola measured through fiscal 2005, and will be recorded as additional goodwill if earned. As of May 31, 2004, no
additional consideration had been earned or recorded under this agreement. Keyola developed innovative business intelligence technology to automatically deliver event-driven notifications to
organizations.

In
July 2001, the Company completed the acquisition of Account4, Inc. ("Account4"). Account4 provided web-based professional services automation software that
enables service organizations to more efficiently manage their businesses and workforce. In this transaction, the Company acquired all the outstanding securities of Account4 in exchange for
$31.3 million including the repayment of assumed liabilities, and recognized goodwill and intangible assets in the amount of $18.4 million and $11.3 million, respectively. The
amount of goodwill recognized is not tax deductible.

The
following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition (in thousands):

July 11,
2001Current assets

$
4,008Intangible assets


11,314Goodwill


18,380Other long-term assets


215Total assets acquired


33,917Current liabilities


(2,053
)Deferred tax liability


(2,763
)Long-term debt


(47
)Total liabilities assumed


(4,863
)Net assets acquired


29,054Less cash acquired


(2,581
)Net cash paid

$
26,473


The
intangible assets of $11.3 million were allocated to the following assets: $4.6 million to acquired technology and $6.7 million to a client list. The acquired
technology and client list are being amortized on a straight-line basis over their estimated useful lives of five and ten years, respectively. No amounts were allocated to
in-process research and development, as Account4 did not have any new products in development at the time of the acquisition.

F-18

---



The
following table presents the consolidated results of operations on an unaudited pro forma basis as if the acquisitions of Closedloop, Armature and Account4 had taken place at the
beginning of the periods presented (in thousands, except per share amounts):

Year Ended May 31,2004

2003

2002Total revenues

$
364,243

$
347,027

$
431,084Net income (loss) applicable to common
    stockholders

$
7,230

$
(8,020
)
$
(30,480
)Net income (loss) per sharebasic

$
0.07

$
(0.08
)
$
(0.38
)Net income (loss) per sharediluted

$
0.07

$
(0.08
)
$
(0.38
)


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

7.     Purchase of Client Maintenance Contracts

On April 30, 2004, the Company acquired assets consisting of client maintenance contracts and client lists from Siemens Medical Solutions Health Services
Corporation ("Siemens") for $19.8 million in cash and $4.3 million in other consideration. Of the total purchase price, $22.9 million was allocated to the maintenance contracts
and is being amortized over the remaining life of the contracts based on estimated periodic contractual revenue recognized. The purchase price allocated to the client list of $1.0 million is
being amortized on a straight-line basis over 7 years. The remaining purchase price of $0.2 million in transitional support costs was charged to expense during the fourth
quarter of fiscal 2004 as the services were performed.

The
asset purchase agreement is part of an overall restructuring of an existing partner agreement between the Company and Siemens. Under the asset purchase agreement, the Company will
assume responsibility for supporting clients using its software applications previously supported by Siemens. The asset purchase agreement did not qualify as a business combination under the criteria
established in SFAS No. 141 "Business Combinations".

F-19

---





8.     Financial Statement Components

Supplemental disclosures of non-cash investing and financing transactions (in thousands):

May 31,2004

2003

2002Accretion on and conversion of preferred stock

$


$


$
30,098Preferred stock exchanged for common stock








29,850Conversion of redeemable warrants








3,559Assets acquired under capital leases





390


1,252Stock option exercises using common stock


70


1,724


5,013Treasury stock exchanged for warrants


1,428





Notes payable issued in conjunction with acquisitions


2,399





Assets acquired through settlement of receivables


2,657








Cash
paid for acquisitions during the twelve months ended May 31, 2004, 2003 and 2002 (in thousands):

2004

2003

2002Details of acquisitions:Fair value of assets

$
20,697

$
8,140

$
39,653Less liabilities assumed


(4,593
)

(317
)

(5,431
)Cash paid


16,104


7,823


34,222Less cash acquired


(225
)




(2,584
)Net cash paid for acquisitions

$
15,879

$
7,823

$
31,638


Certain
balance sheet components consist of the following (in thousands):

Rollforward of the allowance for doubtful accounts:Balance, May 31, 2001

$
6,961Provision


6,250Write-offs


(5,145
)Recoveries


177Balance, May 31, 2002


8,243Provision


423Write-offs


(2,839
)Recoveries


197Translation adjustment


416Balance, May 31, 2003


6,440Provision


3,317Write-offs


(5,166
)Recoveries


741Translation adjustment


301Balance, May 31, 2004

$
5,633


F-20

---



May 31,2004

2003Property and Equipment, NetEquipment

$
43,660

$
44,611Office furniture


11,182


12,356Leasehold improvements


9,492


9,52164,334


66,488Less accumulated depreciation and amortization


(47,099
)

(45,124
)$
17,235

$
21,3642004

2003Deferred Revenue and Client Deposits:Services

$
75,615

$
76,797License


9,175


11,924Total deferred revenue


84,790


88,721Less current portion


(83,095
)

(86,642
)Long-term portion of deferred revenue

$
1,695

$
2,079


9.     Credit Facilities and Long-Term Debt

Long-term debt consists of (in thousands):

May 31,2004

2003Note payableinterest at 13.00% due in monthly installments
    of $44 through June 1, 2003

$


$
44Note payableinterest at 5.20% due in monthly installments
    of $23 through February 1, 2004





225Note payable associated with Numbercraft acquisition, interest
    at variable rate due in installments payable in December
    2004 and July 2005


2,399


Capital leasespayments annually through November 2004.
    As of May 31, 2004, future minimum lease payments were
    $243 excluding $7, representing interest


243


8822,642


1,151Less current maturities


(1,652
)

(896
)$
990

$
255


F-21

---



Scheduled
maturities of long-term debt including capital leases, as of May 31, 2004, are as follows (in thousands):

2004

$
1,6522005


9902006 and thereafter


$
2,642


The
Company had a $25.0 million revolving credit facility, which expired on September 30, 2003, at which time the Company had no amounts outstanding under the revolving
credit facility and was in compliance with all covenants and restrictions under the credit facility. The Company elected not to renew this agreement.

10.   RecapitalizationStock Purchase and Exchange Agreement

On February 23, 2001, the Company closed a Stock Purchase and Exchange Agreement with various investors. In conjunction with the closing, the Company
issued 6.1 million shares of Series A Preferred Stock for a total purchase price of $25.2 million. In addition, in February and March 2001, the investors purchased from
certain stockholders of the Company 2.3 million shares of the Company's common stock for a total purchase price of $5.4 million. The investors then exchanged the 2.3 million
shares of common stock for 1.3 million shares of Series A Preferred Stock with the Company.

The
Company also issued to the investors Senior Subordinated Convertible Notes aggregating $10.0 million, bearing annual interest of 12% and maturing February 23, 2006.
From the date of issuance, at the option of the holder, the Senior Subordinated Convertible Notes were convertible into (i) Senior Subordinated Notes aggregating $10.0 million, bearing
annual interest of 12% and maturing February 23, 2006, and (ii) seven year mandatorily redeemable warrants to purchase 0.4 million shares of common stock at a price of $0.01 per
share. The allocated fair value of the warrants had been accounted for as a discount of $2.1 million on the Senior Subordinated Convertible Notes and was being amortized to interest expense
over the term of the notes. As these warrants enabled the holders to put the warrant to the Company at fair value on February 23, 2006, if the Company had not completed a
qualifying initial public offering, the warrants were considered a debt instrument in accordance with Emerging Issues Task Force ("EITF") Issue No. 00-19. Therefore, the Company
recorded $0.5 million of interest expense during the year ended May 31, 2001 relating to the increase in the fair value of the warrants as provided by FIN No. 28, "Accounting for
Appreciation Rights and other Variable Stock Option or Award Plans". Due to the repayment of the notes prior to the scheduled maturity date, the Company recorded a charge in fiscal 2002, for the total
amount of the unamortized debt issuance costs and the discount on the notes of $2.3 million (Notes 3 and 9).

The
Series A Preferred Stock were deemed to include a beneficial conversion feature. At the date of issue, the Company allocated the entire gross proceeds of $30.0 million
to the beneficial conversion feature and was accreting the beneficial conversion feature over the redemption period using the effective interest method. The Company recorded no accretion in fiscal
2003 and $0.1 million in fiscal 2002, relating to the beneficial conversion feature. As a result of the conversion of the Series A Preferred Stock to common stock, which accelerated the
amortization of the beneficial conversion feature, the Company recognized a $30.0 million non-cash charge to net income available to common stockholders for the unamortized value of
the beneficial conversion feature of our preferred stock in fiscal 2002 (Note 11).

F-22

---



11.   Common Stock

The Company closed its initial public offering on December 12, 2001, at which time the Company issued 13.7 million shares of common stock from the
primary offering, 10.3 million shares of common stock upon conversion of all of the outstanding shares of Series A Preferred Stock, 1.7 million shares of common stock as part of
the over-allotment option exercise and 0.4 million shares of common stock issued upon the exercise of warrants and sold as part of the over-allotment option exercise.
The Company received proceeds, net of commissions and expenses of $197.3 million in the initial public offering. Due to the repayment of the notes prior to the scheduled maturity date, the
Company recorded a charge in fiscal 2002 for the total amount of the unamortized debt issuance costs and the discount on the notes of $2.3 million. Additionally, as a result of the conversion
of the Series A Preferred Stock to common stock, which accelerated the amortization of the beneficial conversion feature, the Company recognized a $30.0 million non-cash
charge to net income available to common stockholders for the unamortized value of the beneficial conversion feature of the Company's preferred stock in fiscal 2002. The Company also recognized
accretion on the preferred stock of $0.1 million for the year ended May 31, 2002.

In
June 2003, the Company's Board of Directors authorized the repurchase, from time to time, of up to $50.0 million of its common shares. Shares are repurchased from time
to time as market conditions warrant either through open market transactions, block purchases, private transactions or other means. The repurchases are funded primarily from proceeds derived from the
Company's stock option and employee stock purchase plans, and supplemented with portions of available cash from operations. The
repurchased shares are used for general corporate purposes. No time limit has been set for the completion of the program. During the year ended May 31, 2004, a total of 4.9 million
shares were repurchased for $40.0 million in cash and $0.1 million in non-cash transactions.

In
December 2002, the Company's Board of Directors authorized the repurchase, from time to time, of up to $15.0 million of its common shares. During the year ended
May 31, 2003, a total of 2.9 million shares were repurchased for $15.0 million. The share repurchase was largely funded by cash proceeds obtained from exercise of employee stock
options and the employee stock purchase plan, and will be used for general corporate purposes. The repurchased common shares are recorded as treasury stock and result in a reduction of stockholders'
equity.

12.   Stock Option Plans

The Company's 1996 Stock Incentive Plan reserves a total of 27.7 million shares of common stock for issuance of stock options to employees. In addition,
the Company has also historically granted to employees individual stock options, which were not under a stock option plan. The total number of stock options outstanding outside the stock option plan
were 0.9 million, 1.4 million and 1.4 million at May 31, 2004, 2003 and 2002, respectively. Option grants may be of incentive or non-qualified stock options for
the purchase of shares of the Company's common stock at exercise prices determined by the Company's Board of Directors. Generally, options granted to employees vest over a three-year to
five-year period and expire ten years after the date of grant. Prior to the initial public offering, the Company historically determined the exercise price of stock options granted by
reference to the most recent independent valuation performed in conjunction with the Company's ESOP. After the initial public offering, the Company determines the exercise price using the closing
market value.

In
February 2001, the stockholders of the Company approved the 2001 Stock Incentive Plan, which became effective upon the initial public offering. The plan provides for the
granting of stock options, including incentive stock options and non-qualified stock options, restricted stock, performance awards

F-23

---



and
other stock-based awards. There are 35.0 million shares of the Company's common stock reserved for issuance under the plan.

The
following summarizes employee stock option activity under and outside of the plan (in thousands, except per share amounts):

Number
of Shares

Exercise
Price
Per Share

Weighted
Average
Exercise
PriceOutstanding, May 31, 2001

26,573

$0.54-$2.97

$
1.95Canceled

(1,064
)
$1.87-$6.49

$
2.48Granted below fair market value

479

$2.25-$14.00

$
7.50Granted at fair market value

96

$4.06-$16.26

$
13.18Exercised

(3,634
)
$0.54-$6.49

$
1.17Outstanding, May 31, 2002

22,450

$0.54-$16.26

$
2.22Canceled

(1,355
)
$1.87-$14.00

$
3.34Granted at fair market value

3,789

$3.99-$6.24

$
5.26Exercised

(4,181
)
$0.59-$5.20

$
1.66Outstanding, May 31, 2003

20,703

$0.54-$16.26

$
2.83Canceled

(786
)
$2.25-$14.00

$
5.74Granted at fair market value

4,078

$5.09-$9.77

$
7.08Exercised

(4,586
)
$0.54-$8.10

$
2.07Outstanding, May 31, 2004

19,409

$0.54-$16.26

$
3.77


Stock
options exercisable at May 31, 2004, 2003 and 2002 were 12.4 million, 13.6 million and 12.4 million, respectively.

The
following table summarizes fixed-price stock options outstanding at May 31, 2004 (in thousands, except per share amounts):

|              |  | Options Outstanding |  | Options Exercisable
|------------- |  | ------------------- |  | -------------------
|
|$0.54-$0.59   |  | 1,126               |  | 1.58               
|$1.23-$1.87   |  | 217                 |  | 3.37               
|$2.25-$2.32   |  | 8,673               |  | 5.61               
|$2.97         |  | 2,219               |  | 6.76               
|$3.99-$6.49   |  | 4,487               |  | 8.37               
|$7.20-$9.77   |  | 2,588               |  | 9.32               
|$14.00-$16.26 |  | 99                  |  | 6.46               
|              |  |                     |  |                    
|$0.54-$16.26  |  | 19,409              |  | 6.62               
|              |  |                     |  |                    

There
was no deferred compensation relating to stock options granted below fair market value in the years ended May 31, 2004 and 2003 and $1.6 million in fiscal 2002. Such
deferred compensation is amortized over the vesting periods of the related stock options, which generally range from three to

F-24

---



five
years. This compensation is recognized on an accelerated basis in accordance with FIN No. 28. Compensation expense recognized relating to stock options granted below fair market value was
$1.4 million, $3.6 million and $8.6 million during the years ended May 31, 2004, 2003 and 2002, respectively.

See
Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements for the impact of stock based compensation on pro forma net income (loss) and net income
(loss) per share.

The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions and results:

2004

2003

2002Dividend yield








Risk free interest rate


3.6
%

3.7
%

4.5
%Expected life


5 years


5 years


5 yearsExpected volatility


65.0
%

75.0
%

75.0
%Estimated fair value of options granted per share

$
4.08

$
3.34

$
10.39


13.   Stock Warrants and Options Issued to Non-Employees

At May 31, 2004, the Company had one outstanding fully vested stock warrant. The warrant, issued in fiscal 2000 with a five-year life, expires
in July 2005 and allows the holder to purchase 1.0 million shares of the Company's common stock at an exercise price of $4.64 per share. In January 2004, a stock warrant issued in
2000, with a four-year life was exercised by its holder. The warrant allowed the holder to purchase 1.2 million shares of the Company's common stock at an exercise price of $4.64.
The warrant was exercised on a net basis, resulting in the issuance of 0.6 million shares of common stock from treasury, which resulted in a $1.4 million reduction to additional
paid-in capital.

On
September 27, 2000, the Company issued stock options to purchase 69,350 shares of the Company's common stock at $2.32 per share to a non-employee in conjunction
with a consulting agreement. The Company accounted for the options in accordance with EITF Issue No. 96-18 "Accounting for Equity Instruments with Variable Terms That Are Issued for
Consideration Other Than Employee Service under FASB Statement No. 123,Accounting for Stock-Based Compensation". In May 2001, the options
were fully vested and the Company recorded compensation expense of $0.7 million relating to these stock options.

14.   Profit Sharing and 401(k) Retirement Plan

The Company has a defined contribution profit sharing plan, which conforms to IRS provisions for 401(k) plans. Employees are eligible to participate in the plan
upon employment and are eligible for the Company match after completing one year of service. Participants may contribute up to 15% of their gross earnings to the plan. The Company matches 50% of the
first 4% of employee contributions and may make additional contributions as determined by the Board of Directors. The Company recorded 401(k) matching contribution expense of approximately
$2.4 million, $2.3 million and $2.2 million for the years ended May 31, 2004, 2003, and 2002, respectively.

F-25

---



15.   Employee Stock Ownership Plan

In May 2002, the Company terminated the ESOP, subject to completion of applicable government filings. In December 2002, the Company received final
approval by the Internal Revenue Service. Prior to the termination, certain employees who were ESOP participants had the right to require the Company to repurchase any vested ESOP shares they received
at the market price. Consequently, shares held by those ESOP participants were considered mandatorily redeemable common stock and were recorded at the estimated fair market value at each balance sheet
date. As a result of the plan termination, the mandatory redemption feature terminated, and the mandatorily redeemable common stock amounts were eliminated from the accompanying balance sheet as of
May 31, 2003. There were zero and 59 mandatorily redeemable shares outstanding as of May 31, 2003 and 2002, respectively. The Company expects that all remaining shares held in the plan
will be distributed to participants in the first quarter of fiscal 2005. The termination did not have a material effect on the Company's financial position, results of operations or cash flows. There
was no ESOP contribution for the fiscal year ended May 31, 2002.

16.   Employee Stock Purchase Plan

In February 2001, the stockholders of the Company approved the 2001 Employee Stock Purchase Plan, which was effective as of the Company's initial public
offering. The purchase plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended. The plan allows
eligible employees to purchase common stock at a price equal to 85% of the lower of the fair market value of the common stock at the beginning or end of the offering period, which commences on each
January 1st and July 1st. The plan will terminate when all of the shares reserved under the plan have been purchased or five years from the effective date unless the Board of Directors
resolves to extend the purchase plan for one or more additional periods of five years each. There are 20.8 million shares of the Company's common stock reserved for issuance under the plan, of
which 18.8 million shares were available for issuance as of May 31, 2004. Shares issued under this plan were 0.6 million and 1.4 million shares in the years ended
May 31, 2004 and 2003, respectively.

17.   Income Taxes

The provision (benefit) for income taxes consists of the following components (in thousands):

Year Ended May 31,2004

2003

2002Current:Federal

$
9,552

$
(3,968
)
$
5,214State


2,284


(219
)

1,81611,836


(4,187
)

7,030Deferred:Federal


(4,604
)

1,434


(1,118
)State


91


307


(326
)(4,513
)

1,741


(1,444
)$
7,323

$
(2,446
)
$
5,586


F-26

---





A reconciliation of the expected federal income tax provision (benefit) at the statutory rate with the provision for income taxes is as follows:

Year Ended May 31,2004

2003

2002Taxes computed at statutory rate

35.0
%
(35.0
)%
35.0
%Valuation allowance

7.8



Nondeductible expenses

5.1

15.4

5.6State taxes, net of federal benefit

3.9

(6.2
)
6.2Tax exempt interest income

(4.9
)
(13.8
)
(3.1
)Other, net

0.9

0.6

(3.7
)47.8
%
(39.0
)%
40.0
%


Temporary
differences comprising net deferred tax assets are as follows (in thousands):

May 31,2004

2003Current:Allowance for doubtful accounts

$
2,197

$
2,540Accrued liabilities and other


9,898


8,140Deferred revenue


3,216


3,693Total current

$
15,311

$
14,373Noncurrent:Depreciation and amortization

$
(3,735
)
$
(3,333
)Stock-based compensation


5,980


7,645Accrued liabilities and other


396


240Deferred revenue


661


820Deferred rent


678


711Net operating loss carryforwards


29,051


14,064Tax loss carryforwards


1,538


Subtotal


34,569


20,147Valuation allowance


(22,225
)

(11,527
)Total noncurrent

$
12,344

$
8,620


As
of May 31, 2004, the Company had federal tax loss carryforwards of approximately $19.8 million representing a $6.9 million deferred tax asset. The federal tax
loss carryforwards will expire in 2019 through 2023, if not utilized. There was no valuation allowance related to this deferred tax asset as of May 31, 2004.

As
of May 31, 2004, the Company had state tax loss carryforwards of approximately $36.9 million representing a $1.5 million deferred tax asset. The state tax loss
carryforwards will expire in 2004 through 2021, if not utilized. The Company had provided a partial valuation allowance of $0.9 million as of May 31, 2004, primarily related to certain
acquired deferred income tax assets, due to the uncertainty in realization prior to expiration.

F-27

---



As
of May 31, 2004, the Company had foreign tax loss carryforwards of approximately $68.2 million representing a $20.6 million deferred tax asset. The Company has
provided a full valuation allowance related these deferred tax assets due to the uncertainty in realization. The majority of the foreign tax loss carryforwards are available indefinitely.

As
of May 31, 2004, the Company had other federal and state tax credits and carryforwards of approximately $2.7 million representing a $1.9 million deferred tax
asset. The federal and state credits and carryforwards will expire in 2004 through 2023, if not utilized. The Company has provided a partial valuation allowance of $0.7 million as of
May 31, 2004 due to the uncertainty in realization prior to expiration.

The
Company's methodology for determining the realizability of its deferred tax assets involves estimates of future taxable income from its 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
the Company had cumulative pre-tax income for financial reporting purposes for the three years ended May 31, 2004, the Company did not pay any significant income taxes
over that period because tax deductions from the exercise of stock options granted prior to the Company's initial public offering generated tax operating losses for the years ended May 31,
2004, 2003 and 2002. In assessing the realizability of its deferred tax assets as of May 31, 2004, the Company considered evidence regarding its ability to generate sufficient future taxable
income to realize its 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, the Company 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, the Company 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.

The
Company also concluded that it was more likely than not that the net deferred tax assets of $27.7 million as of May 31, 2004 and as well as the estimated future tax
deductions from the exercise of stock options outstanding as of May 31, 2004 would be utilized prior to expiring in greater than ten years. Based on this conclusion, the Company would require
approximately $150 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 $27.7 million
as of May 31, 2004 as well as the estimated future tax deductions from the exercise of stock options outstanding and in-the-money as of May 31, 2004. Additionally, the Company 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 $50 million if
the stock options outstanding and in-the-money as of May 31, 2004 are exercised.

F-28

---



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

18.   Commitments and Contingencies

Employment Agreements

The Company has entered into various employment agreements with certain executives of the Company, which provide for severance payments subject to certain
conditions and events.

Operating Leases

The Company rents office space and certain office equipment under operating leases. In addition to minimum lease payments, the office leases require payment of a
proportionate share of real estate taxes and building operating expenses. Some of the lease agreements include escalation clauses. In 1999, in conjunction with a decision to move to its present
facility, the Company recorded a charge and related reserve relating to estimated sublease shortfalls on its former Minneapolis headquarters lease that expired in June 2003. Sublease shortfalls
represent the difference between the total remaining lease obligation and the amount of any estimated sublease recoveries. The Company recorded zero, $0.6 million and $0.2 million for
the years ended May 31, 2004, 2003 and 2002, respectively, of additional lease abandonment expense related to this location in response to conditions in the real estate market and the loss of
two subtenants. Rent expense under operating leases was approximately $14.4 million, $16.1 million, and $15.9 million for the years ended May 31, 2004, 2003, and 2002,
respectively.

Future
minimum lease payments are summarized as follows (in thousands):

2005

$
9,6942006


7,6362007


7,1442008


7,2862009


7,251Thereafter


39,495Total minimum lease payments

$
78,506


Indemnification and Guarantee Agreements

The Company licenses its software products to customers under end user license agreements and to certain resellers or other business partners under business
partner agreements. These agreements generally include certain provisions for indemnifying the customer or business partner against losses, expenses and liabilities from damages that may be awarded
against them if our software, or the third party-owned software the Company resells, is found to infringe a patent, copyright, trademark or other proprietary right of a third party. These agreements
generally limit the Company's indemnification obligations based on industry-standards and geographical parameters, and give the Company the right to replace an infringing product. The maximum
potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company

F-29

---



believes
its internal development processes and other practices limit its exposure under these indemnification provisions. In addition, the invention and nondisclosure agreements signed by the
Company's employees, assign to it various intellectual property rights. The Company has never incurred costs payable to a customer or business partner to defend lawsuits or settle claims related to
these indemnification agreements. As a result, management believes the estimated fair value of these agreements is minimal. Accordingly, there are no liabilities recorded for these agreements as of
May 31, 2004.

The
Company enters into services agreements with customers for the implementation of its software. The Company also may subcontract those services to its business partners. From time to
time, the Company includes in those services agreements, certain provisions for indemnifying the customer against losses, expenses and liabilities from those services, including, for example, personal
injury or tangible property damage. Lease agreements and other contracts with the Company's vendors may also impose similar indemnification obligations on the Company for personal injury, tangible
property damage or other claims. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has
general liability and umbrella insurance policies that enable it to recover a portion of certain amounts paid. The Company has never incurred costs payable to a customer to defend lawsuits or settle
claims related to these indemnification agreements. As a result, management believes the estimated fair value of these agreements is minimal. Accordingly, there are no liabilities recorded for these
agreements as of May 31, 2004.

The
Company has arrangements with certain vendors whereby it guarantees the expenses incurred by certain of its employees. The term is from execution of the arrangement until
cancellation and payment of any outstanding amounts. Unless otherwise limited in the contract, the Company would be required to pay any unsettled employee expenses upon notification from the vendor.
The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is not significant. As a result, management believes the estimated fair
value of these agreements is minimal. Accordingly, there are no liabilities recorded for these agreements as of May 31, 2004.

Delaware
law and the Company's certificate of incorporation and bylaws provide that the Company shall, under certain circumstances and subject to certain limitations, indemnify any
person made or threatened to be made a party to a proceeding by reason of that person's former or present official capacity with the Company against judgments, penalties, fines, settlements and
reasonable expenses. Any such person also is entitled, subject to limitations, to payment or reimbursement of reasonable expenses in advance of the final disposition of the proceeding. An agreement
between the Company and a former director requires the Company to indemnify him for expenses and liabilities incurred by him in any proceeding by reason of his status as a director with the Company to
the extent permitted by Delaware law and as authorized in the Company's certificate of incorporation. The maximum potential amount of future payments the Company could be required to make under these
indemnification arrangements is unlimited; however, the Company has insurance policies that enables the Company to recover a portion of certain amounts paid. The Company has never incurred costs
payable to an indemnitee to defend lawsuits or settle claims related to these indemnification arrangements. As a result, management believes the estimated fair value of these arrangements is minimal.
Accordingly, there are no liabilities recorded for these agreements as of May 31, 2004.

When
a customer purchases support for the Company's software products, the Company generally warrants that those products then eligible for support will operate materially and
substantially as

F-30

---



described
in the documentation that is provided with that software. The Company also generally warrants that its services will be provided by trained personnel and in a professional manner using
commercially reasonable efforts. If necessary, the Company provides for the estimated cost of product and service warranties based on specific warranty claims and claim history.

Legal

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

Acquisitions

When, as part of an acquisition, the Company acquires all of the stock or all of the assets and liabilities of a company, it assumes the liability for certain
events or occurrences that took place before the date of acquisition. The maximum potential amount of future payments the Company could be required to make for such obligations is undeterminable at
this time. Accordingly, there are no liabilities recorded for these items as of May 31, 2004.

The
Company has contingent consideration agreements related to acquisitions, based on the acquired company's future performance, as summarized in the table below. Contingent
consideration earned is recorded as additional goodwill.

Acquisition

Through

Initial
Potential
Contingent
Consideration

Earned

Expired

Remaining
Potential
Contingent
ConsiderationApexion

November, 2005

$
2,000

$


$


$
2,000Numbercraft

May, 2007


9,000


1,075


925


7,000Keyola

May, 2005


3,000





2,250


750Total



$
14,000

$
1,075

$
3,175

$
9,750


Other Commitments

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.

19.   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

F-31

---



wholly-owned
branches and subsidiaries operating in Canada, the United Kingdom, France and the Netherlands.

The
following table presents a summary of revenues and long-lived assets summarized by geographic region (in thousands):

Year Ended May 31,2004

2003

2002Revenues:Domestic operations

$
340,318

$
322,986

$
398,931International operations


23,265


21,332


29,405Consolidated

$
363,583

$
344,318

$
428,336May 31,2004

2003Long-lived assets:Domestic operations

$
84,482

$
54,373International operations


16,562


10,934Consolidated

$
101,044

$
65,307


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

Year Ended May 31,2004

2003

2002Components of revenues:License fees

$
92,338

$
77,614

$
150,243Services:Maintenance


154,938


142,645


134,966Consulting


116,307


124,059


143,127Total services


271,245


266,704


278,093Total revenues

$
363,583

$
344,318

$
428,336


20.   Related Parties

The Company has utilized the marketing and consulting services of one of the Company's directors and of that director's firm. Total fees paid to the director and
the director's firm were zero, $0.1 million, and $0.02 million for the years ended May 31, 2004, 2003 and 2002, respectively. The Company also purchased software from a company of
which this individual is also a director. The software purchase and services totaled $0.2 million and $0.6 million for the years ended May 31, 2003 and 2002. This individual
resigned as director of the Company on May 19, 2003 and provided limited consulting services to the Company in fiscal 2004.

On
June 1, 2001, the Company entered into a service agreement with Triad Conferences (formerly NCG, Inc.) (Triad) a company controlled by a stockholder and former employee
of the Company. Under the terms of the agreement, Triad provides the Company strategic event planning services. Total

F-32

---



fees
paid to Triad were $8.3 million for the year ended May 31, 2002. During fiscal 2003 and fiscal 2004, the Company continued to utilize its services, however the related individual
was no longer affiliated with Triad.

21.   Subsequent Event

On July 26, 2004, the Company's Board of Directors adopted a Shareholder Rights Plan in which preferred stock purchase rights will be distributed as a
non-taxable dividend at the rate of one Right for each share of Common Stock held as of the close of business on July 28, 2004. Each Right will entitle stockholders to buy
one-one hundredth of a newly issued share of Series B Junior Participating Stock of the Company at an exercise price of $29.00. The Rights will be exercisable only if a person or
group, other than an exempted person, acquires beneficial ownership of, or makes a tender for, 15 percent or more of the Company's outstanding Common Stock.

If
any person, other than an exempted person becomes the beneficial owner of 15 percent or more of the Company's outstanding Common Stock, each Right not owned by such person or
certain related parties will entitle its holder to purchase at the Right's then current exercise price shares of the Company's Common Stock having a market value equal to twice the then current
exercise price. In addition, if after a person becomes the beneficial owner of 15 percent or more of the Company's outstanding Common Stock, the Company is involved in a merger or other
business combination transaction with another person after which its Common Stock does not remain outstanding, or sells 50 percent or more of its assets or earning power to another person, each
Right will entitle its holder to purchase at the Right's then current exercise price shares of common stock of such other person having a market value equal to twice the then current exercise price.

The
Company's Board of Directors will be entitled to redeem the Rights at $0.01 per Right at any time prior to a person or group acquiring 15 percent or more of the Company's
Common Stock. Otherwise, the Rights will expire on July 28, 2014.

F-33

---



22.   Supplemental Quarterly Financial Information (Unaudited):

Summarized quarterly supplemental consolidated financial information for 2004 and 2003 are as follows (in thousands, except per share amounts):

|                                  |         | Quarter Ended
|--------------------------------- | ------- | -------------
|
|Fiscal 2004                       |         |              
|Total revenues                    |         | $            
|Gross profit                      |         |              
|Income (loss) before income taxes |         |              
|Net income (loss)                 |         |              
|Net income (loss) per share:      |         |              
|                                  | Basic   |              
|                                  | Diluted |              
|Fiscal 2003                       |         |              
|Total revenues                    |         | $            
|Gross profit                      |         |              
|(Loss) income before income taxes |         |              
|Net (loss) income                 |         |              
|Net (loss) income per share:      |         |              
|                                  | Basic   |              
|                                  | Diluted |              

No
cash dividends have been declared or paid in any period presented.

F-34

---