**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**ý****                                ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

** **

**FOR THEQUARTERLY PERIOD ENDED November 30, 2005**

** **

**or**

 

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

** **

**FOR THETRANSITION PERIOD FROM             TO             **

** **

**Commission file number000-33335**

 

**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 STREETST. PAUL, MINNESOTA 55102**(Address of principalexecutive offices)

** **

**(651) 767-7000**(Registrant’stelephone number, including area code)

 

----

 

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 NOo

 

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act). YES ý NOo

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).YES o NOý

 

The number of shares of the registrant’scommon stock outstanding as of January 3, 2006 was 103,164,474

 

 

----

 

**LAWSONSOFTWARE, INC.**

 

**Form 10-QIndex**

 
| **PART I.** | **FINANCIAL  INFORMATION**                                                                                           | **3**  |
|------------------|----------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.          | Financial Statements  (unaudited)                                                                                    | 3      |
|             | Condensed  Consolidated Balance Sheets at November 30, 2005 and May 31, 2005                               | 3      |
|             | Condensed  Consolidated Statements of Operations  for the three and six months ended November 30, 2005 and 2004 | 4      |
|             | Condensed  Consolidated Statements of Cash Flows  for the six months ended November 30, 2005 and 2004           | 5      |
|             | Notes to Condensed Consolidated Financial Statements                                                                 | 6      |
| Item 2.          | Management’s Discussion and Analysis of Financial Condition and  Results of Operations                          | 15     |
| Item 3.          | Qualitative and Quantitative Disclosures  about Market Risk                                                          | 27     |
| Item 4.          | Controls and Procedures                                                                                              | 27     |
|             |                                                                                                                 |   |
| PART II.    | OTHER INFORMATION                                                                                                    | 28     |
| Item 1.          | Legal Proceedings                                                                                                    | 28     |
| Item 1A.         | Risk Factors                                                                                                         | 28     |
| Item 2.          | Unregistered Sales of Equity Securities and  Use of Proceeds                                                         | 44     |
| Item 3.          | Defaults Upon Senior Securities                                                                                      | 44     |
| Item 4.          | Submission of Matters to a Vote of Security  Holders                                                                 | 44     |
| Item 5.          | Other Information                                                                                                    | 44     |
| Item 6.          | Exhibits                                                                                                             | 45     |
|             | SIGNATURES                                                                                                           | 46     |

 

2

----

 

PART I.  FINANCIALINFORMATION

 

**ITEM 1. FINANCIAL STATEMENTS**

** **

**LAWSONSOFTWARE, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(inthousands)**

**(unaudited)**

 
| ** **                                                                                                                                                                                                                    | ** ** | **November 30,  2005** | ** ** | **May 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------|------------|
| ASSETS                                                                                                                                                                                                                        |       |                        |       |                   |       |
| Current  assets:                                                                                                                                                                                                              |       |                        |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                                     |       | $                           | 172,697    |                   | $          | 187,744 |   |
| Marketable securities                                                                                                                                                                                                         |       | 87,380                      |       | 43,099                 |       |
| Trade accounts receivable, net                                                                                                                                                                                                |       | 48,932                      |       | 42,907                 |       |
| Deferred income taxes                                                                                                                                                                                                         |       | 9,314                       |       | 9,314                  |       |
| Prepaid expenses and other assets                                                                                                                                                                                             |       | 12,841                      |       | 19,260                 |       |
| Total current assets                                                                                                                                                                                                          |       | 331,164                     |       | 302,324                |       |
|                                                                                                                                                                                                                          |       |                        |       |                   |       |
| Long-term  marketable securities                                                                                                                                                                                              |       | 715                         |       | 3,770                  |       |
| Property and  equipment, net                                                                                                                                                                                                  |       | 11,634                      |       | 13,574                 |       |
| Goodwill                                                                                                                                                                                                                      |       | 43,175                      |       | 43,407                 |       |
| Other  intangible assets, net                                                                                                                                                                                                 |       | 27,481                      |       | 31,939                 |       |
| Deferred  income taxes                                                                                                                                                                                                        |       | 21,320                      |       | 21,385                 |       |
| Other assets                                                                                                                                                                                                                  |       | 6,421                       |       | 4,319                  |       |
| Total assets                                                                                                                                                                                                                  |       | $                           | 441,910    |                   | $          | 420,718 |   |
|                                                                                                                                                                                                                          |       |                        |       |                   |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                    |       |                        |       |                   |       |
| Current  liabilities:                                                                                                                                                                                                         |       |                        |       |                   |       |
| Current portion of long-term debt                                                                                                                                                                                             |       | $                           | 1,048      |                   | $          | 1,836 |   |
| Accounts payable                                                                                                                                                                                                              |       | 10,462                      |       | 12,003                 |       |
| Accrued compensation and benefits                                                                                                                                                                                             |       | 18,465                      |       | 17,656                 |       |
| Other accrued liabilities                                                                                                                                                                                                     |       | 17,809                      |       | 15,848                 |       |
| Deferred revenue                                                                                                                                                                                                              |       | 73,103                      |       | 76,571                 |       |
| Total current liabilities                                                                                                                                                                                                     |       | 120,887                     |       | 123,914                |       |
| Other  long-term liabilities                                                                                                                                                                                                  |       | 4,333                       |       | 3,749                  |       |
| Total liabilities                                                                                                                                                                                                             |       | 125,220                     |       | 127,663                |       |
| 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 value; 750,000  shares authorized; 114,152 and 112,414 shares issued, respectively; 102,971  and 100,619 shares outstanding, at November 30, 2005  and May 31, 2005, respectively |       | 1,142                       |       | 1,124                  |       |
| Additional paid-in capital                                                                                                                                                                                                    |       | 350,913                     |       | 338,666                |       |
| Treasury stock, at cost; 11,181 and 11,795  shares at November 30, 2005 and May 31, 2005, respectively                                                                                                         |       | (70,924                     | )          | (72,348                | )          |
| Deferred stock-based compensation                                                                                                                                                                                             |       | (327                        | )          | (41                    | )          |
| Retained earnings                                                                                                                                                                                                             |       | 33,466                      |       | 22,733                 |       |
| Accumulated other comprehensive income                                                                                                                                                                                        |       | 2,420                       |       | 2,921                  |       |
| Total stockholders’ equity                                                                                                                                                                                               |       | 316,690                     |       | 293,055                |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                               |       | $                           | 441,910    |                   | $          | 420,718 |   |

 

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

 

3

----

 

**LAWSON SOFTWARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                             | ** ** | **Three Months Ended**      | ** ** | **Six Months Ended**        | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **November 30,  2005** | ** ** | **November 30,  2004** | ** ** | **November 30,  2005** | ** ** | **November 30,  2004** | ** ** |
| Revenues:                                              |       |                        |       |                        |       |   |   |   |   |
| License fees                                           |       | $                           | 18,121     |                        | $          | 13,195 |   | $ | 36,725 |   | $ | 26,446 |   |
| Services                                               |       | 70,916                      |       | 69,804                      |       | 140,226 |   | 139,238 |   |
| Total revenues                                         |       | 89,037                      |       | 82,999                      |       | 176,951 |   | 165,684 |   |
| Cost of  revenues:                                     |       |                        |       |                        |       |   |   |   |   |
| Cost of license fees                                   |       | 2,774                       |       | 2,904                       |       | 5,195 |   | 5,279 |   |
| Cost of services                                       |       | 33,917                      |       | 37,048                      |       | 66,637 |   | 73,504 |   |
| Total cost of revenues                                 |       | 36,691                      |       | 39,952                      |       | 71,832 |   | 78,783 |   |
|                                                   |       |                        |       |                        |       |   |   |   |   |
| Gross profit                                           |       | 52,346                      |       | 43,047                      |       | 105,119 |   | 86,901 |   |
|                                                   |       |                        |       |                        |       |   |   |   |   |
| Operating  expenses:                                   |       |                        |       |                        |       |   |   |   |   |
| Research and development                               |       | 14,050                      |       | 15,654                      |       | 28,550 |   | 31,301 |   |
| Sales and marketing                                    |       | 19,465                      |       | 19,578                      |       | 38,437 |   | 40,535 |   |
| General and administrative                             |       | 10,039                      |       | 7,911                       |       | 26,911 |   | 16,161 |   |
| Restructuring (Note 7)                                 |       | (5                          | )          | 5,465                       |       | 5 |   | 5,390 |   |
| Amortization of acquired intangibles                   |       | 357                         |       | 384                         |       | 731 |   | 769 |   |
| Total operating expenses                               |       | 43,906                      |       | 48,992                      |       | 94,634 |   | 94,156 |   |
|                                                   |       |                        |       |                        |       |   |   |   |   |
| Operating  income (loss)                               |       | 8,440                       |       | (5,945                      | )          | 10,485 |   | (7,255 | ) |
|                                                   |       |                        |       |                        |       |   |   |   |   |
| Other  income:                                         |       |                        |       |                        |       |   |   |   |   |
| Interest income                                        |       | 2,367                       |       | 907                         |       | 4,672 |   | 1,564 |   |
| Interest expense                                       |       | (19                         | )          | (15                         | )          | (25 | ) | (28 | ) |
| Total other income                                     |       | 2,348                       |       | 892                         |       | 4,647 |   | 1,536 |   |
|                                                   |       |                        |       |                        |       |   |   |   |   |
| Income  (loss) before income taxes                     |       | 10,788                      |       | (5,053                      | )          | 15,132 |   | (5,719 | ) |
| Provision  (benefit) for income taxes                  |       | 4,232                       |       | (2,033                      | )          | 4,399 |   | (2,282 | ) |
| Net income  (loss)                                     |       | $                           | 6,556      |                        | $          | (3,020 | ) | $ | 10,733 |   | $ | (3,437 | ) |
|                                                   |       |                        |       |                        |       |   |   |   |   |
| Net income  (loss) per share:                          |       |                        |       |                        |       |   |   |   |   |
| Basic                                                  |       | $                           | 0.06       |                        | $          | (0.03 | ) | $ | 0.11 |   | $ | (0.03 | ) |
| Diluted                                                |       | $                           | 0.06       |                        | $          | (0.03 | ) | $ | 0.10 |   | $ | (0.03 | ) |
| Shares used  in computing net income (loss) per share: |       |                        |       |                        |       |   |   |   |   |
| Basic                                                  |       | 102,428                     |       | 98,316                      |       | 101,790 |   | 98,305 |   |
| Diluted                                                |       | 107,134                     |       | 98,316                      |       | 106,298 |   | 98,305 |   |

 

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

 

4

----

 

**LAWSON SOFTWARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(inthousands)**

**(unaudited)**

 
| ** **                                                                                | ** ** | **Six Months Ended**        | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                | ** ** | **November 30,  2005** | ** ** | **November 30,  2004** | ** ** |
| **Cash  flows from operating activities:**                                                |       |                        |       |   |   |
| Net income (loss)                                                                         |       | $                           | 10,733     |   | $ | (3,437 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |       |                        |       |   |   |
| Depreciation and amortization                                                             |       | 7,292                       |       | 8,482 |   |
| Deferred income taxes                                                                     |       | 65                          |       | 161 |   |
| Provision for doubtful accounts                                                           |       | (1,104                      | )          | 988 |   |
| Tax benefit from stockholder transactions  for option activity                            |       | 1,809                       |       | 1,858 |   |
| Amortization of stock-based compensation                                                  |       | 239                         |       | 107 |   |
| Stock-based compensation                                                                  |       | 6,368                       |       | — |   |
| Amortization of discount on notes payable                                                 |       | 18                          |       | 48 |   |
| Amortization of (premium) discount on  marketable securities                              |       | (37                         | )          | 89 |   |
| Changes in operating assets and  liabilities, net of effect from acquisitions:            |       |                        |       |   |   |
| Trade accounts receivable                                                                 |       | (4,921                      | )          | 16,088 |   |
| Prepaid expenses and other assets                                                         |       | 6,726                       |       | (2,258 | ) |
| Accounts payable                                                                          |       | (1,541                      | )          | (2,699 | ) |
| Accrued and other liabilities                                                             |       | (1,045                      | )          | (3,723 | ) |
| Income taxes payable                                                                      |       | 2,457                       |       | (999 | ) |
| Deferred revenue and customer deposits                                                    |       | (3,632                      | )          | (8,765 | ) |
| Net cash provided by operating activities                                                 |       | 23,427                      |       | 5,940 |   |
|                                                                                      |       |                        |       |   |   |
| **Cash  flows from investing activities:**                                                |       |                        |       |   |   |
| Cash paid in conjunction with acquisition  (Note 5)                                       |       | (2,407                      | )          | — |   |
| Purchases of marketable securities                                                        |       | (92,721                     | )          | (382,014 | ) |
| Sales and maturities of marketable  securities                                            |       | 51,496                      |       | 356,007 |   |
| Purchases of property and equipment                                                       |       | (1,112                      | )          | (1,675 | ) |
| Net cash used in investing activities                                                     |       | (44,744                     | )          | (27,682 | ) |
|                                                                                      |       |                        |       |   |   |
| **Cash  flows from financing activities:**                                                |       |                        |       |   |   |
| Principal payments on long term debt                                                      |       | (967                        | )          | (482 | ) |
| Exercise of stock options                                                                 |       | 5,740                       |       | 3,847 |   |
| Issuance of treasury shares for employee  stock purchase plan                             |       | 1,497                       |       | 2,368 |   |
| Repurchase of common stock                                                                |       | —                      |       | (10,000 | ) |
| Net cash provided by (used in) financing  activities                                      |       | 6,270                       |       | (4,267 | ) |
| Decrease in  cash and cash equivalents                                                    |       | (15,047                     | )          | (26,009 | ) |
| Cash and  cash equivalents at beginning of period                                         |       | 187,744                     |       | 72,396 |   |
| Cash and  cash equivalents at end of period                                               |       | $                           | 172,697    |   | $ | 46,387 |   |

 

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

 

5

----

 

**LAWSONSOFTWARE, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

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

 

The unaudited condensed consolidatedfinancial statements included herein reflect all adjustments, in the opinion ofmanagement, necessary to fairly state Lawson Software, Inc.’s (the Company’s)consolidated financial position, results of operations and cash flows for theperiods presented. These adjustments consist of normal, recurring items. Thepreparation of financial statements in conformity with generally acceptedaccounting principles in the United States requires management to makeestimates and assumptions that affect the reported amounts therein. Due to theinherent uncertainty involved in making estimates, actual results in futureperiods may differ from those estimates. The results of operations for thethree and six month periods ended November 30, 2005, are notnecessarily indicative of the results to be expected for any subsequent quarteror for the entire fiscal year ending May 31, 2006. 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 year-end condensed consolidatedbalance sheet data was derived from audited financial statements, but does notinclude all disclosures required by accounting principles generally accepted inthe United States.  The accompanyinginterim condensed consolidated financial statements should be read inconjunction with the audited financial statements and related notes included inthe Company’s Annual Report on Forms 10-K and Form 10-K/A filed withthe Securities and Exchange Commission for the fiscal year ended May 31,2005.

 

***Reclassifications***

 

During fiscal 2005, the Companyconcluded that it was appropriate to classify its Dutch auction rate securitiesas marketable securities in accordance with Statement of Financial AccountingStandard (SFAS) No. 95, “Statement of Cash Flows”. Dutch auction ratesecurities are investments that are typically backed by preferred stock orlong-term, variable-rate debt instruments whose interest rates are reset atpredetermined short-term intervals through a Dutch auction process. Previously,such investments had primarily been classified as cash and cash equivalents. Accordingly,the Company has made corresponding reclassifications to the CondensedConsolidated Statement of Cash Flows for the six months ended November 30,2004, to reflect the gross purchases and sales and maturities of thesesecurities as investing activities rather than as a component of cash and cashequivalents. Purchases of marketable securities were originally reported as$58,824 and were reclassified to $382,014. Sales and maturities of marketablesecurities were originally reported as $98,567 and were reclassified to$356,007. Cash and cash equivalents – beginning of the period was originallyreported as $79,996 and was reclassified to $72,396. Cash and cash equivalents– end of the period was originally reported as $119,737 and was reclassified to$46,387. These changes in classification do not affect the Company’s previouslyreported Condensed Consolidated Statements of Operations for any period.

 

In addition to the reclassifications made tothe interim accounting periods presented in this Form 10-Q, reclassificationswere made to the annual financial statements. The table below presents the changes made to the annual financialstatements.  The Previously Reportedcolumn presents the figures as originally presented prior to thereclassification.  The Reclassifiedcolumn presents the figures as reported in the Company’s Annual Report on Forms10-K and Form 10-K/A filed for the fiscal year ended May 31, 2005.

 
| **Consolidated Balance Sheet**                 | ** ** | **May 31, 2004**            | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **Previously  Reported**    | ** ** | **Reclass** | ** ** | **Reclassified** | ** ** |
| ** **                                     | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and  cash equivalents                     |       | $                           | 79,996     |   | $ | (7,600 | ) | $ | 72,396 |   |
| Marketable  securities                         |       | 120,465                     |       | 7,600 |   | 128,065 |   |
| Total                                          |       | $                           | 200,461    |   | $ | — |   | $ | 200,461 |   |
|                                           |       |                        |       |   |   |   |   |
| **Consolidated Statement of Cash  Flow**       | ** ** | **Year Ended May 31, 2004** | ** ** |
| ** **                                     | ** ** | **Previously  Reported**    | ** ** | **Reclass** | ** ** | **Reclassified** | ** ** |
|                                           |       |                        |       |   |   |   |   |
| Purchases of  marketable securities            |       | $                           | (173,044   | ) | $ | (457,655 | ) | $ | (630,699 | ) |
| Sales and  maturities of marketable securities |       | 150,529                     |       | 493,255 |   | 643,784 |   |
| Net change                                     |       | $                           | (22,515    | ) | $ | 35,600 |   | $ | 13,085 |   |

 

The net impact of the $35.6million reclass decreased the total cash used in investing activities for theyear by a similar amount.

 
| **Consolidated Statement of Cash  Flow**       | ** ** | **Year Ended May 31, 2003** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **Previously  Reported**    | ** ** | **Reclass** | ** ** | **Reclassified** | ** ** |
|                                           |       |                        |       |   |   |   |   |
| Purchases of  marketable securities            |       | $                           | (232,059   | ) | $ | (271,060 | ) | $ | (503,119 | ) |
| Sales and  maturities of marketable securities |       | 280,814                     |       | 229,560 |   | 510,374 |   |
| Net change                                     |       | $                           | 48,755     |   | $ | (41,500 | ) | $ | 7,255 |   |

 

The net impact of the $41.5million reclass decreased the total cash provided by investing activities forthe year by a similar amount.

 

**2.****            ****STOCK-BASED COMPENSATION**

 

The Company accounts for stock-based employeecompensation arrangements in accordance with the provisions of AccountingPrinciples Board (APB) Opinion No. 25, “Accounting for Stock Issued toEmployees,” and complies with the disclosure provisions of SFAS No. 123, “Accountingfor Stock-Based Compensation” and SFAS No. 148 “Accounting for Stock-BasedCompensation-Transition and Disclosure, an amendment of Financial AccountingStandards Board (FASB) Statement No. 123.”

 

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) and net income(loss) per share would have been adjusted to the pro forma amounts indicatedbelow (in thousands, except per share amounts):

 

6

----

 
| ** **                                                                                                              | ** ** | **Three Months Ended  November 30,** | ** ** | **Six Months Ended  November 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2005**                                  | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income  (loss):                                                                                                     |       |                                      |       |                                    |       |   |   |   |   |
| As reported                                                                                                             |       | $                                         | 6,556      |                                    | $          | (3,020 | ) | $ | 10,733 |   | $ | (3,437 | ) |
| Add: Stock-based employee compensation  expense included in reported net income (loss), net of taxes                    |       | 65                                        |       | 51                                      |       | 4,044 |   | 65 |   |
| Deduct: Total stock-based compensation  expense determined under fair value based method for all rewards, net of  taxes |       | (1,223                                    | )          | (1,585                                  | )          | (3,459 | ) | (3,531 | ) |
| Pro forma net income (loss)                                                                                             |       | $                                         | 5,398      |                                    | $          | (4,554 | ) | $ | 11,318 |   | $ | (6,903 | ) |
|                                                                                                                    |       |                                      |       |                                    |       |   |   |   |   |
| Net  income (loss) per share:                                                                                      |       |                                      |       |                                    |       |   |   |   |   |
| Basic:                                                                                                                  |       |                                      |       |                                    |       |   |   |   |   |
| As reported                                                                                                             |       | $                                         | 0.06       |                                    | $          | (0.03 | ) | $ | 0.11 |   | $ | (0.03 | ) |
| Pro forma                                                                                                               |       | $                                         | 0.05       |                                    | $          | (0.05 | ) | $ | 0.11 |   | $ | (0.07 | ) |
| Diluted:                                                                                                                |       |                                      |       |                                    |       |   |   |   |   |
| As reported                                                                                                             |       | $                                         | 0.06       |                                    | $          | (0.03 | ) | $ | 0.10 |   | $ | (0.03 | ) |
| Pro forma                                                                                                               |       | $                                         | 0.05       |                                    | $          | (0.05 | ) | $ | 0.11 |   | $ | (0.07 | ) |

 

During the six months ended November 30,2005, the Company recognized $4.0 million of after-tax stock-based employeecompensation expense that included a $3.8 million non-cash charge resultingfrom a negotiated separation agreement with its former president and chiefexecutive officer.  The agreement wasdeemed to be a modification of previously granted options and thereforeresulted in an intrinsic value charge for option expense under APB No. 25.  In calculating the pro forma net income(loss) underSFAS No.123 for the three and six months ended November 30, 2005, $1.2million and $3.5 million respectively, net of related tax effects, werededucted from net income (loss) representing the total stock-based employeecompensation expense that was determined under the fair value based method forall awards.  The options for the formerpresident and chief executive officer that were deemed modified were 100%vested and therefore under the fair value based method only $0.4 million inoption expense was included as expense in the pro forma calculation relating tothe incremental value on the modified options as compared with the optionsbefore modification for the six months ended November 30, 2005.

 

Additionally, during the six months ended November 30,2005, all “out-of-the-money” options for all Section 16b officers anddirectors as of June 1, 2005 were modified to permit a two year exercisewindow after termination.  While thisrequired no charge in the Company’s income statement under APB No. 25,there was an after-tax fair value charge included in the pro forma charge aboveof $0.3 million for the six months ended November 30, 2005. The total ofboth modifications under SFAS No. 123 was$0.7 million for the six months ended November 30, 2005.

 

**3.****            ****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 reflect the weighted average number ofshares of common stock outstanding plus any potentially dilutive sharesoutstanding during the period. Potentially dilutive shares consist of shares tobe issued upon the exercise of stock options and warrants and release ofrestricted stock (in thousands, except per share amounts).

 

7

----

 
| ** **                                           | ** ** | **Three Months Ended  November 30,** | ** ** | **Six Months Ended  November 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                  | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Basic  earnings per share computation:               |       |                                      |       |                                    |       |   |   |   |   |
| Net income (loss) applicable to common  stockholders |       | $                                         | 6,556      |                                    | $          | (3,020 | ) | $ | 10,733 |   | $ | (3,437 | ) |
| Weighted average common shares – basic          |       | 102,428                                   |       | 98,316                                  |       | 101,790 |   | 98,305 |   |
| Basic net  income (loss) per share                   |       | $                                         | 0.06       |                                    | $          | (0.03 | ) | $ | 0.11 |   | $ | (0.03 | ) |
|                                                 |       |                                      |       |                                    |       |   |   |   |   |
| Diluted  earnings per share computation:             |       |                                      |       |                                    |       |   |   |   |   |
| Net income (loss) applicable to common  stockholders |       | $                                         | 6,556      |                                    | $          | (3,020 | ) | $ | 10,733 |   | $ | (3,437 | ) |
| Shares  calculation:                                 |       |                                      |       |                                    |       |   |   |   |   |
| Weighted average common shares – basic          |       | 102,428                                   |       | 98,316                                  |       | 101,790 |   | 98,305 |   |
| Effect of dilutive stock options                     |       | 4,606                                     |       | —                                  |       | 4,366 |   | — |   |
| Effect of restricted stock                           |       | 100                                       |       | —                                  |       | 99 |   | — |   |
| Effect of dilutive warrants                          |       | —                                    |       | —                                  |       | 43 |   | — |   |
| Weighted average common shares – diluted        |       | 107,134                                   |       | 98,316                                  |       | 106,298 |   | 98,305 |   |
| Diluted net  income (loss) per share                 |       | $                                         | 0.06       |                                    | $          | (0.03 | ) | $ | 0.10 |   | $ | (0.03 | ) |

 

Potentiallydilutive shares of common stock excluded from the diluted net income (loss) pershare computations were 2.0 million and 19.9 million as of November 30,2005 and 2004, respectively. Certain potentially dilutive shares of commonstock were excluded from the diluted earnings per share computation becausetheir exercise prices were greater than the average market price of the commonshares during the period and were therefore not dilutive. In addition,potentially dilutive shares of common stock were excluded from periods with anet loss because they were anti-dilutive.

 

**4.****            ****RECENT ACCOUNTINGPRONOUNCEMENTS**

 

In December 2004, the FASB issued SFAS No. 123(revised 2004), *Share-Based Payment (“SFASNo. 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. Thecost 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) supersedes SFAS No. 123, *Accounting for Stock-Based Compensation*(“SFAS No. 123”), and supersedesAPB No. 25, *Accounting for Stock Issuedto Employees*(“Opinion 25”)*.*SFAS No. 123, as originallyissued in 1995, established a fair-value-based method of accounting forshare-based payment transactions with employees. However, SFAS No. 123permitted entities the option of continuing to apply the guidance in Opinion25, as long as the footnotes to financial statements disclosed what net incomewould have been had the fair-value-based method been used. The Company electedthe option of disclosure only under SFAS No. 123. In its disclosures, theCompany has historically used the Black-Scholes option pricing model todetermine the fair value of its share based compensation arrangements. Upon theadoption of SFAS No. 123(R), the Company will determine whether it willcontinue to utilize the Black-Scholes model or adopt some other acceptablemodel. Public entities are required to applySFAS No. 123(R) as of the first annual reporting period that begins after June 15, 2005,which is effective with the Company’s first quarter of fiscal 2007. Basedon the Company’s significant amount of unvested share-based payment awards, theadoption of this statement is anticipated to have a material impact on theCompany’s Consolidated Statements of Operations, however the Company iscurrently evaluating the impact. Historically, had compensation costs for theCompany’s stock options been recognized based on the fair value at the grantdate consistent with the provisions of SFAS No. 123, the Company’s diluted earningsper share would have been reduced by $0.06, $0.05, and $0.05, respectively, forthe years ended May 31, 2005, May 31, 2004, and May 31, 2003, as disclosed inthe Company’s Annual Report on Form 10-K and Form 10-K/A filed for the fiscalyear ended May 31, 2005.

 

In May 2005, the FASB issued SFAS No 154, “AccountingChanges and Error Corrections – A replacement of APB Opinion No. 20 andFASB Statement No. 3” (“SFAS 154”). SFAS 154 changes the requirement for the accounting for and reporting ofa change in accounting principle. This statement applies to all voluntarychanges in accounting principles and changes required by an accountingpronouncement in the unusual instance that the pronouncement does not includespecific transition provisions.  Theprovisions in SFAS 154 are effective for accounting changes and correction oferrors made in fiscal years beginning after December 15, 2005, whichis effective with the Company’s first quarter of fiscal 2007.

 

8

----

 

**5.             PENDING BUSINESS COMBINATION**

 

On June 2, 2005, the Company entered intoan agreement to combine with Stockholm, Sweden-based Intentia International AB(“Intentia”) in an all-stock transaction. The Company and Intentia plan to effecttheir business combination through a recommended public offer in Sweden (the “Offer”)for (i) all outstanding Intentia Series A and Series B sharesand (ii) all outstanding warrants to purchase Series B shares, inexchange for shares of the Company’s common stock. Under the Offer, the Companywould issue approximately 81 million shares of its common stock, with anaggregate transaction value of approximately $460 million, based on the averageclosing price of the Company’s common stock beginning two days before andending two days after the June 2, 2005 announcement date.  The transaction value has been adjusted fromapproximately $464 million as previously reported due to a revision to theestimated transaction costs used in valuing this transaction.  The revision, however, does not have anyimpact on the exchange ratios of the Exchange Offer between Lawson andIntentia. The Offer is expected to result in the Company’s stockholders owningapproximately 56.75 percent, and Intentia’s stockholders owning approximately43.25 percent, based on the Company’s capital stock and Series A and Series BIntentia capital stock, calculated on a fully-diluted basis using the treasurymethod.

 

The transaction is expected to qualify as atax-free exchange for both parties within the meaning of Section 351 ofthe United States Internal Revenue Code. The Company intends to account for thetransaction under the purchase method of accounting and accordingly, the assetsand liabilities acquired will be recorded at their estimated fair values at theeffective date of the acquisition and the results of the operations will beincluded in the Consolidated Statements of Operations effective with theacquisition date.  The Company hasincurred approximately $9.8 million of costs related to the acquisition,of which $6.1 million has been capitalized as directly related to thetransaction and eligible for inclusion as part of the purchase price. Duringthe three and six months ended November 30, 2005, $1.6 million and $2.9million, respectively, of costs related to the acquisition were charged tooperations.

 

**6.             COMPREHENSIVEINCOME (LOSS)**

 

The following table summarizes thecomponents of comprehensive income (loss) (in thousands):

 
| ** **                                                                                                                                                                                                                                                                        | ** ** | **Three Months Ended  November 30,** | ** ** | **Six Months Ended  November 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                        | ** ** | **2005**                                  | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income  (loss)                                                                                                                                                                                                                                                                |       | $                                         | 6,556      |                                    | $          | (3,020 | ) | $ | 10,733 |   | $ | (3,437 | ) |
| Unrealized (loss) gain on  available-for-sale investments, net of taxes (benefit) of $(10) and  $(0.6) for the three months ended November 30, 2005 and 2004,  respectively, and $(13) and $15 for the six months ended November 30,  2005 and 2004, respectively. |       | (15                                       | )          | (1                                      | )          | (21 | ) | 25 |   |
| Foreign currency translation adjustment                                                                                                                                                                                                                                           |       | (551                                      | )          | 1,014                                   |       | (480 | ) | 866 |   |
| Other comprehensive (loss) income                                                                                                                                                                                                                                                 |       | (566                                      | )          | 1,013                                   |       | (501 | ) | 891 |   |
| Comprehensive  income (loss)                                                                                                                                                                                                                                                      |       | $                                         | 5,990      |                                    | $          | (2,007 | ) | $ | 10,232 |   | $ | (2,546 | ) |

 

**7.             RESTRUCTURING**

 

During the three months ended November 30,2005 and 2004, the Company recorded restructuring adjustments resulting in areversal of $0.01 million and a charge of $5.5 million, respectively. For thesix months ended November 30, 2005 and 2004, the Company recorded chargesof $0.01 million and $5.4 million, respectively.

 

9

----

 

***Fiscal 2005 Restructuring***

 

On September 28, 2004, the Companyapproved a plan designed to enhance the Company’s operating effectiveness andprofitability. Under the restructuring plan (Phase I), the Company streamlinedstructure, consolidated leadership and reducedlong-term costs to realign projected expenses with anticipated revenue levels.The plan included the reduction of 107 employees in fiscal 2005 in theUnited States and the United Kingdom, which in accordance with SFAS No. 112,*Employers Accounting for Post Employment Benefits -an amendment of FASB Statements No. 5 and 43(“*SFAS No. 112*”)*, resulted in a charge for severance and related benefitsof $2.9 million, net of a reversal of $0.03 million subsequent to theinitial charge within fiscal 2005. The reduction included employees whoworked in operations, marketing, sales, research and development, maintenanceand services. There were no cash payments made during the three and six monthsended November 30, 2005, respectively. All employee reductions and relatedcash payments were substantially completed as of November 30, 2005. TheCompany adjusted the remaining accrual to cover additional costs that areanticipated to be incurred. Theremaining cash payments are expected to be completed during fiscal 2006.

 

The following table setsforth the restructuring reserve activity related to the Phase I restructuringplan and the remaining balances as of November 30, 2005, which areincluded in accrued compensation and benefits (in thousands):

 
| ** **                       | ** ** | **Severance  and related  benefits** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| Balance,  May 31, 2005 |       | $                                    | 29         |   |
| Adjustments to provision         |       | 13                                   |       |
| Balance,  November 30, 2005 |       | $                                    | 42         |   |

 

At November 30, 2004, the Company alsoaccrued for a restructuring plan (Phase II) that included initiatives tofurther reduce costs and realign projected expenses with anticipated revenuelevels. It included a reduction of 68 employees in the United States and theUnited Kingdom, and because the Company was able to determine probability atthe end of the second quarter of fiscal 2005, the restructuring resultedin a $2.2 million charge for severance and related benefits, net of a reversalof $0.3 million subsequent to the initial charge within fiscal 2005, inaccordance with SFAS No. 112. The reduction included employees who workedin sales, research and development and services. Cash payments duringfiscal 2005 for the Phase II plan were $2.0 million. There were nocash payments made during the three months ended November 30, 2005.  There was $0.01 million in cash payments madeduring the six months ended November 30, 2005.  All employee reductions and related cashpayments were substantially completed as of November 30, 2005.  The Company adjusted the remainingaccrual for costs that are no longer anticipated to be incurred. The remaining cash payments are expected tobe completed during fiscal 2006.

 

The following table setsforth the restructuring reserve activity related to the Phase II restructuringplan and the remaining balances as of November 30, 2005, which areincluded in accrued compensation and benefits (in thousands):

 
| ** **                       | ** ** | **Severance  and related  benefits** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| Balance,  May 31, 2005 |       | $                                    | 114        |   |
| Cash payments                    |       | (14                                  | )          |
| Adjustments to provision         |       | (25                                  | )          |
| Balance,  November 30, 2005 |       | $                                    | 75         |   |

 

***Fiscal 2004 Restructuring***

 

In September 2003,the Company approved a restructuring plan to realign projected expenses withanticipated lower revenue levels and incurred $2.3 million in restructuringcharges for severence and related benefits. The fiscal 2004 plan resultedin the reduction of 93 employees in the second quarter of fiscal 2004,from various functions including research and development, general andadminstrative and sales and marketing, primarily in the United States. Duringthe three months ended August 31, 2004, the Company recorded a $0.03million reversal of restructuring charges for certain employee costs itdetermined would not be incurred.

 

There was $0.1 million incash payments made during the six months ended November 30, 2005. TheCompany adjusted the remaining accrual to cover additional costs that wereincurred in the final cash payments of the plan.

 

10

----

 

The following table setsforth the restructuring reserve activity reflecting the completion of thefiscal 2004 restructuring plan as of November 30, 2005 (inthousands):

 
| ** **                       | ** ** | **Severance  and related  benefits** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| Balance,  May 31, 2005 |       | $                                    | 62         |   |
| Cash payments                    |       | (104                                 | )          |
| Adjustments to provision         |       | 42                                   |       |
| Balance,  November 30, 2005 |       | $                                    | —     |   |

 

***Fiscal 2003 Restructuring***

 

In September 2002,the Company approved a restructuring plan to realign projected expenses withanticipated lower revenue levels and incurred $5.8 million in restructuringcharges, which included $4.7 million of severence and related benefits and$1.1 million for the closure and consolidation of facilities. The planresulted in the reduction of 244 employees in the second quarter offiscal 2003, from various functions including administrative, professionaland managerial in the United States, Canada and Europe. During the three monthsended August 31, 2004, the Company recorded a reversal of restructuringcharges of $0.05 million for certain employee costs it determined would not beincurred. During fiscal 2005, the Company completed its obligations underthe restructuring plan and no further adjustments have been made in fiscal 2006.

 

***Fiscal 2002 Restructuring***

 

In May 2002, the Company approved arestructuring plan in response to the general economic downturn and incurred $3.3 millionin restructuring charges, which included $3.0 million for severancerelated benefits and $0.3 million for the closure of a leased officefacility. During fiscal 2003, the Company recorded $0.2 million in additionalcharges associated with finalization of lease termination agreements. The planresulted in the reduction of 111 employees in various functions includingadministrative, professional, and managerial, primarily in the United States.There was $0.01 million in cash payments made during the six months ended November 30,2005.  The Company adjusted the remainingaccrual to cover additional costs that were incurred in the final cash paymentsof the plan.

 

The following table sets forth the restructuringreserve activity reflecting the completion of the fiscal 2002restructuring plan as of November 30, 2005 (in thousands):

 
| ** **                       | ** ** | **Facilities** | ** ** |
|----------------------------------|------------|----------------|------------|
| Balance,  May 31, 2005 |       | $              | 30         |   |
| Cash payments                    |       | (5             | )          |
| Adjustments to provision         |       | (25            | )          |
| Balance,  November 30, 2005 |       | $              | —     |   |

 

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

 

Thechanges in the carrying amount of goodwill for the six months ended November 30,2005, are as follows (in thousands):

 
| Balance as of May 31, 2005       |   | $    | 43,407 |   |
|---------------------------------------|--------|------|--------|--------|
| Contingency consideration earned      |   | 200  |   |
| Currency translation effect           |   | (432 | )      |
| Balance as  of November 30, 2005 |   | $    | 43,175 |   |

 

11

----

 

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

 
| ** **             | ** ** | **November 30, 2005**   | ** ** | **May 31, 2005**         | ** ** |
|------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
| Maintenance contracts  |       | $                            | 22,940     |                          | $          | (6,304 | ) | $ | 16,636 |   | $ | 22,940 |   | $ | (4,316 | ) | $ | 18,624 |   |
| Acquired technology    |       | 14,109                       |       | (9,952                        | )          | 4,157 |   | 14,234 |   | (8,417 | ) | 5,817 |   |
| Customer  lists        |       | 11,096                       |       | (4,477                        | )          | 6,619 |   | 11,217 |   | (3,879 | ) | 7,338 |   |
| Non-compete agreements |       | 513                          |       | (444                          | )          | 69 |   | 628 |   | (468 | ) | 160 |   |
|                   |       | $                            | 48,658     |                          | $          | (21,177 | ) | $ | 27,481 |   | $ | 49,019 |   | $ | (17,080 | ) | $ | 31,939 |   |
|                        |            |                              |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Intangible assets are amortized on astraight-line basis over the estimated periods benefited, generally three tofive years for acquired technology, four to ten years for customer lists, andthe term of the agreement for non-compete agreements. Intangible assets formaintenance contracts are amortized under an accelerated amortization method,over the estimated term of the agreements based on the estimated revenue forthe applicable period in relation to the total estimated revenue. For the threemonths endedNovember 30, 2005 and 2004, there was $2.2 million in amortization expensefor intangible assets.  For the sixmonths ended November 30, 2005 and 2004, there was $4.3 million and $4.4million, respectively in amortization expense for intangible assets.  Amortization expense is reported in cost oflicense fees, cost of services and amortization of acquired intangibles, in theaccompanying Condensed Consolidated Statements of Operations.

 

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

 
| 2006 (remaining 6 months) |   | $     | 4,175  |   |
|---------------------------|--------|-------|--------|--------|
| 2007                      |   | 6,955 |   |
| 2008                      |   | 4,664 |   |
| 2009                      |   | 3,637 |   |
| 2010                      |   | 3,005 |   |
| Thereafter                |   | 5,045 |   |
|                      |   | $     | 27,481 |   |

 

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

 

The Company has outstanding contingentconsideration agreements related to acquisitions ranging in the aggregate fromzero to $5.7 million, measured over various periods through fiscal 2007,based on the acquired company’s future performance. Contingent considerationearned is paid in cash and recorded as additional goodwill. During the threeand six months ended November 30, 2005, $0.2 million in additionalconsideration had been earned and recorded and $1.0 million expired under theseagreements.

 

The Company is involved in various claims andlegal actions in the normal course of business. Management is of the opinionthat the outcome of such legal actions will not have a significant adverseeffect on the Company’s financial position, results of operations or cashflows. Notwithstanding management’s belief, an unfavorable resolution of someor all of these matters could materially affect the Company’s future results ofoperations and cash flows.

 

Infiscal 2005, the Company and International Business Machines Corporation (IBM)entered into an OEM Software Agreement that was modified in the second quarterof fiscal 2006, and a Master Relationship Agreement (MRA). Under theseagreements, the Company is reselling its business applications in conjunctionwith IBM’s open standards-based software, and the companies will jointly marketthese software solutions.  The MRAgoverns the joint marketing activities and has a three-year term. During theterm of the modified OEM Software Agreement, the Company will pay royalties toIBM for the licensing of IBM programs to each applicable existing and newcustomer of the Company, and will also pay IBM annual maintenance fees for eachapplicable customer.  The royalty andmaintenance payments to IBM will be based on transactions with each applicableLawson customer. The modified OEM Software Agreement has an initial term ofthree years commencing September 2005 and may be extended by the Company fortwo additional one-year terms.  Duringthe initial three-year term, the Company has agreed to pay certain minimumquarterly and annual royalties to IBM. Total commitments under the modified OEMSoftware Agreement approximate $9.5 million over the three-year term. TheCompany may elect to

 

12

----

 

terminate the OEM Software Agreement forconvenience upon 90 days advance notice to IBM. If the Company elects early termination at any time during the initialthree-year term, the Company would pay IBM any unpaid minimum royalties throughthe date of termination plus a prorated share of the guaranteed annual minimumpayment due for the year in which the termination occurred.  The Company has made cash payments of $1.7million according to the terms of the modified OEM Software Agreement duringthe six months ended November 30, 2005. In addition, the Company recorded$0.2 million as other accrued liabilities on the November 30, 2005Condensed Consolidated Balance Sheet, representing the prorated portion of the$0.6 million annual minimum owed in the initial year of the contract.

 

On May 9, 2005,the Company and The Hackett Group, Inc., a wholly-owned subsidiary ofAnswerthink Inc. (“Hackett”), entered into an Advisory Alliance Agreement (the “Agreement”).The Agreement identifies joint programs in which Hackett will provide theCompany and its customers and prospects with, among other things, accessto Hackett benchmark tools, best-practices research and business advisoryservices in exchange for the payment of specified program fees. The term of theAgreement commenced on May 9, 2005, and continues until May 31, 2008,unless terminated earlier in accordance with the provisions of the Agreement.The Company and Hackett have the option to extend the terms of the programsupon mutual written agreement, and Hackett has agreed to provide certainexclusivity rights to the Company in connection with certain of its programs.Under the Agreement, the Company paid $1.1 million in the six months ended November 30,2005, and is contractually committed to pay an additional $1.0 million withinthe next twelve months that has been recorded as other accrued liabilities at November 30,2005. Approximately $1.6 million of fees is being amortized on a straight linebasis over the term of the Agreement and is reflected as sales and marketingexpenses and approximately $0.5 million is being amortized over the same periodthe revenue is being recognized and is reflected as cost of license fees. Inaddition, the Company will pay additional fees when sales volumes meetestablished criteria throughout the term of the contract.

 

In February 2004, the Company enteredinto an offshore agreement with a third-party to provide software customersupport services. If the Company terminates this agreement prior to its initialtwenty-four month term, a termination fee would be incurred equal to the sum ofthe previous six months service charges, estimated to be $2.0 million.Management is of the opinion that the agreement will not be terminated withinthe initial twenty-four month period and therefore has not accrued anytermination fees.

 

**10.****         ****SEGMENT AND GEOGRAPHIC AREAS**

 

The Company views its operations andmanages its business as one segment, the development and marketing of computersoftware and related services. Factors used to identify the Company’s singleoperating segment include the financial information available for evaluation bythe chief operating decision maker in making decisions about how to allocateresources and assess performance.  TheCompany markets its products and services through the Company’s offices in theUnited States and its wholly-owned branches and subsidiaries operating inCanada, the United Kingdom, France and the Netherlands. The following tablepresents revenues and long-lived assets summarized by geographic region (inthousands):

 
| ** **               | ** ** | **Three Months Ended  November 30,** | ** ** | **Six Months Ended  November 30,** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **               | ** ** | **2005**                                  | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                |       |                                      |       |                                    |       |   |   |   |   |
| Domestic operations      |       | $                                         | 84,114     |                                    | $          | 78,636 |   | $ | 168,691 |   | $ | 156,607 |   |
| International operations |       | 4,923                                     |       | 4,363                                   |       | 8,260 |   | 9,077 |   |
| Consolidated             |       | $                                         | 89,037     |                                    | $          | 82,999 |   | $ | 176,951 |   | $ | 165,684 |   |
|                     |       |                                      |       |                                    |       |   |   |   |   |
| ** **               | ** ** | **November 30,  2005**               | ** ** | **May 31,  2005**                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-lived  assets:      |       |                                      |       |                                    |       |   |   |   |   |
| Domestic operations      |       | $                                         | 68,616     |                                    | $          | 73,925 |   |   |   |   |   |
| International operations |       | 13,674                                    |       | 14,995                                  |       |   |   |   |   |
| Consolidated             |       | $                                         | 82,290     |                                    | $          | 88,920 |   |   |   |   |   |
|                          |            |                                           |            |                                         |            |  |  |  |  |  |  |  |  |  |  |

 

13

----

 

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

 
| ** **               | ** ** | **Three Months Ended  November 30,** | ** ** | **Six Months Ended  November 30,** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **               | ** ** | **2005**                                  | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Components  of revenues: |       |                                      |       |                                    |       |   |   |   |   |
| License fees             |       | $                                         | 18,121     |                                    | $          | 13,195 |   | $ | 36,725 |   | $ | 26,446 |   |
| Services:                |       |                                      |       |                                    |       |   |   |   |   |
| Consulting               |       | 26,362                                    |       | 26,904                                  |       | 52,059 |   | 55,656 |   |
| Customer support         |       | 44,554                                    |       | 42,900                                  |       | 88,167 |   | 83,582 |   |
| Total services           |       | 70,916                                    |       | 69,804                                  |       | 140,226 |   | 139,238 |   |
| Total revenues           |       | $                                         | 89,037     |                                    | $          | 82,999 |   | $ | 176,951 |   | $ | 165,684 |   |
|                          |            |                                           |            |                                         |            |  |  |  |  |  |  |  |  |  |

 

**11.****          COMMONSTOCK REPURCHASES**

 

In June 2003, the Company’s Board ofDirectors authorized the repurchase of up to $50.0 million of the Company’scommon shares. Shares were repurchased from time to time as market conditionswarranted either through open market transactions, block purchases, privatetransactions or other means. During the six months ended November 30,2004, the Company completed the authorized stock repurchase plan by purchasingthe remaining 1.4 million shares for $10.0 million in cash. Cash proceedsobtained from the maturities of marketable securities, the exercise of employeestock options and contributions to the employee stock purchase plan, largelyfunded the share repurchases. The repurchased shares, which remain in treasury,will be used for general corporate purposes.

 

**12.****          STOCKWARRANT**

 

On July 18, 2005, a stock warrant issuedin fiscal 2001 with a five-year life, was exercised allowing its holder topurchase 1.0 million shares of the Company’s common stock at an exerciseprice of $4.64 per share. The warrant was exercised on a net basis, resultingin the issuance of  0.1 millionshares of common stock from treasury, which resulted in a $0.3 millionreduction to additional paid-in capital during the first quarter of fiscal2006.  As of November 30, 2005,there are no more outstanding stock warrants.

 

**13.****          STOCKCOMPENSATION**

 

**Amendments to Stock Option Agreements**

 

Effective on June 1, 2005, theCompany amended the stock options held by each of its non-employee directorsto: (1) fully vest and eliminate the Company’s call right to purchaseshares issued after exercise and (2) allow those options to be exerciseduntil the earlier of two years after resignation as a director or ten yearsafter the date of grant. This change resulted in recognizing $0.1 millionin compensation expense included in general and administrative expenses in theCondensed Consolidated Statements of Operations during the first quarter offiscal 2006 because a portion of these options were “in-the-money” at the timethey were immediately vested.

 

Effective on June 1, 2005, theCompany amended the stock options that have an exercise price per share greaterthan or equal to $5.95 (the closing price on NASDAQ on June 1, 2005)and that are held by each officer who was subject to the reporting requirementsof Section 16 of the Securities Exchange Act of 1934, to allow thatofficer to exercise the options that are unexercised and vested as of thatofficer’s employment termination date until the earlier of two years aftertermination of employment or ten years after the date of grant.  Stock options previously granted to any Section 16reporting person with an exercise price per share of less than $5.95 were notamended. This stock-based compensation change resulted in no impact to theCondensed Consolidated Statements of Operations in the first quarter of fiscal2006.

 

**Restricted Stock Award**

 

On June 2, 2005, the Company granted arestricted stock award of 100,000 shares of common stock to its newly appointedpresident and chief executive officer. The shares, with a $0.5 million marketvalue at date of grant, shall vest in two 50,000 share increments on June 1,2006 and 2007, subject to acceleration upon certain events.  The market value of the restricted stock wasrecorded as unearned compensation, a component of shareholders’ equity, and isbeing amortized over the respective vesting periods. For the three and sixmonths ended November 30, 2005 amortization of the unearned compensationrelated to restricted stock was$0.1 million and $0.2 million, respectively.

 

14

----

 

**Stock Compensation Charge**

 

During the first quarter of fiscal 2006, theCompany recorded a $6.3 million non-cash charge resulting from a negotiatedseparation agreement with its former president and chief executive officer,which among other terms provided that he remain available to the Company in apart-time employment status for a period of up to two years.  That agreement was deemed to be amodification of previously granted options, resulting in a non-cash charge foroption expense.  The charge is includedin general and administrative expenses in the Condensed Consolidated Statementsof Operations for the six months ended November 30, 2005.

 

**14.          INCOMETAXES**

 

The quarterly tax expense is measured using anestimated annual tax rate for the period. At November 30, 2005, theCompany’s estimated annual tax rate was 39.7%. The Company’s effective tax ratewas 39.2% and 40.2% for the three months ended November 30, 2005 and 2004, respectively.  The Company’s overall effective tax rate was29.1% and 39.9% for the six months ended November 30, 2005 and 2004,respectively. The decrease in the effective tax rate for the six months endedNovember 30, 2005 as compared to the same prior year period was primarily theresult of the Company releasing $1.6 million of tax reserves in the firstquarter of fiscal 2006.

 

The Company reviews its annual tax rate on aquarterly basis and makes any necessary changes. The estimated annual tax ratemay fluctuate due to changes in forecasted annual operating income; positive ornegative changes to the valuation allowance for net deferred tax assets;changes to actual or forecasted permanent book to tax differences; impacts fromfuture tax settlements with state, federal or foreign tax authorities; orimpacts from enacted tax law changes.  TheCompany identifies items which are unusual and non-recurring in nature, andtreats these as discrete events. The tax effect of discreet items is bookedentirely in the quarter in which the discrete event occurs.

 

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

 

**Forward-Looking Statements**

 

In addition to historical information,this Form 10-Q contains forward-looking statements. These forward-lookingstatements are made in reliance upon the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,”“project,” “should” and similar expressions are intended to identify “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. Forward-looking statements include, among others, statements about ourfuture performance, the continuation of historical trends, the sufficiency ofour sources of capital for future needs, the effects of acquisitions and theexpected impact of recently issued accounting pronouncements. Theseforward-looking statements are subject to certain risks and uncertainties thatcould cause actual results to differ materially from those reflected in theforward-looking statements. Factors that might cause such a difference include,but are not limited to, those discussed in the section entitled “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Factors That May Affect Our Future Results or the Market Priceof Our Stock.” Readers are cautioned not to place undue reliance on theseforward-looking statements, which reflect management’s opinions only as of thedate hereof. We undertake no obligation to revise or publicly release theresults of any revision to these forward-looking statements based oncircumstances or events, which occur in the future. Readers should carefullyreview the risk factors described in this report on Form 10-Q and in otherdocuments we file from time to time with the Securities and Exchange Commission(SEC).

 

**Business Overview**

 

We provide business application software,services and support that help organizations manage, analyze and improve theirbusinesses. The markets we serve include healthcare, retail, financial services(including banking, insurance and other financial services), local/stategovernment, education and professional services. We derive revenues fromlicensing business application software and providing comprehensiveprofessional services, including consulting, training and implementationservices, as well as ongoing customer support and maintenance. Consulting,training and implementation services are generally not essential to thefunctionality of our software products, are sold separately and also are availablefrom a number of third-party service providers. Accordingly, revenues fromthese services are generally recorded separately from license fees. We haveoffices and affiliates serving North and South America, Europe, Asia, Africa,and Australia.

 

15

----

 

**5. PENDINGBUSINESS COMBINATION**

 

On June 2,2005, we entered into an agreement to combine with Stockholm, Sweden-basedIntentia International AB (“Intentia”) in all-stock transaction. We plan toeffect our business combination through a recommended public offer in Sweden(the “Offer”) for (i) all outstanding Intentia Series A and Series B shares and(ii) all outstanding warrants to purchase Series B shares, in exchange forshares of our common stock. Under the Offer, we would issue approximately 81million shares of our common stock, with an aggregate transaction value ofapproximately $460 million, based on the average closing price of our commonstock beginning two days before and ending two days after the June 2, 2005announcement date. The transaction value has been adjusted from approximately$464 million as previously reported due to a revision to the estimatedtransaction costs used in valuing this transaction. The revision, however, doesnot have any impact on the exchange ratios of the Exchange Offer. The Offer isexpected to result in our stockholders owning approximately $56.75 percent, andIntentia’s stockholders owning approximately 43.25 percent, based on ourcapital stock and Series A and Series B Intentia capital stock, calculated on afully-diluted basis using the treasury method.

 

The transaction is expected to qualify as atax-free exchange for both parties within the meaning of Section 351 of theUnited States Internal Revenue Code. We intend to account for the transactionunder the purchase method of accounting and accordingly, the assets andliabilities acquired will be recorded at their estimated fair values at theeffective date of the acquisition and the results of the operations will beincluded in the Consolidated Statements of Operations effective with theacquisition date.

 

OnNovember 21, 2005 we announced that we had made our initial filing of aproxy statement and prospectus as part of a Form S-4 registrationstatement, with the SEC under the name Lawson Holdings, Inc. Theregistration statement provides the details of the previously announced offerfor the shares and warrants in Intentia International AB. The S-4 also containsa proxy statement that will be used to solicit certain actions by Lawsonshareholders, including approval of the merger agreement and issuance of newshares. The registration statement has not yet become effective.

 

**Critical Accounting Policies and Estimates**

 

Our discussion and analysis offinancial condition and results of operations are based upon our unauditedcondensed consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements, the reported amounts of revenues and expensesduring the reporting period, and related disclosures of contingent assets andliabilities. The Notes to the Condensed Consolidated Financial Statementscontained herein describe our significant accounting polices used in thepreparation of the consolidated financial statements. On an on-going basis, weevaluate our estimates, including, but not limited to, those related to baddebt, 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 accountingpolices listed below reflect our more significant judgments, estimates andassumptions used in the preparation of our condensed consolidated financialstatements.

 

*Revenue Recognition.*    Revenue recognition rules for softwarebusinesses are very complex. We follow specific and detailed guidelines indetermining the proper amount of revenue to be recorded; however, certainjudgments affect the application of our revenue recognition policy. Revenueresults are difficult to predict, and any shortfall in revenue or delay inrecognizing revenue could cause our operating results to vary significantlyfrom quarter to quarter.

 

The significant judgments for revenuerecognition typically involve whether collectibility can be considered probableand whether fees are fixed or determinable. In addition, our transactions oftenconsist of multiple element arrangements, which typically include license fees,customer support fees and professional service fees.  These multiple element arrangements must beanalyzed to determine the relative fair value of each element, the amount ofrevenue to be recognized upon shipment, if any, and the period and conditionsunder which deferred revenue should be recognized.

 

We recognize revenues in accordancewith the provisions of the American Institute of Certified Public Accountants(AICPA) Statement of Position (SOP) 97-2, “Software Revenue Recognition,” asamended and SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition,With Respect to Certain Transactions,” as well as Technical Practice Aidsissued from time to time by the AICPA, and in accordance with the Securitiesand Exchange Commission Staff Accounting Bulletin (SAB) No. 104, “RevenueRecognition”. We license software under non-cancelable license agreements andprovide related professional services, including consulting, training, andimplementation services, as well as ongoing customer support and maintenance.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 andrecognized as the services are performed. Software arrangements which includecertain fixed-fee service components are recognized as the services areperformed while corresponding costs to provide these services are expensed asincurred. Software arrangements including services that are essential to thefunctionality of our software products are recognized using contract accountingand the percentage-of-completion methodology based on labor hours

 

16

----

 

input.The amount of judgment involved in addressing significant assumptions, risksand uncertainties in applying the application of the percentage-of-completionmethodology can impact the amounts of revenue and related expenses reported inthe consolidated financial statements. Our specific revenue recognitionpolicies are as follows:

 

•      SoftwareLicense Fees— License fee revenues fromend-users are recognized when the software product has been shipped, provided anon-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 customers. 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 customer 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 arrangements inwhich we do not have vendor-specific objective evidence of fair value of allundelivered elements, revenue is deferred until fair value is determined or allelements for which we do not have vendor-specific objective evidence of fairvalue, have been delivered.

 

•      Services—Revenues from training andconsulting services are recognized as services are provided to customers.Revenues from support contracts are deferred and recognized ratably over theterm of the support agreements. Revenues for customer support that are bundledwith the initial license fee are deferred based on the fair value of thebundled support services and recognized ratably over the term of the agreement.Fair value is based on the renewal rate for continued support arrangements.

 

*Allowance for Doubtful Accounts.*  We maintain an allowance fordoubtful accounts at an amount we estimate to be sufficient to provide adequateprotection against losses resulting from extending credit to ourcustomers.  In judging the adequacy ofthe allowance for doubtful accounts, we consider multiple factors includinghistorical bad debt experience, the general economic environment, the need forspecific customer reserves and the aging of our receivables. This provision isincluded in operating expenses as a general and administrative expense. Aconsiderable amount of judgment is required in assessing these factors. If thefactors utilized in determining the allowance do not reflect futureperformance, then a change in the allowance for doubtful accounts would benecessary in the period such determination has been made impacting futureresults of operations.

 

*Sales Returns andAllowances*.** **Although we do not provide acontractual right of return, in the course of arriving at practical businesssolutions to various warranty and other claims, we have allowed sales returnsand allowances. We record a provision for estimated sales returns andallowances on licenses in the same period the related revenues are recorded orwhen current information indicates additional amounts are required. Theseestimates are based on historical experience determined by analysis of specificreturn activity and other known factors. If the historical data we utilize doesnot reflect future performance, then a change in the allowances would benecessary in the period such determination has been made impacting futureresults of operations.

 

*Valuation of Long-Lived andIntangible Assets and Goodwill.***  **In accordance with SFAS No. 144 “*Accounting for the Impairment or Disposal of Long-Lived Assets*,”******we reviewidentifiable intangible and other long-lived assets for impairment wheneverevents or changes in circumstances indicate the carrying amount may not berecoverable. Events or changes in circumstances that indicate the carryingamount may not be recoverable include, but are not limited to a significantdecrease in the market value of the business or asset acquired, a significantadverse change in the extent or manner in which the business or asset acquiredis used or a significant adverse change in the business climate. If such eventsor changes in circumstances are present, the undiscounted cash flows method isused to determine whether the long-lived asset is impaired. Cash flows wouldinclude the estimated terminal value of the asset and exclude any interestcharges. To the extent the carrying value of the asset exceeds the undiscountedcash flows over the estimated remaining life of the asset; the impairment ismeasured using the discounted cash flows method. The discount rate utilizedwould be based on management’s

 

17

----

 

best estimate of the related risksand return at the time the impairment assessment is made.

 

In accordance with SFAS No. 142 “*Goodwill and Other Intangible Assets”* if events or changesin circumstances indicate the carrying amount may not be recoverable, the firststep of the goodwill impairment test, used to identify potential impairment,compares the fair value of a reporting unit with its carrying amount, includinggoodwill. We operate as one reporting unit and therefore compare our book valueto market value. Market value is determined utilizing our market capitalizationplus a control premium. If our market value exceeds our book value, goodwill isconsidered not impaired, thus the second step of the impairment test is notnecessary. If our book value exceeds our market value, the second step of thegoodwill impairment test is performed to measure the amount of impairment loss,if any. The second step of the goodwill impairment test, used to measure theamount of impairment loss, compares the implied fair value of the goodwill withthe book value of the goodwill. If the carrying value of the goodwill exceedsthe implied fair value of the goodwill, an impairment loss would be recognizedin an amount equal to the excess. Any loss recognized cannot exceed thecarrying amount of goodwill. After a goodwill impairment loss is recognized,the adjusted carrying amount of goodwill is the new accounting basis. Asubsequent reversal of a previously recognized goodwill impairment loss isprohibited once the measurement of that loss is completed.

 

*Income Taxes*.  Significant judgment is required in determining the income taxes in each of thejurisdictions in which we operate. This process involves estimating our actualcurrent tax exposure together with assessing temporary differences resultingfrom the different treatment of specific items for tax and financial reportingpurposes. These differences result in deferred tax assets and liabilities,which are included within our Condensed Consolidated Balance Sheets. Althoughwe believe our assessments are reasonable, no assurance can be given that thefinal tax outcome of these matters will not be different than that which isreflected in our historical income tax provisions, benefits and accruals. Suchdifferences could have a material effect on our income tax provision and netincome in the period in which such a determination is made.

 

We are required to evaluate the likelihood that ournet deferred 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 or reverse some or all of the valuationallowance, we must include an expense or expense reversal within the taxprovision included in the Condensed Consolidated Statements of Operations. Asof November 30, 2005 and May 31, 2005, the CondensedConsolidated Balance Sheets include net deferred tax assets in the amount of$30.6 million and $30.7 million, respectively. We have evaluated anddetermined that no additional adjustment, positive or negative, is required tothe valuation allowance as of November 30, 2005.

 

Our methodology for determining the realization ofour deferred tax assets involves estimates of future taxable income from ourcore business, the estimated impact of future stock option deductions from theexercise of outstanding stock options, and the expiration dates and amounts ofstate, federal and foreign net operating losses and other carryforwards inaddition to various tax credits. These estimates are projected through the lifeof the related deferred tax assets based on assumptions that managementbelieves to be reasonable and consistent with current operating results.

 

Although we had cumulative pre-tax income forfinancial reporting purposes for the twelve cumulative quarters ended November 30,2005, we did not pay any significant income taxes during that period becausetax deductions from the exercise of stock options granted prior to our initialpublic offering generated tax operating losses. In assessing the future realization of our deferred tax assets as of November 30, 2005,we considered both positive and negative evidence regarding our ability togenerate sufficient future taxable income to realize our deferred tax assets.The evidence considered included the cumulative tax operating loss for the pastthree years; the cumulative pre-tax income for financial reporting purposes forthe past twelve cumulative quarters; a one year income look back; the estimatedimpact of future tax deductions from the exercise of stock options outstandingas of November 30, 2005; and the estimated future taxable incomebased on historical operating results.

 

We estimate, based largely on historical income,that it may take ten years or more before we fully utilize our current U.S. baseddeferred tax assets associated with the tax loss and tax credit carryforwards.After giving consideration to these factors, we concluded that it was morelikely than not that tax loss carryforwards and other tax credit carryforwardsthat expire within the next ten years will not be utilized. For the three andsix months ended November 30, 2005, we determined that there was noadditional valuation allowance or reversal of valuation allowance required.

 

We also concluded that it was more likely than notthat the net deferred tax assets of $30.6 million as of November 30, 2005,as well as the estimated future tax deductions from the exercise of stockoptions outstanding as of November 30, 2005, would be utilized priorto expiring in greater than ten years. Based on this conclusion, we wouldrequire approximately $115.1 million in cumulative future taxable incometo be generated at various times over the next twenty years to realize therelated net deferred tax assets of $30.6 million as of November 30, 2005,as well as the estimated future tax deductions from the exercise of stockoptions outstanding as of November 30, 2005.

 

18

----

 

In the event that we adjust estimates of futuretaxable income or tax deductions from the exercise of stock options, or ourstock price changes significantly without a corresponding change in taxableincome, we may need to establish an additional valuation allowance or reversesome or all of the existing valuation allowance, which could materially impactour financial position and results of operations.

 

*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.

 

**Results of Operations**

 

The following table sets forth certainline items in our Condensed Consolidated Statements of Operations as apercentage of total revenues for the periods indicated:

 
| ** **                            | ** ** | **Three Months  Ended** | ** ** | **Six Months  Ended** | ** ** | **Percent of  Dollar Change  2005 vs. 2004** | ** ** |
|---------------------------------------|------------|-------------------------|------------|-----------------------|------------|----------------------------------------------|------------|
| ** **                            | ** ** | **November 30,**   | ** ** | **November 30,** | ** ** | ** **                                   | ** ** | **Year-** | ** ** |
| ** **                            | ** ** | **2005**                | ** ** | **2004**              | ** ** | **2005**                                     | ** ** | **2004** | ** ** | **Quarter** | ** ** | **to-Date** | ** ** |
|                                  |       |                    |       |                  |       |                                         |       |   |   |   |   |   |   |
| Revenues:                             |       |                    |       |                  |       |                                         |       |   |   |   |   |   |   |
| License fees                          |       | 20.4                    | %          | 15.9                  | %          | 20.8                                         | %          | 16.0 | % | 37.3 | % | 38.9 | % |
| Services                              |       | 79.6                    |       | 84.1                  |       | 79.2                                         |       | 84.0 |   | 1.6 |   | 0.7 |   |
| Total revenues                        |       | 100.0                   |       | 100.0                 |       | 100.0                                        |       | 100.0 |   | 7.3 |   | 6.8 |   |
|                                  |       |                    |       |                  |       |                                         |       |   |   |   |   |   |   |
| Cost of revenues:                     |       |                    |       |                  |       |                                         |       |   |   |   |   |   |   |
| Cost of license fees                  |       | 3.1                     |       | 3.5                   |       | 2.9                                          |       | 3.2 |   | (4.5 | ) | (1.6 | ) |
| Cost of services                      |       | 38.1                    |       | 44.6                  |       | 37.7                                         |       | 44.4 |   | (8.5 | ) | (9.3 | ) |
| Total cost of revenues                |       | 41.2                    |       | 48.1                  |       | 40.6                                         |       | 47.6 |   | (8.2 | ) | (8.8 | ) |
|                                  |       |                    |       |                  |       |                                         |       |   |   |   |   |   |   |
| Gross margin                          |       | 58.8                    |       | 51.9                  |       | 59.4                                         |       | 52.4 |   | 21.6 |   | 21.0 |   |
|                                  |       |                    |       |                  |       |                                         |       |   |   |   |   |   |   |
| Operating expenses:                   |       |                    |       |                  |       |                                         |       |   |   |   |   |   |   |
| Research and development              |       | 15.8                    |       | 18.9                  |       | 16.2                                         |       | 18.9 |   | (10.2 | ) | (8.8 | ) |
| Sales and marketing                   |       | 21.9                    |       | 23.6                  |       | 21.7                                         |       | 24.4 |   | (0.6 | ) | (5.2 | ) |
| General and administrative            |       | 11.2                    |       | 9.5                   |       | 15.2                                         |       | 9.8 |   | 26.9 |   | 66.5 |   |
| Restructuring                         |       | 0.0                     |       | 6.6                   |       | 0.0                                          |       | 3.3 |   | — |   | — |   |
| Amortization of acquired  intangibles |       | 0.4                     |       | 0.5                   |       | 0.4                                          |       | 0.4 |   | (7.0 | ) | (4.9 | ) |
| Total operating expenses              |       | 49.3                    |       | 59.1                  |       | 53.5                                         |       | 56.8 |   | (10.4 | ) | 0.5 |   |
|                                  |       |                    |       |                  |       |                                         |       |   |   |   |   |   |   |
| Operating income (loss)               |       | 9.5                     |       | (7.2                  | )          | 5.9                                          |       | (4.4 | ) | 242.0 |   | 244.5 |   |
|                                  |       |                    |       |                  |       |                                         |       |   |   |   |   |   |   |
| Other income                          |       | 2.6                     |       | 1.1                   |       | 2.6                                          |       | 0.9 |   | 163.2 |   | 202.5 |   |
| Income (loss) before income  taxes    |       | 12.1                    |       | (6.1                  | )          | 8.5                                          |       | (3.5 | ) | 313.5 |   | 364.6 |   |
| Provision (benefit) for income  taxes |       | 4.7                     |       | (2.5                  | )          | 2.4                                          |       | (1.4 | ) | 308.2 |   | 292.8 |   |
| Net income (loss)                     |       | 7.4                     | %          | (3.6                  | )%         | 6.1                                          | %          | (2.1 | )% | 317.1 | % | 412.3 | % |

 

**Three Months Ended November 30, 2005 Compared With ThreeMonths Ended November 30, 2004**

 

***Revenues***

 

*Total Revenues.*    Welicense software under non-cancelable license agreements and provide relatedprofessional services including consulting, training, and implementationservices, as well as ongoing customer support. Total revenues increased to$89.0 million for the three months ended November 30, 2005 from $83.0million for the three months ended November 30, 2004, representing a 7.3%increase. The $6.0 million increase in total revenues was attributed to a $4.9million increase in license fees and a $1.1 million increase in services.

 

19

----

 

*License Fees.*    Revenues from license fees increased to $18.1million for the three months ended November 30, 2005 from$13.2 million for the three months ended November 30, 2004,representing a 37.3% increase. The $4.9 million increase from the prior yearperiod resulted from a 71.1% increase in the average selling price of ourlicensing transactions, offset by a 16.1% decrease in the number of licensingtransactions.  During the three monthsended November 30, 2005, we closed six licensing transactions greater than $1million each as compared to two closed licensing transactions greater than $1million each during the prior year period. This increase in large transactions was the primary factor for theincrease in license fee revenues during the quarter.  The size and number of licensing transactionsvaries each quarter and as a result, the 71.1% increase in average sellingprice may not be indicative of future performance.

 

Revenues from license fees include transactions withnew clients and existing clients.  Thenumber of licensing transactions with new clients increased by 38.1% over theprior year period.  Of the six licensingtransactions greater than $1 million each, the majority were with new clientsfor the three months ended November 30, 2005. The increase in new client sales is due in part because Lawson is beingselected more frequently to bid on potential transactions.  Before the Oracle/Peoplesoft merger wascompleted a year ago, we were encountering uncertainty in the marketplace.  Since our average sales cycle isnine months, deals that were started after the merger was completed arebeginning to be reflected in the first and second quarter fiscal 2006results.  In addition, most of our targetedpublic company clients have completed their initial year of Sarbanes-Oxleycompliance, which has freed up their time and resources to facilitate some ofthe increase in sales activity.  Revenuesfrom license fees as a percentage of total revenues for the three months ended November 30,2005 and 2004 were 20.4% and 15.9%, respectively.

 

*Services.*    Revenuesfrom services increased to $70.9 million for the three months ended November 30,2005 from $69.8 million for the three months ended November 30, 2004,representing a 1.6% increase.  The $1.1million increase in services includes a $1.7 million increase in customersupport revenue that was partially offset by a $0.5 million decrease inconsulting revenue. The $1.7 million increase in customer support revenue wasprimarily due to general price increases. The $0.5 million decrease inconsulting revenue was primarily due to the decline in fiscal year 2005 licensecontracting activity as compared to the fiscal year 2004, which resulted infewer consulting opportunities during the second quarter of fiscal 2006.  As contracting volumes continue to increase,service revenues are expected to show growth in subsequent quarters.   Service revenues as a percentage of totalrevenues for the three months ended November 30, 2005 and 2004 were 79.6%and 84.1%, 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 may vary depending on the proportion of third-party product salesin our revenue mix.

 

Cost of license fees decreased to $2.8million for the three months ended November 30, 2005 from $2.9 million forthe three months ended November 30, 2004, despite an increase in licensefees, primarily as a result of a significant decline in the proportion ofthird-party sales in our revenue mix. Cost of license fees as a percentage of total revenues for the threemonths endedNovember 30, 2005 and 2004 were 3.1% and 3.5%, respectively. Gross marginon revenue from license fees was 84.7% and 78.0% for the three months ended November 30,2005 and 2004, respectively.

 

*Cost ofServices. *Costof services includes the salaries, employee benefits and related travel andoverhead costs for providing consulting, training, implementation and supportservices to customers as well as intangible asset amortization on supportcontracts purchased in April 2004. Cost of services decreased to $33.9 million for the three monthsended November 30, 2005 from $37.0 million for the three months endedNovember 30, 2004, representing an 8.5% decrease.  The $3.1 million decrease in cost of serviceswas primarily due to a $2.6 million decrease in employee costs resulting fromworkforce reductions primarily related to restructuring initiatives, and a $0.3million decrease in depreciation expenses as a result of efforts to maintaincapital expenditures.  Cost of servicesas a percentage of total revenues for the three months ended November 30,2005 and 2004 was 38.1% and 44.6%, respectively.  Gross margin on services revenues was 52.2%and 46.9% for the three months ended November 30, 2005 and 2004,respectively.

 

***Operating Expenses***

 

*Research andDevelopment.*    Research anddevelopment expenses consist primarily of salaries, employee benefits, relatedoverhead costs and consulting fees relating to product development,enhancements, upgrades, testing, quality assurance and documentation.  Research and development expenses decreasedto $14.1 million for the three months ended November 30, 2005 from$15.7 million for the three months ended November 30, 2004,representing a 10.2% decrease. The $1.6 million decrease in research anddevelopment was primarily due to a $0.7 million decrease in employee andrelated costs resulting from workforce reductions, a $1.1 million decreaserelated to a planned reduction in contract personnel and a $0.2 milliondecrease in depreciation expenses as a result of efforts to maintain capitalexpenditures.  The decreases werepartially offset by a $0.7 million increase in outsourcing to the recentlyestablished off-shore third-party relationship resulting in overallproductivity improvements.  Research anddevelopment expenses as a percentage of total revenues for the three monthsended November 30, 2005 and 2004 were 15.8% and 18.9%, respectively.

 

20

----

 

*Sales and Marketing.*   Salesand marketing expenses consist primarily of salaries and incentivecompensation, employee benefits and travel and overhead costs related to oursales and marketing personnel, as well as trade show activities and advertisingcosts.  Sales and marketing expensesdecreased to $19.5 million for the three months ended November 30, 2005from $19.6 million for the three months ended November 30, 2004,representing a 0.6% decrease. The $0.1 million decrease in sales and marketingexpenses was due to a $0.6 million reduction in marketing initiatives, a $0.5million reduction in consulting fees, a $1.2 million decrease in employee andrelated costs due to workforce reductions primarily related to restructuring initiatives,and a $0.4 million decline in travel expenses due to lower headcount.  These decreases were partially offset by a$2.1 million increase in incentive compensation primarily due to increasedlicense revenue and a $0.4 million increase in costs related to the pendingmerger with Intentia.  Sales andmarketing expenses as a percentage of total revenues for the three months endedNovember 30, 2005 and 2004 were 21.9% and 23.6%, respectively.

 

*General and Administrative.*    General and administrativeexpenses consist primarily of salaries, employee benefits and related overheadcosts for administrative employees, as well as legal and accounting expenses,consulting fees, bad debt expense and corporate insurance policies, includingproperty and casualty, general liability and other insurance.  General and administrative expenses increasedto $10.0 million for the three months ended November 30, 2005 from$7.9 million for the three months ended November 30, 2004,representing a 26.9% increase. The $2.1 million increase in general andadministrative expenses was primarily due to a $1.3 million increase inemployee related costs including bonus and severance costs, a $0.9 millionincrease for contract personnel primarily for finance and a $0.9 millionincrease in costs for the pending merger with Intentia a portion of which isincluded in contract personnel.  Theincreases in costs were partially offset by a $0.7 million decrease in bad debtexpense primarily driven by improved aging of receivables due to strongcollection efforts and lower specific reserves and $0.2 million decrease inmanagement consulting fees.  General andadministrative expenses as a percentage of total revenues for the three monthsended November 30, 2005 and 2004 were 11.2 % and 9.5%, respectively.

 

*Restructuring.*   During the three months ended November 30, 2005 we recorded a $0.01million reversal of the restructuring charge compared with a $5.5 million restructuringcharge for the three months ended November 30, 2004. See Note 7 of Notesto Condensed Consolidated Financial Statements for a summary of activity foryear-to-date fiscal 2006.

 

*Amortization ofAcquired Intangibles. * Amortizationof acquired intangibles of $0.4 million for the three months ended November 30,2005 was consistent with the three months ended November 30, 2004.

 

***Other Income, Net***

 

Other income, net, which is primarilycomprised of interest income earned from cash, marketable securities and longterm investments increased to $2.4 million for the three months ended November 30,2005 from $0.9 million for the three months ended November 30, 2004.  The $1.5 million increase in interest incomewas due primarily to a $64.8 million increase in average invested balances andan increase in average yields, which were 3.8% and 1.8% for the three monthsended November 30, 2005 and 2004, respectively.

 

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

 

We recorded a $4.2 million income tax provision forthe three months ended November 30, 2005 compared with a$2.0 million income tax benefit for the three months ended November 302004. Our income tax provision (benefit) is based on pretax income (loss) andconsists primarily of federal and state income taxes.  The quarterly tax expense is measured usingan estimated annual tax rate for the period. At November 30, 2005, the Company’s estimated annual tax rate is39.7%. Our effective tax rate was 39.2% and 40.2% for the three months ended November 30,2005 and 2004, respectively.  We reviewour reported effective tax rate on a quarterly basis and make any necessarychanges.

 

**Six Months Ended November 30, 2005 Compared With SixMonths Ended November 30, 2004**

 

***Revenues***

 

*Total Revenues.*    Welicense software under non-cancelable license agreements and provide relatedprofessional services including consulting, training, and implementationservices, as well as ongoing customer support. Total revenues increased to$177.0 million for the six months ended November 30, 2005 from$165.7 million for the six months ended November 30, 2004, representinga 6.8% increase. The $11.3 million increase in total revenues was attributed toa $10.3 million increase in license fees and a $1.0 million increase inservices.

 

21

----

 

*License Fees.*    Revenues from licensefees increased to $36.7 million for the six months ended November 30, 2005from $26.4 million for the six months ended November 30, 2004,representing a 38.9% increase. The $10.3 million increase from the prior yearperiod resulted from a 55.5% increase in the average selling price of ourlicensing transactions, offset by a 13.4% decrease in the number of licensingtransactions. Revenues from license fees include transactions with new clientsand existing clients.  The number oflicensing transactions with new clients increased from the prior yearperiod.  The increase in new client salesis due in part because Lawson is being selected more frequently to bid onpotential transactions.  Before theOracle/Peoplesoft merger was completed a year ago, we were encounteringuncertainty in the market place.  Sinceour average sales cycle is nine months, deals that were started after the mergerwas completed are beginning to be reflected in the first and second quarterfiscal 2006 results.  In addition, most ofour targeted public company clients have completed their initial year ofSarbanes-Oxley compliance, which has freed up their time and resources tofacilitate some of the increase in sales activity.  Revenues from license fees as a percentage oftotal revenues for the six months ended November 30, 2005 and 2004 were 20.8%and 16.0%, respectively.

 

*Services.*    Revenuesfrom services increased to $140.2 million for the six months ended November 30,2005 from $139.2 million for the six months ended November 30, 2004,representing a 0.7% increase.  The $1.0million increase in services includes a $4.6 million increase in customer supportrevenue that was partially offset by a $3.6 million decrease in consultingrevenue. The $4.6 million increase in customer support revenue was primarilydue to general price increases.  The $3.6million decrease in consulting revenue was primarily due to a decline in fiscal2005 license contracting activities, which resulted in fewer consultingopportunities during the first and second quarters of fiscal 2006.  As contracting volumes continue to increase,service revenues are expected to show growth in subsequent quarters.  Service revenues as a percentage of totalrevenues for the six months ended November 30, 2005 and 2004 were 79.2%and 84.0%, 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 may vary depending on the proportion of third-party product salesin our revenue mix.

 

Cost of license fees remainedconsistent for the six months ended November 30, 2005 and 2004, despite anincrease in license fees, primarily as a result of a significant decline in theproportion of third-party sales in our revenue mix.  Cost of license fees as a percentage of totalrevenues for the six months ended November 30, 2005 and 2004 were 2.9% and3.2%, respectively. Gross margin on revenue from license fees was 85.9% and80.0% for the six months ended November 30, 2005 and 2004, respectively.

 

*Cost ofServices. *Costof services includes the salaries, employee benefits and related travel andoverhead costs for providing consulting, training, implementation and supportservices to customers as well as intangible asset amortization on supportcontracts purchased in April 2004. Cost of services decreased to $66.6 million for the six monthsended November 30, 2005 from $73.5 million for the six months ended November 30,2004, representing a 9.3% decrease. The $6.9 million decrease in cost ofservices was primarily due to a $5.0 million decrease in employee costsresulting from workforce reductions primarily related to restructuringinitiatives and attrition that occurred since the prior year period, a $0.7million reduction in travel expenses and $0.6 million reduction in depreciationexpense as a result of efforts to maintain capital expenditures.  Cost of services as a percentage of totalrevenues for the six months ended November 30, 2005 and 2004 was 37.7%and 44.4%, respectively.  Gross margin onservices revenues was 52.5% and 47.2% for the six months ended November 30,2005 and 2004, respectively.

 

***Operating Expenses***

 

*Research andDevelopment.*    Research anddevelopment expenses consist primarily of salaries, employee benefits, relatedoverhead costs and consulting fees relating to product development,enhancements, upgrades, testing, quality assurance and documentation.  Research and development expenses decreasedto $28.6 million for the six months ended November 30, 2005 from$31.3 million for the six months ended November 30, 2004,representing an 8.8% decrease. The $2.7 million decrease in research anddevelopment was primarily due to a $1.3 million decrease in employee costsresulting from workforce reductions primarily related to restructuringinitatives, a $2.1 million decrease related to a planned reduction in contractpersonnel and a $0.3 million decrease in depreciation expense as a result ofefforts to maintain capital expenditures. The decreases were partially offset by a $1.2 million increase inoutsourcing to the recently established off-shore third-party relationship resultingin overall productivity improvements. Research and development expenses as a percentage of total revenues forthe six months ended November 30, 2005 and 2004 were 16.2% and 18.9%,respectively.

 

22

----

 

*Sales and Marketing.*   Salesand marketing expenses consist primarily of salaries and incentivecompensation, employee benefits and travel and overhead costs related to oursales and marketing personnel, as well as trade show activities and advertisingcosts.  Sales and marketing expenses decreasedto $38.4 million for the six months ended November 30, 2005 from$40.5 million for the six months ended November 30, 2004,representing a 5.2% decrease.  The $2.1million decrease in sales and marketing expenses was due to a $2.2 millionreduction in advertising costs, a $0.9 million reduction in consulting fees anda $0.5 million reduction in marketing initiatives.  In addition, there was a $2.7 milliondecrease in employee and related costs due to workforce reductions primarilyrelated to restructuring initiatives, a $1.0 million reduction for travelexpenses due to lower headcount and a $0.5 million reduction in facilitycosts.  These decreases were partiallyoffset by a $4.0 million increase in incentive compensation primarily due toincreased license revenue, a $0.9 million increase in costs related to thepending merger with Intentia and a $0.5 million increase in other costsprimarily consisting of training.  Salesand marketing expenses as a percentage of total revenues for the six monthsended November 30, 2005 and 2004 were 21.7% and 24.4%, 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 insurancepolicies, including property and casualty, general liability and otherinsurance.  General and administrativeexpenses increased to $26.9 million for the six months ended November 30,2005 from $16.2 million for the six months ended November 30, 2004,representing a 66.5% increase. The $10.8 million increase in general andadministrative expenses was primarily due to $7.3 million in costs associatedwith the departure of the former president and CEO.  These costs included a $6.3 millionnon-cash charge for stock option expense and a $1.0 million cash paymentresulting from a negotiated separation agreement.  The remaining increase was due primarily to a$1.3 million increase in incentive compensation and related taxes, a $1.7million increase in costs for the pending merger with Intentia, a $1.2 millionincrease in contractor spending primarily in finance, $0.8 million in otherseverance costs and $0.3 million for placement fees for new employees.   The increases in costs were partially offsetby a $2.1 million decrease in bad debt expense primarily driven by improvedaging of receivables due to strong collection efforts and lower specificreserves.  General and administrative expensesas a percentage of total revenues for the six months ended November 30,2005 and 2004 were 15.2% and 9.8%, respectively.

 

*Restructuring.*   During the six months ended November 30, 2005 we recorded a $0.01 million restructuringcharge compared with a $5.4 million restructuring charge, for the six monthsended November 30, 2004.  See Note 7of Notes to Condensed Consolidated Financial Statements for a summary ofactivity for year-to-date fiscal 2006.

 

*Amortization ofAcquired Intangibles. * Amortizationof acquired intangibles for the six months ended November 30, 2005 of$0.7 million was primarily consistent with the $0.8 million for the sixmonths ended November 30, 2004.

 

***Other Income, Net***

 

Other income, net, which is primarilycomprised of interest income earned from cash, marketable securities and longterm investments increased to $4.6 million for the six months ended November 30,2005 from $1.5 million for the six months ended November 30, 2004.  The $3.1 million increase in interest incomewas due primarily to a $59.6 million increase in average invested balances andan increase in average yields,  whichwere 3.5% and 1.6% for the six months ended November 30, 2005 and 2004,respectively, and $0.4 million in interest income received on a tax refund.

 

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

 

We recorded a $4.4 million income tax provision forthe six months ended November 30, 2005 compared with a $2.3 million incometax benefit for the six months ended November 30, 2004. Our income taxprovision (benefit) is based on pretax income (loss) and consists primarily offederal and state income taxes.  Thequarterly tax expense is measured using an estimated annual tax rate for theperiod.  At November 30, 2005, theCompany’s estimated annual tax rate is 39.7%. Our effective tax rate was 29.1%and 39.9% for the six months ended November 30, 2005 and 2004,respectively. The decreased effective tax rate was primarily the result ofreleasing $1.6 million of tax reserves in the first quarter of fiscal 2006.  We review our reported effective tax rate ona quarterly basis and make any necessary changes.

 

23

----

 

**Liquidity and Capital Resources**

 
| ** **                                           | ** ** | **As of and for the Six Months Ended  November 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **(in millions, except %)**                     | ** ** | **2005**                                                  | ** ** | **2004** | ** ** | **Change** | ** ** |
| Working  capital                                     |       | $                                                         | 210.3      |   | $ | 170.8 |   | 23.1 | % |
| Cash and cash equivalents and marketable  securities |       | $                                                         | 260.8      |   | $ | 208.9 |   | 24.8 | % |
| Cash  provided by operating activities               |       | $                                                         | 23.4       |   | $ | 5.9 |   | 294.4 | % |
| Cash used in  investing activities                   |       | $                                                         | 44.7       |   | $ | 27.7 |   | 61.6 | % |
| Cash  provided by (used in) financing activities     |       | $                                                         | 6.3        |   | $ | (4.3 | ) | 246.9 | % |

 

As of November 30, 2005 we had $260.8million in cash, cash equivalents and marketable securities and $210.3 millionin working capital. Our most significant source of operating cash flows isderived from license fees and services to our customers. Days salesoutstanding, which is calculated on net receivables at period end divided byrevenue for the quarter times 90 days in the quarter, was 49 and 45 as of November 30,2005 and May 31, 2005, respectively. The increase is reflective of a $6.0million increase in accounts receivable associated with the increased salesduring the second quarter of fiscal 2006 versus the fourth quarter of fiscal2005.  Our primary uses of cash fromoperating activities are for employee costs, third-party costs for licenses andservices, and facilities.

 

We believe that cash flows from operations,together with our cash, cash equivalents and marketable securities, will besufficient to meet our cash requirements for working capital, capitalexpenditures and investments for the foreseeable future. As part of ourbusiness strategy we may acquire companies or products from time to time toenhance our product lines.  On June 2, 2005we entered into an agreement to combine with Stockholm, Sweden-based IntentiaInternational AB.  We intend this to bean all-stock transaction; however we may utilize cash to acquire certain sharesas well as to fund acquisition related costs. We are estimating these acquisition related costs to be in the range of$115 million to $130 million, which includes approximately $10 million to $15million of costs to close the transaction, approximately $25 million to $35million of integration costs once the transaction is completed, approximately$40 million for the pay-off of loans and approximately $40 million if all theIntentia shares are not tendered and we are required to purchase them forcash.  We believe we have sufficient cashto fund this business transaction.  Foradditional information refer to Note 5, “Pending Business Combination” in theNotes to the Condensed Consolidated Financial Statements.

 

***Cash flows fromoperating activities:***

 

Net cash provided by operating activities was$23.4 million for the six months ended November 30, 2005 compared with $5.9million for the six months ended November 30, 2004.  Our net income of $10.7 million was increasedby $14.7 million innon-cash charges before working capital changes.  Non-cash charges primarily consist of a $6.4million stock compensation charge related to a negotiated separation agreementwith the Company’s former president and chief executive officer and $7.3million of depreciation and amortization. The $2.0 million in net working capital changes decreased the overallcash provided to $23.4 million.

 

The activity in working capital changes forfiscal 2006 primarily relates to a $6.7 million net decrease in cash used forprepaid expenses and other assets and an increase in income taxes payablerelated to the increase earnings that was offset by an increase in accountsreceivable related to the increased sales and a $3.6 million net decrease incash received on customer support billings that is reflected as a decrease indeferred revenue.  The net decrease in cashused for prepaid expenses and other assets is primarily due to an $8.8 millionfederal tax refund, including interest, received during the first quarter offiscal 2006.  The $3.6 milliondecrease in deferred revenue was primarily due to a decrease in deferredrevenue associated with customer support. The decrease is a result of thetiming of some customer collections that occurred in December rather thanNovember.

 

***Cash flows frominvesting activities:***

 

Net cash used in investing activities was$44.7 million for the six months ended November 30, 2005 compared with$27.7 million for the six months ended November 30, 2004.   The decrease in cash from investingactivities for the six

 

24

----

 

months ended November 30,2005 primarily related to $41.2 million of cash used in net purchases ofmarketable securities as well as $2.4 million of cash paid in conjunction withthe acquisition of Intentia.  Refer toNote 5 “Pending Business Combination” in the Notes to the Condensed ConsolidatedFinancial Statements for additional information.  

 

We have made reclassifications to our CondensedConsolidated Statement of Cash Flows for fiscal 2005 to reflect the grosspurchases and gross sales of Dutch auction rate securities as investingactivities rather than as a component of cash and cash equivalents. Refer toNote 1, “Basis of Presentation” in the Notes to the Condensed ConsolidatedFinancial Statements.

 

***Cash flows fromfinancing activities***:

 

Net cash provided by financing activities was$6.3 million for the six months ended November 30, 2005 compared with $4.3 millionnet cash used in financing activities for the six months ended November 30,2004.  The financing activities for thesix months ended November 30, 2005 primarily related to$5.7 million in cash received from the exercise of stock options and$1.5 million in cash received from employee contributions to our employee stockpurchase plan.

 

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

#### *** ***

In June 2003 our Board of Directorsauthorized us to repurchase up to $50.0 million of our common shares. Shareswere repurchased from time to time as market conditions warranted eitherthrough open market transactions, block purchases, private transactions orother means.  During the six months endedNovember 30, 2004, we completed the authorized stock repurchase plan bypurchasing the remaining 1.4 million shares for $10.0 million in cash.  Cash proceeds obtained from maturities ofmarketable securities, the exercise of employee stock options and contributionsto the employee stock purchase plan largely funded the share repurchases.  The repurchased shares, which remain intreasury, will be used for general corporate purposes.  

 

**Disclosures about Contractual Obligations andCommercial Commitments**

 

The following summarizes our contractualobligations at November 30, 2005, and the effect these contractualobligations are expected to have on our liquidity and cash flows in futureperiods (in thousands):

 
| ** **                                  | ** ** | **Total** | ** ** | **1 Year or  Less** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
|---------------------------------------------|------------|-----------|------------|---------------------|------------|---------------|------------|---------------|------------|------------------------|------------|
| **Balance  Sheet Contractual Obligations:** |       |      |       |                |       |          |       |          |       |                   |       |
| Debt                                        |       | $         | 1,048      |                | $          | 1,048         |       | $             | —     |                   | $          | — |   | $ | — |   |
| Strategic  partner commitments (2) (3) |       | 1,200     |       | 1,200               |       | —        |       | —        |       | —                 |       |
| Total                                       |       | $         | 2,248      |                | $          | 2,248         |       | $             | —     |                   | $          | — |   | $ | — |   |
| **Other  Contractual Obligations:**         |       |      |       |                |       |          |       |          |       |                   |       |
| Operating  leases                           |       | $         | 69,512     |                | $          | 8,220         |       | $             | 16,321     |                   | $          | 15,970 |   | $ | 29,001 |   |
| Purchase  obligations (1)                   |       | 12,508    |       | 8,967               |       | 3,394         |       | 147           |       | —                 |       |
| Total                                       |       | $         | 82,020     |                | $          | 17,187        |       | $             | 19,715     |                   | $          | 16,117 |   | $ | 29,001 |   |
|                                        |       |      |       |                |       |          |       |          |       |                   |       |
| **Total  Contractual Obligations**          |       | $         | 84,268     |                | $          | 19,435        |       | $             | 19,715     |                   | $          | 16,117 |   | $ | 29,001 |   |

 

----

(1)                                  Our purchaseobligations represent those commitments greater than $50,000 and consistprimarily of commitments for marketing activities.

 

(2)                                  Under the Agreement with Hackett that commenced May 9, 2005, wepaid $1.1 million during the six months ended November 30, 2005, and arecontractually committed to pay an additional $1.0 million within the nexttwelve months.  We will pay additionalfees when sales volumes meet established criteria throughout the term of thecontract.  The Agreement identifies jointprograms in which Hackett will provide the Company and its customers andprospects with, among other things, access to Hackett benchmark tools,best-practices research and business advisory services.  SeeNote 9 “Commitments and Contingencies” to the Condensed ConsolidatedFinancial Statements for additional information.

 

(3)                                  In fiscal 2005, the Company and InternationalBusiness Machines Corporation (IBM) entered into an OEM Software Agreement thatwas modified in the second quarter of fiscal 2006, and a Master RelationshipAgreement (MRA). Under these agreements, we are reselling our businessapplications in conjunction with IBM’s open standards-based software, and thecompanies will jointly market these software solutions.  The MRA governs

 

25

----

 

thejoint marketing activities and has a three-year term. During the term of themodified OEM Software Agreement, we will pay royalties to IBM for the licensingof IBM programs to each applicable existing and new customer of the Company,and will also pay IBM annual maintenance fees for each applicablecustomer.  The royalty and maintenancepayments to IBM are based on transactions with each applicable Lawson customer.The modified OEM Software Agreement has an initial term of three yearscommencing September 2005 and may be extended by us for two additional one-yearterms.  During the initial three-yearterm, we have agreed to pay certain minimum quarterly and annual royalties toIBM. Total commitments under the modified OEM Software Agreement approximate$9.5 million over the three-year term. We may elect to terminate the OEMSoftware Agreement for convenience upon 90 days advance notice to IBM.  If we elect early termination at any timeduring the initial three-year term, we would pay IBM any unpaid minimumroyalties through the date of termination plus a prorated share of the guaranteedannual minimum payment due for the year in which the termination occurred.  We have made cash payments of $1.7 million accordingto the terms of the modified OEM Software Agreement during the six months endedNovember 30, 2005. In addition, we recorded $0.2 million as other accruedliabilities on the November 30, 2005 Condensed Consolidated Balance Sheet,representing the prorated portion of the $0.6 million annual minimum owed inthe initial year of the contract.  SeeNote 9 “Commitments and Contingencies” to the Condensed Consolidated FinancialStatements for additional information.

 

**Off-Balance-Sheet Arrangements**

 

We do not use off-balance-sheet arrangements withunconsolidated entities, related parties or other forms of off-balance-sheetarrangements such as research and development arrangements. Accordingly, ourliquidity and capital resources are not subject to off-balance-sheet risks fromunconsolidated entities. As of November 30, 2005, we did not have anyoff-balance-sheet arrangements, as defined in Item 303(a) (4) (ii) ofSEC Regulation S-K.

 

We have entered into operating leases for most U.S.and international sales and support offices and certain equipment in the normalcourse of business. These arrangements are often referred to as a form ofoff-balance-sheet financing. As ofNovember 30, 2005, we leased facilities and certain equipment undernon-cancelable operating leases expiring between 2006 and 2017. Rentexpense under operating leases for the three months ended November 30,2005 and 2004 was $3.3 million and$3.5 million, respectively. Rent expense under operating leases for the sixmonths ended November 30, 2005 and 2004 was $6.9 million.  Future minimum lease payments under ouroperating leases as of November 30, 2005 are included above in “Disclosuresabout Contractual Obligations and Commercial Commitments”.

 

**Recent Accounting Pronouncements**

 

In December 2004 the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standard No. 123(revised 2004), *Share-Based Payment (“SFASNo. 123(R)”)*. SFAS No. 123(R) requires compensation costrelating to unvested share-based payment transactions that are outstanding asof the effective date and newly issued transactions to be recognized in thefinancial statements. The cost will be measured based on the fair value of theequity 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)supersedesSFAS No. 123, *Accounting forStock-Based Compensation*(“SFASNo. 123”), and supersedes Accounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees*(“Opinion 25”)*.*SFAS No. 123, as originally issued in 1995,established a fair-value-based method of accounting for share-based paymenttransactions with employees. However, SFAS No. 123 permitted entities theoption of continuing to apply the guidance in Opinion 25, as long as thefootnotes to financial statements disclosed what net income would have been hadthe fair-value-based method been used. We elected the option of disclosure onlyunder SFAS No. 123. In our disclosures, we have historically used theBlack-Scholes option pricing model to determine the fair value of its sharebased compensation arrangements. Upon the adoption of SFAS No. 123(R), wewill determine whether it will continue to utilize the Black-Scholes model oradopt some other acceptable model. Public entities are required to apply SFAS No. 123(R)as of the first annual reporting period that begins after June 15, 2005,which is effective with our first quarter of fiscal 2007. Based on thesignificant amount of our unvested share-based payment awards, the adoption ofthis statement is anticipated to have a material impact on our ConsolidatedStatements of Operations, however we are currently evaluating the impact. Historically,had compensation costs for the Company’s stock options been recognized based onthe fair value at the grant date consistent with the provisions of SFAS No.123, the Company’s diluted earnings per share would have been reduced by $0.06,$0.05, and $0.05, respectively, for the years endedMay 31, 2005, May 31, 2004, and May 31, 2003, as disclosed in the Company’sAnnual Report on Form 10-K and Form 10-K/A filed for the fiscal year ended May31, 2005.

 

In May 2005, the FASB issued SFAS No 154, “AccountingChanges and Error Corrections — A replacement of APB Opinion No 20 and FASBStatement No. 3” (“SFAS 154”).  SFAS154 changes the requirement for the accounting for and reporting of a change inaccounting principle.  This statementapplies to all voluntary changes in accounting principles and changes requiredby an accounting pronouncement in the unusual instance that the pronouncementdoes not include

 

26

----

 

specifictransition provisions.  The provisions inSFAS 154 are effective for accounting changes and correction of errors made infiscal years beginning after December 15, 2005, which is effectivewith our first quarter of fiscal 2007.

 

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

 

There were no material changes in market riskfor the Company in the period covered by this report. See the Company’s AnnualReport on Forms 10-K and 10-K/A for the fiscal year ended May 31, 2005 fora discussion of market risk for the Company.

 

**ITEM 4. CONTROLS ANDPROCEDURES**

 

(a)  Evaluation ofDisclosure Controls and Procedures – Under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, we evaluated the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rule13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that, as of the end ofthe period covered by this report, our disclosure controls and procedures wereeffective.

 

(b)  Changes in InternalControl Over Financial Reporting – There were no changes in our internalcontrol over financial reporting identified in connection with our evaluationduring the quarter ended November 30, 2005, which have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

 

27

----

 

**PART II. OTHERINFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

We are, and from time to time may become, involvedin litigation in the normal course of business concerning our products andservices. While the outcome of these claims cannot be predicted with certainty,we do not believe that the outcome of any one of these legal matters will havea material adverse effect on our consolidated financial position,results of operations or cash flows. However, depending on the amount and thetiming, an unfavorable resolution of some or all of these matters couldmaterially affect our future results of operations or cash flows in a particularperiod.

 

**ITEM 1A.RISK FACTORS**

 

**Factors That May Affect Our FutureResults or the Market Price of our Stock**

 

We operate in a rapidly changing environmentthat involves numerous uncertainties and risks. Investors evaluating ourcompany and its business should carefully consider the factors described belowand all other 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 thefollowing factors could materially harm our business, operating results andfinancial condition. Additional factors and uncertainties not currently knownto us or that we currently consider immaterial could also harm our business,operating results and financial condition. We may make forward-lookingstatements from time to time, both written and oral. We undertake no obligationto revise or publicly release the results of any revisions to theseforward-looking statements based on circumstances or events which occur in thefuture. The actual results may differ materially from those projected in anysuch forward-looking statements due to a number of factors, including those setforth below and elsewhere in this report on Form 10-Q.

 

**Risks Relating to the Proposed Business Combinationbetween Lawson and Intentia International****AB**

 

On June 2, 2005 we announced an agreementto combine Lawson with Intentia International AB in an all-stock transactionreferred to as an “Exchange Offer”. If the transaction is completed, Lawsonwill issue approximately 81 million shares of Lawson common stock pursuant tothe terms of the Exchange Offer. If the Exchange Offer is accepted and thetransaction is completed, each Series A share of Intentia stock will beentitled to receive 0.5061 newly issued shares of Lawson common stock; each Series Bshare of Intentia stock will be entitled to receive 0.4519 newly issued sharesof Lawson common stock; and each Warrant for the purchase of Intentia stockwill be entitled to receive 0.2157 newly issued shares of Lawson common stock.These exchange ratios will not change based on the fluctuations in the marketprice of our common stock. The closing of the Exchange Offer and businesscombination with Intentia is subject to several conditions, includingregulatory review, approval by our stockholders and sufficient tender of sharesby Intentia security holders. Our efforts to close the business combination andintegrate our two businesses will create several additional risks anduncertainties.

 

***The exchange ratios are fixed and will not be adjusted based onfluctuations in our stock price. As a result, the specific dollar value of ourcommon stock that Intentia shareholders and warrant holders will receive uponcompletion of the transaction will depend on the market value of our commonstock at that time.***

 

Lawson’sstock price has been volatile in the past and may continue to be volatile inthe future. If the transaction is completed, Lawson will issue approximately 81million shares of Lawson common stock pursuant to the terms of the ExchangeOffer. If the Exchange Offer is accepted and the transaction is completed, eachholder of a Series A share will be entitled to receive 0.5061 of a newlyissued share of Lawson common stock; each holder of a Series B share willbe entitled to receive 0.4519 of a newly issued share of Lawson common stock;and each holder of a Warrant will be entitled to receive 0.2157 of a newlyissued share of Lawson common stock. These exchange ratios will not changebased on the fluctuations in the market price of Lawson common stock. As aresult, the specific dollar value of Lawson common stock that holders of Sharesand Warrants will receive upon completion of the transaction will depend on themarket value of Lawson common stock at that time. The market price of Lawsoncommon stock upon the completion of the transaction will likely vary from themarket price as of the date of this 10-Q Report and the date that the ExchangeOffer is made to holders of Shares and Warrants. Any reduction in Lawson’sstock price will result in holders of Shares and Warrants receiving less valueat the time of the closing of the transaction. Conversely, any increase inLawson’s stock price will result in holders of Intentia’s Shares and Warrantsreceiving greater value at the time of the closing of the transaction.

 

Variationsin the market price of Lawson common stock may be caused by a number offactors, including, among others, changes in the businesses, operations orprospects of Lawson and/or Intentia, the timing of the transaction, regulatoryconsiderations and general market, software industry and economic conditions. 

 

***Wemay not be able to achieve the anticipated financial and strategic benefits ofour proposed combination with Intentia.***

 

Among the factors considered by our Board of Directorsin connection with its approval of the Exchange Offer were

 

28

----

 

the anticipated financial and strategic benefits of the combination ofLawson and Intentia, including the opportunities for cost savings fromoperational efficiencies and the anticipated increase in sales resulting fromthe combined efforts of both businesses and the combined sales channels. We arenot able to guarantee that these savings will be realized within the timeperiods contemplated or that they will be realized at all. We are not able toguarantee that the combination of Lawson and Intentia will result in therealization of the full benefits, including increased sales anticipated by thebusinesses.

 

***The reconciliation of Intentia’shistorical financial statements from Swedish GAAP to United States GAAP willresult in material differences.***

 

Intentia has informed us that its historical financialstatements have been prepared based on generally accepted accounting principlesin Sweden, referred to as Swedish GAAP. Because of the differences betweenSwedish GAAP and U.S. GAAP, including, for example, differences in softwarerevenue recognition, Intentia’s historical financial results under U.S. GAAPwill show material differences for each of the respective periods, as comparedwith Swedish GAAP. As a result, the Intentia financial statements reconciled toU.S. GAAP may not be indicative of the results of operations to be expected infuture periods. In addition, a substantial portion of Intentia’s deferredrevenue under U.S. GAAP will not be recognizable in the future under U.S. GAAPdue to the impact of purchase accounting.

 

***Our investment in goodwill and intangiblesfrom our acquisitions could become impaired.***

 

As of November 30, 2005 we had goodwillof $43.2 million and acquired intangibles of $27.5 million on our Condensed ConsolidatedBalance Sheet.  Upon completion of thepending merger with Intentia, we anticipate a significant increase in goodwilland acquired intangibles.  To the extentthat we do not generate sufficient cash flows to recover the net amount of thegoodwill and intangibles recorded, the goodwill and intangibles could besubsequently written-off.  In such anevent, our results of operations in any given period would be negativelyimpacted, and the market price of our stock could decline.

 

***Theintegration of Lawson’s and Intentia’s businesses will require significantfocus on staffing, training and compliance procedures for our internal controlover financial reporting under Section 404 of the Sarbanes-Oxley Act of2002.***

 

***As aSwedish company, Intentia has not had to comply with the requirements of Section 404of the Sarbanes-Oxley Act of 2002 concerning the effectiveness of internalcontrols over financial reporting. Consequently, Intentia does not currently have the staff, experience,training or procedures to comply with these requirements.  The integration of Lawson and Intentia willrequire significant focus on staffing and training to address theserequirements.  If we are unable toimplement our compliance procedures and have a properly trained staff in placeon a timely basis, we could encounter a significant deficiency or materialweakness in our internal controls.  If inthe future we are unable to assert that our internal control over financialreporting is effective as of the end of the then current fiscal year orapplicable quarter (or, if our independent registered public accounting firm isunable to attest that our management’s report is fairly stated or they areunable to express an opinion on the effectiveness of our internal controls), wecould lose investor confidence in the accuracy and completeness of ourfinancial reports, which would have a negative market reaction.***

 

***We will encounter material adverseconsequences if we are unable to process and report, on a timely basis, thecombined company’s financial results under U.S. GAAP and SEC requirements.***

 

Because the merger with Intentia willsignificantly increase the complexity of our global operations, we will need todevelop and implement worldwide procedures designed for accurate and timelyfinancial reporting under U.S. GAAP and SEC requirements.  In addition, we will need to train the staffof the combined company to comply with these requirements on a globalbasis.  If we are unable to close ourbooks and prepare financial reports on a timely basis, we would be required toseek a reporting extension under applicable SEC rules.  A reporting extension could adversely impactthe trading of our stock, erode investor confidence and result in other materialadverse consequences.

 

***Wemay not be able to successfully integrate our business with the business ofIntentia.***

 

This transaction involves the integration of twobusinesses based in different countries that currently operate independently.This integration is a complex, costly and time-consuming process. Following thecombination of Lawson and Intentia, we may encounter difficulties inintegrating our operations, technology and personnel with those of Intentia andthis

 

29

----

 

may continue for some time. Lawson management has limited experienceintegrating operations as substantial and geographically diverse as those ofIntentia. The combined company may not successfully integrate the operations ofLawson and Intentia in a timely manner, or at all. The failure to successfullyintegrate the two businesses’ operations could undermine the anticipatedbenefits and synergies of the combination, which could adversely affect ourbusiness, financial condition and results of operations. The anticipatedbenefits relate to greater economies of scale and revenue enhancementopportunities resulting from Lawson’s and Intentia’s complementary productofferings, geographic and industry specialties and technology platforms.However, these anticipated benefits are based on projections and assumptions,not actual experience, and assume a successful integration.

 

***Wemay have difficulties adapting Intentia’s operations to U.S. regulatoryrequirements.***

 

As a company governed by Swedish laws and the rules ofthe Stockholm Stock Exchange, Intentia’s operations have not been designed tocomply with financial reporting, disclosure controls and internal controlsrequirements imposed by US GAAP and the Sarbanes-Oxley Act of 2002 and otherU.S. securities laws and regulations. The implementation of the necessarycontrols systems will be costly and time consuming. If Lawson fails to promptlyimplement these controls and systems at Intentia’s operations, Lawson couldfail to comply with U.S. regulatory requirements, which could adversely offsetour business, financial condition and results of operations.

 

***Themarket price of our common stock may decline as a result of the Exchange Offer.***

 

In connection with the Exchange Offer, we could issueas many as 81 million shares of our common stock to the holders of sharesand warrants if all Intentia securityholders elect to tender their shares orwarrants in exchange for shares of our common stock. The shares of our commonstock issued in the Exchange Offer, subject to the contractual limitations onthose persons who executed the lock-up agreements, will be freely-tradable uponconsummation of the Exchange Offer. The acquisition of our shares by Intentiasecurityholders who may not wish to hold shares in a U.S. company, as well asthe increase in the outstanding number of shares of our common stock, may leadto sales of such shares or the perception that such sales may occur, either ofwhich may adversely affect the market for, and the market price of, our commonstock. In addition, the market price of our common stock may decline followingthe closing of the Exchange Offer for a number of reasons, including if theintegration of Intentia’s business is unsuccessful or we do not achieve theanticipated financial and strategic benefits of our combination with Intentiaas rapidly or to the extent anticipated by stock market analysts or investors.The closing price of our common stock was $5.95 on June 1, 2005, thelast day of trading prior to the announcement of the proposed Exchange Offer.Since that date, our stock has fluctuated from a low of $5.02 to a high of$7.91. On January 5, 2006, the closing price of our common stock was $7.80.

 

***Ourshareholders will suffer immediate and substantial dilution to their equity andvoting interests as a result of the Exchange Offer.***

*** ***

In connection with the Exchange Offer, we may issue asmany as 81 million sharesof our common stock to the holders of Intentia shares or Intentia warrants ifall Intentia securityholders elect to tender their Shares or Warrants in exchangefor shares of our common stock. This means that the Intentia securityholderscould own up to approximately 43.25% of the total number of shares of ouroutstanding common stock following the Exchange Offer. Accordingly, theExchange Offer will have the effect of substantially reducingthe percentage of equity and voting interest held by each of our currentstockholders.

 

***TheIntentia securityholders may be able to influence our company significantlyfollowing the Exchange Offer.***

 

After the Exchange Offer, former Intentiasecurityholders could own approximately 43.25% of the total number of shares ofour common stock based on the treasury method. Intentia’s largest shareholder,Symphony Technology Group, will own approximately 14% of Lawson’s common stockfollowing the combination.  Symphony andIntentia securityholders as a group may be able to exercise substantialinfluence on the election of directors and other matters submitted for approvalby our shareholders. This potential concentration of ownership of our commonstock may make it difficult for our other shareholders to successfully approveor defeat matters submitted for shareholder action. It may also have the effectof delaying, deterring or preventing a change in control of our company withoutthe consent of Symphony or of the Intentia securityholders generally.

 

***Unanticipatedcosts relating to the Exchange Offer and resulting combination of Intentia andLawson could reduce our future earnings.***

 

We believe that we have reasonably estimated the likelycosts of integrating our operations with the operations of

 

30

----

 

Intentia and that such costs are estimated to be in excess of$25 million for the first 12 months following closing of the transaction.Our objective is to minimize incremental costs of operating as a combinedcompany and we believe that any incremental costs will be offset by costsavings of the combined company. It is possible that unexpected transactioncosts, such as taxes, fees or professional expenses, or unexpected futureoperating expenses, such as increased personnel costs or unexpected severancecosts, as well as other types of unanticipated developments, could adverselyimpact our business and profitability.

 

***Theuncertainties associated with our combination with Intentia may cause ourcustomers and Intentia’s customers to delay or defer decisions which may resultin the loss of customers and revenues.***

 

Our customers and Intentia’s customers may, inresponse to the announcement of the Exchange Offer and resulting combination ofLawson and Intentia, and prior to its effectiveness, delay or defer decisionsconcerning business with either or both of the businesses. Any delay ordeferral in those decisions by our respective customers could adversely affectour businesses. For example, either company could experience a decrease inexpected revenue as a consequence of such delays or deferrals.

 

***Theuncertainties associated with our combination with Intentia may cause Intentiaor us to lose key personnel.***

 

Employees of Lawson or Intentia may perceiveuncertainty about their future role with the combined company until strategieswith regard to the combined company are announced or executed. Any uncertaintymay affect either company’s ability to attract and retain key management,sales, marketing, technical and financial personnel. Our competitors might alsoattempt to hire our key personnel.

 

***Combination-relatedaccounting charges may delay or reduce our profitability.***

*** ***

We are accounting for the combination with Intentia asa purchase following accounting principles generally accepted in the UnitedStates. Under the purchase method of accounting, the purchase price of Intentiawill be allocated to the fair value of the identifiable tangible and intangibleassets and liabilities that we acquire from Intentia. In addition, accountingfor the combination of Intentia under the purchase method may require adecrease in deferred revenue to fair value. The excess of the purchase priceover Intentia’s tangible net assets will be allocated to goodwill andintangible assets. We are required to perform periodic impairment tests ongoodwill and certain intangibles to evaluate whether the intangible assets andgoodwill that we acquire from Intentia continue to have fair values that meetor exceed the amounts recorded on our balance sheet. If the fair values of suchassets decline below their carrying value on our balance sheet, we may berequired to recognize an impairment charge related to such decline. We cannotpredict whether or when there will be an impairment charge, or the amount ofsuch charge, if any. However, if the charge is significant, it could cause themarket price of our common stock to decline.

 

If, as of the closing date, there are unknown liabilitiesin connection with Intentia’s business, and those liabilities are not reflectedon the closing date balance sheet, we would be required to record a chargeduring each period when those liabilities became known, probable andestimable.  Those charges, if material,could have an unanticipated and significant adverse effect on our financialresults and stock price.

 

Inaddition, we will incur transaction and integration costs in our combinationwith Intentia.  As a result, we willincur accounting charges from the combination that may delay and reduce ourprofitability in the accounting period in which the combination is consummated.

 

***Weexpect to expend a significant amount of cash in the Exchange Offer, which willpartially reduce our cash balance.***

 

If we acquire more than 90%, but fewer than all of the Intentiasecurities in the Exchange Offer, we intend to purchase the remaining Intentiasecurities for cash, pursuant to compulsory acquisition proceedings underSwedish law. Assuming 90% of the Intentia securities are tendered in theExchange Offer and the price that is required to be paid pursuant to theSwedish compulsory acquisition proceedings for the remaining 10% of theIntentia securities equals SEK 22.17 per Series A share and SEK 19.80 per Series Bshare, we could be obligated to pay approximately $41million (approximately SEK333 million assuming a currency exchange rate of SEK 8.08 to $1.00 as of November 30,2005), for the Intentia securities purchased in the compulsory acquisition.This cash expenditure would normally occur between one and three years afterthe closing of the Exchange Offer.

 

31

----

 

Weestimate that the total cash closing expenses for Lawson and Intentia will beapproximately $25 million, including investment banking fees, accounting andlegal fees, printing, mailing and other out-of-pocket transaction costs. Afterpayment of those expenses, we will have approximately $196 million in availablecash and cash equivalents, based on the amount of cash and cash equivalentsthat we and Intentia had as of November 30, 2005. It is anticipated thatwe may use an additional amount of approximately $40 million in connection withthe Combination, excluding the compulsory acquisition procedures referencedabove and integration related costs, within one to three years following theclosing of the Exchange Offer. Included in this amount is a junior facilityloan made by Tennenbaum to Intentia valued at $26.8 million and Notes valued at$9.9 million, which includes accrued interest of$0.1 million, as of September 30, 2005. The Tennenbaum loan matures in September 2009.However, pursuant to an agreement with Tennenbaum entered into in November 2005,Lawson intends to prepay the Tennenbaum loan following the closing of theExchange Offer. Assuming current LIBOR interest rates until the prepaymentdate, the amount required to prepay the Tennenbaum loan in September 2006,calculated in accordance with the November 2005 agreement with Tennenbaum,is estimated to be $3.7 million. 

 

***Fullintegration of our operations with Intentia’s operations may not be achieved ifwe cannot compulsorily acquire all of the issued and outstanding Shares.***

 

Our obligation to consummate the Exchange Offer issubject to a condition that, before the end of the Exchange Offer period, thereshall have been validly tendered and not properly withdrawn greater than 90% ofeach of the outstanding Shares (including Warrants) and voting power inIntentia on a fully diluted basis (including all shares issuable pursuant tooutstanding warrants but excluding shares issuable pursuant to outstandingconvertible securities). In addition, the compulsory acquisition proceedingsmay be time consuming.  To effect thecompulsory acquisition under Swedish law, we are required to have a beneficialinterest in greater than 90% of all of the voting power of the Intentiasecurities. It is possible that, at the end of the Exchange Offer period, wewill elect to waive the above condition and consummate the Exchange Offer if wehold at least 70% of the outstanding securities and voting power of Intentia,even though we do not hold more than 90% of the outstanding Intentiasecurities. As a result, we would not be able to effect a compulsoryacquisition of the remaining outstanding securities and voting power ofIntentia. This could prevent or delay us from realizing some or all of theanticipated financial and strategic benefits of our combination with Intentia.

 

***Asa result of the consummation of the Exchange Offer, we will conduct more of ourbusiness internationally, which will expose us to additional and increasedrisks.***

 

Although international revenues accounted forapproximately 5% of our total revenues during fiscal year 2005, we willsignificantly increase our international operations upon consummation of theExchange Offer, particularly in Europe. There are many risks that currentlyimpact, and will continue to impact our international business andmultinational operations, which risks will increase upon consummation of theExchange Offer.  These risks include thefollowing:

 

•                                          compliancewith multiple and potentially conflicting regulations in Europe, Asia and NorthAmerica, including export requirements, tariffs, import duties and other tradebarriers, as well as health and safety requirements;

 

•                                          potentiallabor strikes, lockouts, work slowdowns and work stoppages at U.S. andinternational ports;

 

•                                          differencesin intellectual property protections in Europe and Asia;

 

•                                          difficultiesin staffing and managing foreign operations in Europe and Asia;

 

•                                          restrictionson downsizing foreign operations in Europe and expenses and delays associatedwith any such activities;

 

•                                          longeraccounts receivable collection cycles in Europe and Asia;

 

•                                          currencyfluctuations and resulting losses on currency translations;

 

•                                          economicinstability, including inflation and interest rate fluctuations, such as thosepreviously seen in South Korea and Brazil;

 

•                                          competitionfor foreign-based suppliers in Asia and Europe;

 

32

----

 

•                                          overlappingor differing tax structures;

 

•                                          cultural andlanguage differences among the United States, Europe and Asia; and

 

•                                          political orcivil turmoil.

 

Any failure on our part to manage these riskseffectively would seriously reduce our competitiveness in the businessapplications software marketplace.

 

***Asa result of the consummation of the Exchange Offer, we will be a larger andbroader organization, and if our management is unable to manage the combinationof our business with Intentia’s, our operating results will suffer.***

 

***As a result of the consummation of the Exchange Offer, wewill acquire the worldwide operations and approximately 2,100 employees ofIntentia.  Consequently, we will facechallenges inherent in efficiently managing an increased number of employeesover large geographic distances, including the need to implement appropriatesystems, policies, benefits and compliance programs.  In addition, we will be exposed to risksassociated with the translation of Intentia’s SEK-denominated financial resultsand balance sheet into U.S. dollars. Our reporting currency will remain as theU.S. dollar; however, a portion of our consolidated financial obligations willarise in other currencies, including Euros, British Pounds and SEK. Inaddition, the carrying value of some of our assets and liabilities will beaffected by fluctuations in the value of the U.S. dollar as compared with theEuro, British Pound and SEK.  Any inabilityto successfully manage the geographically more diverse and substantially largercombined organization, or any significant delay in achieving successfulmanagement, could have a material adverse effect on our results of operationsafter the Exchange Offer is consummated and, as a result, on the market priceof our common stock.***

 

***Thenew management team might not be able to define or successfully implement abusiness plan for the combined businesses.***

 

In June 2005, we appointed Harry Debes as our newpresident, chief executive officer, and director. Upon the completion of theExchange Offer, we will appoint a new co-chairman, Romesh Wadhwani, who iscurrently the chairman of the board of Intentia, and a new chief operatingofficer, Bertrand Sciard, the current president and chief executive officer ofIntentia. While Mr. Wadhwani, Mr. Debes and Mr. Sciard haveextensive experience in the software industry and managing software businessesand while Mr. Debes and Mr. Sciard have also managed large teams ofpeople at other U.S. software businesses, neither Mr. Debes nor Mr. Sciardhas previously been chief executive or chief operating officer of a publiccompany in the U.S. If this new management team is unable to adapt successfullyto the demands of managing a U.S. public company or to define or execute ourbusiness plan, our results of operations may be adversely affected.

 

**Risks Relating to Lawson’sBusiness**

 

Our business and company will continue to be subjectto other risks and uncertainties, regardless of whether we complete theproposed business combination with Intentia.

 

***Economic, political and marketconditions can adversely affect our revenue growth and operating results.***

 

Our revenue and profitability depend on the overalldemand for computer software, support and services, particularly in theindustries in which we sell our products and services. Demand for enterprisesoftware and demand for our solutions are affected by general economicconditions, competition, product acceptance and technology lifecycles. Regionaland global changes in the economy, governmental budget deficits and politicalinstability in certain geographic areas have resulted in businesses, governmentagencies and educational institutions reducing their spending for technologyprojects generally and delaying or reconsidering potential purchases of ourproducts and related services. The uncertainty posed by the long-term effectsof the war in the Middle East, terrorist activities, potential flu pandemicsand related uncertainties and risks and other geopolitical issues may impactthe purchasing decisions of current or potential customers. Because of thesefactors, we believe the level of demand for our products and services, andprojections of future revenue and operating results, will continue to bedifficult to predict. During fiscal 2005 and the prior three fiscal years,we took measures to realign our projected expenses with anticipated revenue,and incurred restructuring charges for severance and related benefits, facilityclosure or consolidation charges. There is no assurance that these costreduction measures will be sufficient to offset any future revenue declines.Future declines in demand for our products and/or services could adverselyaffect our revenues and operating results.

 

33

----

 

***A number of our competitors arewell-established software businesses that have advantages over us.***

 

We face competition from a number of softwarebusinesses that have advantages over us due to their larger customer bases,greater name recognition, long operating and product development history,greater international presence and substantially greater financial, technicaland marketing resources. These competitors include well-established businessessuch as Oracle Corporation, and SAP AG, both of which have larger installedcustomer bases. If customers or prospects want to reduce the number of theirsoftware vendors, they may elect to purchase competing products from Oracle orSAP AG since those larger vendors offer a wider range of products. Furthermore,Oracle is capable of bundling its software with its database applications,which underlie a significant portion of our installed applications. When wecompete with Oracle or SAP AG for new customers, we believe that both of thoselarger businesses often attempt to use their size and staying power as acompetitive advantage against us. Oracle’s purchase of PeopleSoft, Inc.,Retek Inc., Siebel Systems, and other consolidations in the software industryhave fueled uncertainty among customer prospects.

 

In addition, we compete with a variety of morespecialized software and services vendors, including:

 

•                  Internet(on demand) software vendors;

 

•                  single-industrysoftware vendors;

 

•                  emergingenterprise resource optimization software vendors;

 

•                  humanresource management software vendors;

 

•                  financialmanagement software vendors;

 

•                  merchandisingsoftware vendors;

 

•                  servicesautomation software vendors; and

 

•                  outsourcedservices providers.

 

As a result, the market for enterprise softwareapplications has been and continues to be intensely competitive. Somecompetitors are increasingly aggressive with their pricing, payment termsand/or issuance of contractual warranties, implementation terms or guarantees.We may be unable to continue to compete successfully with new and existingcompetitors without lowering prices or offering other favorable terms tocustomers. We expect competition to persist and intensify, which couldnegatively impact our operating results and market share.

 

***We may be unable to retain or attractcustomers 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:

 

•                  maintainand enhance our technological capabilities to correspond to these emergingenvironments and standards;

 

•                  developand market products and services that meet changing customer needs; or

 

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

 

34

----

 

A substantial portion of our researchand development resources is devoted to product upgrades that addressregulatory and support requirements. Only the remainder of our limited researchand development resources is available for new products. New products requiresignificant development investment. That investment is further constrainedbecause of the added costs of developing new products that work with multipleoperating systems or databases. We face uncertainty when we develop or acquirenew products because there is no assurance that a sufficient market willdevelop for those products.  If we do notattract sufficient customer interest in those products, we will not realize areturn on our investment and our operating results will be adversely affected.

 

Our core products 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 increasedcosts of developing and supporting software products across multiple platforms,we may need to reduce the number of those platforms.  In addition, conflicting new technologiespresent us with difficult choices of which new technologies to adopt. If wefail to anticipate the most popular platforms or fail to respond adequately totechnological developments, or experience significant delays in productdevelopment or introduction, our business and operating results will benegatively impacted.

 

In May 2005, we announced that weintend to produce new software products using a business application platformwe are developing known as “Landmark.” The goals of Landmark are to simplifysoftware development and improve product quality. Because we have not yetreleased any new products developed using Landmark, it is too early to confirmwhether we will successfully achieve these goals.

 

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 incommercially viable technological products. The loss of revenue and increasedcosts to us from such changing technologies would adversely affect our businessand operating 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 ourcompetitors offer deep discounts on certain products or services in an effortto recapture or gain market share or to sell other products or services, we mayneed to lower prices or offer other favorable terms in order to competesuccessfully. Any such changes would be likely to reduce margins and couldadversely 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 are experiencing increased competition forattracting and retaining software engineers and sales personnel. If we areunable to attract, train and retain highly-skilled technical, managerial, salesand marketing personnel, we may be at a competitive disadvantage and unable toincrease our revenue. Competition for personnel in the software industry isintense, and at times, we have had difficulty locating qualified candidateswithin desired geographic locations, or with certain industry-specific domainexpertise. The failure to attract, train, retain and effectively manageemployees could negatively impact our development and sales efforts and cause adegradation of our customer service. In particular, the loss of sales personnelor groups of sales personnel could lead to lost sales opportunities because itcan take several months to hire and train replacement sales personnel.Uncertainty created by turnover of key employees could adversely affect ourbusiness, operating results and stock price. 

 

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

 

We currently account for the issuance of stockoptions under APB Opinion No. 25, *Accountingfor Stock Issued to Employees*. The FASB has issued SFAS No. 123(R),*Share-Based Payment* that changesthe accounting treatment for grants of options, sale of shares under ouremployee stock purchase plan and other equity instruments issued to employees.The provisions of SFAS No. 123(R) require us to value equity instrumentsissued to employees and liability-classified awards at grant date fair value orbased upon certain valuation methods that approximate grant date fair value,and to record those values as compensation expense in our statement ofoperations. Upon the adoption of SFAS No. 123(R), the Company willdetermine whether it will continue to utilize the Black-Scholes model or adoptsome other acceptable model. We will be

 

35

----

 

required to expense all outstandingnon-vested stock options as of June 1, 2006 and stock options and otherapplicable equity instruments issued to employees on or after June 1,2006. Public entities are required to apply SFAS No. 123(R) as of thefirst annual reporting period that begins after June 15, 2005, whichis effective with the Company’s first quarter of fiscal 2007. Due to thesignificant number of outstanding unvested stock options anticipated as of June 1,2006, we expect to incur material compensation expense after June 1, 2006as those options vest or in the event we decide to accelerate vesting. We maydecide to change our stock based compensation plan strategy for future grants.This could affect our ability to retain existing employees and attractqualified candidates, and also could increase cash compensation. 

 

***Because our customers 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 targetedservice industries, our financial results depend, in significant part, uponeconomic and market conditions in the healthcare, retail, government andeducation and financial services industries. Because the healthcare marketplacefor our products is maturing, we need to expand our product offerings toachieve long-term revenue growth. Many state and local governments are facingbudget shortfalls and are reducing capital spending, including spending onsoftware and services. In addition, we must continue to develop industryspecific functionality for our solutions, which satisfies the changing,specialized requirements of prospective customers in our target industries.This need is becoming more prevalent as the marketplace for our traditionalproducts 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:

 

•                  asignificant number of our existing and prospective customers’ decisionsregarding whether to enter into license agreements with us are made within thelast few weeks or days of each quarter;

 

•                  wehave historically had a higher concentration of licensing activities in thesecond half of our fiscal year due to the nature of our sales personnelcompensation programs; however, this pattern was not as prominent in fiscal2005 as in prior years and there is no assurance that this pattern will or willnot continue in the future;

 

•                  thesize of license transactions can vary significantly;

 

•                  adecrease in license fee revenue may likely result in a decrease in servicesrevenue in the same or subsequent quarters;

 

•                  customersmay unexpectedly postpone or cancel projects due to changes in their strategicpriorities, project objectives, budget or personnel;

 

•                  theuncertainty caused by potential business combinations in the software industrymay cause customers and prospective customers to cancel, postpone or reducecapital spending projects on software;

 

•                  customerevaluations and purchasing processes vary significantly from company tocompany, and a customer’s internal approval and expenditure authorizationprocess can be difficult and time consuming to complete, even after selectionof a vendor;

 

•                  thenumber, timing and significance of software product enhancements and newsoftware product announcements;

 

•                  existingcustomers may decline to renew support for our products, and market pressuresmay limit our ability to increase support fees or require customers to upgradefrom older versions of our products;

 

•                  prospectivecustomers may decline or defer the purchase of new products or releases if wedo not have

 

36

----

 

sufficient customer references for those products;or

 

•                  wemay have to defer revenues under our revenue 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 customers often take significant time evaluating ourproducts before licensing them. The period between initial customer contact anda purchase by a customer may vary from nine months to more than one year.During the evaluation period, prospective customers may decide not to purchaseor may scale down proposed orders of our products for various reasons,including:

 

•                  reduced demand for enterprisesoftware solutions;

 

•                  introduction of products by ourcompetitors;

 

•                  lower prices offered by ourcompetitors;

 

•                  changes in budgets and purchasingpriorities; and

 

•                  reduced need to upgrade existingsystems.

 

Our existing and prospective customers routinely require educationregarding the use and benefits of our products. This may also lead to delays in receiving customers’ orders.

 

***Our future revenue is dependent in part on our installedcustomer base continuing to renew support agreements, license additionalproducts, and purchase additional professional services.***

 

Our installed client base hastraditionally generated additional support, license or professional servicerevenues. In future periods, customers may not necessarily make thesepurchases. Support is generally renewable annually at a customer’s option, andthere are no mandatory payment obligations or obligations to license additionalsoftware. If our customers decide not to renew their support agreements orlicense additional products or contract for additional services or if theyreduce the scope of the support agreements, our revenues could decrease and ouroperating results could be adversely affected. If we do not license ourproducts to enough customers each quarter to offset the number of existingcustomers who elect not to renew support, our total customer count will declineand, over time, our support revenue will likely decrease.

 

***A reduction in our licensing activity may result inreduced services revenues in future periods.***

 

Our ability to maintain or increase service revenueprimarily depends on our ability to increase the number of our licensingagreements. Variances or slowdowns in licensing activity may adversely impactour consulting, training and support service revenues in future periods.

 

***The interplay between Lawson’s revenue and cost structure maynegatively affect its earnings on a short term basis.***

 

A significant part of Lawson’s total cost base isattributed to fixed costs related to personnel. While Lawson’s license sales generate a substantial gross margin,reductions in license sales in the short term may have a substantial effect onearnings due to the fact that cost adjustments in the organization will notoccur as quickly as the accompanying changes in revenue.

 

37

----

 

***While we believe we currently haveadequate internal control over financial reporting, we are required to evaluateon a continued basis our internal control over financial reporting under Section 404of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluationcould have a negative market reaction.***

 

Pursuant to Section 404 of the Sarbanes-OxleyAct of 2002 (Section 404), beginning with our Annual Report on Form 10-Kfor the fiscal year ended May 31, 2005, we were required to furnish areport by our management on our internal control over financial reporting. Thatreport contained, among other matters, an assessment of the effectiveness ofour internal control over financial reporting as of the end of the fiscal year,including a statement that our internal control over financial reporting waseffective. This assessment included disclosure that the Company did not haveany material weaknesses in our internal control over financial reportingidentified by management.  That reportalso contained a statement that our independent registered public accountingfirm had issued an attestation report on management’s assessment of suchinternal controls. If in the future we are unable to assert that our internalcontrol over financial reporting is effective as of the end of the then currentfiscal year or applicable quarter (or, if our independent registered publicaccounting firm is unable to attest that our management’s report is fairlystated or they are unable to express an opinion on the effectiveness of ourinternal controls), we could lose investor confidence in the accuracy andcompleteness of our financial reports, which would have a negative marketreaction.

 

***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 severalfactors, including the following situations:

 

•                  thelicense agreements include applications that are under development or haveother undelivered elements;

 

•                  wemust deliver services, including significant modifications, customization orcomplex interfaces, which could delay product delivery or acceptance;

 

•                  thetransaction includes acceptance criteria;

 

•                  thetransaction includes contingent payment terms or fees;

 

•                  athird-party vendor, whose technology is incorporated into our softwareproducts, delays delivery of the final software product to the customer;

 

•                  weare required to accept certain fixed-fee services contracts; or

 

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

 

Because of the factors listed above and otherspecific requirements under accounting principles generally accepted in theUnited States for software revenue recognition, we must have very precise termsin our license agreements to recognize revenue when we initially deliversoftware or perform services. Negotiation of mutually acceptable terms andconditions can extend the sales cycle, and sometimes we do not obtain terms andconditions that permit revenue recognition at the time of delivery or even aswork on the project is completed. Furthermore, because many contracts within our verticals, includinggovernment and education and healthcare, often include the terms summarizedabove, the contracts result in revenue deferrals.

 

If accounting interpretations relatingto revenue recognition change, our reported revenues could decline or we couldbe forced to make changes in our business practices. The accounting professionand regulatory agencies continue to address and discuss accounting standardsand interpretations covering revenue recognition for the software industry withthe objective of providing additional guidance on their application. Thesediscussions and the issuance of new interpretations, once finalized, could leadto unanticipated reductions in our recognized revenue. They could also drivesignificant adjustments to our business practices which could result inincreased administrative costs, lengthened sales cycles and other changes whichcould adversely affect our reported revenues and results of operations.

 

38

----

 

***Future adjustments in our net deferred taxassets may materially impact our financial results.***

 

On November 30, 2005 the Condensed ConsolidatedBalance Sheet includes net deferred tax assets in the amount of$30.6 million. Each quarter, 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 or reverse all or a portion of thevaluation allowance, we must include an expense or expense reversal within thetax provision in the statement of operations. For the fiscal year ended May 31, 2005, we updated ouranalysis to reflect the necessary changes in estimates and determined that anadditional valuation allowance of $0.4 million was necessary. Thisincrease was primarily due to additional federal contribution carryforwards andstate operating loss carryforwards that expire within the next ten years.  For the six months ended November 30,2005 we determined that our valuation allowance did not need to be adjusted.

 

Inthe event that we adjust our estimates of future taxable income or taxdeductions from the exercise of stock options; or our stock price increasessignificantly without a corresponding increase in taxable income, we may needto establish an additional valuation allowance, which could materiallyadversely impact our financial position and results of operations. With theexpected closing of the merger with Intentia we will need to reassess the combinedU.S. historical results for Lawson and Intentia as well as the combined U.S.deferred tax assets.  Intentia’s U.S.operations are not material and therefore its deferred tax assets aresignificantly less than Lawson’s. However, Intentia’s historical losses in the U.S. and its added deferredtax assets will impact the assessment and are expected to increase thepossibility of a future valuation allowance.

 

***We may experience fluctuations inquarterly results that could adversely impact our annual effective tax rate.***

 

Our revenues and operating results are difficult topredict and may fluctuate 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 impact the computation of theestimated effective tax rate for the year. Our estimated annual effective tax rate may fluctuate for a variety ofreasons, including the following:

 

•                  changesin forecasted annual operating income;

 

•                  changesto the valuation allowance on net deferred tax assets;

 

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

 

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

 

•                  impactsfrom tax law changes.

 

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

 

The trading price of our common stock has fluctuatedsignificantly in the past. Changes in our business operations or prospects,regulatory considerations, general market and economic conditions, or otherfactors may affect the price of our common stock. Many of these factors arebeyond our control. The future trading price of our common stock is likely to bevolatile and could be subject to wide price fluctuations in response to suchfactors, including:

 

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

 

•                  announcementsof technological innovations by us or our competitors;

 

•                  developmentswith respect to our intellectual property rights, including patents, or thoseof our competitors;

 

•                  fluctuationsin demand for and sales of our products, which will depend on, among otherthings, the acceptance of our products in the marketplace and the general levelof spending in the software industry;

 

•                  rumorsor dissemination of false and/or misleading information;

 

39

----

 

•                  changesin management;

 

•                  proposedand completed acquisitions or other significant transactions by us or ourcompetitors;

 

•                  introductionand success of new products or significant customer wins or losses by us or ourcompetitors;

 

•                  themix of products and services sold by us;

 

•                  thetiming of significant orders by our customers;

 

•                  conditionsand trends in the software industry, or consolidation within the technologyindustry that may impact our customers, partners, suppliers or competitors;

 

•                  adoptionof new accounting standards affecting the software industry;

 

•                  actsof war or terrorism; and

 

•                  generalmarket conditions.

 

***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 in our amended and restated certificateof incorporation and bylaws, our stockholder rights plan and under Delaware lawcould make it more difficult for other businesses to acquire us, even if doingso would benefit our stockholders.  Ouramended and restated certificate of incorporation and bylaws contain thefollowing provisions, among others, which may inhibit an acquisition of ourcompany by a third-party:

 

•                            advance notification procedures for matters to be brought beforestockholder meetings;

 

•                            a limitation on who may call stockholder meetings;

 

•                            a prohibition on stockholder action by written consent; and

 

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

 

The issuance of stock under our stockholderrights plan could delay, deter or prevent a takeover attempt that stockholdersmight consider in their best interests. We are also subject to provisions ofDelaware law that prohibit us from engaging in any business combination withany “interested stockholder,” meaning generally that a stockholder whobeneficially owns more than 15% of our stock cannot acquire us for a period ofthree years from the date this person became an interested stockholder unlessvarious conditions are met, such as approval of the transaction by our board ofdirectors. Any of these restrictions could have the effect of delaying orpreventing 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 license third-party software products that weincorporate into, or resell with, our own software products. For example, weincorporate Micro Focus International, Inc.’s software in many of ourproducts and have reseller and alliance relationships with IBM, BusinessSoftware Incorporated, Business Objects, Hyperion Solutions Corporation,The Hackett Group, Inc. and other businesses that allow us to resell theirofferings with our products and services. These relationships and othertechnology licenses are subject to periodic renewal and may include minimumsales requirements. A failure to renew or early termination of theserelationships or other technology licenses could adversely impact our business.If any of the third-party software vendors change their product offerings orterminate our licenses, we may lose potential revenues and may need to incuradditional development costs and seek alternative third-party relationships. Inaddition, if the cost of licensing any of these third-party software productssignificantly increases, or if there is a change in the relative mix ofproducts we offer, our gross profits could significantly decrease. We rely onexisting relationships with software vendors who are also competitors. If thesevendors change their business practices, we may be compelled to findalternative vendors with

 

40

----

 

complementary software, which may not beavailable on attractive terms or at all, or may not be as widely accepted or aseffective as the software provided by our existing vendors. Our relationshipswith these and other third-party vendors are an important part of our businessand a deterioration of these relationships could adversely impact our businessand operating results.

 

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

 

Our ability to achieve revenue growth will depend inlarge part on adding new partners to expand our sales channels, as well asleveraging our relationships with existing partners. If our relationships withthese resellers, system integrators and strategic and technology partnersdeteriorate or terminate, we may lose important sales and marketingopportunities. Our reseller arrangements may from time to time give rise todisputes regarding marketing strategy, sales of competing products, exclusiveterritories, payment of fees and customer relationships, which could negativelyaffect our business or result in costly litigation.

 

Our current and potential customers often rely onthird-party systems integrators to implement and manage new and existingapplications. These systems integrators may increase their promotion ofcompeting enterprise software applications, or may otherwise discontinue theirrelationships with us.

 

We also may enter into joint arrangements withstrategic partners to develop new software products or extensions, sell oursoftware as part of integrated products or serve as an application serviceprovider for our products. Our business may be adversely affected if thesestrategic partners change their business priorities or experience difficultiesin their operations, which in either case causes them to terminate or reducetheir support for the joint arrangements. Furthermore, the financial conditionof our channel partners impacts our business. If our partners are unable torecruit and adequately train a sufficient number of consulting personnel tosupport the implementation of our software products, or they otherwise do notadequately perform implementation services, we may lose customers. Ourrelationships with resellers, systems integrators and other third-party vendorsare an important part of our business, and a deterioration of theserelationships could adversely 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 customers or incur liabilities.***

 

Our software programs are often deployed in largeand complex computer networks. Because of the nature of these programs, theycan only be fully tested for reliability when deployed in networks for longperiods of time. Our software programs may contain undetected defects whenfirst introduced or as new versions are released, and our customers maydiscover defects in our products, experience corruption of their data orencounter performance or scaling problems only after our software programs havebeen deployed. As a consequence, from time to time we have received customercomplaints following installation of our products. We are currently a defendantin several lawsuits where customers have raised these types of issues with ourproducts 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:

 

•                  lossof customers;

 

•                  damageto our brand reputation;

 

•                  failureto attract new customers or achieve market acceptance;

 

•                  diversionof development and services resources; and

 

•                  legalactions by our customers or government regulators.

 

In addition, we may not be able to avoid or limitliability for disputes relating to product performance, software security orthe provision of services. The occurrence of any one or more of the foregoingfactors could cause us to experience losses, incur liabilities and adverselyaffect our operating results.

 

41

----

 

***If our customers lose confidence in thesecurity of data on the Internet, our revenues could be adversely affected.***

 

Maintaining the security of computers and computernetworks is an issue of critical importance for our customers. Attempts byexperienced computer programmers, or hackers, to penetrate client networksecurity or the security of web sites to misappropriate confidentialinformation are currently an industry-wide phenomenon that affects computersand 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 customers to seek to reduce or delay futurepurchases or to purchase competitors’ products which are not Internet-basedapplications. Customers may also increase their spending to protect theircomputer networks from attack, which could delay adoption of new technologies.Any of these actions by customers could adversely affect our revenues.

 

***We may be required to undertake acostly redesign of our products if third- party software development toolsbecome an industry standard or cause obsolescence of our toolsets.***

 

Several businesses have focused on providingsoftware development tools and each of them is attempting to establish its owntools as the accepted industry standard. If a software product were to emergeas a clearly 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.

 

***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 our business strategy, we intend topursue strategic acquisitions. We may be unable to identify suitableacquisitions or investment candidates. Even if we identify suitable candidates,we cannot provide assurance that we will be able to make acquisitions orinvestments on commercially acceptable terms. If we acquire a company, we mayincur losses in the operations of that company and we may have difficultyintegrating its products, personnel and operations into our business. Inaddition, its key personnel may decide not to work for us. We may also havedifficulty integrating acquired businesses, products, services and technologiesinto our operations. These difficulties could disrupt our ongoing business, distractour management and workforce, increase our expenses and adversely affect ouroperating results. We may also incorrectly judge the value or worth of anacquired company or business. Furthermore, we may incur significant debt or berequired to issue equity securities to pay for future acquisitions orinvestments. The issuance of equity securities may be dilutive to ourstockholders. If the products of an acquired company are not successful, thoseremaining assets could become impaired, which may result in an impairment lossthat could materially adversely impact our financial position and results ofoperations.

 

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

 

Some businesses choose to access enterprise softwareapplications through hosted “on demand” services or application serviceproviders who distribute enterprise software through a hosted subscriptionservice. We do not currently have our own “on demand” hosting program for ourproducts and have had limited success with channel partners who serve asapplication service providers for customers. If these alternative distributionmodels gain popularity, we may not be able to compete effectively in thisenvironment.

 

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

 

We are subject to the risk of adverse claims andlitigation alleging infringement by us of the intellectual property rights ofothers. Many participants in the technology industry have an increasing numberof patents and patent applications and have frequently demonstrated a readinessto take legal action based on allegations of patent and other intellectualproperty infringement. Further, as the number and functionality of our productsincrease, we believe that we may become increasingly subject to the risk ofinfringement claims. If infringement claims are brought against us, theseassertions could distract management and we may have to expend potentiallysignificant funds and resources to defend or settle such claims. If we arefound to infringe on the intellectual property rights of others, we could beforced to pay significant license fees or damages for infringement.

 

42

----

 

If one of our developers embedded open sourcecomponents into one of our products, without our knowledge or authorization,our ownership and licensing of that product could be in jeopardy.  Depending on the open source license terms,the use of an open source component could mean that all products delivered withthat open source component become part of the open source community.  In that case, we would not own thosedelivered products and could not charge license fees for those products.  We currently take steps to train ourdevelopers and monitor the content of products in development, but there is noassurance that these steps will always be effective.

 

As part of our standard license agreements, we agreeto indemnify our customers for some types of infringement claims under the lawsof the United States and some foreign jurisdictions that may arise from the useof our products. If a claim against us were successful, we may be required toincur significant expense and pay substantial damages, as we are unable toinsure against this risk. Even if we were to prevail, the accompanyingpublicity could adversely impact the demand for our software. Provisions attemptingto limit our liability in our standard agreements may be invalidated byunfavorable judicial decisions or by federal, state, local or foreign laws orordinances.

 

***If the open source community expands into enterprise applicationsoftware, our license fee revenues may decline.***

 

The open source community is comprised of manydifferent formal and informal groups of software developers and individuals whohave created a wide variety of software and have made that software availablefor use, distribution and modification, often free of charge. Open sourcesoftware, such as the Linux operating system, has been gaining in popularityamong business users. If developers contribute enterprise application softwareto the open source community, and that software has competitive features andscale to support business users in our markets, we will need to change ourproduct pricing and distribution strategy to compete.

 

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

 

We contract for insurance to cover several, but notall, potential risks and liabilities. In the current market, insurance coverageis becoming more restrictive, and, when insurance coverage is offered, thedeductible for which we are responsible is larger. In light of thesecircumstances, it may become more difficult to maintain insurance coverage athistorical levels, or if such coverage is available, the cost to obtain ormaintain it may increase substantially. This may result in our being forced tobear the burden of an increased portion of risks for which we havetraditionally been covered by insurance, which could negatively impact ourresults of operations.

 

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

 

We consider certain aspects of our internaloperations, software and documentation to be proprietary, and rely on acombination of contract, copyright, trademark and trade secret laws to protectthis information. In addition, to date, we hold one patent and have filedseveral patent applications. Outstanding applications may not result in issuedpatents and, even if issued, the patents may not provide any competitiveadvantage. Existing copyright laws afford only limited protection. Ourcompetitors may independently develop technologies that are less expensive orbetter than our technology. In addition, when we license our products tocustomers, we provide source code for many of our products. We may also permitcustomers to obtain access to our other source code through a source codeescrow arrangement. This access to our source code may increase the likelihoodof misappropriation or other misuse of our intellectual property. In addition,the laws of some countries in which our software products are or may belicensed do not protect our software products and intellectual property rightsto the same extent as the laws of the United States. Defending our rights couldbe costly.

 

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

 

Business disruptions could affect our futureoperating results. Our operating results and financial condition could beadversely affected in the event of a security breach, major fire, war,terrorist attack or other catastrophic event. Impaired access or significantdamage to our data center at our headquarters in St. Paul, Minnesota due tosuch an event could cause a disruption of our information, research anddevelopment, and customer support systems and loss of financial data andcertain customer data, which could adversely impact results of operations andbusiness financial conditions.

 

***We have limited experience withoffshore outsourcing.***

 

To help improve margins and gain operationalefficiencies, many software businesses have outsourced portions of theirsoftware development and software services to businesses located in India orother parts of the world. In February 2004,

 

43

----

 

we entered into an offshore agreement with athird-party based in India to provide certain software support services for ourproducts. We have recently expanded our efforts to use this third-party toassist us in providing lower cost implementation services for customers. Wehave limited experience with these types of outsourcing and may be unable toachieve the anticipated economic efficiencies expected****of this arrangement.

 

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

 

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 stockholders couldsignificantly influence matters requiring stockholder approval.*******

 

As of November 30, 2005, our executiveofficers, directors, and affiliated entities, in the aggregate, beneficiallyowned 16.4% of our outstanding common stock. These stockholders, if actingtogether, would be able to significantly influence all matters requiringapproval by stockholders, including the election of directors and the approvalof mergers or other business combinations. Sale of a portion of these shares in the public market, or the perceptionthat such sales are likely to occur, could depress the market price of ourcommon stock and could impair our ability to raise capital through the sale ofadditional equity securities.  Inaddition, certain of our stockholders have agreed to irrevocable undertakingswith Intentia International AB, under which those shareholders have given theirproxy to affiliates of Intentia to vote an aggregate of 34,967,320****of our shares in favor of the proposed acquisition ofIntentia.

 

***Financial outlook.***

 

From time to time in press releases andotherwise, we may publish forecasts or other forward-looking statementsregarding our future results, including estimated revenues or net earnings. Anyforecast of our future performance reflects various assumptions. Theseassumptions are subject to significant uncertainties, and as a matter ofcourse, any number of them may prove to be incorrect. Further, the achievementof any forecast depends on numerous risks and other factors (including thosedescribed in this discussion), many of which are beyond our control. As aresult, we cannot provide assurance that our performance will be consistentwith any management forecasts or that the variation from such forecasts willnot be material and adverse. Current and potential stockholders are cautionednot to base their entire analysis of our business and prospects upon isolatedpredictions, but instead are encouraged to utilize our entire publiclyavailable mix of historical and forward-looking information, as well as otheravailable information affecting us, our products and services, and the softwareindustry when evaluating our prospective results of operations.

 

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

 

(a) Not applicable

 

(b) Useof Proceeds

 

As of November 30, 2005, we held$112.5 million of net proceeds from our initial public offering ininterest-bearing, investment grade securities. During the three months ended November 30,2005, we used approximately $0.7 million for capital expenditures and $1.3million in capitalized costs for the pending business acquisition with Intentia.

 

**ITEM 3. DEFAULTS UPONSENIOR SECURITIES**

 

None

 

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

 

None

 

**ITEM 5. OTHER INFORMATION**

 

None

 

44

----

 

**ITEM 6. EXHIBITS**

 
| (a)    |   | Exhibits |
|--------|--------|----------|
|   |   |     |
|   |   |     |   |
|   |   | 31.1     | Certification of  President and Chief Executive Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act- Harry Debes. |
|   |   |     |   |
|   |   | 31.2     | Certification of Executive Vice President and Chief Financial and  Performance Officer Pursuant to Section 302 of the Sarbanes-Oxley Act-  Robert G. Barbieri. |
|   |   |     |   |
|   |   | 32.1     | Certification of President and Chief Executive Officer Pursuant to Section 906 of the  Sarbanes-Oxley Act- Harry Debes. |
|   |   |     |   |
|   |   | 32.2     | Certification of Executive Vice President and Chief Financial and  Performance Officer Pursuant to Section 906 of the Sarbanes-Oxley Act-  Robert G. Barbieri. |

 

45

----

 

**SIGNATURES**

 

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

 

 
| Date: January 6, 2006 |                       |
|----------------------------|----------------------------|
|                       |                       |
|                       | 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) |

 

46

----

 

**EXHIBIT INDEX**

 
| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION OF DOCUMENTS**                                                               |
|---------------------|------------|--------------------------------------------------------------------------------------------|
|                |       |                                                                                       |
| 31.1                |       | Certification Pursuant to Section 302  of the Sarbanes-Oxley Act- Harry Debes.        |
|                |       |                                                                                       |
| 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-  Harry Debes.        |
|                |       |                                                                                       |
| 32.2                |       | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act-  Robert G. Barbieri. |

 

47

----