**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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| **ý**                                                 | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                                                                                                                   |
|------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                 | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                |
| **FOR THE  QUARTERLY PERIOD ENDED February 28, 2005** |
| ** **                                                 | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                |
| **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 specifiedin its charter)

 
| **DELAWARE**                                                     | ** ** | **41-1251159**                           |
|------------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification Number) |
| ** **                                                       | ** ** | ** **                               |
| **380 ST.  PETER STREET  ST. PAUL, MINNESOTA 55102**             |
| (Address of principal  executive offices)                        |
| ** **                                                       | ** ** | ** **                               |
| **(651) 767-7000**                                          |
| (Registrant’s telephone  number, including area code)       |

 

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Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. YES ý NO o

 

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

 

The number of shares of the registrant’scommon stock outstanding as of March 31, 2005 was 100,425,568.

 

 

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**LAWSONSOFTWARE, INC.**

 

**Form 10-QIndex**

 
| **PART I.** | **FINANCIAL  INFORMATION**                                                                                                               | **3**  |
|------------------|------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.          | Financial  Statements                                                                                                                    | 3      |
|             | Condensed  Consolidated Balance Sheets at February 28, 2005 and May 31, 2004                                                   | 3      |
|             | Condensed  Consolidated Statements of Operations  for the three and nine months ended February 28, 2005 and  February 29, 2004 | 4      |
|             | Condensed  Consolidated Statements of Cash Flows  for the nine months ended February 28, 2005 and February 29, 2004            | 5      |
|             | Notes to Condensed Consolidated Financial  Statements                                                                                    | 6      |
| Item 2.          | Management’s Discussion and Analysis of Financial Condition and Results  of Operations                                              | 13     |
| Item 3.          | Qualitative and Quantitative Disclosure  about Market Risk                                                                               | 36     |
| Item 4.          | Controls and Procedures                                                                                                                  | 36     |
|             |                                                                                                                                     |   |
| PART II.    | OTHER INFORMATION                                                                                                                        | 36     |
| Item 1.          | Legal Proceedings                                                                                                                        | 36     |
| Item 2.          | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                             | 36     |
| Item 3.          | Defaults Upon Senior Securities                                                                                                          | 36     |
| Item 4.          | Submission of Matters to a Vote of Security  Holders                                                                                     | 36     |
| Item 5.          | Other Information                                                                                                                        | 36     |
| Item  6.         | Exhibits                                                                                                                                 | 36     |
| SIGNATURES       |                                                                                                                                     | 37     |

 

2

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**PART I.**  FINANCIAL INFORMATION

 

**ITEM 1**.  FINANCIAL STATEMENTS

 

**LAWSONSOFTWARE, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(inthousands, except per share data)**

**(unaudited)**

 
| ** **                                                                                                                                                | ** ** | **February 28,  2005** | ** ** | **May 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------|------------|
| ASSETS                                                                                                                                                    |       |                        |       |                   |       |
| Current assets:                                                                                                                                           |       |                        |       |                   |       |
| Cash and cash equivalents                                                                                                                                 |       | $                           | 73,128     |                   | $          | 72,396 |   |
| Marketable securities                                                                                                                                     |       | 146,732                     |       | 128,065                |       |
| Trade accounts receivable, net                                                                                                                            |       | 42,299                      |       | 65,236                 |       |
| Deferred income taxes                                                                                                                                     |       | 11,753                      |       | 15,311                 |       |
| Prepaid expenses and other assets                                                                                                                         |       | 27,396                      |       | 20,450                 |       |
|                                                                                                                                                      |       |                        |       |                   |       |
| Total current assets                                                                                                                                      |       | 301,308                     |       | 301,458                |       |
|                                                                                                                                                      |       |                        |       |                   |       |
| Long-term marketable securities                                                                                                                           |       | 2,006                       |       | 8,521                  |       |
| Property and equipment, net                                                                                                                               |       | 14,817                      |       | 17,235                 |       |
| Goodwill                                                                                                                                                  |       | 43,372                      |       | 43,042                 |       |
| Other intangible assets, net                                                                                                                              |       | 34,346                      |       | 40,767                 |       |
| Deferred income taxes                                                                                                                                     |       | 12,074                      |       | 12,344                 |       |
| Other assets                                                                                                                                              |       | 201                         |       | 231                    |       |
|                                                                                                                                                      |       |                        |       |                   |       |
| Total assets                                                                                                                                              |       | $                           | 408,124    |                   | $          | 423,598 |   |
|                                                                                                                                                      |       |                        |       |                   |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                 |       |                        |       |                   |       |
| Current liabilities:                                                                                                                                      |       |                        |       |                   |       |
| Current portion of long-term debt                                                                                                                         |       | $                           | 1,344      |                   | $          | 1,652 |   |
| Accounts payable                                                                                                                                          |       | 13,361                      |       | 14,391                 |       |
| Accrued compensation and benefits                                                                                                                         |       | 17,240                      |       | 25,086                 |       |
| Other accrued liabilities                                                                                                                                 |       | 13,078                      |       | 11,898                 |       |
| Deferred revenue and client deposits                                                                                                                      |       | 74,376                      |       | 83,095                 |       |
| Total current liabilities                                                                                                                                 |       | 119,399                     |       | 136,122                |       |
| Long-term debt, less current portion                                                                                                                      |       | —                      |       | 990                    |       |
| Other long-term liabilities                                                                                                                               |       | 3,354                       |       | 3,600                  |       |
| Total liabilities                                                                                                                                         |       | 122,753                     |       | 140,712                |       |
| Commitments and contingencies (Note 9)                                                                                                                    |       |                        |       |                   |       |
| 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; 112,070 and 110,074 shares issued, respectively; 99,801 and  98,346 shares outstanding, respectively |       | 1,122                       |       | 1,099                  |       |
| Additional paid-in capital                                                                                                                                |       | 337,250                     |       | 327,715                |       |
| Treasury stock, at cost; 12,269 and 11,728  shares, respectively                                                                                          |       | (73,448                     | )          | (65,555                | )          |
| Deferred stock-based compensation                                                                                                                         |       | (132                        | )          | (774                   | )          |
| Retained earnings                                                                                                                                         |       | 16,794                      |       | 17,471                 |       |
| Accumulated other comprehensive income                                                                                                                    |       | 3,785                       |       | 2,930                  |       |
| Total stockholders’ equity                                                                                                                           |       | 285,371                     |       | 282,886                |       |
| Total liabilities and stockholders’ equity                                                                                                           |       | $                           | 408,124    |                   | $          | 423,598 |   |

 

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

 

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**LAWSON SOFTWARE, INC.**

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(inthousands, except per share data)**

**(unaudited)**

 
| ** **                                             | ** ** | **Three Months Ended**     | ** ** | **Nine Months Ended**      | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                             | ** ** | **February 28, 2005** | ** ** | **February 29, 2004** | ** ** | **February 28, 2005** | ** ** | **February 29, 2004** | ** ** |
| Revenues:                                              |       |                       |       |                       |       |   |   |   |   |
| License fees                                           |       | $                          | 13,924     |                       | $          | 25,195 |   | $ | 40,370 |   | $ | 65,169 |   |
| Services                                               |       | 68,790                     |       | 66,411                     |       | 208,028 |   | 198,704 |   |
| Total revenues                                         |       | 82,714                     |       | 91,606                     |       | 248,398 |   | 263,873 |   |
| Cost of revenues:                                      |       |                       |       |                       |       |   |   |   |   |
| Cost of license fees                                   |       | 2,232                      |       | 3,911                      |       | 7,511 |   | 11,990 |   |
| Cost of services                                       |       | 34,260                     |       | 34,258                     |       | 107,764 |   | 100,090 |   |
| Total cost of revenues                                 |       | 36,492                     |       | 38,169                     |       | 115,275 |   | 112,080 |   |
|                                                   |       |                       |       |                       |       |   |   |   |   |
| Gross profit                                           |       | 46,222                     |       | 53,437                     |       | 133,123 |   | 151,793 |   |
|                                                   |       |                       |       |                       |       |   |   |   |   |
| Operating expenses:                                    |       |                       |       |                       |       |   |   |   |   |
| Research and development                               |       | 15,527                     |       | 16,940                     |       | 46,828 |   | 47,132 |   |
| Sales and marketing                                    |       | 17,681                     |       | 23,615                     |       | 58,216 |   | 68,111 |   |
| General and administrative                             |       | 10,325                     |       | 9,090                      |       | 26,486 |   | 28,400 |   |
| Restructuring                                          |       | (153                       | )          | —                     |       | 5,237 |   | 2,210 |   |
| Amortization of acquired intangibles                   |       | 391                        |       | 346                        |       | 1,160 |   | 912 |   |
| Total operating expenses                               |       | 43,771                     |       | 49,991                     |       | 137,927 |   | 146,765 |   |
|                                                   |       |                       |       |                       |       |   |   |   |   |
| Operating income (loss)                                |       | 2,451                      |       | 3,446                      |       | (4,804 | ) | 5,028 |   |
|                                                   |       |                       |       |                       |       |   |   |   |   |
| Other income:                                          |       |                       |       |                       |       |   |   |   |   |
| Interest income                                        |       | 1,281                      |       | 797                        |       | 2,845 |   | 2,459 |   |
| Interest expense                                       |       | (11                        | )          | (18                        | )          | (39 | ) | (56 | ) |
| Total other income                                     |       | 1,270                      |       | 779                        |       | 2,806 |   | 2,403 |   |
|                                                   |       |                       |       |                       |       |   |   |   |   |
| Income (loss) before income taxes                      |       | 3,721                      |       | 4,225                      |       | (1,998 | ) | 7,431 |   |
| Provision (benefit) for income taxes                   |       | 961                        |       | 1,648                      |       | (1,321 | ) | 2,898 |   |
|                                                   |       |                       |       |                       |       |   |   |   |   |
| Net income (loss)                                      |       | $                          | 2,760      |                       | $          | 2,577 |   | $ | (677 | ) | $ | 4,533 |   |
|                                                   |       |                       |       |                       |       |   |   |   |   |
| Net income (loss) per share:                           |       |                       |       |                       |       |   |   |   |   |
| Basic                                                  |       | $                          | 0.03       |                       | $          | 0.03 |   | $ | (0.01 | ) | $ | 0.05 |   |
| Diluted                                                |       | $                          | 0.03       |                       | $          | 0.02 |   | $ | (0.01 | ) | $ | 0.04 |   |
| Shares used in computing net income (loss)  per share: |       |                       |       |                       |       |   |   |   |   |
| Basic                                                  |       | 99,342                     |       | 98,650                     |       | 98,651 |   | 98,472 |   |
| Diluted                                                |       | 104,899                    |       | 107,510                    |       | 98,651 |   | 107,339 |   |

 

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

 

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**LAWSON SOFTWARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(inthousands)**

**(unaudited)**

 
| ** **                                                                                | ** ** | **Nine Months Ended**      | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                | ** ** | **February 28, 2005** | ** ** | **February 29, 2004** | ** ** |
| **Cash flows from operating activities:**                                                 |       |                       |       |   |   |
| Net (loss) income                                                                         |       | $                          | (677       | ) | $ | 4,533 |   |
| Adjustments to reconcile net (loss) income  to net cash provided by operating activities: |       |                       |       |   |   |
| Depreciation and amortization                                                             |       | 12,258                     |       | 9,756 |   |
| Deferred income taxes                                                                     |       | 3,828                      |       | — |   |
| Provision for doubtful accounts                                                           |       | 413                        |       | 2,967 |   |
| Loss on the disposal of assets                                                            |       | 1                          |       | 149 |   |
| Tax benefit from stockholder transactions                                                 |       | 2,955                      |       | 10,289 |   |
| Tax commitment from exercise of stock  options                                            |       | (1,144                     | )          | (1,720 | ) |
| Amortization of stock-based compensation                                                  |       | 171                        |       | 1,046 |   |
| Amortization of discount on notes payable                                                 |       | 67                         |       | — |   |
| Amortization of discount and accretion of  premium on marketable securities               |       | 119                        |       | 566 |   |
| Restructuring                                                                             |       | 5,237                      |       | 2,210 |   |
| Changes in operating assets and  liabilities, net of effect from acquisitions:            |       |                       |       |   |   |
| Trade accounts receivable                                                                 |       | 22,524                     |       | (4,805 | ) |
| Prepaid expenses and other assets                                                         |       | (6,918                     | )          | (5,443 | ) |
| Accounts payable                                                                          |       | (1,030                     | )          | (795 | ) |
| Accrued expenses and other liabilities                                                    |       | (10,803                    | )          | (3,672 | ) |
| Income taxes payable                                                                      |       | (999                       | )          | — |   |
| Deferred revenue and client deposits                                                      |       | (8,915                     | )          | (4,370 | ) |
| Net cash provided by operating activities                                                 |       | 17,087                     |       | 10,711 |   |
|                                                                                      |       |                       |       |   |   |
| **Cash flows from investing activities:**                                                 |       |                       |       |   |   |
| Cash paid in conjunction with acquisitions,  net of cash acquired                         |       | —                     |       | (15,879 | ) |
| Purchases of marketable securities                                                        |       | (447,864                   | )          | (467,836 | ) |
| Sales and maturities of marketable  securities                                            |       | 435,608                    |       | 465,259 |   |
| Purchases of property and equipment                                                       |       | (3,101                     | )          | (3,830 | ) |
| Net cash used in investing activities                                                     |       | (15,357                    | )          | (22,286 | ) |
|                                                                                      |       |                       |       |   |   |
| **Cash flows from financing activities:**                                                 |       |                       |       |   |   |
| Principal payments on debt                                                                |       | (1,323                     | )          | (726 | ) |
| Exercise of stock options                                                                 |       | 6,378                      |       | 8,638 |   |
| Issuance of treasury shares for employee  stock purchase plan                             |       | 3,947                      |       | 3,659 |   |
| Repurchase of common stock                                                                |       | (10,000                    | )          | (30,164 | ) |
| Net cash used in financing activities                                                     |       | (998                       | )          | (18,593 | ) |
| Increase (decrease) in cash and cash  equivalents                                         |       | 732                        |       | (30,168 | ) |
| Cash and cash equivalents at beginning of  period                                         |       | 72,396                     |       | 109,871 |   |
| Cash and cash equivalents at end of period                                                |       | $                          | 73,128     |   | $ | 79,703 |   |

 

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

 

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**LAWSONSOFTWARE, INC.**

**NOTES****TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS****(unaudited)**

 

**1.****            ****BASIS OF PRESENTATION**

 

The unaudited condensed consolidated financial statements includedherein reflect all adjustments, in the opinion of management, necessary tofairly state Lawson Software, Inc.’s (the Company’s) consolidatedfinancial position, results of operations and cash flows for the periodspresented. These adjustments consist of normal, recurring items. Thepreparation of financial statements in conformity with generally acceptedaccounting principles in the United States of America requires management tomake estimates and assumptions that affect the reported amounts therein. Due tothe inherent uncertainty involved in making estimates, actual results in futureperiods may differ from those estimates. The results of operations for thethree and nine months ended February 28, 2005 are not necessarilyindicative of the results to be expected for any subsequent quarter or for theentire fiscal year ending May 31, 2005. The unaudited condensedconsolidated financial statements and notes are presented as permitted by therequirements for Form 10-Q and do not contain certain information includedin the Company’s annual financial statements and notes. The accompanyinginterim condensed consolidated financial statements should be read inconjunction with the financial statements and related notes included in theCompany’s Annual Report on Form 10-K filed with the Securities and ExchangeCommission for the fiscal year ended May 31, 2004. Certainreclassifications have been made to conform prior year’s data to the currentpresentation. These reclassifications had no effect on reported earnings. Alsosee Note 2 of Notes to Condensed Consolidated Financial Statements.

 

**2.****            ****REVISION IN THE CLASSIFICATION OFCERTAIN SECURITIES**

 

In connection with the preparation of thisreport, the Company concluded that it was appropriate to classify its dutchauction rate securities as marketable securities. Dutch auction rate securitiesare investments that are typically backed by preferred stock or long-term, variable-ratedebt instruments whose interest rates are reset at predetermined short-termintervals through a dutch auction process. Previously, such investments hadprimarily been classified as cash and cash equivalents. Accordingly, theCompany has revised the classification to report these securities as marketablesecurities in the Condensed Consolidated Balance Sheet as of May 31, 2004.The Company has also made corresponding adjustments to the CondensedConsolidated Statement of Cash Flows for the nine months ended February 29,2004, to reflect the gross purchases and sales of these securities as investingactivities rather than as a component of cash and cash equivalents. This changein classification does not affect previously reported cash flows fromoperations or from financing activities in the Company’s previously reportedCondensed Consolidated Statements of Cash Flows, or the Company’s previouslyreported Condensed Consolidated Statements of Operations for any period.

 

As of May 31, 2004, $7.6 million ofthese current investments were classified as cash and cash equivalents on theCompany’s Consolidated Balance Sheet. For the nine months ended February 29,2004, net cash provided by investing activities related to these currentinvestments comprised of gross purchases of $376.7 million and gross sales of $353.7million that was included in cash and cash equivalents in the Company’sCondensed Consolidated Statement of Cash Flows.

 

At February 28, 2005 and May 31,2004, the Company held $143.9 million and $110.3 million, respectively of dutchauction rate securities classified within marketable securities asavailable-for-sale. As of May 31, 2004, of the $110.3 million of dutchauction rate securities held, $3.0 million were classified as long-termmarketable securities as the reset dates were longer than 365 days from May 31,2004. The Company’s investments in these securities are recorded at cost, whichapproximates fair market value due to their variable interest rates, whichtypically reset every 7 to 49 days, and, despite the long-term nature of theirstated contractual maturities, the Company believes it has the ability toquickly liquidate these securities. As a result, the Company had no cumulativegross unrealized holding gains (losses) or gross realized gains (losses) fromthese investments. All income generated from these investments was recorded asinterest income.

 

**3.****            ****STOCK-BASED COMPENSATION**

 

The Company accounts for stock-based employeecompensation arrangements in accordance with the provisions of AccountingPrinciples Board (APB) Opinion No. 25, *Accountingfor Stock Issued to Employees*, and complies with the disclosureprovisions of Statement of Financial Accounting Standard (SFAS) No. 123, *Accounting for Stock-Based Compensation*and SFAS No. 148, *Accounting forStock-Based Compensation-Transition and Disclosure - an amendment of FinancialAccounting Standards Board (FASB) Statement No.123.*

 

6

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The Company has adopted the disclosure-onlyprovisions of SFAS No. 123. For purposes of the pro forma disclosuresbelow, the estimated fair value of the options is amortized to expense over theoptions’ vesting period. Had compensation cost for the Company’s stock optionsbeen recognized based on the fair value at the grant date consistent with theprovisions of SFAS No. 123, the Company’s net income (loss) would havebeen adjusted to the pro forma amounts indicated below (in thousands, exceptper share amounts):

 
| ** **                                                                                                             | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                             | ** ** | **February 28,  2005** | ** ** | **February 29,  2004** | ** ** | **February 28,  2005** | ** ** | **February 29,  2004** | ** ** |
| Net income (loss):                                                                                                     |       |                        |       |                        |       |   |   |   |   |
| As reported                                                                                                            |       | $                           | 2,760      |                        | $          | 2,577 |   | $ | (677 | ) | $ | 4,533 |   |
| Add:  Stock-based employee  compensation expense included in reported net income (loss), net of taxes             |       | 38                          |       | 257                         |       | 104 |   | 637 |   |
| Deduct: Total stock-based compensation expense determined under fair  value based method for all rewards, net of taxes |       | (1,862                      | )          | (2,010                      | )          | (5,441 | ) | (5,296 | ) |
| Pro forma  net income (loss)                                                                                           |       | $                           | 936        |                        | $          | 824 |   | $ | (6,014 | ) | $ | (126 | ) |
|                                                                                                                   |       |                        |       |                        |       |   |   |   |   |
| Net income (loss) per share:                                                                                      |       |                        |       |                        |       |   |   |   |   |
| Basic:                                                                                                                 |       |                        |       |                        |       |   |   |   |   |
| As reported                                                                                                            |       | $                           | 0.03       |                        | $          | 0.03 |   | $ | (0.01 | ) | $ | 0.05 |   |
| Pro forma                                                                                                              |       | $                           | 0.01       |                        | $          | 0.01 |   | $ | (0.06 | ) | $ | 0.00 |   |
| Diluted:                                                                                                               |       |                        |       |                        |       |   |   |   |   |
| As reported                                                                                                            |       | $                           | 0.03       |                        | $          | 0.02 |   | $ | (0.01 | ) | $ | 0.04 |   |
| Pro forma                                                                                                              |       | $                           | 0.01       |                        | $          | 0.01 |   | $ | (0.06 | ) | $ | 0.00 |   |

 

**4.****            ****PER SHARE DATA**

 

Basic earnings per share is computed usingthe net income (loss) and the weighted average number of shares of common stockoutstanding. Diluted earnings per share reflects the weighted average number ofshares of common stock outstanding plus any potentially dilutive sharesoutstanding during the period. Potentially dilutive shares consist of sharesissuable upon the exercise of stock options and warrants (in thousands, exceptper share amounts).

 
| ** **                                           | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **February 28,  2005** | ** ** | **February 29,  2004** | ** ** | **February 28,  2005** | ** ** | **February 29, 2004** | ** ** |
| Basic earnings per share computation:                |       |                        |       |                        |       |   |   |   |   |
| Net income (loss) applicable to common  stockholders |       | $                           | 2,760      |                        | $          | 2,577 |   | $ | (677 | ) | $ | 4,533 |   |
| Weighted average common shares – basic          |       | 99,342                      |       | 98,650                      |       | 98,651 |   | 98,472 |   |
| Basic net income (loss) per share                    |       | $                           | 0.03       |                        | $          | 0.03 |   | $ | (0.01 | ) | $ | 0.05 |   |
|                                                 |       |                        |       |                        |       |   |   |   |   |
| Diluted earnings per share computation:              |       |                        |       |                        |       |   |   |   |   |
| Net income (loss) applicable to common  stockholders |       | $                           | 2,760      |                        | $          | 2,577 |   | $ | (677 | ) | $ | 4,533 |   |
| Shares calculation:                                  |       |                        |       |                        |       |   |   |   |   |
| Weighted average common shares – basic          |       | 99,342                      |       | 98,650                      |       | 98,651 |   | 98,472 |   |
| Effect of dilutive stock options and  warrants       |       | 5,557                       |       | 8,860                       |       | — |   | 8,867 |   |
| Weighted average common shares – diluted        |       | 104,899                     |       | 107,510                     |       | 98,651 |   | 107,339 |   |
| Diluted net income (loss) per share                  |       | $                           | 0.03       |                        | $          | 0.02 |   | $ | (0.01 | ) | $ | 0.04 |   |

 

Potential dilutive sharesof common stock and warrants excluded from the diluted net income (loss) pershare computations were 13.6 million and 13.3 million as of February 28,2005 and February 29, 2004, respectively. Certain potential dilutiveshares of common stock were excluded from the diluted earnings per sharecomputation because their exercise prices were greater than the average marketprice of the common shares during the period and were therefore not dilutive.In addition, potential dilutive shares of common stock were excluded fromperiods with a net loss because they were anti-dilutive.

 

7

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**5.****            ****NEW ACCOUNTINGPRONOUNCEMENTS**

 

In December 2004 the Financial Accounting Standards Board (FASB)issued Statement of Financial Accounting Standard No. 123 (revised 2004), *Share-Based Payment (SFAS No. 123(R))*.SFAS No. 123(R) requires compensation cost relating to unvestedshare-based payment transactions that are outstanding as of the effective dateand newly issued transactions to be recognized in the financial statements.That cost will be measured based on the fair value of the equity or liabilityinstruments issued. SFAS No. 123(R) covers a wide range of share-basedcompensation arrangements including share options, restricted share plans,performance-based awards, share appreciation rights and employee share purchaseplans. SFAS No. 123(R) replaces SFAS No. 123, *Accounting for Stock-Based Compensation*(SFAS No. 123), andsupersedes Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*(Opinion 25)*.*SFAS No. 123, as originally issuedin 1995, established fair-value-based method of accounting for share-basedpayment transactions with employees. However, SFAS No. 123 permittedentities the option of continuing to apply the guidance in Opinion 25, as longas the footnotes to financial statements disclosed what net income would havebeen had the fair-value-based method been used. As disclosed in Note 3 of Notesto Condensed Consolidated Financial Statements, the Company elected the optionof disclosure only under SFAS No. 123. In its disclosures, the Company hashistorically used the Black-Scholes option pricing model to determine the fairvalue of its share based compensation arrangements. Upon the adoption of SFAS No. 123(R),the Company will determine whether it will continue to utilize theBlack-Scholes Model or adopt some other acceptable model. Public entities willbe required to apply SFAS No. 123(R) as of the first interim or annualreporting period that begins after June 15, 2005, which is effectivewith the Company’s second quarter of fiscal 2006. Based on the Company’ssignificant amount of unvested share-based payment awards, the adoption of thisstatement is anticipated to have a material impact on the Company’s results ofoperations; however the Company is currently evaluating the impact of thisstatement.

 

In November 2003 and March 2004, the Emerging Issues TaskForce (EITF) reached a consensus on EITF Issue No. 03-01, *The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments*. The consensus reachedrequires companies to apply new guidance for evaluating whether an investmentis other-than-temporarily impaired and also requires quantitative andqualitative disclosures of debt and equity securities, classified asavailable-for-sale or held-to-maturity, that are determined to be onlytemporarily impaired at the balance sheet date. The Company incorporated therequired disclosures for investments accounted for under SFAS No. 115, *Accounting for Certain Investments in Debt and EquitySecurities*, as required in the fourth quarter of fiscal year 2004,and chose to early adopt the guidance related to evaluatingother-than-temporary impairment. Disclosures for all investments outside thescope of SFAS No. 115 (cost and equity method investments), of which theCompany has none, are required in the fourth quarter of fiscal 2005. Adoptionof EITF Issue No. 03-01 will not have an impact on the Company’sstatements of consolidated operations, financial position or cash flows.

 

**6.****            ****COMPREHENSIVE INCOME**

 

The following table presents thecalculation of comprehensive income (in thousands):

 
| ** **                                                              | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                              | ** ** | **February 28,  2005** | ** ** | **February 29,  2004** | ** ** | **February 28,  2005** | ** ** | **February 29,  2004** | ** ** |
| Net income (loss)                                                       |       | $                           | 2,760      |                        | $          | 2,577 |   | $ | (677 | ) | $ | 4,533 |   |
| Unrealized (loss) gain on  available-for-sale investments, net of taxes |       | (11                         | )          | (26                         | )          | 14 |   | (133 | ) |
| Foreign currency translation adjustment                                 |       | (25                         | )          | 984                         |       | 841 |   | 2,264 |   |
| Other comprehensive (loss) income                                       |       | (36                         | )          | 958                         |       | 855 |   | 2,131 |   |
| Comprehensive income                                                    |       | $                           | 2,724      |                        | $          | 3,535 |   | $ | 178 |   | $ | 6,664 |   |
|                                                                         |            |                             |            |                             |            |  |  |  |  |  |  |  |  |  |

 

**7.****            ****RESTRUCTURING**

 

On September 28, 2004, the Company approved a plan designed toenhance the Company’s operating effectiveness and profitability. Under therestructuring plan (Phase I), the Company streamlined structure, consolidatedleadership and reduced long-term costs to realign projected expenses withanticipated revenue levels. The plan included the reduction of approximately100 employees in the United States and the United Kingdom, which in accordancewith SFAS No. 112, *Employers Accounting forPost Employment Benefits - an amendment of FASB Statements No. 5 and 43*,resulted in a charge for severance and related benefits of $3.0 million in thesecond quarter ending November 30, 2004. The reduction included employeeswho worked in operations, marketing, sales, research and development,maintenance and services. During the third quarter ended February 28,2005, the Company recorded an unfavorable adjustment of $0.05 million for costsassociated with severance and related benefits that will be incurred under thePhase I Plan. All terminations and related cash payments were primarilycompleted as of February 28, 2005. The remaining cash payments areexpected to be completed during the fourth quarter of fiscal 2005.

 

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The following table sets forth the restructuringreserve activity related to the Phase I restructuring plan and the remainingbalances as of February 28, 2005, which are included in accruedcompensation and benefits (in thousands):

 
| ** **                          | ** ** | **Severance  and related  benefits** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|
| Phase I provision for restructuring |       | $                                    | 2,998      |   |
| Cash payments                       |       | (2,829                               | )          |
| Adjustment                          |       | 49                                   |       |
| Balance, February 28, 2005     |       | $                                    | 218        |   |
|                                     |            |                                      |            |  |  |

 

AtNovember 30, 2004, the Company also accrued for a plan (Phase II) thatincluded initiatives to further reduce costs and realign projected expenseswith anticipated revenue levels. It included a reduction of approximately 70employees in the United States and the United Kingdom, and because the Companywas able to determine probability at the end of the second quarter of fiscal2005, the restructuring resulted in a charge of approximately $2.5 million forseverance and related benefits, in accordance with SFAS No. 112.  The reduction included employees who workedin sales, research and development and services. All terminations and relatedcash payments were primarily completed as of February 28, 2005.  The remaining cash payments are expected tobe completed during the first quarter of fiscal 2006. During the thirdquarter ended February 28, 2005, the Company recorded a reversal of $0.2million for costs associated with severance and related benefits that will notbe incurred under the Phase II restructuring plan.

 

The following table sets forth the restructuringreserve activity related to the Phase II restructuring plan and the remainingbalances as of February 28, 2005, which are included in accrued compensationand benefits (in thousands):

 
| ** **                           | ** ** | **Severance  and related  benefits** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| Phase II provision for restructuring |       | $                                    | 2,467      |   |
| Cash payments                        |       | (1,618                               | )          |
| Adjustment                           |       | (215                                 | )          |
| Balance, February 28, 2005      |       | $                                    | 634        |   |
|                                      |            |                                      |            |  |  |

 

As of February 28, 2005, remaining reserve balances related toprior years’ restructurings consist of $0.1 million in employee related costsand $0.07 million of facility closure liabilities. The employee-related costsare included in accrued compensation and benefits and are expected to be paidin full during fiscal 2005. The facility closure related costs are included inother accrued liabilities and are expected to be paid in full during the firstquarter of fiscal 2006.

 

**8.****            ****GOODWILL AND INTANGIBLEASSETS**

 

The changes in the carrying amount of goodwill for the nine monthsended February 28, 2005 are as follows (in thousands):

 
| Balance as of May 31, 2004          |   | $   | 43,042 |   |
|------------------------------------------|--------|-----|--------|--------|
| Contingent consideration adjustment, net |   | (89 | )      |
| Currency translation effect              |   | 419 |   |
| Balance as of February 28, 2005     |   | $   | 43,372 |   |

 

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

 
| ** **             | ** ** | **February 28, 2005**   | ** ** | **May 31, 2004**         | ** ** |
|------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Maintenance contracts  |       | $                            | 22,940     |                          | $          | 3,315 |   | $ | 19,625 |   | $ | 22,940 |   | $ | 324 |   | $ | 22,616 |   |
| Acquired technology    |       | 14,412                       |       | 7,700                         |       | 6,712 |   | 14,272 |   | 5,183 |   | 9,089 |   |
| Client lists           |       | 11,391                       |       | 3,607                         |       | 7,784 |   | 11,254 |   | 2,594 |   | 8,660 |   |
| Non-compete agreements |       | 648                          |       | 423                           |       | 225 |   | 632 |   | 230 |   | 402 |   |
|                   |       | $                            | 49,391     |                          | $          | 15,045 |   | $ | 34,346 |   | $ | 49,098 |   | $ | 8,331 |   | $ | 40,767 |   |

 

Intangible assets are amortized on a straight-line basis over theestimated periods benefited, generally three to five years for acquired technology,four to ten years for client lists, and the term of the agreement fornon-compete agreements.  Intangibleassets for maintenance contracts are amortized under a front end loadedaccelerated amortization schedule, over the estimated term of the agreementsbased on the estimated revenue for the applicable period in relation to thetotal estimated revenue.  Amortizationexpense for the three months ended February 28, 2005 and February 29,2004 was $2.2 million and $1.1 million, respectively.  Amortization expense for the nine monthsended February 28, 2005 and February 29, 2004 was $6.6 million and$2.8 million, respectively. Amortization expense is reported in amortization of acquiredintangibles, cost of license fees and cost of services in the accompanyingCondensed Consolidated Statements of Operations.

 

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

 
| Remainder of Fiscal Year 2005 |   | $     | 2,329  |   |
|-------------------------------|--------|-------|--------|--------|
| Fiscal Year 2006              |   | 8,613 |   |
| Fiscal Year 2007              |   | 6,941 |   |
| Fiscal Year 2008              |   | 4,660 |   |
| Fiscal Year 2009              |   | 3,633 |   |
| Thereafter                    |   | 8,170 |   |
|                          |   | $     | 34,346 |   |

 

**9.****            ****COMMITMENTS ANDCONTINGENCIES**

 

TheCompany has contingent consideration agreements related to acquisitions rangingin the aggregate from zero to $8.6 million, measured over various periodsthrough fiscal 2007, based on the acquired company’s future performance.Contingent consideration is recorded as additional goodwill.  During the three months ended August 31,2004, a $0.3 million adjustment to reduce goodwill related to contingentconsideration was recorded. During the three months ended November 30,2004, a $0.2 million increase to goodwill consideration was recorded under thecontingent consideration agreements. No contingent consideration was earned oradjusted during the three months ended February 28, 2005.

 

The Company is involved in various claims and legal actions in thenormal course of business. Management is of the opinion that the outcome ofsuch legal actions will not have a significant adverse effect on the Company’sfinancial position, results of operations or cash flows. Notwithstandingmanagement’s belief, an unfavorable resolution of some or all of these matterscould materially affect the Company’s future results of operations and cashflows.

 

In February 2004, the Company entered into an offshore agreementwith a third-party to provide software maintenance services. If the Companyterminates the agreement prior to its initial twenty-four month term, atermination fee will be incurred equal to the sum of the previous nine monthsservice charges, estimated to be approximately $1.6 million. Management is ofthe opinion that the agreement will not be terminated within the twenty-fourmonth period.

 

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**10.****          SUPPLEMENTALCASH FLOW INFORMATION**

 

During the nine months ended February 29, 2004the Company paid cash totaling $15.9 million for the acquisitions of ApexionTechnologies Inc., Closedloop Solutions, Inc and Numbercraft Limited. Aconsolidated summary of the acquisitions is as follows (in thousands):

 
| ** **                     | ** ** | **Nine Months  Ended  February 29,  2004** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|
| Details of acquisition:        |       |                                            |       |
| Fair value of assets           |       | $                                               | 20,697     |   |
| Less liabilities assumed       |       | (4,593                                          | )          |
| Cash paid                      |       | 16,104                                          |       |
| Less cash acquired             |       | (225                                            | )          |
| Net cash paid for acquisitions |       | $                                               | 15,879     |   |

 

**11.****         ****SEGMENT AND GEOGRAPHIC AREAS**

 

The Company views its operations and manages its business as onesegment, the development and marketing of computer software and relatedservices. Factors used to identify the Company’s single operating segmentinclude the financial information available for evaluation by the chiefoperating decision maker in making decisions about how to allocate resourcesand assess performance.  The Companymarkets its products and services through the Company’s offices in the UnitedStates and its wholly-owned branches and subsidiaries operating in Canada, theUnited Kingdom, France and the Netherlands. The following table presentsrevenues and long-lived assets summarized by geographic region (in thousands):

 
| ** **               | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|--------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | **February 28,  2005** | ** ** | **February 29,  2004** | ** ** | **February 28,  2005** | ** ** | **February 29,  2004** | ** ** |
| Revenues:                |       |                        |       |                        |       |   |   |   |   |
| Domestic operations      |       | $                           | 78,490     |                        | $          | 84,692 |   | $ | 235,097 |   | $ | 245,474 |   |
| International operations |       | 4,224                       |       | 6,914                       |       | 13,301 |   | 18,399 |   |
| Consolidated             |       | $                           | 82,714     |                        | $          | 91,606 |   | $ | 248,398 |   | $ | 263,873 |   |
|                          |            |                             |            |                             |            |  |  |  |  |  |  |  |  |  |

 
|                     |   | **February 28,  2005** |   | **May 31,  2004** |   |
|--------------------------|--------|-----------------------------|--------|------------------------|--------|
| Long-lived assets:       |   |                        |   |                   |   |
| Domestic operations      |   | $                           | 76,723 |                   | $      | 84,482 |   |
| International operations |   | 15,812                      |   | 16,562                 |   |
| Consolidated             |   | $                           | 92,535 |                   | $      | 101,044 |   |

 

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

 
| ** **              | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|-------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **February 28,  2005** | ** ** | **February 29,  2004** | ** ** | **February 28,  2005** | ** ** | **February 29,  2004** | ** ** |
| Components of revenues: |       |                        |       |                        |       |   |   |   |   |
| License fees            |       | $                           | 13,924     |                        | $          | 25,195 |   | $ | 40,370 |   | $ | 65,169 |   |
| Services:               |       |                        |       |                        |       |   |   |   |   |
| Consulting              |       | 25,513                      |       | 28,121                      |       | 81,169 |   | 84,838 |   |
| Maintenance             |       | 43,277                      |       | 38,290                      |       | 126,859 |   | 113,866 |   |
| Total services          |       | 68,790                      |       | 66,411                      |       | 208,028 |   | 198,704 |   |
| Total revenues          |       | $                           | 82,714     |                        | $          | 91,606 |   | $ | 248,398 |   | $ | 263,873 |   |

 

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**12.****          COMMONSTOCK REPURCHASES**

 

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

 

**13.****          INCOMETAXES**

 

The quarterly tax expense is measured using an estimated annual taxrate for the period. At February 28, 2005, the Company’s estimated annualtax rate is 43.9%. The Company’s effective tax rate is 25.8% and 39.0% for thethree months ended February 28,2005 and February 29, 2004, respectively. At February 28,2005, the Company applied the 43.9% estimated annual tax rate to the year todate loss for the nine months ended February 28, 2005. The taxbenefit was further adjusted for a tax benefit of $0.4 million recorded inthe three months ended February 28, 2005 related to the true-up ofthe tax provision computed for the twelve months ended May 31, 2004to the actual tax returns filed on February 15, 2005. The resulting taxprovision recorded results in an effective tax rate of 25.8% for the threemonths ended February 28, 2005.

 

The Company’s overall effective tax rate is 66.1% and 39.0% for thenine months ended February 28,2005 and February 29, 2004, respectively. The higher effectivetax rate is due to the recording of a tax benefit on the pre-tax book loss atthe estimated annual tax rate of 43.9% in the amount of $0.9 million forthe nine months ended February 28, 2005. This tax benefit was increased bya tax benefit of $0.4 million related to the true-up of the tax provisioncomputed for the twelve months ended May 31, 2004 to the actual taxreturns filed on February 15, 2005. The combination of these items resultsin an effective tax rate of 66.1% for the nine months ended February 28,2005.

 

The Company’s effective tax rate is 47.8% for the fiscal year ended May 31,2004 and includes the impact of a $1.2 million valuation allowance for netdeferred tax assets. The change in the effective tax rate from fiscal 2004 is aresult of the Company’s need for a significantly lower additional valuationallowance against the deferred tax asset. The Company is estimating a potentialvaluation allowance tax expense of $0.3 million for the twelve months ended May 31,2005.

 

The Company reviews its annual tax rate on a quarterly basis and makesnecessary changes. The estimated annual tax rate may fluctuate due to changesin forecasted annual operating income; changes to the valuation allowance fornet deferred tax assets; changes to actual or forecasted permanent book to taxdifferences; impacts from future tax settlements with state, federal or foreigntax authorities; or impacts from tax law changes. In addition, the Companyidentifies items which are not normal and recurring in nature and treats theseas discreet events. The tax effect of discreet items is booked entirely in thequarter in which the discreet event occurs.

 

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

 

**Forward-Looking Statements**

 

In addition to historical information, this Form 10-Q contains forward-lookingstatements. These forward-looking statements are made in reliance upon the safeharbor provisions of the Private Securities Litigation Reform Act of 1995.  The words “believe,” “expect,” “anticipate,” “intend,”“estimate,” “forecast,” “project,” “should” and similar expressions areintended to identify “forward-looking statements” within the meaning of thePrivate Securities Litigation Reform Act of 1995. Forward-looking statementsinclude, among others, statements about our future performance, thecontinuation of historical trends, the sufficiency of our sources of capitalfor future needs, the effects of acquisitions and the expected impact ofrecently issued accounting pronouncements. These forward-looking statements aresubject to certain risks and uncertainties that could cause actual results todiffer 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 andAnalysis of Financial Condition and Results of Operations—Factors That May AffectOur Future Results or the Market Price of Our Stock.” Readers are cautioned notto place undue reliance on these forward-looking statements, which reflectmanagement’s opinions only as of the date hereof. We undertake no obligation torevise or publicly release the results of any revision to these forward-lookingstatements based on circumstances or events, which occur in the future. Readersshould carefully review the risk factors described in this report on Form 10-Qand in other documents we file from time to time with the Securities andExchange Commission.

 

**Business Overview**

 

We provide business application software, services and support thathelp 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 businessapplication software and providing comprehensive professional services,including consulting, training and implementation services, as well as ongoingclient support. Consulting, training and implementation services are generallynot essential to the functionality of our software products, are soldseparately and also are available from a number of third-party serviceproviders. Accordingly, revenues from these services are generally recordedseparately from the license fee. Additionally, we generate a portion of ourrevenues from reselling our business application software through third-partyvendors. We have offices and affiliates serving North and South America,Europe, Asia, Africa and Australia.

 

**Difficult Operating EnvironmentDuring the Three and Nine Months Ended February 28, 2005**

 

We continue to face a difficult environment for sales of our softwareand services.  Our license fee revenuedeclined year-over-year during the three and nine months ended February 28,2005 due to reduced software purchasing activity by our potential clients andcompetition from Oracle Corporation and SAP AG. We believe the reduced purchasing activity results from lower capitalspending by potential clients for new software systems, uncertainty amongpotential clients due to consolidation and other factors in the softwareindustry, and competing priorities for resources within our clients such as therecent focus on Sarbanes-Oxley compliance by public companies.  When we compete with Oracle and SAP for newclients, we believe that both of those companies attempt to use theirrelatively larger size and greater market position as a competitive advantageagainst us.  In response, wehighlight our strong balance sheet and focus on client experience and return oninvestment.

 

Lower new software licensing activity in the three and nine monthsended February 28, 2005 also resulted in fewer consulting engagementsassociated with the implementation of new software systems, and associateddeclining professional services revenue during those periods.  During the fall of 2004, a new leadershipteam with extensive experience in consulting and services practices, was givenresponsibility for our professional services, and this team is in the processof implementing various improvements and enhancements to our services. Oursupport revenues increased, as compared to the prior year by $5.0 million and$13.0 million during the three and nine months ended February 28, 2005,due primarily to our acquisition of support contracts from Siemens in April 2004.Continued growth in support revenue depends in part on adding new softwareclients through licensing activity to offset normal client attrition due toclient consolidation and other factors.

 

Recognizing the need to better balance our operating expenses to thesofter sales environment, we continued our efforts to control costs, and on ayear-over-year basis, we reduced total operating expenses by $6.2 million and$8.8 million during the three and nine months ended February 28, 2005,respectively.

 

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**Critical Accounting Policies and Estimates**

 

Our discussion and analysis of financial condition and results ofoperations are based upon our unaudited condensed consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. The preparation of thesefinancial statements requires us to make estimates and assumptions that affectthe reported amounts of assets and liabilities at the date of the financialstatements, the reported amounts of revenues and expenses during the reportingperiod, and related disclosures of contingent assets and liabilities. The Notesto Condensed Consolidated Financial Statements contained herein describe oursignificant accounting polices used in the preparation of the consolidatedfinancial statements. On an on-going basis, we evaluate our estimates,including, but not limited to, those related to bad debt, product warranty reserves,intangible assets and contingencies. We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results could differ from theseestimates.

 

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

 

*Revenue Recognition.*  Revenuerecognition rules for software companies are very complex. We followspecific and detailed guidelines in determining the proper amount of revenue tobe recorded; however, certain judgments affect the application of our revenuerecognition policy. Revenue results are difficult to predict, and any shortfallin revenue or delay in recognizing revenue could cause our operating results tovary significantly from quarter to quarter.

 

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

 

We recognize revenues in accordance with the provisions of the AmericanInstitute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2,*Software Revenue Recognition*asamended by SOP 98-4, *Deferral of theEffective 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, andin accordance with the Securities and Exchange Commission Staff AccountingBulletin (SAB) No. 104, *RevenueRecognition*. We license software under non-cancelable licenseagreements and provide related professional services, including consulting,training, and implementation services, as well as ongoing client support.Consulting, training and implementation services are generally not essential tothe functionality of our software products, are sold separately and also areavailable from a number of third-party service providers. Accordingly, revenuesfrom these services are generally recorded separately from license fees.Software arrangements which include fixed-fee service components are recognizedas the services are performed and the costs to provide the related services areexpensed as incurred. Software arrangements which include services that areessential to the functionality of our software products are recognized usingcontract accounting and the percentage-of-completion methodology based on laborhours input. The amount of judgment involved in addressing significantassumptions, risks and uncertainties in applying the application of thepercentage-of-completion methodology can impact the amounts of revenue andrelated expenses reported in the consolidated financial statements. Our specificrevenue recognition policies are as follows:

 

• SoftwareLicense Fees — License fee revenuesfrom end-users are recognized when the software product has been shipped, provideda non-cancelable license agreement has been signed, there are no uncertaintiessurrounding product acceptance, the fees are fixed or determinable andcollection of the related receivable is considered probable. Provided the abovecriteria are met, license fee revenues from resellers are recognized when thereis a sell-through by a reseller to an end-user. A sell-through is determinedwhen we receive an order form from a reseller for a specific end-user sale. Wedo not generally offer rights of return, acceptance clauses or price protectionto our clients. In situations where we do provide rights of return oracceptance clauses, revenue is deferred until the clause expires. Typically,our software license fees are due within a twelve-month period from the date ofshipment. If the fee due from the client is not fixed or determinable,including payment terms greater than twelve months from shipment, revenue isrecognized as payments become due and all other conditions for revenuerecognition have been satisfied. In software arrangements that include rightsto multiple software products, specified upgrades, support or services, weallocate the total arrangement fee among each deliverable using the fair valueof each of the deliverables determined using vendor-specific objectiveevidence. Vendor-specific objective evidence of fair value is determined usingthe price charged when that element is sold separately. In softwarearrangements in which we have fair value of all undelivered elements but not ofa delivered element, we use the residual method to record revenue.  Under the residual method, the fair value ofthe undelivered elements is deferred and the remaining portion of thearrangement fee is allocated to the delivered element(s) and is recognized asrevenue. In software

 

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arrangements in which we do not havevendor-specific objective evidence of fair value of all undelivered elements,revenue is deferred until fair value is determined or all elements for which wedo not have vendor-specific objective evidence of fair value have beendelivered.

 

•Services—Revenues from training and consulting services are recognized asservices are provided to clients. Revenues from support contracts are deferredand recognized ratably over the term of the support agreements. Revenues forclient support that are bundled with the initial license fee are deferred basedon the fair value of the bundled support services and recognized ratably overthe term of the agreement. Fair value is based on the renewal rate forcontinued support arrangements.

 

*Allowance for Doubtful Accounts.* We maintain an allowance for doubtful accounts at an amount we estimate to besufficient to provide adequate protection against losses resulting fromextending credit to our clients. In judging the adequacy of the allowance fordoubtful accounts, we consider multiple factors including historical bad debtexperience, the general economic environment, the need for specific clientreserves and the aging of our receivables. This provision is included inoperating expenses as a general and administrative expense. A considerableamount of judgment is required in assessing these factors. If the factorsutilized in determining the allowance do not reflect future performance, then achange in the allowance for doubtful accounts would be necessary in the periodsuch determination has been made impacting future results of operations.

 

*Sales Returns and Allowances*.** **Althoughwe do not provide a contractual right of return, in the course of arriving atpractical business solutions to various warranty and other claims, we haveallowed sales returns and allowances. We record a provision for estimated salesreturns and allowances on license and services in the same period the relatedrevenues are recorded or when current information indicates additional amountsare required. These estimates are based on historical experience determined byanalysis of specific return activity and other known factors. If the historicaldata we utilize does not reflect future performance, then a change in the allowanceswould be necessary in the period such determination has been made impactingfuture results of operations.

 

*Valuation of Long-Lived and Intangible Assetsand Goodwill.*   We review identifiableintangible and other long-lived assets for impairment whenever events orchanges in circumstances indicate the carrying amount may not be recoverable.Events or changes in circumstances that indicate the carrying amount may not berecoverable include, but are not limited to, a significant decrease in themarket value of the business or asset acquired, a significant adverse change inthe extent or manner in which the business or asset acquired is used or asignificant adverse change in the business climate. If such events or changesin circumstances are present, the first step of the goodwill impairment test,used to identify potential impairment, compares the fair value of a reportingunit with its carrying amount, including goodwill. We operate as one reportingunit and therefore compare our book value to market value. If our market valueexceeds our book value, goodwill is considered not impaired, thus the secondstep of the impairment test is not necessary. If our book value exceeds ourmarket value, the second step of the goodwill impairment test shall be performedto measure the amount of impairment loss, if any. The second step of thegoodwill impairment test, used to measure the amount of impairment loss,compares the implied fair value of the goodwill with the book value of thegoodwill. If the carrying value of the goodwill exceeds the implied fair valueof the goodwill, an impairment loss would be recognized in an amount equal tothe excess. Any loss recognized cannot exceed the carrying amount of goodwill.After a goodwill impairment loss is recognized, the adjusted carrying amount ofgoodwill is the new accounting basis. A subsequent reversal of a previouslyrecognized goodwill impairment loss is prohibited once the measurement of thatloss is completed.

 

* IncomeTaxes.*  Significantjudgment is required in determining our income taxes in each of thejurisdictions in which we operate. This process involves estimating our actualcurrent tax exposure together with assessing temporary differences resultingfrom differing treatment of items for tax and financial reporting purposes.These differences result in deferred tax assets and liabilities, which areincluded within our condensed consolidated balance sheets. Although we believeour assessments are reasonable, no assurance can be given that the final taxoutcome of these matters will not be different than that which is reflected inour historical income tax provisions, benefits and accruals. Such differencescould have a material effect on our income tax provision and net income (loss)in the period in which such a determination is made.

 

We must assess the likelihood that our netdeferred tax assets will be recovered from future taxable income and to theextent we believe that recovery is not likely, we must establish a valuationallowance. To the extent we establish a valuation allowance; we must include anexpense within the tax provision in the statement of operations. As of May 31,2004, the condensed consolidated balance sheet included net deferred tax assetsin the amount of $27.7 million.  For theyear ended May 31, 2004, we recorded a valuation allowance of $1.2 millionassociated primarily with federal

 

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contribution carryforwards,state net operating loss carryforwards and certain federal tax credit carryforwardsthat are estimated to expire prior to our utilization.

 

Our methodology for determining therealizability of our deferred tax assets involves estimates of future taxableincome from our core business, the estimated impact of future stock option deductionsfrom outstanding stock options, and the expiration dates and amounts of netoperating loss carryforwards and other tax credits. These estimates areprojected through the life of the related deferred tax assets based onassumptions which management believes to be reasonable and consistent withcurrent operating results.

 

Although we had cumulative pre-tax income forfinancial reporting purposes for the three years ended May 31, 2004, we did not pay any significant income taxes over that periodbecause tax deductions from the exercise of stock options granted prior to ourinitial public offering generated tax operating losses for the years ended May 31,2004, 2003 and 2002.  In assessing therealizability of our deferred tax assets as of May 31, 2004, we consideredevidence regarding our ability to generate sufficient future taxable income torealize our deferred tax assets. The primary evidence considered included thecumulative tax operating loss for the past three years; the cumulative pre-taxincome for financial reporting purposes for the past three years; the estimatedimpact of future tax deductions from the exercise of stock options outstandingas of May 31, 2004; and the estimated future taxable income based onhistorical operating results.

 

After giving consideration to these factors,we concluded that it was more likely than not that tax loss carryforwards andother tax credits that expire within the next ten years will not be utilizedprimarily due to the estimated future tax deductions from the exercise of stockoptions 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 incometaxes of $1.2 million for certain deferred tax assets associated primarily withfederal contribution carryforwards, state net operating loss carryfowards andcertain federal tax credit carryfowards.

 

As of February 28, 2005, we updated ouranalysis to reflect the necessary changes in estimates and determined that anincrease in the valuation allowance in the amount of $0.3 million will benecessary. This anticipated increase has been reflected in the computation ofthe estimated annual effective tax rate. This increase is primarily due toadditional federal contribution carryforwards and state net operating losscarryforwards.

 

We also concluded that it was more likelythan not that the net deferred tax assets of $23.8 million as of February 28,2005 as well as the estimated future tax deductions from the exercise of stockoptions outstanding as of February 28, 2005 would be utilized prior toexpiring in greater than ten years. Based on this conclusion, we would requireapproximately $119.2 million in cumulative future taxable income to begenerated at various times over the next twenty years to realize the relatednet deferred tax assets of $23.8 million as of February 28,2005 as well as the estimated future tax deductions from the exercise of stockoptions outstanding and in-the-money as of February 28, 2005.Additionally, we determined that it is likely the net deferred tax assets willcontinue to increase for the next several years prior to utilization of the taxloss carryforwards and could reach in excess of $33.7 million if the stockoptions outstanding and in-the-money as of February 28, 2005 areexercised.

 

In the event that we adjust estimates of futuretaxable income or tax deductions from the exercise of stock options, or ourstock price increases significantly without a corresponding increase in taxableincome, we may need to establish an additional valuation allowance, which couldmaterially impact our financial position and results of operations. Wecurrently expect the fourth quarter of fiscal 2005 to be profitable; however ifactual results differ significantly from estimated results, we would likely berequired to fully reserve our deferred tax assets.

 

*Contingencies.*  Weare subject to the possibility of various loss contingencies in the normalcourse of business. We accrue for loss contingencies when a loss is estimatableand probable.

 

**Informal Securities and Exchange Commission Investigation**

 

On January 5, 2005, we announced thatthe Securities and Exchange Commission (SEC) conducted an informalinvestigation concerning our revenue recognition practices. We have fullycooperated with the SEC. In response to a telephone call from the SEC seekinginformation from us, our Audit Committee retained independent legal counsel,which retained an independent accounting firm, to investigate thoroughly theissues identified by the SEC. The Audit Committee’s investigation was completedin January 2005. Following the Audit Committee’s investigation, weconcluded that our financial statements can continue to be relied upon and neednot be restated.  The Audit Committeeshared the results of its independent investigation with the SEC, and we willcontinue to provide information to the SEC as the process proceeds. The SEC hasnot concluded its informal investigation, and it is not bound by the results ofour independent investigation.

 

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We incurred approximately $2.6 million infees and expenses for this independent investigation, of which approximately$0.6 million was incurred during the second quarter of fiscal 2005 and $2.0million was incurred during the third quarter of fiscal 2005. If the SECinitiates a formal investigation or initiates other actions we would incuradditional fees and expenses and may incur other associated costs orliabilities.

 

**Results of Operations**

 

The following table sets forth certain line items in our condensedconsolidated statements of operations as a percentage of total revenues for theperiods indicated:

 
| ** **                            | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **February 28,  2005** | ** ** | **February 29,  2004** | ** ** | **February 28,  2005** | ** ** | **February 29,  2004** | ** ** |
|                                  |       |                        |       |                        |       |   |   |   |   |
| Revenues:                             |       |                        |       |                        |       |   |   |   |   |
| License fees                          |       | 16.8                        | %          | 27.5                        | %          | 16.3 | % | 24.7 | % |
| Services                              |       | 83.2                        |       | 72.5                        |       | 83.7 |   | 75.3 |   |
| Total revenues                        |       | 100.0                       |       | 100.0                       |       | 100.0 |   | 100.0 |   |
|                                  |       |                        |       |                        |       |   |   |   |   |
| Cost of revenues:                     |       |                        |       |                        |       |   |   |   |   |
| Cost of license fees                  |       | 2.7                         |       | 4.3                         |       | 3.0 |   | 4.6 |   |
| Cost of services                      |       | 41.4                        |       | 37.4                        |       | 43.4 |   | 37.9 |   |
| Total cost of revenues                |       | 44.1                        |       | 41.7                        |       | 46.4 |   | 42.5 |   |
|                                  |       |                        |       |                        |       |   |   |   |   |
| Gross margin                          |       | 55.9                        |       | 58.3                        |       | 53.6 |   | 57.5 |   |
|                                  |       |                        |       |                        |       |   |   |   |   |
| Operating expenses:                   |       |                        |       |                        |       |   |   |   |   |
| Research and development              |       | 18.7                        |       | 18.5                        |       | 18.8 |   | 17.9 |   |
| Sales and marketing                   |       | 21.4                        |       | 25.8                        |       | 23.4 |   | 25.8 |   |
| General and administrative            |       | 12.5                        |       | 9.9                         |       | 10.7 |   | 10.8 |   |
| Restructuring                         |       | (0.2                        | )          | —                      |       | 2.1 |   | 0.8 |   |
| Amortization of acquired  intangibles |       | 0.5                         |       | 0.3                         |       | 0.5 |   | 0.3 |   |
| Total operating expenses              |       | 52.9                        |       | 54.5                        |       | 55.5 |   | 55.6 |   |
|                                  |       |                        |       |                        |       |   |   |   |   |
| Operating income (loss)               |       | 3.0                         |       | 3.8                         |       | (1.9 | ) | 1.9 |   |
|                                  |       |                        |       |                        |       |   |   |   |   |
| Other income                          |       | 1.5                         |       | 0.8                         |       | 1.1 |   | 0.9 |   |
| Income (loss) before income  taxes    |       | 4.5                         |       | 4.6                         |       | (0.8 | ) | 2.8 |   |
| Provision (benefit) for income  taxes |       | 1.2                         |       | 1.8                         |       | (0.5 | ) | 1.1 |   |
| Net income (loss)                     |       | 3.3                         | %          | 2.8                         | %          | (0.3 | )% | 1.7 | % |

 

**Three Months Ended February 28, 2005 Compared To ThreeMonths Ended February 29, 2004**

 

***Revenues***

 

*Total Revenues.*    Welicense software under non-cancelable license agreements and provide relatedprofessional services including consulting, training, and implementationservices, as well as ongoing client support. Total revenues decreased to$82.7 million for the three months ended February 28, 2005 from$91.6 million for the three months ended February 29, 2004,representing a decrease of 9.7%. The $8.9 million decline in total revenue wasattributed to a $11.3 million decline in license fees that was partially offsetby a $2.4 million increase in services.

 

*License Fees.*    Revenuesfrom license fees decreased to $13.9 million for the three months ended February 28,2005 from $25.2 million for the three months ended February 29, 2004,representing a decrease of 44.7%. The $11.3 million decline in license fees wasprimarily due to a reduction in new client business activity and continuedconsolidation and uncertainty in the industry as well as priorities such asSarbanes-Oxley compliance by public companies reducing capital spending onsoftware. The average overall selling price of our licensing transactions forthe three months ended February 28, 2005 decreased 29.8%, while the numberof licensing transactions decreased 26.5% as compared to the same three monthperiod of fiscal 2004.  Revenues fromlicense fees as a percentage of total revenues, for the three months ended February 28,2005 and February 29, 2004, were 16.8% and 27.5%, respectively.

 

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*Services.*    Revenuesfrom services increased to $68.8 million for the three months ended February 28,2005 from $66.4 million for the three months ended February 29, 2004,representing an increase of 3.6%.  The$2.4 million increase in services was due to a $5.0 million increase in supportrevenue that was partially offset by a $2.6 million decrease in consultingrevenue. The $5.0 million increase in support revenue was primarily due to a$2.7 million increase in revenue earned on support contracts purchased in April 2004,strong renewals and price increases.  The$2.6 million decrease in consulting revenue is consistent with lower businessactivity in product sales that directly impacts consulting revenue.  Services, as a percentage of total revenues,for the three months ended February 28, 2005 and February 29, 2004were 83.2% and 72.5%, respectively.

 

***Cost of Revenues***

 

*Cost of License Fees.*   Costof license fees includes royalties to third parties, amortization of acquiredsoftware and software delivery expenses. Our software solutions may includeembedded components of third-party vendors, for which a fee is paid to thevendor upon sale of our products. In addition, we resell third-party productsin conjunction with the license of our software solutions. The cost of licensefees is higher when we resell products of third-party vendors. As a result,gross profits vary depending on the proportion of third-party product sales inour revenue mix.

 

Cost oflicense fees decreased to $2.2 million for the three months ended February 28,2005 from $3.9 million for the three months ended February 29, 2004,representing a decrease of 42.9%.  The$1.7 million decrease was primarily due to a 44.7% decline in license feeswhich included a decline in the proportion of third-party product sales in ourrevenue mix. Cost of license fees as a percentage of total revenues for thethree months ended February 28, 2005 and February 29, 2004 were 2.7%and 4.3%, respectively. Gross margin on revenue from license fees was 84.0% and84.5% for the three months ended February 28, 2005 andFebruary 29, 2004, respectively.

 

*Cost of Services. *Cost of servicesincludes the salaries, employee benefits and related travel and overhead costsfor providing consulting, training, implementation and support services toclients as well as intangible asset amortization on support contracts purchasedin April 2004. Cost of services was $34.3 million for both the threemonths ended February 28, 2005 and February 29, 2004.  Cost of services was consistent year overyear primarily due to several offsetting factors including, a $1.6 millionincrease in third-party consulting costs resulting from a higher proportion ofthird-party services in our revenue mix; and a $1.0 million increase inamortization related to support contracts purchased in April 2004. Theseincreases were offset by a $1.3 million decrease in employee related costs,including a $0.7 million decrease due to the favorable impacts fromrestructuring activities and a $0.6 million reduction in incentivecompensation; and a $1.0 million decrease in travel related costs, driven bylower consulting revenues and general cost containment activities. Cost ofservices as a percentage of total revenues for the three months ended February 28,2005 and February 29, 2004 were 41.4% and 37.4%, respectively.  Gross margin on services revenues were 50.2%and 48.4% for the three months ended February 28, 2005 and February 29,2004, respectively.

 

***Operating Expenses***

 

*Research and Development.*    Research and developmentexpenses consist primarily of salaries, employee benefits, related overheadcosts and consulting fees relating to product development, enhancements,upgrades, testing, quality assurance and documentation.  Research and development expenses decreasedto $15.5 million for the three months ended February 28, 2005 from$16.9 million for the three months ended February 29, 2004,representing a decrease of 8.3%.  The$1.4 million decrease in research and development was primarily due to a $1.2million reduction in employee related costs, including a $0.6 million decreasedue to the favorable impacts from restructuring activities, a $0.5 milliondecrease in incentive compensation, and a $0.4 million decrease due to areduction in headcount, partially offset by a $0.3 million increase in annualsalaries; a $0.5 million decrease in costs due to general cost containmentactivities. These decreases were partially offset by a $0.7 million increase inspending on corporate initiatives, including $0.6 million related to thethird-party offshore software support services agreement we entered into in February 2004.Research and development expenses as a percentage of total revenues for thethree months ended February 28, 2005 andFebruary 29, 2004 were 18.7% and 18.5%, respectively.

 

*Sales and Marketing.*   Sales and marketingexpenses consist primarily of salaries and incentive compensation, employeebenefits, travel and overhead costs related to our sales and marketingpersonnel, as well as trade show activities and advertising costs.  Sales and marketing expenses decreased to$17.7 million for the three months ended February 28, 2005 from$23.6 million for the three months ended February 29, 2004,representing a decrease of 25.1%.

 

The $5.9 million decrease insales and marketing expenses was primarily due to a $3.5 million decrease inemployee related costs, including a $1.8 million decrease due to incentivecompensation, and a $1.3 million decrease due to

 

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thefavorable impacts from restructuring activities; a $1.1 million decrease incosts associated with marketing initiatives, including event spending, publicrelations costs and industry analyst relations costs; a $0.8 million decreasein costs due to general cost containment activities, primarily travel relatedcosts; and a $0.5 million decrease in office support costs. Sales and marketingexpenses as a percentage of total revenues for the three months ended February 28,2005 and February 29, 2004 were 21.4% and 25.8%, respectively.

 

*General and Administrative.*    General andadministrative expenses consist primarily of salaries, employee benefits andrelated overhead costs for administrative employees, as well as legal andaccounting expenses, consulting fees, bad debt expense and corporate insurance expensesincluding property and casualty, general liability and other insurance.  General and administrative expenses increasedto $10.3 million for the three months ended February 28, 2005 from$9.1 million for the three months ended February 29, 2004,representing an increase of 13.6%.

 

The $1.2 million increase ingeneral and administrative expenses was primarily due to a $2.0 millionincrease in fees and expenses related to the SEC’s informal investigation; anda $1.0 million increase in costs primarily associated with Sarbanes-Oxleycompliance initiatives. These increases were partially offset by a $1.2 milliondecline in bad debt expense reflecting a general reduction of accountsreceivable as well as the favorable results that our focused collection effortsand a favorable client settlement had on reducing our reserve requirements; anda $0.3 million decrease in employee related costs.  General and administrative expenses as apercentage of total revenues for the three months ended February 28, 2005and February 29, 2004 were 12.5% and 9.9%, respectively.

 

*Restructuring.*   Duringthe three months ended February 28, 2005, we recorded a $0.2 million netreversal of restructuring for costs associated with severance and relatedbenefits that will not be incurred related to the fiscal 2005 restructuringplans (Phase I and II). For additional information related to our restructuringinitiatives refer to the following discussion regarding Restructuring under oursummary of results of operations for the Nine Months Ended February 28,2005 Compared to the Nine Months Ended February 29, 2004 as well as Note 7of Notes to Condensed Consolidated Financial Statements.

 

During thethree months ended February 28, 2005, we experienced a reduction in ouremployee related costs of approximately $3.8 million due to our fiscal 2005restructuring activities.

 

Cash paymentsduring the three months ended February 28, 2005 for the fiscal 2005restructuring plans (Phase I and II) were $2.2 million. The remaining cashpayments for the fiscal 2005 restructuring plans are expected to be completedduring the first quarter of fiscal 2006. Although the prior years’restructuring plans have been fully executed, we continue to make cash paymentsfor continuing lease and employee related costs. During the three months ended February 28,2005, we made cash payments totaling $0.04 million. During the three monthsended February 29, 2004, we made cash payments totaling $0.3 million. Theremaining cash payments for the prior years’ restructuring plans are expectedto be completed during the first quarter of fiscal 2006.

 

*Amortization of Acquired Intangibles. * Amortizationof acquired intangibles increased to $0.4 million for the three monthsended February 28, 2005 from $0.3 million for the three months ended February 29,2004. The $0.1 million increase in amortization expense is primarily due toincreases in amortization of intangibles associated with support contractsacquired in April 2004.

 

***Other Income, Net***

 

Other income,net, which is primarily comprised of interest income earned from cash,marketable securities and long term investments increased to $1.3 million forthe three months ended February 28, 2005 from $0.8 million for the threemonths ended February 29, 2004. The $0.5 million increase in interestincome is primarily due to an increase in the average yield on investmentscompared to the same prior year period partially offset by an approximate $16.1million decrease in average invested balances compared to the same prior yearperiod.

 

***Provision (Benefit) for Income Taxes***

 

We recognized $1.0million of income tax expense for the three months ended February 28, 2005compared to $1.6 million for the three months ended February 29,2004.  Our effective tax rate was 25.8%and 39.0% for the three months endedFebruary 28, 2005 and February 29,2004, respectively.  At February 28,2005, the Company applied the 43.9% estimated annual tax rate to the year todate loss for the nine months ended February 28, 2005. The tax benefit wasfurther adjusted for a tax benefit of $0.4 million recorded in the threemonths ended February 28, 2005 related to the true-up of the tax provisioncomputed for the twelve months ended May 31, 2004 to the actual taxreturns filed on February 15, 2005. The resulting tax provision recordedresults in an effective tax rate of 25.8% for the three months ended February 28,2005. We review our effective tax rate on a quarterly basis and make necessarychanges.

 

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**Nine months Ended February 28, 2005 Compared To Ninemonths Ended February 29, 2004**

 

*Total Revenues.*    Total revenues decreased to $248.4 million for the nine months ended February 28,2005 from $263.9 million for the nine months ended February 29, 2004,representing a decrease of 5.9%.  The$15.5 million decline in total revenue was attributed to a $24.8 milliondecline in license fees that was partially offset by a $9.3 million increase inservices.

 

*License Fees.*    Revenuesfrom license fees decreased to $40.4 million for the nine months ended February 28,2005 from $65.2 million for the nine months ended February 29, 2004,representing a decrease of 38.1%.  The$24.8 million decline in license fees was primarily due to a reduction in newclient business activity as well as priorities such as Sarbanes-Oxleycompliance by public companies reducing capital spending on software. Theaverage overall selling price of our licensing transactions for the nine monthsended February 28, 2005, decreased 22.8% while the number of licensingtransactions decreased 18.4% as compared to the same nine month period offiscal 2004.  Revenues from license feesas a percentage of total revenues for the nine months ended February 28,2005 and February 29, 2004 were 16.3% and 24.7%, respectively.

 

*Services.*    Revenuesfrom services increased to $208.0 million for the nine months ended February 28,2005 from $198.7 million for the nine months ended February 29, 2004,representing an increase of 4.7%.  The$9.3 million increase in services was due to a $13.0 million increase insupport revenue offset by a $3.7 million decrease in consulting revenue. The$13.0 million increase in support revenue was primarily due to an $8.4 millionincrease in revenue earned on support contracts purchased in April 2004,strong renewals and price increases. The $3.7 million decrease in consultingrevenue is consistent with lower business activity in product sales thatdirectly impacts consulting revenue. Services as a percentage of total revenuesfor the nine months ended February 28, 2005 and February 29, 2004were 83.7% and 75.3%, respectively.

 

***Cost of Revenues***

 

*Cost of License Fees.*   Costof license fees decreased to $7.5 million for the nine months ended February 28,2005 from $12.0 million for the nine months ended February 29, 2004,representing a decrease of 37.4%.  The$4.5 million decrease was primarily due to a 38.1% decline in license feeswhich included a decline in the proportion of third-party product sales in ourrevenue mix. Cost of license fees as a percentage of total revenues for thenine months ended February 28, 2005 and February 29, 2004 were 3.0%and 4.6%, respectively. Gross margin on revenue from license fees was 81.4% and81.6% for the nine months ended February 28, 2005 and February 29,2004, respectively.

 

*Cost of Services. *Cost of servicesincreased to $107.8 million for the nine months ended February 28,2005 from $100.1 million for the nine months ended February 29, 2004,representing an increase of 7.7%.  The$7.7 million increase in cost of services was primarily due to a $5.0 millionincrease in third-party consulting costs as a result of a higher proportion ofthird-party services in our revenue mix; a $3.0 million increase in amortizationrelated to support contracts purchased in April 2004; and a $1.0 millionincrease in employee related costs, including a $1.6 million increase in annualsalary increases, partially offset by a $0.8 million decrease due to thefavorable impacts from restructuring activities.  These increases were partially offset by a$0.7 million decrease in travel related costs; a $0.4 million decrease incosts related to general cost containment activities; and a $0.2 milliondecrease in our sales reward program.  Costof services as a percentage of total revenues for the nine months ended February 28,2005 and February 29, 2004 were 43.4% and 37.9%, respectively.  Gross margin on services revenues were 48.2%and 49.6% for the nine months ended February 28, 2005 and February 29,2004, respectively.

 

***Operating Expenses***

 

*Research and Development.*   Research and development expenses decreased to $46.8 million for the ninemonths ended February 28, 2005 from $47.1 million for the nine monthsended February 29, 2004, representing a decrease of 0.6%. The$0.3 million decrease in research and development expenses was primarilydue to a $2.3 million decrease in employee related costs, including a $1.9 million decrease inincentive compensation, a $0.9 million decrease due to the favorable impactsfrom restructuring activities, a $0.8 million decrease due to a reduction inheadcount, partially offset by a $1.0 million increase in annual salaries; anda $0.8 million decrease due to general cost containment activities.These decreases were partially offset by a $2.6 million increase in costsassociated with corporate initiatives, including $1.6 million related to thethird-party offshore software support services agreement we entered into in February 2004.Research and development expenses as a percentage of total revenues for thenine months ended February 28, 2005 and February 29, 2004 were18.8% and 17.9%, respectively.

 

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*Sales and Marketing.*    Sales and marketing expenses decreased to$58.2 million for the nine months endedFebruary 28, 2005 from $68.1 million for the nine months ended February 29,2004, representing a decrease of 14.5%.

 

The $9.9million decrease in sales and marketing expenses was primarily due to a $8.7million decrease in employee related costs, including a $4.1 million decreasedue to incentive compensation, a $1.9 million decrease due to the favorableimpacts resulting from restructuring activities, and a $1.9 million decreasedue to a reduction in headcount, partially offset by a $0.8 million increase inannual salaries; a $2.1 million decrease in costs due to general costcontainment activities, primarily travel related costs; and a $1.3 milliondecrease in other costs, primarily contract labor and rent. These decreaseswere partially offset by a $2.2 million increase in costs primarily associatedwith marketing initiatives, including event spending, public relations costsand industry analyst costs.  Sales andmarketing expenses as a percentage of total revenues for the nine months ended February 28,2005 and February 29, 2004 were 23.4% and 25.8%, respectively.

 

*General and Administrative.* Generaland administrative expenses decreased to $26.5 million for the nine monthsended February 28, 2005 from $28.4 million for the nine months ended February 29,2004, representing a decrease of 6.7%.

 

The $1.9million decrease in general and administrative expenses was primarily due to a$2.6 million decline in bad debt expense due to a general reduction ofaccounts receivable as well as the favorable results that our focusedcollection efforts and a favorable client settlement had on reducing ourreserve requirements; a $2.1 million decrease in other legal relatedcosts; and a$1.5 million decrease in employee related costs, including a $1.9 milliondecrease in incentive compensation, and a $0.3 million decrease due to thefavorable impacts of restructuring activities; and a $0.6 million decrease inother costs, primarily due to a $0.7 million asset impairment charge relatedto a discontinued project recorded in the prior year. These decreases werepartially offset by a $2.6 million increase in fees and expenses related to theSEC’s informal investigation; a $1.6 million increase in costs associated withSarbanes-Oxley compliance initiatives; and a $0.9 million increase due tocorporate initiatives designed to increase efficiencies.  General and administrative expenses as apercentage of total revenues for the nine months ended February 28, 2005and February 29, 2004 were 10.7% and 10.8%, respectively.

 

*Restructuring.*During the nine months ended February 28, 2005, we recorded $5.5 millionof restructuring charges related to corporate restructuring initiativesdesigned to enhance operating effectiveness and profitability. Partiallyoffsetting these charges was the reversal of $0.08 million of restructuringcharges recorded for the fiscal 2003 and fiscal 2002 restructuring plans thatwe determined would not be incurred. During the nine months ended November 30,2003, we recorded $2.3 million of restructuring charges related to corporaterestructuring initiatives designed to enhance operating effectiveness andprofitability. Partially offsetting these charges was the reversal of $0.04million of restructuring charges recorded for the fiscal 2002 restructuringplan that we determined would not be incurred.

 

On September 28,2004, we approved a plan designed to enhance the Company’s operatingeffectiveness and profitability. Under the restructuring plan (Phase I), westreamlined structure, consolidated leadership and reduced long-term costs torealign projected expenses with anticipated revenue levels. The plan includedthe reduction of approximately 100 employees in the United States and theUnited Kingdom, which in accordance with SFAS No. 112, *Employers Accounting for Post Employment Benefits - an amendment ofFASB Statements No. 5 and 43*, resulted in a charge forseverance and related benefits of $3.0 million in the second quarter ending November 30,2004. The reduction included employees who worked in operations, marketing,sales, research and development, maintenance and services. During the thirdquarter ended February 28, 2005 we recorded an unfavorable adjustment of$0.05 million for costs associated with severance and related benefits thatwill be incurred under the Phase I restructuring plan.  All terminations and related cash paymentswere primarily completed as of February 28, 2005. The remaining cashpayments are expected to be completed during the fourth quarter of fiscal 2005.

 

At November 30, 2004,we also accrued for a plan (Phase II) that included initiatives to furtherreduce costs and realign projected expenses with anticipated revenue levels. Itincluded a reduction of approximately 70 employees in the United States and theUnited Kingdom, and because we were able to determine probability at the end ofthe second quarter of fiscal 2005, the restructuring plan resulted in a chargeof approximately $2.5 million for severance and related benefits, in accordancewith SFAS No. 112.  The reductionincluded employees who worked in sales, research and development and services.All terminations and related cash payments were primarily completed as of February 28,2005.  The remaining cash payments areexpected to be completed during the first quarter of fiscal 2006. Duringthe third quarter ended February 28, 2005, we recorded a reversal of $0.2million for costs associated with severance and related benefits that will notbe incurred under the Phase II restructuring plan.

 

During thenine months ended February 28, 2005, we experienced a reduction in ouremployee related costs of approximately $5.2 million due to our fiscal 2005restructuring activities. We anticipate that we will experience

 

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approximately $4.6 million inadditional reductions in our employee related costs during the fourth quarterof fiscal 2005, for a total savings of $9.8 million in employee related costsduring fiscal 2005. As a result of our fiscal 2005 restructuring plans,beginning in fiscal 2006 and going forward we anticipate an annualizedreduction in our employee related costs of approximately $19.0 million.

 

As of February 28,2005, remaining reserve balances related to prior years’ restructurings consistof $0.1 million in employee related costs and $0.07 million of facility closureliabilities. The employee related costs are included in accrued compensationand benefits and the facility closure related costs are included in otheraccrued liabilities.

 

Cash paymentsduring the nine months ended February 28, 2005, for the fiscal 2005restructuring plans (Phase I and II) were $4.4 million.  Although the restructuring plans for fiscal2003 and 2002 have been fully executed, we continue to make cash payments forcontinuing lease and employee related costs. During the nine months ended February 28,2005, we made cash payments totaling $0.1 million. The remaining cash paymentsfor the prior years’ restructurings are expected to be completed during the firstquarter of fiscal 2006.

 

*Amortization of Acquired Intangibles. * Amortizationof acquired intangibles increased to $1.2 million for the nine monthsended February 28, 2005 from $0.9 million for the nine months ended February 29,2004. The $0.3 million increase in amortization expense is primarily due toincreases in amortization of intangibles associated with support contractsacquired in April 2004 and companies acquired since the prior year period.The companies acquired include Numbercraft Limited acquired in July 2003,Closedloop Solutions, Inc. acquired in September 2003 and ApexionTechnologies, Inc. acquired in October 2003.

 

***Other Income, Net***

 

Other income,net, which is primarily comprised of interest income earned from cash,marketable securities and long-term investments, increased to $2.8 million forthe nine months ended February 28, 2005 from $2.4 million for the ninemonths ended February 29, 2004.  The$0.4 million increase in interest income is due to an increase in the averageyield on investments partially offset by an approximate $24.0 million decreasein average invested balances compared to the same prior year period.

 

***(Benefit) Provision for Income Taxes***

 

We recognizeda $1.3 million income tax benefit for the nine months ended February 28,2005 compared to a $2.9 million income tax provision for the nine months ended February 29,2004. Our effective tax rate is 66.1% and 39.0% for the nine months ended February 28,2005 and February 29, 2004, respectively. At February 28, 2005, the Companyapplied the 43.9% estimated annual tax rate to the year to date loss for thenine months ended February 28, 2005. The tax benefit was furtheradjusted for a tax benefit of $0.4 million recorded in the three months ended February 28,2005, related to the true-up of the tax provision computed for the twelvemonths ended May 31, 2004 to the actual tax returns filed on February 15,2005.  The resulting tax provisionrecorded results in an effective tax rate of 66.1% for the nine months ended February 28, 2005.  We review our effective tax rate on aquarterly basis and make necessary changes.

 

**Liquidity and Capital Resources**

 

As of February 28,2005, we had $221.9 million in cash, cash equivalents and marketable securitiesand $181.9 million in working capital. Our most significant source of operatingcash flows is derived from license fees and services to our clients. Days salesoutstanding (DSO), which is calculated as net receivables at period end dividedby revenue for the quarter times 90 days in the quarter, was 46 and 59 as of February 28,2005 and May 31, 2004, respectively. The decrease in the DSO for the three months ended February 28, 2005as compared to the three months ended May 31, 2004 was due primarily to adecrease in net receivables as a result of focused collection efforts. Ourprimary uses of cash from operating activities are for employee costs,third-party costs for licenses and services and facilities.

 

We believethat cash, cash equivalents and marketable securities will be sufficient tomeet our cash requirements for working capital, capital expenditures andinvestments for at least the next twelve months.

 

***Cash flows fromoperating activities:***

 

Net cashprovided by operating activities was $17.1 million for the nine months ended February 28,2005 compared with $10.7 million for the nine months ended February 29,2004. Our net loss of $0.7 million was offset by 

 

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non-cash charges resulting in$23.9 million of cash from operations before working capital changes. Thenet working capital changes of $6.1 million reduced the overall cash providedto $17.1 million.

 

Thesignificant activity in cash flows from working capital changes for the ninemonths ended February 28, 2005 primarily related to a $22.5 millionincrease in cash from trade accounts receivable that was offset by a $10.8million decrease in accrued expenses and other liabilities; an $8.9 milliondecrease in deferred revenue and client deposits; and a $6.9 million increasein prepaid expenses and other assets.

 

The $22.5million increase in cash from trade accounts receivable was due primarily tofocused collection efforts.The $10.8 million decrease in accrued expenses and other liabilities was dueprimarily to the payment of employee benefits under our restructuring plans andthe payment of fiscal 2004 incentive compensation in the first quarter fiscal2005.  The $8.9 million decrease indeferred revenue and client deposits was primarily due to a decrease in cashreceived on support billings as a result of a change in client billing cyclesand other delayed collections.  Thechange in client billing cycles resulted in initially smaller client invoicesdue to pro-rata billings in an effort to get individual multiple client supportbillings to a common renewal date. The cash collections generated by thepro-rata billings will fluctuate according to renewal periods identified by ourclients. The $6.9 million increase in prepaid expenses and other assets wasprimarily due to an increase in our income tax receivable.

 

***Cash flows frominvesting activities:***

 

Net cash usedin investing activities was $15.4 million for the nine months ended February 28,2005 compared with$22.3 million for the nine months ended February 29, 2004. The decrease incash from investing activities for the nine months ended February 28, 2005primarily related to the proceeds from the maturities and sales ofmarketable securities that were used to augment cash flows from operations, tofund capital expenditures, share repurchases, and to repay debt. We have madereclassifications to our Condensed Consolidated Statement of Cash Flows for thenine months ended February 29, 2004, to reflect the gross purchases andgross sales of dutch auction rate securities as investing activities ratherthan as a component of cash and cash equivalents. Refer to Note 2 of Notes tothe Condensed Consolidated Financial Statements for additional information.

 

***Cash flows fromfinancing activities***:

 

Net cash usedin financing activities was $1.0 million for the nine months ended February 28,2005 compared with $18.6 million for the nine months ended February 29,2004.  The decrease in cash fromfinancing activities for the nine months ended February 28, 2005 primarilyrelated to $10.0 million in cashused to fund the repurchase of common stock and $1.3 million used for debtservice that was primarily offset by $6.4 million in cash received fromthe exercise of stock options, and $3.9 million in cash received from employeecontributions to our employee stock purchase plan.

 

#### ***Repurchase of Common Shares***

#### *** ***

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

 

**New Accounting Pronouncements**

 

In December 2004the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standard No. 123 (revised 2004), *Share-Based Payment (SFAS No. 123(R))*. SFAS No. 123(R)requires compensation cost relating to unvested share-based paymenttransactions that are outstanding as of the effective date and newly issuedtransactions to be recognized in the financial statements. That cost will bemeasured based on the fair value of the equity or liability instruments issued.SFAS No. 123(R) covers a wide range of share-based compensationarrangements including share options, restricted share plans, performance-basedawards, share appreciation rights and employee share purchase plans. SFAS No. 123(R)replaces SFAS No. 123, *Accounting forStock-Based Compensation*(SFAS No. 123), and supersedes Accounting PrinciplesBoard Opinion No. 25, *Accounting forStock Issued to Employees*(Opinion 25)*.*SFAS No. 123, as originally issuedin 1995, established a fair-value-based method of accounting for share-basedpayment transactions with employees. However, SFAS No. 123 permittedentities the option of continuing to apply the guidance in Opinion 25, as longas the footnotes to financial statements disclosed what net income would havebeen had the

 

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fair-value-based method beenused.  As disclosed in Note 3 of Notes tothe Condensed Consolidated Financial Statements, we elected the option ofdisclosure only under SFAS No. 123. In its disclosures, the Company hashistorically used the Black-Scholes option pricing model to determine the fairvalue of its share based compensation arrangements. Upon the adoption of SFASNo. 123(R), the Company will determine whether it will continue to utilize theBlack-Scholes model or adopt some other acceptable model. Public entities willbe required to apply SFAS No. 123(R) as of the first interim or annualreporting period that begins after June 15, 2005, which is effective withour second quarter of fiscal 2006. Based on our significant amount of unvestedshare-based payment awards, the adoption of this statement is anticipated tohave a material impact on our results of operations, however we are currentlyevaluating the impact of this statement.

 

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

 

##### ***Disclosuresabout Contractual Obligations and Commercial Commitments***

##### *** ***

**The following summarizes our contractual obligationsat February 28, 2005, and the effect these contractual obligations areexpected to have on our liquidity and cash flows in future periods (inthousands):**

** **
| ** **               | ** ** | **Total** | ** ** | **1 Year or Less** | ** ** | **1-3 Years** | ** ** | **3 – 5 Years** | ** ** | **More than 5  Years** | ** ** |
|--------------------------|------------|-----------|------------|--------------------|------------|---------------|------------|----------------------|------------|------------------------|------------|
| Operating leases         |       | $         | 75,469     |               | $          | 8,679         |       | $                    | 15,793     |                   | $          | 15,834 |   | $ | 35,163 |   |
| Debt                     |       | 1,344     |       | 1,344              |       | —        |       | —               |       | —                 |       |
| Purchase obligations (1) |       | 7,435     |       | 4,796              |       | 2,471         |       | 168                  |       | —                 |       |
| Total                    |       | $         | 84,248     |               | $          | 14,819        |       | $                    | 18,264     |                   | $          | 16,002 |   | $ | 35,163 |   |

 

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(1) Our purchaseobligations represent those commitments greater than $50,000.

 

**Factors That May Affect Future Results or the MarketPrice of Our Stock**

 

We operate ina rapidly changing environment that involves numerous uncertainties andrisks.  Investors evaluating our companyand its business should carefully consider the factors described below and allother information contained in this report on Form 10-Q. This section shouldbe read in conjunction with the Condensed Consolidated Financial Statements andNotes thereto and Management’s Discussion and Analysis of Financial Conditionand Results of Operations included in this report on Form 10-Q.  Any of the following factors could materiallyharm our business, operating results and financial condition. Additionalfactors and uncertainties not currently known to us or that we currentlyconsider immaterial could also harm our business, operating results andfinancial condition. We may make forward-looking statements from time-to-time,both written and oral. We undertake no obligation to revise or publicly releasethe results of any revisions to these forward-looking statements based oncircumstances or events which occur in the future. The actual results maydiffer materially from those projected in any such forward-looking statementsdue to a number of factors, including those set forth below and elsewhere inthis report on Form 10-Q.

 

***Economic, politicaland market conditions can adversely affect our revenue growth and operatingresults.***

 

Our revenueand profitability depend on the overall demand for computer software, supportand services, particularly in the industries in which we sell our products andservices.  Demand for enterprise softwareand demand for our solutions are affected by general economic conditions,competition, product acceptance and technology lifecycles.  Regional and global changes in the economy,governmental budget deficits and political instability in certain geographicareas have resulted in companies, government agencies and educationalinstitutions reducing their spending for technology projects generally anddelaying or reconsidering potential purchases of our products and relatedservices. The uncertainty posed by the long-term effects of the war in theMiddle East, terrorist activities and related uncertainties and risks and othergeopolitical issues may impact the purchasing decisions of current or potentialclients. Because of these factors, we believe the level of demand for ourproducts and services, and projections of future revenue and operating results,will continue to be difficult to predict. During fiscal 2005 and the prior three fiscal years, we took measures torealign our projected expenses with anticipated revenue, and incurred restructuringcharges for severance and related benefits, facility closure or

 

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consolidation charges.  There is no assurance that these costreduction measures will be sufficient to offset any future revenuedeclines.  Future declines in demand forour products and/or services could adversely affect our revenues and operatingresults.

 

***A number of ourcompetitors are well-established software companies that have advantages overus.***

 

We facecompetition from a number of software companies that have advantages over usdue to their larger client bases, greater name recognition, long operating andproduct development history, greater international presence and substantiallygreater financial, technical and marketing resources. These competitors includewell-established companies such as Oracle Corporation, and SAP AG, both ofwhich have larger installed client bases. If clients or prospects want toreduce the number of their software vendors, they may elect to purchasecompeting products from Oracle or SAP since those larger vendors offer a widerrange of products. Furthermore, Oracle is capable of bundling its software withits database applications, which underlie a significant portion of ourinstalled applications. When we compete with Oracle or SAP for new clients, webelieve that both of those larger companies often attempt to use their size andstaying power as a competitive advantage against us. Oracle’s recent purchaseof Peoplesoft, and pending purchase of Retek Inc., and other consolidations inthe software industry, have fueled uncertainty among client prospects.

 

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

 

•                  Internet (on demand) software vendors;

 

•                  single-industry software vendors;

 

•                  emerging enterprise resource optimizationsoftware vendors;

 

•                  human resource management software vendors;

 

•                  financial management software vendors;

 

•                  merchandising software vendors;

 

•                  services automation software vendors; and

 

•                  outsourced services providers.

 

As a result,the market for enterprise software applications has been and continues to beintensely competitive. Some competitors are increasingly aggressive with theirpricing, payment terms and/or issuance of contractual warranties, implementationterms or guarantees. We may be unable to continue to compete successfully withnew and existing competitors without lowering prices or offering otherfavorable terms. We expect competition to persist and intensify, which couldnegatively impact our operating results and market share.

 

***We may be unable to retain or attractclients if we do not develop new products and enhance our current products inresponse to technological changes and competing products.***

 

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

 

•                  maintain and enhance our technologicalcapabilities to correspond to these emerging environments and standards;

 

•                  develop and market products and services thatmeet changing client needs; or

 

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

 

A substantial portion of our researchand development resources is devoted to product upgrades that addressregulatory and support requirements. Only the remainder of our limited research and development resources isavailable for new products. New products require significant developmentinvestment.  That investment is furtherconstrained because of the added costs of developing new products that work withmultiple operating systems or databases. We face uncertainty when we develop or acquire new products becausethere is no assurance that a sufficient market will develop for thoseproducts.  If we do not attract sufficientclient interest in those products, we will not realize a return on our investmentand our operating results will be adversely affected.

 

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Our core product face competition fromnew or revised technologies that may render our existing technology lesscompetitive or obsolete, reducing the demand for our products. As a result, wemust continually redesign our products to incorporate these new technologiesand to adapt our software products to operate on, and comply with evolvingindustry standards for hardware and software platforms. Maintaining andupgrading our products to operate on multiple hardware and database platformsreduces our resources for developing new products.  Because of the increased costs of developingand supporting software products across multiple platforms, we may need toreduce the number of those platforms.  Inaddition, conflicting new technologies present us with difficult choices ofwhich new technologies to adopt. If we fail to anticipate the most popularplatforms or fail to respond adequately to technological developments, orexperience significant delays in product development or introduction, ourbusiness and operating results will be negatively impacted.

 

In addition, to the extent we determinethat new technologies and equipment are required to remain competitive, thedevelopment, acquisition and implementation of such technologies may require usto make significant capital investments. We may not be able to obtain capitalfor these purposes and investments in new technologies may not result in commerciallyviable technological products. The loss of revenue and increased costs to usfrom such changing technologies would adversely affect our business andoperating results.

 

***We may need to change our pricing models tocompete successfully.***

 

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

 

***If we are unable to attract and retain qualified personnel,specifically software engineers and sales personnel, we will be unable todevelop new products and increase our revenue.***

*** ***

We areexperiencing increased competition for attracting and retaining softwareengineers and sales personnel. If we are unable to attract, train and retainhighly-skilled technical, managerial, sales and marketing personnel, we may beat a competitive disadvantage and unable to increase our revenue. Competitionfor personnel in the software industry is intense, and at times, we have haddifficulty locating qualified candidates within desired geographic locations,or with certain industry-specific domain expertise. The failure to attract,train, retain and effectively manage employees could negatively impact ourdevelopment and sales efforts and cause a degradation of our client service. Inparticular, the loss of sales personnel could lead to lost sales opportunitiesbecause it can take several months to hire and train replacement salespersonnel. Uncertainty created by turnover of key employees could adverselyaffect our business, operating results and stock price.

 

***Our earnings may be impacted by the newaccounting pronouncement requiring expensing of equity instruments issued toemployees.***

 

We currently account for the issuanceof stock options under APB Opinion No. 25, *Accounting for Stock Issued to Employees*. The FASB hasissued SFAS No. 123(R), *Share-BasedPayment* that changes the accounting treatment for grants of options,sale of shares under our employee stock purchase plan and other equity instrumentsissued to employees. The provisions of SFAS No. 123(R) require us to valueequity instruments issued to employees and liability-classified awards at grantdate fair value or based upon certain valuation methods that approximate grantdate fair value, and to record those values as compensation expense in ourstatement of operations. We will be required to expense all outstandingnon-vested stock options as of September 1, 2005 and stock options andother applicable equity instruments issued to employees on or after September 1,2005.  Due to the significant number ofoutstanding unvested stock options as of September 1, 2005, we expect toincur material compensation expense after September 1, 2005 as thoseoptions vest or in the event we decide to accelerate vesting.  We may decide to change our stock basedcompensation plan strategy for future grants. This could affect our ability toretain existing employees and attract qualified candidates, and also could increasethe cash compensation. Note 3 of Notes to Condensed Consolidated FinancialStatements describes the pro forma impact of a change to fair value accountingon earnings and earnings per share for the three and nine months ended February 28,2005 and February 29, 2004.

 

***Because our clients are concentrated intargeted service industries, our operating results may be adversely affected byadverse changes in one or more of these industries.***

 

As a result of our focus on targeted serviceindustries, our financial results depend, in significant part, upon economicand market conditions in the healthcare, retail, government and education andfinancial services industries. Because the healthcare marketplace for ourproducts is maturing, we need to expand our product offerings to achievelong-term revenue growth. Many state and local governments are facing budgetshortfalls and are reducing capital spending, including spending on softwareand services.  In addition, we mustcontinue to develop industry specific functionality for

 

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our solutions, which satisfies the changing,specialized requirements of prospective clients in our targetindustries. This need is becoming more prevalent as the marketplace for ourtraditional products is maturing.

 

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

 

Our actual revenues in a quarter couldfall below expectations, which could lead to a decline in our stock price. Ourrevenues and operating results are difficult to predict and may fluctuatesubstantially from quarter to quarter. Revenues from license fees in anyquarter depend substantially upon our licensing activity and our ability torecognize revenues in that quarter in accordance with our revenue recognitionpolicies. Our quarterly license and services revenue may fluctuate and may bedifficult to forecast for a variety of reasons, including the following:

 

•                  a significant number of our existing andprospective clients’ decisions regarding whether to enter into licenseagreements with us are made within the last few weeks or days of each quarter;

 

•                  we have historically had a higherconcentration of licensing activities in the second half of our fiscal year dueto the nature of our sales personnel compensation programs; this pattern didnot continue in the third quarter ended February 28, 2005 and there is noassurance that this pattern will or will not continue in the future;

 

•                  the size of license transactions can varysignificantly;

 

•                  a decrease in license fee revenue may likelyresult in a decrease in services revenue in the same or subsequent quarters;

 

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

 

•                  the uncertainty caused by potential businesscombinations in the software industry may cause clients and prospective clientsto cancel, postpone or reduce capital spending projects on software;

 

•                  client evaluations and purchasing processesvary significantly from company to company, and a client’s internal approvaland expenditure authorization process can be difficult and time consuming tocomplete, even after selection of a vendor;

 

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

 

•                  existing clients may decline to renew supportfor our products, and market pressures may limit our ability to increasesupport fees or require clients to upgrade from older versions of our products;

 

•                  prospective clients may decline or defer thepurchase of new products or releases if we do not have sufficient clientreferences for those products; or

 

•                  we may have to defer revenues under ourrevenue recognition policies.

 

Fluctuation in our quarterly revenuesmay adversely affect our operating results. In each fiscal quarter our expenselevels, operating costs and hiring plans are based on projections of futurerevenues and are relatively fixed. If our actual revenues fall belowexpectations we could experience a reduction in operating results.

 

***Our lengthy and variable sales cycle makesit difficult to predict our operating results.***

 

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

 

•                  reduced demand for enterprisesoftware solutions;

 

•                  introduction of products by ourcompetitors;

 

•                  lower prices offered by our competitors;

 

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•                  changes in budgets and purchasingpriorities; and

 

•                  reduced need to upgrade existingsystems.

 

Our existing and prospective clients routinely requireeducation regarding the use and benefits of our products.  This may also lead to delays in receivingclients’orders.

 

***Our future revenue is dependent in part onour installed client base continuing to renew support agreements, licenseadditional products, and purchase additional professional services.***

 

Our installed client base has traditionallygenerated additional support, license or professional service revenues. Infuture periods, clients may not necessarily make these purchases.  Support is generally renewable annuallyat a client’s option, and there are no mandatory payment obligations orobligations to license additional software. If our clients decide not to renewtheir support agreements or license additional products or contract foradditional services, or if they reduce the scope of the support agreements, ourrevenues could decrease and our operating results could be adversely affected.

 

***A reduction in our licensing activity mayresult in reduced services revenues in future periods.***

 

Our ability to maintain orincrease service revenue primarily depends on our ability to increase thenumber of our licensing agreements. Variances or slowdowns in licensingactivity may adversely impact our consulting, training and support servicerevenues in future periods.

 

***While we believe we currently have adequate internal control overfinancial reporting, we are required to evaluate our internal control overfinancial reporting under Section 404 of the Sarbanes-Oxley Act of 2002and any adverse results from such evaluation could result in a loss of investorconfidence in our financial reports and have an adverse effect on our stockprice.***

 

Pursuant to Section 404of the Sarbanes-Oxley Act of 2002 (Section 404), beginning with our AnnualReport on Form 10-K for the fiscal year ending May 31, 2005, we will berequired to furnish a report by our management on our internal control overfinancial reporting.  That report willcontain, among other matters, an assessment of the effectiveness of ourinternal control over financial reporting as of the end of our fiscal year,including a statement as to whether or not our internal control over financialreporting is effective.  This assessmentmust include disclosure of any material weaknesses in our internal control overfinancial reporting identified by management.  That report must also contain a statement thatour auditors have issued an attestation report on management’s assessment ofsuch internal controls.

 

The Committee of SponsoringOrganizations of the Treadway Commission (COSO) provides a framework for companiesto assess and improve their internal control systems.  Auditing Standard No. 2 provides theprofessional standards and related performance guidance for auditors to attestto, and report on, management’s assessment of the effectiveness of internalcontrol over financial reporting under Section 404.  Management’s assessment of internal controlsover financial reporting requires management to make subjective judgments and,particularly because Auditing Standard No. 2 is just recently effective,some of the judgments will be in areas that may be open to interpretation andtherefore the report may be uniquely difficult to prepare and our auditors maynot agree with our assessments.

 

While we currently believeour internal control over financial reporting is effective, we are stillperforming the system and process documentation and evaluation needed to complywith Section 404, which is both costly and challenging.  During this process, if our managementidentifies one or more material weaknesses in our internal control overfinancial reporting, we will be unable to assert such internal control iseffective.  If we are unable to assertthat our internal control over financial reporting is effective as of May 31,2005 (or, if our auditors are unable to attest that our management’s report isfairly stated or they are unable to express an opinion on the effectiveness ofour internal controls), we could lose investor confidence in the accuracy andcompleteness of our financial reports, which would have an adverse effect onour stock price.

 

While we currently anticipate beingable to satisfy the requirements of Section 404 in a timely fashion, wecannot be certain as to the timing of completion of our evaluation, testing andany required remediation due in large part to the fact that there is noprecedent available by which to measure compliance with the new AuditingStandard No. 2.

 

***We may be required to delay revenuerecognition into future periods, which could adversely impact our operatingresults***

 

We have in the past had to, and in thefuture may have to, defer revenue recognition for license fees due to several

 

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factors,including the following situations:

 

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

 

•                  we must deliver services, includingsignificant modifications, customization or complex interfaces, which coulddelay product delivery or acceptance;

 

•                  the transaction includes acceptance criteria;

 

•                  the transaction includes contingent paymentterms or fees;

 

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

 

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

 

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

 

Because of thefactors listed above and other specific requirements under accounting principlesgenerally accepted in the United States of America for software revenuerecognition, we must have very precise terms in our license agreements torecognize revenue when we initially deliver software or perform services.Negotiation of mutually acceptable terms and conditions can extend the salescycle, and sometimes we do not obtain terms and conditions that permit revenuerecognition at the time of delivery or even as work on the project iscompleted.  Furthermore, because manycontracts within our verticals including, government and education andhealthcare, often include the terms summarized above, the contracts result inrevenue deferrals.

 

***If accounting interpretations relating torevenue recognition change, our reported revenues could decline or we could beforced to make changes in our business practices.***

 

The accountingprofession and regulatory agencies continue to address and discuss accountingstandards and interpretations covering revenue recognition for the softwareindustry with the objective of providing additional guidance on theirapplication. These discussions and the issuance of new interpretations, oncefinalized, could lead to unanticipated reductions in our recognized revenue.They could also drive significant adjustments to our business practices whichcould result in increased administrative costs, lengthened sales cycles andother changes which could adversely affect our reported revenues and results ofoperations.

 

***Future adjustments in our net deferred taxassets may be materially adverse to our financial results.***

 

On February 28,2005, the condensed consolidated balance sheet includes net deferred tax assetsin the amount of $23.8 million. Each quarter, we must assess thelikelihood that our net deferred tax assets will be recovered from futuretaxable income and to the extent we believe that recovery is not likely, wemust establish a valuation allowance. To the extent we establish a valuationallowance, we must include an expense within the tax provision in the statementof operations. For the fiscal year ended May 31, 2004, we recorded avaluation allowance of $1.2 million associated primarily with federalcontribution carryforwards, state net operating loss carryforwards and certainfederal tax credit carryforwards that are estimated to expire prior toutilization. As of February 28, 2005, we updated our analysis to reflectthe necessary changes in estimates and determined that an additional valuationallowance of $0.3 million was necessary. This increase is primarily due to additionalfederal contribution carryforwards and state operating loss carryforwards thatexpire within the next ten years.

 

In the eventthat we adjust our estimates of future taxable income or tax deductions fromthe exercise of stock options; or our stock price increases significantlywithout a corresponding increase in taxable income, we may need to establish anadditional valuation allowance, which could materially adversely impact ourfinancial position and results of operations. We currently expect the fourthquarter of fiscal 2005 to be profitable; however if actual results differsignificantly from estimated results, we would likely be required to fullyreserve our deferred tax assets.

 

***We may experience fluctuations in quarterly results that could adverselyimpact our annual effective tax rate.***

 

Our revenues and operating results are difficult to predict and mayfluctuate substantially from quarter to quarter.  Since we must estimate our annual effectivetax rate each quarter based on a combination of actual results and forecastedresults of subsequent quarters, any significant change in our actual quarterlyor forecasted annual results may adversely

 

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impact the computation of the estimated effective tax rate for theyear.  Our estimated annual effective taxrate may fluctuate for a variety of reasons, including the following:

 

•                  changes in forecasted annual operatingincome;

 

•                  changes to the valuation allowance on netdeferred tax assets;

 

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

 

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

 

•                  impacts from tax law changes.

 

***Our stock price may remain volatile.***

 

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

 

•                  actual or anticipated fluctuations inrevenues or operating results, including revenue or results of operations inany quarter failing to meet the expectations, published or otherwise, of theinvestment community;

 

•                  developments in the SEC investigation that weannounced on January 5, 2005;

 

•                  announcements of technological innovations byus or our competitors;

 

•                  developments with respect to our intellectualproperty rights, including patents, or those of our competitors;

 

•                  fluctuations in demand for and sales of ourproducts, which will depend on, among other things, the acceptance of ourproducts in the marketplace and the general level of spending in the softwareindustry;

 

•                  rumors or dissemination of false and/ormisleading information, particularly through Internet chat rooms, instantmessaging and other means;

 

•                  changes in management;

 

•                  proposed and completed acquisitions or othersignificant transactions by us or our competitors;

 

•                  introduction and success of new products orsignificant client wins or losses by us or our competitors;

 

•                  the mix of products and services sold by us;

 

•                  the timing of significant orders by us;

 

•                  conditions and trends in the softwareindustry, or consolidation within the technology industry that may impact ourclients, partners, suppliers or competitors;

 

•                  adoption of new accounting standards affectingthe software industry;

 

•                  acts of war or terrorism; and

 

•                  general market conditions.

 

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

 

Provisions inour amended and restated certificate of incorporation and bylaws, ourstockholder rights plan and under Delaware law could make it more difficult forother companies to acquire us, even if doing so would benefit ourstockholders.  Our amended and restatedcertificate of incorporation and bylaws contain the following provisions, amongothers, which may inhibit an acquisition of our company by a third party:

 

•                  advancenotification procedures for matters to be brought before stockholder meetings;

 

•                  alimitation on who may call stockholder meetings;

 

•                  aprohibition on stockholder action by written consent; and

 

•                  theability of our board of directors to issue shares of preferred stock without astockholder vote.

 

The issuanceof stock under our stockholder rights plan could delay, deter or prevent atakeover attempt that stockholders might consider in their best interests.  We are also subject to provisions of Delawarelaw that prohibit us from engaging in any business combination with any “interestedstockholder,” meaning generally that a stockholder who beneficially owns morethan 15% of our stock cannot acquire us for a period of three years from the datethis 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 theeffect of delaying or preventing a change in control.

 

***Changes in the terms on which we licensetechnologies from third-party vendors could result in the loss of potentialrevenues or increased costs or delays in the production and improvement of ourproducts.***

 

We licensethird-party software products that we incorporate into, or resell with, our ownsoftware products. For example, we incorporate Micro Focus International, Inc.’ssoftware in many of our products and have reseller relationships with BusinessSoftware Incorporated, Business Objects, Hyperion Solutions Corporationand other companies that allow us to resell their technology with our products.These licenses and other technology licenses are subject to periodic renewaland may include minimum sales requirements. A failure to renew, or earlytermination of these licenses or other technology licenses could adverselyimpact our business. If any of the third-party software vendors change theirproduct offerings or terminate our licenses, we may lose potential revenues andmay need to incur additional development costs and seek alternative third-partyrelationships. In addition, if the cost of licensing any of these third-partysoftware products significantly increases, or if there is a change in therelative mix of products we offer, our gross profits could significantlydecrease. We rely on existing relationships with software vendors who are alsocompetitors. If these vendors change their business practices, we may becompelled to find alternative vendors with complementary software, which maynot be available on attractive terms or at all, or may not be as widelyaccepted or as effective as the software provided by our existing vendors. Ourrelationships with these and other third-party vendors are an important part ofour business, and a deterioration of these relationships could adversely impactour business and operating results.

 

***A deterioration in our relationship withresellers, systems integrators and other third parties that market and sell ourproducts could reduce our revenues.***

 

Our ability toachieve revenue growth will depend in large part on adding new partners toexpand our sales channels, as well as leveraging our relationships withexisting partners. If our relationships with these resellers, systemintegrators and strategic and technology partners deteriorate or terminate, wemay lose important sales and marketing opportunities. Our reseller arrangementsmay from time-to-time give rise to disputes regarding marketing strategy, salesof competing products, exclusive territories, payment of fees and clientrelationships, which could negatively affect our business or result in costlylitigation.

 

Our currentand potential clients often rely on third-party systems integrators toimplement and manage new and existing applications. These systems integratorsmay increase their promotion of competing enterprise software applications, ormay otherwise discontinue their relationships with or support of us.

 

We also mayenter into joint arrangements with strategic partners to develop new softwareproducts or extensions, sell our software as part of integrated products orserve as an application service provider for our products. Our business may beadversely affected if these strategic partners change their business prioritiesor experience difficulties in their operations, which in either case causesthem to terminate or reduce their support for the joint arrangements.Furthermore,

 

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the financial condition of ourchannel partners impacts our business. If our partners are unable to recruitand adequately train a sufficient number of consulting personnel to support theimplementation of our software products, or they otherwise do not adequatelyperform implementation services, we may lose clients. Our relationships withresellers, systems integrators and other third-party vendors are an importantpart of our business, and a deterioration of these relationships couldadversely impact our business and operating results.

 

***Our programs are deployed in large andcomplex systems and may contain defects that are not detected until after ourprograms have been installed, which could damage our reputation and cause us tolose clients or incur liabilities.***

 

Our softwareprograms are often deployed in large and complex computer networks. Because ofthe nature of these programs, they can only be fully tested for reliabilitywhen deployed in networks for long periods of time. Our software programs maycontain undetected defects when first introduced or as new versions arereleased, and our clients may discover defects in our products, experiencecorruption of their data or encounter performance or scaling problems onlyafter our software programs have been deployed. As a consequence, fromtime-to-time we have received client complaints following installation of ourproducts. We are currently a defendant in several lawsuits where clients haveraised these types of issues with our products and services.  In addition, our products are combined with productsfrom other vendors. As a result, should problems occur, it may be difficult toidentify the source of the problem. Software and data security are becomingincreasingly important because of regulatory restrictions on data privacy andthe significant legal exposures and business disruptions stemming from computerviruses and other unauthorized entry or use of computer systems. Theseconditions increase the risk that we could experience, among other things:

 

•                  loss of clients;

 

•                  damage to our brand reputation;

 

•                  failure to attract new clients or achievemarket acceptance;

 

•                  diversion of development and servicesresources; and

 

•                  legal actions by our clients or governmentregulators.

 

In addition,we may not be able to avoid or limit liability for disputes relating to productperformance, software security or the provision of services. The occurrence ofany 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 thesecurity of data on the Internet, our revenues could be adversely affected.***

 

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

 

***We may be requiredto undertake a costly redesign of our products if third party software developmenttools become an industry standard or cause obsolescence of our toolsets.***

 

While noindustry standard exists for software development tools, several companies havefocused on providing software development tools and each of them is attemptingto establish its own tools as the accepted industry standard.  If a software product were to emerge as aclearly established and widely accepted industry standard or if risingexpectations of toolsets of applications cause our toolsets to become obsolete,we may not be able to adapt our tools appropriately or rapidly enough tosatisfy market demand. In addition, we could be forced to abandon or modify ourtools or to redesign our software products to accommodate the new industrystandard. This would be expensive and time-consuming and may adversely affectresults of operations and the financial condition of our business. Our failureto drive or adapt to new and changing industry standards or third-partyinterfaces could adversely affect sales of our products and services.

 

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***We do not have substantial internationaloperations and may not be able to develop our international operationssuccessfully.***

 

We have only limited internationaloperations. Our products do not meet the requirements of Asia and many otherlocal markets. Factors that could have an adverse effect on our ability todevelop our international operations include:

 

•                  lack of experience in a particular geographicmarket;

 

•                  significant presence of our competitors ininternational markets;

 

•                  increased cost and development time requiredto modify and translate our products for local markets;

 

•                  inability to recruit personnel in a specificcountry or region;

 

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

 

•                  differing foreign technical standards; and

 

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

 

Our limitedinternational operations could become subject to unexpected, uncontrollable andrapidly changing events and circumstances in addition to those experienced inthe United States. The following factors, among others, could have an adverseeffect on our business and operating results:

 

•                  operating costs in many countries are higherthan in the United States;

 

•                  conducting business in currencies other thanUnited States dollars subjects us to currency controls and fluctuations incurrency exchange rates;

 

•                  we may be unable to hedge some transactionsbecause of uncertainty or the inability to reasonably estimate our foreignexchange exposure;

 

•                  we may hedge some anticipated transactionsand transaction exposures, but could still experience losses due to exchangerate fluctuations;

 

•                  laws, policies and other regulatoryrequirements affecting trade and investment including loss or modification ofexemptions for taxes and tariffs, and import and export license requirements;and

 

•                  exposure to different legal standards orrisks.

 

***We may be unable to identify or completesuitable acquisitions and investments; and any acquisitions and investments wedo complete may create business difficulties or dilute our stockholders.***

 

As part of ourbusiness strategy, we intend to pursue strategic acquisitions. We may be unableto identify suitable acquisitions or investment candidates. Even if we identifysuitable candidates, we cannot provide assurance that we will be able to makeacquisitions or investments on commercially acceptable terms. If we acquire acompany, we may incur losses in the operations of that company and we may havedifficulty integrating its products, personnel and operations into ourbusiness. In addition, its key personnel may decide not to work for us. We mayalso have difficulty integrating acquired businesses, products, services andtechnologies into our operations. These difficulties could disrupt our ongoingbusiness, distract our management and workforce, increase our expenses andadversely affect our operating results. We may also incorrectly judge the valueor worth of an acquired company or business. Furthermore, we may incursignificant debt or be required to issue equity securities to pay for futureacquisitions or investments. The issuance of equity securities may be dilutiveto our stockholders. If the products of an acquired company are not successful,those remaining assets could become impaired, which may result in an impairmentloss that could materially adversely impact our financial position and resultsof operations.

 

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***We currently do not compete in the software“on demand” or application service provider markets.***

 

Somebusinesses choose to access enterprise software applications through hosted “ondemand” services or application service providers who distribute enterprisesoftware through a hosted subscription service. We do not currently have an “ondemand” hosting program for our products and have had limited success withchannel partners who serve as application service providers for clients. Ifthese alternative distribution models gain popularity, we may not be able tocompete effectively in this environment.

 

***In the event our products infringe on theintellectual property rights of third parties, our business may suffer if we aresued for infringement or cannot obtain licenses to these rights on commerciallyacceptable terms.***

 

We are subjectto the risk of adverse claims and litigation alleging infringement by us of theintellectual property rights of others. Many participants in the technologyindustry have an increasing number of patents and patent applications and havefrequently demonstrated a readiness to take legal action based on allegationsof patent and other intellectual property infringement. Further, as the numberand functionality of our products increase, we believe that we may becomeincreasingly subject to the risk of infringement claims. If infringement claimsare brought against us, these assertions could distract management and we mayhave to expend potentially significant funds and resources to defend or settlesuch claims. If we are found to infringe on the intellectual property rights ofothers, we could be forced to pay significant license fees or damages forinfringement.

 

As part of ourstandard license agreements, we agree to indemnify our clients for some typesof infringement claims under the laws of the United States of America and someforeign jurisdictions that may arise from the use of our products. If a claimagainst us were successful, we may be required to incur significant expense andpay substantial damages, as we are unable to insure against this risk. Even ifwe were to prevail, the accompanying publicity could adversely impact thedemand for our software. Provisions attempting to limit our liability in ourstandard agreements may be invalidated by unfavorable judicial decisions or byfederal, state, local or foreign laws or ordinances.

 

***If the open source community expands intoenterprise application software, our license fee revenues may decline.***

*** ***

The opensource community is comprised of many different formal and informal groups ofsoftware developers and individuals who have created a wide variety of softwareand have made that software available for use, distribution and modification,often free of charge. Open source software, such as the Linux operating system,has been gaining in popularity among business users. If developers contributeenterprise application software to the open source community, and that softwarehas competitive features and scale to support business users in our markets, wewill need to change our product pricing and distribution strategy to compete.

 

***It may become increasingly expensive toobtain and maintain liability insurance.***

 

We contractfor 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 responsibleis larger. In light of these circumstances, it may become more difficult tomaintain insurance coverage at historical levels, or if such coverage isavailable, the cost to obtain or maintain it may increase substantially. Thismay result in our being forced to bear the burden of an increased portion of risksfor which we have traditionally been covered by insurance, which couldnegatively impact our results of operations.

 

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

 

We considercertain aspects of our internal operations, software and documentation to beproprietary, and rely on a combination of contract, copyright, trademark andtrade secret laws to protect this information. In addition, to date, we holdone patent and have filed several patent applications. Outstanding applicationsmay not result in issued patents and, even if issued, the patents may notprovide any competitive advantage. Existing copyright laws afford only limitedprotection. Our competitors may independently develop technologies that areless expensive or better than our technology. In addition, when we license ourproducts to clients, we provide source code for many of our products. We mayalso permit clients to obtain access to our other source code through a sourcecode escrow arrangement. This access to our source code may increase thelikelihood of misappropriation or other misuse of our intellectual property. Inaddition, the laws of some countries in which our software products are or maybe licensed do not protect our software products and intellectual propertyrights to the same extent as the laws of the United States of America.Defending our rights could be costly.

 

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***Business disruptions may interfere with ourability to conduct business.***

 

Businessdisruptions could affect our future operating results. Our operating resultsand financial condition could be adversely affected in the event of a securitybreach, major fire, war, terrorist attack or other catastrophic event. Impairedaccess or significant damage to our data center at our headquarters in St.Paul, Minnesota due to such an event could cause a disruption of ourinformation, research and development, and client support systems and loss offinancial data and certain client data, which could adversely impact results ofoperations and business financial conditions.

 

***Our future success depends on our ability to continue to retain andattract qualified personnel.***

 

We believe that our futuresuccess depends upon our ability to continue to train, retain, effectivelymanage and attract highly skilled technical, managerial, sales and marketingpersonnel. If our efforts in these areas are not successful, our costs mayincrease, development and sales efforts may be hindered and our client servicemay be degraded.  There is intensecompetition for personnel in the software industry. From time-to-time, weexperience difficulties in locating enough highly qualified candidates in desiredgeographic locations, or with required product development or industry-specificexpertise.

 

***We have limited experience with offshore outsourcing.***

 

To helpimprove margins and gain operational efficiencies, many software companies haveoutsourced portions of their support or development efforts to companieslocated in India or other parts of the world. In February 2004, we entered into an offshore agreement with athird-party to provide certain software support services for our products.  We have limited experience with this type ofoutsourcing and may be unable to achieve the anticipated economic efficienciesexpected****of this arrangement.

 

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

 

In October 2004,we announced that our Founder and Chairman had entered into a selling plan tosell up to 1,750,000 shares during the period October 2004 through August 2005.  In October 2004, we also announced thatour Chief Executive Officer and Chief Financial Officer had each entered intoselling plans, to sell up to 400,000 and 219,000 shares, respectively, duringthe period January 2005 through October 2005.  These executive officers may also elect tosell or transfer other shares apart from the selling plans. Other executiveofficers, directors or principal stockholders could also elect to sell theirshares from time-to-time. A substantial number of shares of our common stockare held by our founders, their family members, a pre-initial public offeringinvestor, current or former employees, officers or directors. Sale of a portionof these shares in the public market, or the perception that such sales arelikely to occur, could depress the market price of our common stock and couldimpair our ability to raise capital through the sale of additional equitysecurities.

 

***Control by existing shareholders couldsignificantly influence matters requiring stockholder approval.***

 

As of February 28,2005, our executive officers, directors, and affiliated entities, in the aggregate,beneficially owned 18.6% of our outstanding common stock. These stockholders,if acting together, would be able to significantly influence all mattersrequiring approval by stockholders, including the election of directors and theapproval of mergers or other business combinations.

 

***Financial outlook.***

 

Fromtime-to-time in press releases and otherwise, we may publish forecasts or otherforward-looking statements regarding our future results, including estimatedrevenues or net earnings. Any forecast of our future performance reflectsvarious assumptions. These assumptions are subject to significantuncertainties, and as a matter of course, any number of them may prove to beincorrect. Further, the achievement of any forecast depends on numerous risks andother factors (including those described in this discussion), many of which arebeyond our control. As a result, we cannot provide assurance that ourperformance will be consistent with any management forecasts or that thevariation from such forecasts will not be material and adverse. Current andpotential stockholders are cautioned not to base their entire analysis of ourbusiness and prospects upon isolated predictions, but instead are encouraged toutilize our entire publicly available mix of historical and forward-lookinginformation, as well as other available information affecting us, our productsand services, and the software industry when evaluating our prospective resultsof operations.

 

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**ITEM 3. QUALITATIVEAND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

As required by Rule 13a-15(b) underthe Securities Exchange Act of 1934, as amended (Exchange Act) we conducted anevaluation under the supervision and with the participation of our management,including the Chief Executive Officer and the Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this report. Based on that evaluation, the Chief ExecutiveOfficer and the Chief Financial Officer concluded that our current disclosurecontrols and procedures are effective in ensuring that all information requiredto be disclosed in reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission rules and forms. There was nosignificant change in our internal control over financial reporting thatoccurred during the most recent fiscal quarter that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

**PART II. OTHERINFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

We are, and fromtime-to-time may become, involved in litigation in the normal course of businessconcerning our products and services. While the outcome of these claims cannotbe predicted with certainty, we do not believe that the outcome of any one ofthese legal matters will have a material adverse effect on our consolidatedfinancial position, results of operations or cash flows. However, depending onthe amount and the timing, an unfavorable resolution of some or all of thesematters could materially affect our future results of operations or cash flowsin a particular period.

 

**ITEM 2. UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

(b) Useof Proceeds

 

As of February 28,2005, we held $116.6 million of net proceeds from our initial publicoffering in interest-bearing, investment grade securities. During the threemonths ended February 28, 2005, we used approximately $1.4 million forcapital expenditures and $0.8 million for the repayment of debt.

 

**ITEM 3. DEFAULTS UPONSENIOR SECURITIES**

 

None

 

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

 

None

 

**ITEM 5. OTHER INFORMATION**

 

None

 

**ITEM 6. EXHIBITS**

 
|   | (a)    | Exhibits |
|--------|--------|----------|
|   |
|   |   | 31.1     | Certification Pursuant  to Section 302 of the Sarbanes-Oxley Act- John J. Coughlan. |
|   |   |     |   |
|   |   | 31.2     | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act-  Robert G. Barbieri. |
|   |   |     |   |
|   |   | 32.1     | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act-  John J. Coughlan. |
|   |   |     |   |
|   |   | 32.2     | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act-  Robert G. Barbieri. |

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| Date: April 6, 2005 |                       |                                                                                                                                  |
|--------------------------|----------------------------|---------------------------------------------------------------------------------------------------------------------------------------|
|                     |                       |                                                                                                                                  |
|                     | LAWSON SOFTWARE, INC. |
|                     |                       |                                                                                                                                  |
|                     | By:                        | /s/ ROBERT G. BARBIERI                                                                                                                |   |
|                     |                       | Robert G. Barbieri*Executive Vice President  and Chief Financial and Performance Officer*(principal financial and accounting officer) |

 

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**EXHIBIT INDEX**

 
| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION OF DOCUMENTS**                                                               |
|---------------------|------------|--------------------------------------------------------------------------------------------|
|                |       |                                                                                       |
| 31.1                |       | Certification Pursuant to Section 302  of the Sarbanes-Oxley Act- John J. Coughlan.   |
|                |       |                                                                                       |
| 31.2                |       | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act-  Robert G. Barbieri. |
|                |       |                                                                                       |
| 32.1                |       | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act-  John J. Coughlan.   |
|                |       |                                                                                       |
| 32.2                |       | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act-  Robert G. Barbieri. |

 

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