**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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| **ý**                                           | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                               |
|------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                           | ** ** | ** **                                                                                                                                                                                                       |
| **FOR THE QUARTERLY PERIOD ENDED November 30, 2004** |
| ** **                                           |
| **Or**                                               |
|                                                 |       |                                                                                                                                                                                                             |
| **o**                                                | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                              |
| ** **                                           |
| ** **                                           | ** ** | **FOR THE TRANSITION PERIOD FROM                                TO** |
| ** **                                           | ** ** | ** **                                                                                                                                                                                                       |
| **Commission file  number 000-33335**                |

 

**LAWSON SOFTWARE, INC.**

(Exact name of registrant as specifiedin its charter)

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

 

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Indicate by check mark whether theregistrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for 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

 

The number of shares of the registrant’scommon stock outstanding as of January 3, 2005 was 99,086,047.

 

 

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**LAWSONSOFTWARE, INC.**

 

**Form 10-QIndex**

 
| **PART I.** | ** ** | **FINANCIAL INFORMATION**                                                                                              | **3**  |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.     |       | Financial Statements                                                                                                   | 3      |
|        |       | Condensed  Consolidated Balance Sheets at November 30, 2004 and May 31, 2004                                           | 3      |
|        |       | Condensed  Consolidated Statements of Operations for the three months and six months  ended November 30, 2004 and 2003 | 4      |
|        |       | Condensed  Consolidated Statements of Cash Flows for the six months ended November 30,  2004 and 2003                  | 5      |
|        |       | Notes to Condensed Consolidated Financial  Statements                                                                  | 6      |
| Item 2.     |       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                            | 13     |
| Item 3.     |       | Qualitative and Quantitative Disclosure  about Market Risk                                                             | 35     |
| Item 4.     |       | Controls and Procedures                                                                                                | 35     |
|        |       |                                                                                                                   |   |
| PART II.    |       | OTHER INFORMATION                                                                                                      | 35     |
| Item 1.     |       | Legal Proceedings                                                                                                      | 35     |
| Item 2.     |       | Unregistered Sales of Equity Securities and  Use of Proceeds                                                           | 35     |
| Item 3.     |       | Defaults Upon Senior Securities                                                                                   | 35     |
| Item 4.     |       | Submission of Matters to a Vote of Security  Holders                                                                   | 36     |
| Item 5.     |       | Other Information                                                                                                      | 36     |
| Item 6.     |       | Exhibits                                                                                                               | 36     |
| SIGNATURES  | 37         |

 

2

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**PART I. FINANCIAL INFORMATION**

** **

**ITEM1.  FINANCIAL STATEMENTS**

** **

**LAWSONSOFTWARE, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands)**

**(unaudited)**

 
| ** **                                      | ** ** | **November 30,  2004** | ** ** | **May 31,  2004** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ASSETS                                          |       |                   |       |              |       |
| Current assets:                                 |       |                   |       |              |       |
| Cash and cash equivalents                       |       | $                      | 119,737    |              | $          | 79,996 |   |
| Marketable securities                           |       | 86,326                 |       | 120,465           |       |
| Trade accounts receivable, net                  |       | 48,160                 |       | 65,236            |       |
| Deferred income taxes                           |       | 15,311                 |       | 15,311            |       |
| Prepaid expenses and other assets               |       | 22,746                 |       | 20,450            |       |
|                                            |       |                   |       |              |       |
| Total current assets                            |       | 292,280                |       | 301,458           |       |
|                                            |       |                   |       |              |       |
| Long-term marketable securities                 |       | 2,858                  |       | 8,521             |       |
| Property and equipment, net                     |       | 14,944                 |       | 17,235            |       |
| Goodwill                                        |       | 43,315                 |       | 43,042            |       |
| Other intangible assets, net                    |       | 36,542                 |       | 40,767            |       |
| Deferred income taxes                           |       | 12,183                 |       | 12,344            |       |
| Other assets                                    |       | 188                    |       | 231               |       |
|                                            |       |                   |       |              |       |
| Total assets                                    |       | $                      | 402,310    |              | $          | 423,598 |   |
|                                            |       |                   |       |              |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY       |       |                   |       |              |       |
| Current liabilities:                            |       |                   |       |              |       |
| Current portion of long-term debt               |       | $                      | 2,155      |              | $          | 1,652 |   |
| Accounts payable                                |       | 11,692                 |       | 14,391            |       |
| Accrued compensation and benefits               |       | 20,174                 |       | 25,086            |       |
| Other accrued liabilities                       |       | 12,845                 |       | 11,898            |       |
| Deferred revenue and client deposits            |       | 74,602                 |       | 83,095            |       |
| Total current liabilities                       |       | 121,468                |       | 136,122           |       |
| Long-term debt, less current portion            |       | —                 |       | 990               |       |
| Other long-term liabilities                     |       | 3,309                  |       | 3,600             |       |
| Total liabilities                               |       | 124,777                |       | 140,712           |       |
| Commitments and contingencies (Note 8)          |       |                   |       |              |       |
| Stockholders’ equity:                      |       |                   |       |              |       |
| Preferred stock                                 |       | —                 |       | —            |       |
| Common stock                                    |       | 1,113                  |       | 1,099             |       |
| Additional paid-in capital                      |       | 332,941                |       | 327,715           |       |
| Treasury stock, at cost                         |       | (74,082                | )          | (65,555           | )          |
| Deferred stock-based compensation               |       | (294                   | )          | (774              | )          |
| Retained earnings                               |       | 14,034                 |       | 17,471            |       |
| Accumulated other comprehensive income          |       | 3,821                  |       | 2,930             |       |
| Total stockholders’ equity                 |       | 277,533                |       | 282,886           |       |
| Total liabilities and stockholders’ equity |       | $                      | 402,310    |              | $          | 423,598 |   |
|                                                 |            |                        |            |                   |            |  |  |  |  |

 

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

 

3

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**LAWSON SOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except per share data)**

**(unaudited)**

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                             | ** ** | **November 30,  2004** | ** ** | **November 30,  2003** | ** ** | **November 30,  2004** | ** ** | **November 30,  2003** | ** ** |
| Revenues:                                              |       |                   |       |                   |       |   |   |   |   |
| License fees                                           |       | $                      | 13,195     |                   | $          | 17,313 |   | $ | 26,446 |   | $ | 39,974 |   |
| Services                                               |       | 69,804                 |       | 66,952                 |       | 139,238 |   | 132,293 |   |
| Total revenues                                         |       | 82,999                 |       | 84,265                 |       | 165,684 |   | 172,267 |   |
| Cost of revenues:                                      |       |                   |       |                   |       |   |   |   |   |
| Cost of license fees                                   |       | 2,904                  |       | 3,988                  |       | 5,279 |   | 8,079 |   |
| Cost of services                                       |       | 37,048                 |       | 33,731                 |       | 73,504 |   | 65,832 |   |
| Total cost of revenues                                 |       | 39,952                 |       | 37,719                 |       | 78,783 |   | 73,911 |   |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| Gross profit                                           |       | 43,047                 |       | 46,546                 |       | 86,901 |   | 98,356 |   |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| Operating expenses:                                    |       |                   |       |                   |       |   |   |   |   |
| Research and development                               |       | 15,654                 |       | 15,257                 |       | 31,301 |   | 30,192 |   |
| Sales and marketing                                    |       | 19,578                 |       | 21,498                 |       | 40,535 |   | 44,496 |   |
| General and administrative                             |       | 7,911                  |       | 10,085                 |       | 16,161 |   | 19,310 |   |
| Restructuring                                          |       | 5,465                  |       | 2,250                  |       | 5,390 |   | 2,210 |   |
| Amortization of acquired intangibles                   |       | 384                    |       | 321                    |       | 769 |   | 566 |   |
| Total operating expenses                               |       | 48,992                 |       | 49,411                 |       | 94,156 |   | 96,774 |   |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| Operating (loss) income                                |       | (5,945                 | )          | (2,865                 | )          | (7,255 | ) | 1,582 |   |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| Other income:                                          |       |                   |       |                   |       |   |   |   |   |
| Interest income                                        |       | 907                    |       | 780                    |       | 1,564 |   | 1,662 |   |
| Interest expense                                       |       | (15                    | )          | (20                    | )          | (28 | ) | (38 | ) |
| Total other income                                     |       | 892                    |       | 760                    |       | 1,536 |   | 1,624 |   |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| (Loss) income before income taxes                      |       | (5,053                 | )          | (2,105                 | )          | (5,719 | ) | 3,206 |   |
| (Benefit) provision for income taxes                   |       | (2,033                 | )          | (821                   | )          | (2,282 | ) | 1,250 |   |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| Net (loss) income                                      |       | $                      | (3,020     | )                      | $          | (1,284 | ) | $ | (3,437 | ) | $ | 1,956 |   |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| Net (loss) income per share:                           |       |                   |       |                   |       |   |   |   |   |
| Basic                                                  |       | $                      | (0.03      | )                      | $          | (0.01 | ) | $ | (0.03 | ) | $ | 0.02 |   |
| Diluted                                                |       | $                      | (0.03      | )                      | $          | (0.01 | ) | $ | (0.03 | ) | $ | 0.02 |   |
| Shares used in computing net (loss) income  per share: |       |                   |       |                   |       |   |   |   |   |
| Basic                                                  |       | 98,316                 |       | 98,302                 |       | 98,305 |   | 98,383 |   |
| Diluted                                                |       | 98,316                 |       | 98,302                 |       | 98,305 |   | 107,253 |   |

 

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

 

4

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**LAWSON SOFTWARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(in thousands)**

**(unaudited)**

 
| ** **                                                                                          | ** ** | **Six Months Ended**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                          | ** ** | **November 30,  2004** | ** ** | **November 30,  2003** | ** ** |
| **Cash flows from operating activities:**                                                           |       |                   |       |   |   |
| Net (loss) income                                                                                   |       | $                      | (3,437     | ) | $ | 1,956 |   |
| Adjustments to reconcile net (loss) income  to net cash provided by (used in) operating activities: |       |                   |       |   |   |
| Depreciation and amortization                                                                       |       | 8,482                  |       | 5,854 |   |
| Deferred income taxes                                                                               |       | 161                    |       | — |   |
| Provision for doubtful accounts                                                                     |       | 988                    |       | 2,383 |   |
| Loss on the disposal of assets                                                                      |       | —                 |       | 160 |   |
| Tax benefit from stockholder transactions                                                           |       | 1,858                  |       | 4,746 |   |
| Tax commitment from exercise of stock  options                                                      |       | (972                   | )          | (1,132 | ) |
| Amortization of stock-based compensation                                                            |       | 107                    |       | 624 |   |
| Amortization of discount on notes payable                                                           |       | 48                     |       | — |   |
| Amortization of discount and accretion of  premium on marketable securities                         |       | 89                     |       | 480 |   |
| Restructuring                                                                                       |       | 5,390                  |       | 2,210 |   |
| Changes in operating assets and  liabilities, net of effect from acquisitions:                      |       |                   |       |   |   |
| Trade accounts receivable                                                                           |       | 16,088                 |       | 489 |   |
| Prepaid expenses and other assets                                                                   |       | (2,258                 | )          | (2,460 | ) |
| Accounts payable                                                                                    |       | (2,699                 | )          | (1,653 | ) |
| Accrued and other liabilities                                                                       |       | (8,141                 | )          | (4,858 | ) |
| Income taxes payable                                                                                |       | (999                   | )          | — |   |
| Deferred revenue and client deposits                                                                |       | (8,765                 | )          | (9,583 | ) |
| Net cash provided by (used in) operating  activities                                                |       | 5,940                  |       | (784 | ) |
|                                                                                                |       |                   |       |   |   |
| **Cash flows from investing activities:**                                                           |       |                   |       |   |   |
| Cash paid in conjunction with acquisitions,  net of cash acquired                                   |       | —                 |       | (15,879 | ) |
| Purchases of marketable securities                                                                  |       | (58,824                | )          | (51,600 | ) |
| Sales and maturities of marketable securities                                                       |       | 98,567                 |       | 80,245 |   |
| Purchases of property and equipment                                                                 |       | (1,675                 | )          | (2,467 | ) |
| Net cash provided by investing activities                                                           |       | 38,068                 |       | 10,299 |   |
|                                                                                                |       |                   |       |   |   |
| **Cash flows from financing activities:**                                                           |       |                   |       |   |   |
| Principal payments on debt                                                                          |       | (482                   | )          | (457 | ) |
| Exercise of stock options                                                                           |       | 3,847                  |       | 5,406 |   |
| Issuance of treasury shares for employee  stock purchase plan                                       |       | 2,368                  |       | 2,175 |   |
| Repurchase of common stock                                                                          |       | (10,000                | )          | (18,912 | ) |
| Net cash used in financing activities                                                               |       | (4,267                 | )          | (11,788 | ) |
| Increase (decrease) in cash and cash equivalents                                                    |       | 39,741                 |       | (2,273 | ) |
| Cash and cash equivalents at beginning of  period                                                   |       | 79,996                 |       | 153,071 |   |
| Cash and cash equivalents at end of period                                                          |       | $                      | 119,737    |   | $ | 150,798 |   |

 

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

 

5

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**LAWSONSOFTWARE, INC.**

**NOTES TO CONDENSEDCONSOLIDATED 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 of America requires management tomake estimates and assumptions that affect the reported amounts therein. Due tothe inherent uncertainty involved in making estimates, actual results in futureperiods may differ from those estimates. The results of operations for thethree and six month periods ended November 30, 2004 are notnecessarily indicative of the results to be expected for any subsequent quarteror for the entire fiscal year ending May 31, 2005. The unauditedcondensed consolidated financial statements and notes are presented aspermitted by the requirements for Form 10-Q and do not contain certaininformation included in the Company’s annual financial statements and notes.The accompanying interim condensed consolidated financial statements should beread in conjunction with the financial statements and related notes included inthe Company’s Annual Report on Form 10-K filed with the Securities andExchange Commission for the fiscal year ended May 31, 2004. Certainreclassifications have been made to conform prior year’s data to the currentpresentation. These reclassifications had no effect on reported earnings.

 

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

 

TheCompany accounts for stock-based employee compensation arrangements inaccordance with the provisions of Accounting Principles Board (APB) OpinionNo. 25, “Accounting for Stock Issued to Employees,” and complies with thedisclosure provisions of Statement of Financial Accounting Standard (SFAS)No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accountingfor Stock-Based Compensation-Transition and Disclosure, an amendment ofFinancial Accounting Standards Board (FASB) Statement No. 123”.

 

TheCompany has adopted the disclosure-only provisions of SFAS No. 123. Forpurposes of the pro forma disclosures below, the estimated fair value of theoptions is amortized to expense over the options’ vesting period. Had compensationcost for the Company’s stock options been recognized based on the fair value atthe grant date consistent with the provisions of SFAS No. 123, the Company’snet (loss) income would have been adjusted to the pro forma amounts indicatedbelow (in thousands, except per share amounts):

 
| ** **                                                                                                             | ** ** | **Three Months Ended  November 30,** | ** ** | **Six Months Ended  November 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net (loss) income:                                                                                                     |       |                                 |       |                               |       |   |   |   |   |
| As reported                                                                                                            |       | $                                    | (3,020     | )                                  | $          | (1,284 | ) | $ | (3,437 | ) | $ | 1,956 |   |
| Add: Stock-based employee compensation expense included in reported  net (loss) income, net of taxes                   |       | 51                                   |       | (46                                | )          | 65 |   | 380 |   |
| Deduct: Total stock-based compensation expense determined under fair  value based method for all rewards, net of taxes |       | (1,585                               | )          | (1,701                             | )          | (3,531 | ) | (3,286 | ) |
| Pro forma  net loss                                                                                                    |       | $                                    | (4,554     | )                                  | $          | (3,031 | ) | $ | (6,903 | ) | $ | (950 | ) |
|                                                                                                                   |       |                                 |       |                               |       |   |   |   |   |
| Net (loss) income per share:                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Basic:                                                                                                                 |       |                                 |       |                               |       |   |   |   |   |
| As reported                                                                                                            |       | $                                    | (0.03      | )                                  | $          | (0.01 | ) | $ | (0.03 | ) | $ | 0.02 |   |
| Pro forma                                                                                                              |       | $                                    | (0.05      | )                                  | $          | (0.03 | ) | $ | (0.07 | ) | $ | (0.01 | ) |
| Diluted:                                                                                                               |       |                                 |       |                               |       |   |   |   |   |
| As reported                                                                                                            |       | $                                    | (0.03      | )                                  | $          | (0.01 | ) | $ | (0.03 | ) | $ | 0.02 |   |
| Pro forma                                                                                                              |       | $                                    | (0.05      | )                                  | $          | (0.03 | ) | $ | (0.07 | ) | $ | (0.01 | ) |
|                                                                                                                        |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |  |

 

6

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**3.****                                     ****PER SHARE DATA**

 

Basic earnings per share is computed using the net (loss) income andthe weighted average number of shares of common stock outstanding. Dilutedearnings per share reflects the weighted average number of shares of commonstock outstanding plus any potentially dilutive shares outstanding during theperiod. Potentially dilutive shares consist of shares issuable upon theexercise of stock options and warrants (in thousands, except per shareamounts).

 
| ** **                                           | ** ** | **Three Months Ended  November 30,** | ** ** | **Six Months Ended  November 30,** | ** **

** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------------------|
| ** **                                           | ** ** | **2004**                             | ** ** | **2003**                           | ** **             | **2004** | ** ** | **2003** | ** ** |
| Basic earnings per share computation:                |       |                                 |       |                               |                   |   |   |   |   |
| Net (loss) income applicable to common  stockholders |       | $                                    | (3,020     | )                                  | $                      | (1,284 | ) | $ | (3,437 | ) | $ | 1,956 |   |
| Weighted average common shares – basic          |       | 98,316                               |       | 98,302                             |                   | 98,305 |   | 98,383 |   |
| Basic net (loss) income per share                    |       | $                                    | (0.03      | )                                  | $                      | (0.01 | ) | $ | (0.03 | ) | $ | 0.02 |   |
|                                                 |       |                                 |       |                               |                   |   |   |   |   |
| Diluted earnings per share computation:              |       |                                 |       |                               |                   |   |   |   |   |
| Net (loss) income applicable to common  stockholders |       | $                                    | (3,020     | )                                  | $                      | (1,284 | ) | $ | (3,437 | ) | $ | 1,956 |   |
| Shares calculation:                                  |       |                                 |       |                               |                   |   |   |   |   |
| Weighted average common shares – basic          |       | 98,316                               |       | 98,302                             |                   | 98,305 |   | 98,383 |   |
| Effect of dilutive stock options                     |       | —                               |       | —                             |                   | — |   | 8,196 |   |
| Effect of dilutive warrants                          |       | —                               |       | —                             |                   | — |   | 674 |   |
| Weighted average common shares – diluted        |       | 98,316                               |       | 98,302                             |                   | 98,305 |   | 107,253 |   |
| Diluted net (loss) income per share                  |       | $                                    | (0.03      | )                                  | $                      | (0.01 | ) | $ | (0.03 | ) | $ | 0.02 |   |

 

Potential dilutive shares of common stock andwarrants excluded from the diluted net (loss) income per share computationswere 19.9 million and 0.3 million as of November 30, 2004 and 2003,respectively. Certain potential dilutive shares of common stock were excludedfrom the diluted earnings per share computation because their exercise priceswere greater than the average market price of the common shares during theperiod and were therefore not dilutive. In addition, potential dilutive shares ofcommon stock were excluded from periods with a net loss because they wereanti-dilutive.

 

**4.****                                     ****NEW ACCOUNTINGPRONOUNCEMENTS**

 

In December 2004 the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standard No. 123 (revised 2004), *Share-Based Payment (SFAS No. 123(R))*. SFASNo. 123(R) requires compensation cost relating to unvested share-based paymenttransactions that are outstanding as of the effective date and newly issuedtransactions to be recognized in the financial statements. That cost will bemeasured based on the fair value of the equity or liability instruments issued.SFAS No. 123(R) covers a wide range of share-based compensation arrangementsincluding share options, restricted share plans, performance-based awards,share appreciation rights and employee share purchase plans. SFAS No. 123(R)replaces SFAS No. 123, *Accounting forStock-Based Compensation*(SFAS No. 123), and supersedes Accounting PrinciplesBoard Opinion No. 25, *Accounting for StockIssued to Employees*(Opinion 25)*.*SFAS No. 123, as originally issued in 1995, establishedfair-value-based method of accounting for share-based payment transactions withemployees. However, that Statement permitted entities the option of continuingto apply the guidance in Opinion 25, as long as the footnotes to financialstatements disclosed what net income would have been had the fair-value-basedmethod been used. As disclosed in footnote 2, the Company elected the option ofdisclosure only under SFAS No. 123. Public entities will be required to applySFAS No. 123(R) as of the first interim or annual reporting period that beginsafter June 15, 2005, which is effective with the Company’s secondquarter of fiscal 2006. Based on the Company's significant amount of unvested share-basedpayment awards, the adoption of this statement is anticipated to have amaterial impact on the Company’s results of operations; however the Company iscurrently evaluating the impact of this statement.

 

7

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In November 2003 and March 2004, the Emerging Issues TaskForce (EITF) reached a consensus on EITF Issue No. 03-01, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments.”The consensus reached requires companies to apply new guidance for evaluatingwhether an investment is other-than-temporarily impaired and also requiresquantitative and qualitative disclosures of debt and equity securities,classified as available-for-sale or held-to-maturity, that are determined to beonly temporarily impaired at the balance sheet date. The Company incorporatedthe required disclosures for investments accounted for under SFAS No. 115, “Accountingfor Certain Investments in Debt and Equity Securities,” as required in thefourth quarter of fiscal year 2004, and chose to early adopt the guidancerelated to evaluating other-than-temporary impairment. Disclosures for allinvestments outside the scope of SFAS No. 115 (cost and equity methodinvestments), of which the Company has none, are required in the fourth quarterof fiscal 2005. Adoption of EITF Issue No. 03-01 will not have an impact on theCompany’s statements of consolidated operations, financial position or cashflows.

 

**5.****                                     ****COMPREHENSIVE (LOSS) INCOME**

 

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

 
| ** **                                                              | ** ** | **Three Months Ended  November 30,** | ** ** | **Six Months Ended  November 30,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                              | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net (loss) income                                                       |       | $                                    | (3,020     | )                                  | $          | (1,284 | ) | $ | (3,437 | ) | $ | 1,956 |   |
| Unrealized (loss) gain on available-for-sale  investments, net of taxes |       | (1                                   | )          | (46                                | )          | 25 |   | (107 | ) |
| Foreign currency translation adjustment                                 |       | 1,014                                |       | 2,049                              |       | 866 |   | 1,279 |   |
| Other comprehensive income                                              |       | 1,013                                |       | 2,003                              |       | 891 |   | 1,172 |   |
| Comprehensive (loss) income                                             |       | $                                    | (2,007     | )                                  | $          | 719 |   | $ | (2,546 | ) | $ | 3,128 |   |
|                                                                         |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |  |

 

**6.****                                     ****RESTRUCTURING**

 

On September 28, 2004, the Company approved a plan designed toenhance the Company’s operating effectiveness and profitability. Under therestructuring plan (Phase I), the Company streamlined structure, consolidatedleadership and reduced long-term costs to realign projected expenses withanticipated revenue levels. The plan included the reduction of approximately100 employees in the United States and the United Kingdom, which in accordancewith SFAS No. 112, *Employers Accounting forPost Employment Benefits - an amendment of FASB Statements No. 5 and 43*,resulted in a charge for severance and related benefits of $3.0 million in thesecond quarter ending November 30, 2004. The reduction included employeeswho work in operations, marketing, sales, research and development, maintenanceand services. All terminations and related cash payments have primarily beencompleted as of November 30, 2004. The remaining cash payments are expected tobe completed during fiscal 2005.

 

The followingtable sets forth the restructuring reserve activity related to the Phase Irestructuring plan and the remaining balances as of November 30, 2004, whichare included in accrued compensation and benefits (in thousands):

 
| ** **                          | ** ** | **Severance  and related  benefits** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|
| Phase I provision for restructuring |       | $                                    | 2,998      |   |
| Cash payments                       |       | (2,282                               | )          |
| Balance, November 30, 2004          |       | $                                    | 716        |   |

 

8

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At November 30, 2004, the Company alsoaccrued for a plan (Phase II) that includes initiatives to further reduce costsand realign projected expenses with anticipated revenue levels.  It includes a reduction of approximately 75employees in the United States and the United Kingdom, and because the Companywas able to determine probability at the end of the quarter, the restructuringresulted in a charge of approximately $2.5 million for severance and relatedbenefits, in accordance with SFAS No. 112. The reduction includes employees who work in sales, research anddevelopment and services. All terminations and related cash payments areexpected to be completed during fiscal 2005.

 

The table belowsets forth the restructuring reserve activity related to the Phase IIrestructuring plan and the remaining balances as of November 30, 2004, which areincluded in accrued compensation and benefits (in thousands):

 
| ** **                           | ** ** | **Severance  and related  benefits** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| Phase II provision for restructuring |       | $                                    | 2,467      |   |
| Cash payments                        |       | —                               |       |
| Balance, November 30, 2004           |       | $                                    | 2,467      |   |

 

As of November 30, 2004, remaining reserve balances related to prioryears’ restructurings consist of $0.1 million in employee related costs and$0.1 million of facility closure liabilities. The employee related costs areincluded in accrued compensation and benefits and are expected to be paid infull during fiscal 2005. The facility closure related costs are included inother accrued liabilities and are expected to be paid in full during fiscal2006.

 

**7.****                                     ****GOODWILL AND INTANGIBLEASSETS**

 

The changes inthe carrying amount of goodwill for the six months ended November 30, 2004 areas follows (in thousands):

 
| Balance as of May 31, 2004               |   | $   | 43,042 |   |
|------------------------------------------|--------|-----|--------|--------|
| Contingent consideration adjustment, net |   | (89 | )      |
| Currency translation effect              |   | 362 |   |
| Balance as of November 30, 2004          |   | $   | 43,315 |   |

 

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

 
| ** **             | ** ** | **November 30, 2004**        | ** ** | **May 31, 2004**              | ** ** |
|------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Maintenance contracts  |       | $                            | 22,940     |                          | $          | 2,310 |   | $ | 20,630 |   | $ | 22,940 |   | $ | 324 |   | $ | 22,616 |   |
| Acquired technology    |       | 14,394                       |       | 6,868                         |       | 7,526 |   | 14,272 |   | 5,183 |   | 9,089 |   |
| Client lists           |       | 11,373                       |       | 3,274                         |       | 8,099 |   | 11,254 |   | 2,594 |   | 8,660 |   |
| Non-compete agreements |       | 646                          |       | 359                           |       | 287 |   | 632 |   | 230 |   | 402 |   |
|                   |       | $                            | 49,353     |                          | $          | 12,811 |   | $ | 36,542 |   | $ | 49,098 |   | $ | 8,331 |   | $ | 40,767 |   |
|                        |            |                              |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Intangible assets are amortized on a straight-line basis over theestimated periods benefited, generally three to five years for acquiredtechnology, four to ten years for client lists, and the term of the agreementfor non-compete agreements.  Intangibleassets for maintenance contracts are amortized under a front end loadedaccelerated amortization schedule, over the estimated term of the agreementsbased on the estimated revenue for the applicable period in relation to thetotal estimated revenue.  Amortizationexpense for the three months ended November 30, 2004 and 2003 was $2.2 millionand $1.0 million, respectively. Amortization expense for the six months ended November 30, 2004 and 2003was $4.4 million and $1.7 million, respectively.  Amortization expense is reported inamortization of acquired intangibles, cost of license fees and cost of servicesin the accompanying Condensed Consolidated Statements of Operations.

 

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

 
| Remainder of Fiscal Year 2005 |   | $     | 4,525  |   |
|-------------------------------|--------|-------|--------|--------|
| Fiscal Year 2006              |   | 8,613 |   |
| Fiscal Year 2007              |   | 6,941 |   |
| Fiscal Year 2008              |   | 4,660 |   |
| Fiscal Year 2009              |   | 3,633 |   |
| Thereafter                    |   | 8,170 |   |
|                          |   | $     | 36,542 |   |

 

**8.****                                     ****COMMITMENTS ANDCONTINGENCIES**

 

The Securities and Exchange Commission (SEC)is conducting an informal investigation regarding the Company’s revenuerecognition practices. The Company’s Audit Committee has recently completed anindependent investigation related to this matter and the Company is fullycooperating with the SEC. In connection with the independent investigation, theCompany has incurred approximately $2.2 million of fees and expenses, of which $0.6million was incurred during the second quarter fiscal 2005.

 

The Company has contingentconsideration agreements related to acquisitions ranging in the aggregate fromzero to $8.6 million, measured over various periods through fiscal 2007,based on the acquired company’s future performance. Contingent consideration isrecorded as additional goodwill.  Duringthe three months ended August 31, 2004, a $0.3 million adjustment to reducegoodwill related to contingent consideration was recorded. During the threemonths ended November 30, 2004, a $0.2 million increase to goodwillconsideration was recorded under the contingent consideration agreements.

 

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.

 

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

 

**9.****                                      SUPPLEMENTAL CASHFLOW INFORMATION**

 

Duringthe six months ended November 30, 2003 the Company paid cash totaling $15.9million for the acquisitions of Apexion Technologies Inc., ClosedloopSolutions, Inc and Numbercraft Limited. A consolidated summary of theacquisitions is as follows (in thousands):

 
| ** **                     | ** ** | **Six Months  Ended**  | ** ** |
|--------------------------------|------------|------------------------|------------|
| ** **                     | ** ** | **November 30,  2003** | ** ** |
| Details of acquisition:        |       |                   |       |
| Fair value of assets           |       | $                      | 20,697     |   |
| Less liabilities assumed       |       | (4,593                 | )          |
| Cash paid                      |       | 16,104                 |       |
| Less cash acquired             |       | (225                   | )          |
| Net cash paid for acquisitions |       | $                      | 15,879     |   |

 

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**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,** | ** ** |
|--------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **               | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                |       |                                 |       |                               |       |   |   |   |   |
| Domestic operations      |       | $                                    | 78,636     |                               | $          | 78,129 |   | $ | 156,607 |   | $ | 160,782 |   |
| International operations |       | 4,363                                |       | 6,136                              |       | 9,077 |   | 11,485 |   |
| Consolidated             |       | $                                    | 82,999     |                               | $          | 84,265 |   | $ | 165,684 |   | $ | 172,267 |   |
|                          |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **               | ** ** | **November 30,  2004** | ** ** | **May 31,  2004** | ** ** |
|--------------------------|------------|------------------------|------------|-------------------|------------|
| Long-lived  assets:      |       |                   |       |              |       |
| Domestic operations      |       | $                      | 78,618     |              | $          | 84,482 |   |
| International operations |       | 16,183                 |       | 16,562            |       |
| Consolidated             |       | $                      | 94,801     |              | $          | 101,044 |   |

 

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

 
| ** **              | ** ** | **Three Months Ended  November 30,** | ** ** | **Six Months Ended  November 30,** | ** ** |
|-------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **              | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Components of revenues: |       |                                 |       |                               |       |   |   |   |   |
| License fees            |       | $                                    | 13,195     |                               | $          | 17,313 |   | $ | 26,446 |   | $ | 39,974 |   |
| Services:               |       |                                 |       |                               |       |   |   |   |   |
| Consulting              |       | 26,904                               |       | 28,600                             |       | 55,656 |   | 56,717 |   |
| Maintenance             |       | 42,900                               |       | 38,352                             |       | 83,582 |   | 75,576 |   |
| Total services          |       | 69,804                               |       | 66,952                             |       | 139,238 |   | 132,293 |   |
| Total revenues          |       | $                                    | 82,999     |                               | $          | 84,265 |   | $ | 165,684 |   | $ | 172,267 |   |
|                         |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |  |  |

 

**11.****                               COMMON STOCK REPURCHASES**

 

In June 2003,the Company’s Board of Directors authorized the repurchase, from time to time, ofup to $50.0 million of the Company’s common shares. Shares were repurchased asmarket conditions warranted either through open market transactions, blockpurchases, private transactions or other means. During the three months endedAugust 31, 2004, the Company completed the authorized stock repurchase plan bypurchasing 1.4 million shares for $10.0 million in cash. Cash proceeds obtainedfrom the maturities of marketable securities, the exercise of employee stockoptions and contributions to the employee stock purchase plan, largely fundedthe share repurchases. The repurchased shares, which remain in treasury, willbe used for general corporate purposes.

 

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**12.****                               INCOME TAXES**

 

The annualeffective tax rate is forecasted quarterly using actual historical informationand forward-looking estimates.  TheCompany’s effective tax rate for the three months ended November 30, 2004 and2003 was 40.2% and 39.0%, respectively. The Company’s effective tax rate forthe six months ended November 30, 2004 and 2003 was 39.9% and 39.0%,respectively.  The change in theeffective tax rates for the three and six months ended November 30, 2004 fromNovember 30, 2003 was primarily due to the impact of changes in actual andforecasted permanent book to tax differences. The Company’s effective tax rate for the year ended May 31, 2004 was47.8%. The change in the effective tax rate from fiscal 2004 was primarily aresult of the Company recording a $1.2 million valuation allowance for netdeferred tax assets in fiscal 2004. The Company determined that no additionalvaluation allowance was necessary for the three and six months ended November30, 2004.

 

The Companyreviews its annual effective tax rate on a quarterly basis and makes necessarychanges. The estimated annual effective tax rate may fluctuate due to changesin forecasted annual operating income; changes to the valuation allowance fornet deferred tax assets; changes to actual or forecasted permanent book to taxdifferences; impacts from future tax settlements with state, federal or foreigntax authorities; or impacts from tax law changes.

 

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

 

**Forward-Looking Statements**

 

In addition to historical information,this Form 10-Q contains forward-looking statements. These forward-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 Price ofOur 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 ExchangeCommission.

 

**Business Overview**

 

We provide business applicationsoftware, services and support that help services organizations to manage,analyze and improve their businesses. The markets we serve include healthcare, government andeducation, retail, financial services (including banking, insurance and otherfinancial services), and professional services. We derive revenues fromlicensing business application software and providing comprehensiveprofessional services, including consulting, training and implementationservices, as well as ongoing client support. Consulting, training andimplementation services are generally not essential to the functionality of oursoftware products, are sold separately and also are available from a number ofthird-party service providers. Accordingly, revenues from these services aregenerally recorded separately from the license fee. Additionally, we generate aportion of our revenues from reselling our business application softwarethrough third-party vendors. We have offices and affiliates serving North andSouth America, Europe, Asia, Africa and Australia.

 

**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 Statesof America. The preparation of these financial statements requires us to makeestimates and assumptions that affect the reported amounts of assets andliabilities at the date of the financial statements, the reported amounts ofrevenues and expenses during the reporting period, and related disclosures ofcontingent assets and liabilities. The Notes to the Condensed ConsolidatedFinancial Statements contained herein describe our significant accountingpolices used in the preparation of the consolidated financial statements. On anon-going basis, we evaluate our estimates, including, but not limited to, thoserelated to bad debt, intangible assets and contingencies. We base our estimateson historical experience and on various other assumptions that we believe to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily 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.

 

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*Revenue Recognition.*    Revenue recognition rules for softwarecompanies 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 must be analyzed to determinethe relative fair value of each element, the amount of revenue to be recognizedupon shipment, if any, and the period and conditions under which deferredrevenue 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 by SOP 98-4, “Deferral of the Effective Date of a Provision of SOP97-2, Software Revenue Recognition” and SOP 98-9, “Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions”, as well asTechnical Practice Aids issued from time to time by the AICPA, and inaccordance with the Securities and Exchange Commission Staff AccountingBulletin (SAB) No. 104, “Revenue Recognition”. We license software undernon-cancelable license agreements and provide related professional services,including consulting, training, and implementation services, as well as ongoingclient support. Consulting, training and implementation services are generallynot essential to the functionality of our software products, are soldseparately and also are available from a number of third-party service providers.Accordingly, revenues from these services are generally recorded separatelyfrom license fees. Software arrangements which include fixed-fee servicecomponents are recognized as the services are performed and the costs toprovide the related services are expensed as incurred. Software arrangementswhich include services that are essential to the functionality of our softwareproducts are recognized using contract accounting and thepercentage-of-completion methodology based on labor hours input. The amount ofjudgment involved in addressing significant assumptions, risks anduncertainties 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 clients. In situations where we do provide rights of return oracceptance clauses, revenue is deferred until the clause expires. Typically,our software license fees are due within a twelve-month period from the date ofshipment. If the fee due from the client is not fixed or determinable,including payment terms greater than twelve months from shipment, revenue isrecognized as payments become due and all other conditions for revenuerecognition have been satisfied. In software arrangements that include rightsto multiple software products, specified upgrades, support or services, weallocate the total arrangement fee among each deliverable using the fair valueof each of the deliverables determined using vendor-specific objectiveevidence. Vendor-specific objective evidence of fair value is determined usingthe price charged when that element is sold separately. In softwarearrangements in which we have fair value of all undelivered elements but not ofa delivered element, we use the residual method to record revenue.  Under the residual method, the fair value ofthe undelivered elements is deferred and the remaining portion of thearrangement fee is allocated to the delivered element(s) and is recognized asrevenue.   In software 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—Revenuesfrom training and consulting services are recognized as services are providedto clients. Revenues from support contracts are deferred and recognized ratablyover the term of the support agreements. Revenues for client support that arebundled with the initial license fee are deferred based on the fair value ofthe bundled support services and recognized ratably over the term of theagreement. Fair value is based on the renewal rate for continued supportarrangements.

 

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*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 our clients.  In judging the adequacy of the allowance fordoubtful accounts, we consider multiple factors including historical bad debtexperience, the general economic environment, the need for specific clientreserves and the aging of our receivables. This provision is included inoperating expenses as a general and administrative expense. A considerableamount of judgment is required in assessing these factors. If the factorsutilized in determining the allowance do not reflect future performance, then achange in the allowance for doubtful accounts would be necessary in the periodsuch determination has been made impacting future results of operations.

 

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

 

***Valuation of Long-Lived and IntangibleAssets and Goodwill***.   Wereview identifiable intangible and other long-lived assets for impairmentwhenever events or changes in circumstances indicate the carrying amount maynot be recoverable. Events or changes in circumstances that indicate thecarrying amount may not be recoverable include, but are not limited to, asignificant decrease in the market value of the business or asset acquired, asignificant adverse change in the extent or manner in which the business orasset acquired is used or a significant adverse change in the business climate.If such events or changes in circumstances are present, the first step of thegoodwill impairment test, used to identify potential impairment, compares thefair value of a reporting unit with its carrying amount, including goodwill. Weoperate as one reporting unit and therefore compare our book value to marketvalue (market capitalization plus a control premium). If our market valueexceeds our book value, goodwill is considered not impaired, thus the secondstep of the impairment test is not necessary. If our book value exceeds ourmarket value, the second step of the goodwill impairment test shall beperformed to measure the amount of impairment loss, if any. The second step ofthe goodwill impairment test, used to measure the amount of impairment loss,compares the implied fair value of the goodwill with the book value of thegoodwill. If the carrying value of the goodwill exceeds the implied fair valueof the goodwill, an impairment loss would be recognized in an amount equal tothe excess. Any loss recognized cannot exceed the carrying amount of goodwill.After a goodwill impairment loss is recognized, the adjusted carrying amount ofgoodwill is the new accounting basis. A subsequent reversal of a previouslyrecognized goodwill impairment loss is prohibited once the measurement of thatloss is completed.

*** ***

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

 

We must assess the likelihood that our net deferred tax assets will berecovered from future taxable income and to the extent we believe that recoveryis not likely, we must establish a valuation allowance. To the extent weestablish a valuation allowance; we must include an expense within the taxprovision in the statement of operations. As of May 31, 2004, the condensedconsolidated balance sheet includes net deferred tax assets in the amount of$27.7 million.  For the year ended May31, 2004, we recorded a valuation allowance of $1.2 million associatedprimarily with federal contribution carryforwards, state net operating loss carryforwardsand certain federal tax credit carryforwards that are estimated to expire priorto our utilization.

 

Our methodology for determining the realizability of our deferred taxassets involves estimates of future taxable income from our core business, theestimated impact of future stock option deductions from outstanding stockoptions, and the expiration dates and amounts of net operating losscarryforwards and other tax credits. These estimates are projected through thelife of the related deferred tax assets based on assumptions which managementbelieves to be reasonable and consistent with current operating results.

 

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

 

After giving consideration to these factors, we concluded that it wasmore likely than not that tax loss carryforwards and other tax credits thatexpire within the next ten years will not be utilized primarily due to theestimated future tax deductions from the exercise of stock options outstandingas of May 31, 2004. As a result, for the year ended May 31, 2004, weestablished a valuation allowance through the provision for income taxes of $1.2million for certain deferred tax assets associated primarily with federalcontribution carryforwards, state net operating loss carryfowards and certainfederal tax credit carryfowards.

 

As of November 30, 2004, we updated our analysis to reflect thenecessary changes in estimates and determined that no additional valuationallowance was necessary.

 

We also concluded that it was more likely than not that the netdeferred tax assets of $27.5 million as of November 30, 2004 as well as theestimated future tax deductions from the exercise of stock options outstandingas of November 30, 2004 would be utilized prior to expiring in greater than tenyears. Based on this conclusion, we would require approximately $118.0 millionin cumulative future taxable income to be generated at various times over thenext twenty years to realize the related net deferred tax assets of $27.5 millionas of November 30, 2004 as well as the estimated future tax deductions from theexercise of stock options outstanding and in-the-money as of November 30, 2004.Additionally, we determined that it is likely the net deferred tax assets willcontinue to increase for the next several years prior to utilization of the taxloss carryforwards and could reach in excess of $40.5 million if the stockoptions outstanding and in-the-money as of November 30, 2004 are exercised.

 

Inthe event that we adjust estimates of future taxable income or tax deductionsfrom the exercise of stock options, or our stock price increases significantlywithout a corresponding increase in taxable income, we may need to establish anadditional valuation allowance, which could materially impact our financialposition and results of operations. We currently expect the second half offiscal 2005 to be profitable; however if it were not, we would likely berequired to fully reserve our deferred tax assets.

 

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

 

**InformalSecurities and Exchange Commission Investigation **

 

                On January 5,2005 we announced that the Securities and Exchange Commission (SEC) isconducting an informal investigation concerning our revenue recognitionpractices. We are fully cooperating with the SEC. In response to a telephonecall from the SEC seeking information from us, our Audit Committee retainedindependent legal counsel, which retained an independent accounting firm, toinvestigate thoroughly the issues identified by the SEC. The Audit Committee’sinvestigation was recently completed.  Followingthe Audit Committee's investigation, we concluded that our financial statementscan continue to be relied upon and need not be restated.  The Audit Committee will share the results ofits independent investigation with the SEC, and we will continue to provideinformation to the SEC as the process proceeds. The SEC has not concluded itsinformal investigation, and it is not bound by the results of our independentinvestigation.

 

                We haveincurred approximately $2.2 million in fees and expenses for this independentinvestigation, of which approximately $0.6 million was incurred during thesecond quarter fiscal 2005. If the SEC initiates a formal investigation orinitiates other actions we would incur additional fees and expenses and mayincur other associated costs or liabilities.

 

 

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**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  November 30,** | ** ** | **Six Months  Ended  November 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                            | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                  |       |                                  |       |                                |       |   |   |   |   |
| Revenues:                             |       |                                  |       |                                |       |   |   |   |   |
| License fees                          |       | 15.9                                  | %          | 20.5                                | %          | 16.0 | % | 23.2 | % |
| Services                              |       | 84.1                                  |       | 79.5                                |       | 84.0 |   | 76.8 |   |
| Total revenues                        |       | 100.0                                 |       | 100.0                               |       | 100.0 |   | 100.0 |   |
|                                  |       |                                  |       |                                |       |   |   |   |   |
| Cost of revenues:                     |       |                                  |       |                                |       |   |   |   |   |
| Cost of license fees                  |       | 3.5                                   |       | 4.8                                 |       | 3.2 |   | 4.7 |   |
| Cost of services                      |       | 44.6                                  |       | 40.0                                |       | 44.4 |   | 38.2 |   |
| Total cost of revenues                |       | 48.1                                  |       | 44.8                                |       | 47.6 |   | 42.9 |   |
|                                  |       |                                  |       |                                |       |   |   |   |   |
| Gross margin                          |       | 51.9                                  |       | 55.2                                |       | 52.4 |   | 57.1 |   |
|                                  |       |                                  |       |                                |       |   |   |   |   |
| Operating expenses:                   |       |                                  |       |                                |       |   |   |   |   |
| Research and development              |       | 18.9                                  |       | 18.1                                |       | 18.9 |   | 17.5 |   |
| Sales and marketing                   |       | 23.6                                  |       | 25.5                                |       | 24.4 |   | 25.9 |   |
| General and administrative            |       | 9.5                                   |       | 12.0                                |       | 9.8 |   | 11.2 |   |
| Restructuring                         |       | 6.6                                   |       | 2.6                                 |       | 3.3 |   | 1.3 |   |
| Amortization of acquired  intangibles |       | 0.5                                   |       | 0.4                                 |       | 0.4 |   | 0.3 |   |
| Total operating expenses              |       | 59.1                                  |       | 58.6                                |       | 56.8 |   | 56.2 |   |
|                                  |       |                                  |       |                                |       |   |   |   |   |
| Operating (loss) income               |       | (7.2                                  | )          | (3.4                                | )          | (4.4 | ) | 0.9 |   |
|                                  |       |                                  |       |                                |       |   |   |   |   |
| Other income                          |       | 1.1                                   |       | 0.9                                 |       | 0.9 |   | 0.9 |   |
| (Loss) income before income  taxes    |       | (6.1                                  | )          | (2.5                                | )          | (3.5 | ) | 1.8 |   |
| (Benefit) provision for income  taxes |       | (2.5                                  | )          | (1.0                                | )          | (1.4 | ) | 0.7 |   |
| Net (loss) income                     |       | (3.6                                  | )%         | (1.5                                | )%         | (2.1 | )% | 1.1 | % |

 

**Three Months Ended November 30, 2004 Compared To Three MonthsEnded November 30, 2003**

 

***Revenues***

 

*Total Revenues.*    Welicense software under non-cancelable license agreements and provide relatedprofessional services including consulting, training, and implementationservices, as well as ongoing client support. Total revenues decreased to$83.0 million for the three months ended November 30, 2004 from$84.3 million for the three months ended November 30, 2003, representing adecrease of 1.5%. The $1.3 million decline in total revenue was attributed to a$4.1 million decline in license fees that was partially offset by a $2.8million increase in services.

 

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*License Fees.*    Revenues from licensefees decreased to $13.2 million for the three months ended November 30, 2004from $17.3 million for the three months ended November 30, 2003,representing a decrease of 23.8%.  The$4.1 million decline in license fees was primarily due to our lower businessactivity and longer customer decision cycles. This was a result of issues impacting us relating to the prospect ofindustry consolidation and priorities such as Sarbanes-Oxley complianceby public companies reducing capital spending on software.  The average overall selling price of ourlicensing transactions for the three months ended November 30, 2004, decreased8.7% while the number of licensing transactions decreased 8.1% as compared tothe same three month period of fiscal 2004. Revenues from license fees as a percentage of total revenues, for thethree months ended November 30, 2004 and 2003 were 15.9% and 20.5%,respectively.

 

*Services.*    Revenuesfrom services increased to $69.8 million for the three months ended November30, 2004 from $67.0 million for the three months ended November 30, 2003,representing an increase of 4.3%.  The$2.8 million increase in services was due to a $4.5 million increase in supportrevenue that was partially offset by a $1.7 million decrease in consultingrevenue. The $4.5 million increase in support revenue was primarily due to a$2.9 million increase in revenue earned on support contracts purchased in April2004.  The $1.6 million decrease inconsulting revenue is consistent with lower business activity in product salesthat directly impacts consulting revenue. Services, as a percentage of total revenues, for the three months ended November30, 2004 and 2003 were 84.1% and 79.5%, respectively.

 

***Cost of Revenues***

 

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

 

Cost of license fees decreased to$2.9 million for the three months ended November 30, 2004 from$4.0 million for the three months ended November 30, 2003, representing adecrease of 27.2%.  The $1.1 milliondecrease was primarily due to a 23.8% decline in license fees as well as adecline in the proportion of third-party product sales in our revenue mix. Costof license fees as a percentage of total revenues for the three months endedNovember 30, 2004 and 2003 were 3.5% and 4.8%, respectively. Gross margin onrevenue from license fees was 78.0% and 77.0% for the three months endedNovember 30, 2004 and 2003, 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 increased to$37.0 million for the three months ended November 30, 2004 from$33.7 million for the three months ended November 30, 2003, representingan increase of 9.8%.  The $3.3 millionincrease in cost of services was primarily due to a $1.6 million increase inemployee related costs, with annual salary increases being the largest singlecontributing factor; a $1.3 million increase in third-party consulting costsresulting from a higher proportion of third-party services in our revenue mix; a$1.0 million increase in amortization related to support contracts purchased inApril 2004; and a $0.2 million increase in third party maintenance costs. Theseincreases were partially offset by a $0.2 million decrease due to general costcontainment activities; a $0.2 million decrease in our sales reward program;and a $0.4 million decrease in other costs, primarily related to travel.  Cost of services as a percentage of totalrevenues for the three months ended November 30, 2004 and 2003 were 44.6% and40.0%, respectively.  Gross margin onservices revenues were 46.9% and 49.6% for the three months ended November 30, 2004 and 2003,respectively.

 

***Operating Expenses***

 

*Research and Development.*    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 increasedto $15.7 million for the three months ended November 30, 2004 from$15.3 million for the three months ended November 30, 2003, representingan increase of 2.6%.  The $0.4 millionincrease in research and development was primarily due to a $1.1 millionincrease in spending on corporate initiatives, including $0.6 million relatedto the third-party offshore software support services agreement we entered intoin February 2004; and a $0.2 million increase in other costs includingannual salary increases.  These increaseswere partially offset by a $0.5 million decrease in incentive compensation; anda $0.4 million reduction in costs as a result of favorable impacts fromrestructuring activities. Research and development expenses as a percentage oftotal revenues for the three months ended November 30, 2004 and 2003 were 18.9%and 18.1%, respectively.

 

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*Sales and Marketing.*   Salesand marketing expenses consist primarily of salaries and incentivecompensation, employee benefits, travel and overhead costs related to our salesand marketing personnel, as well as trade show activities and advertisingcosts.  Sales and marketing expensesdecreased to $19.6 million for the three months ended November 30, 2004 from$21.5 million for the three months ended November 30, 2003, representing adecrease of 8.9%.

 

The $1.9 million decrease in sales andmarketing expenses was primarily due to a $1.1 million favorable impact fromgeneral cost containment activities; a $0.7 million decrease in incentivecompensation; and a $0.7 million decrease in employee related costs drivenprimarily by a reduction in headcount and the favorable impacts fromrestructuring activities.  Thesedecreases were partially offset by a $0.9 million increase in costs associatedwith marketing initiatives, including event spending, public relations costsand industry analyst relations costs. Sales and marketing expenses as a percentage of total revenues for thethree months endedNovember 30, 2004 and 2003 were 23.6% and 25.5%, 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 decreased to $7.9 million for the three months ended November 30,2004 from $10.1 million for the three months ended November 30, 2003,representing a decrease of 21.6%.

 

The$2.2 million decrease in general and administrative expenses was primarily dueto $1.8 million decrease in legal related costs; an $0.8 million decline in baddebt expense reflecting a general decrease in accounts receivable; and a $0.5million reduction in incentive compensation. The decreases were partially offset by a $0.6 million increase in feesand expenses related to the SEC's informal investigation: a $0.3 millionincrease in costs related to corporate initiatives designed to increaseefficiencies; and a $0.3 million increase in costs associated with Sarbanes-Oxleycompliance initiatives. General and administrative expenses as a percentage oftotal revenues for the three months ended November 30, 2004 and 2003 were 9.5%and 12.0%, respectively.

 

*Restructuring.*   OnSeptember 30, 2004, we announced our intent to enact corporate restructureinitiatives. We have approved two separate restructure plans. Both weredesigned to enhance operating effectiveness and profitability.

 

The plan announced onSeptember 30, 2004 (Phase I - restructuring), included initiatives tostreamline structure, consolidate leadership and reduce long-term costs torealign projected expenses with anticipated levels. It included a reduction ofapproximately 100 employees in the United States and the United Kingdom, andresulted in a charge of approximately $3.0 million for severance and relatedbenefits in the second quarter ended November 30, 2004. The reduction includedemployees who work in operations, marketing, sales, research and development,support and services. All terminations and related cash payments have beenprimarily completed as of November 30, 2004. The remaining payments areexpected to be completed during fiscal 2005.

 

At November 30, 2004, wealso accrued for a plan (Phase II - restructuring) that includes initiatives tofurther reduce costs and realign projected expenses with anticipated revenuelevels. It includes a reduction of approximately 75 employees in the UnitedStates and the United Kingdom. Because we were able to determine probability atthe end of the quarter, the restructuring resulted in a charge of approximately$2.5 million for severence and related benefits. The reduction includesemployees who work in sales, research and development and services. Allterminations and related cash payments are expected to be completed duringfiscal 2005.

 

In September 2003, weapproved a restructuring plan to realign projected expenses with anticipatedlower revenue levels and incurred restructuring charges of $2.3 million forseverence and related benefits. The plan included the termination of 93employees in various functions including research and development, general andadministrative and sales and marketing primarily in the United States, all ofwhich were terminated during the three months ended November 30, 2003. Duringthe three months ended November 30, 2003, we made cash payments toterminated employees totaling $2.0 million.

 

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Cash payments for the2004 Phase I restructuring plans  were$2.3 million.  The remaining cashpayments for the 2004 restructuring plans (Phase I and II) are expected to becompleted during fiscal 2005. Although the restructuring plans for fiscal 2003and 2002 have been fully executed, we continue to make cash payments for continuinglease and employee related costs. During the three months ended November 30,2004, we made cash payments totaling approximately $0.04 million. During thethree months ended November 2003, we made cash payments totaling $0.1 million.  The remaining cash payments for the fiscal2003 and 2002 restructuring plans are expected to be completed during fiscal2006.

 

*Amortization of Acquired Intangibles. * Amortizationof acquired intangibles increased to $0.4 million for the three monthsended November 30, 2004 from $0.3 million for the three months ended November30, 2003. The $0.1 million increase in amortization expense is primarily due toincreases in amortization of intangibles associated with companies acquiredsince the prior year period.  Thecompanies acquired include, Closedloop Solutions, Inc. acquired inSeptember 2003 and Apexion Technologies, Inc. acquired inOctober 2003.

 

***Other Income, Net***

 

Other income, net, which is primarilycomprised of interest income earned from cash, marketable securities and longterm investments increased to $0.9 million for the three months ended November30, 2004 from $0.8 million for the three months ended November 30, 2003.  The $0.1 million increase in interest incomeis primarily due to an approximate $39 million increase in average investedbalances compared to the same prior year period.

 

***Benefit for Income Taxes***

 

We recognizedan income tax benefit of $2.0 million for the three months ended November 30,2004 compared to an income tax benefit of $0.8 million for the three monthsended November 30, 2003. Our income tax benefit is based on pretax loss andconsists primarily of federal and state income tax benefits. Our effective taxrate was 40.2% and 39.0% for the three months endedNovember 30, 2004 and 2003, respectively. The increase in the effective taxrate was primarily due to the impact of changes in actual and forecastedpermanent book to tax differences. We review our effective tax rate on aquarterly basis and make necessary changes.

 

**Six Months Ended November 30, 2004 Compared To Six MonthsEnded November 30, 2003**

 

*Total Revenues.*    Total revenues decreased to $165.7 million for the six months ended November30, 2004 from $172.3 million for the six months ended November 30, 2003,representing a decrease of 3.8%.  The$6.6 million decline in total revenue was attributed to a $13.5 million declinein license fees that was partially offset by a $6.9 million increase inservices.

 

*License Fees.*    Revenuesfrom license fees decreased to $26.4 million for the six months ended November30, 2004 from $40.0 million for the six months ended November 30, 2003,representing a decrease of 33.8%.  The$13.5 million decline in license fees was primarily due to our lower businessactivity and longer customer decision cycles. This was a result of issues impacting us related to the prospect ofindustry consolidation and priorities such as Sarbanes-Oxley compliance bypublic companies reducing capital spending on software.  The average overall selling price of ourlicensing transactions for the six months ended November 30, 2004, decreased16.9% while the number of licensing transactions decreased 14.6% as compared tothe same six month period of fiscal 2004. Revenues from license fees as a percentage of total revenues for the sixmonths ended November 30, 2004 and 2003 were 16.0% and 23.2%, respectively.

 

*Services.*    Revenuesfrom services increased to $139.2 million for the six months ended November30, 2004 from $132.3 million for the six months ended November 30, 2003, representingan increase of 5.2%.  The $6.9 millionincrease in services was due to a $8.0 million increase in support revenueoffset by a $1.1 million decrease in consulting revenue. The $8.0 millionincrease in support revenue was primarily due to a $5.8 million increase inrevenue earned on support contracts purchased in April 2004.  The $1.1 million decrease in consultingrevenue is consistent with lower business activity in product sales thatdirectly impacts consulting revenue. Services as a percentage of total revenues for the six months endedNovember 30, 2004 and 2003 were 84.0% and 76.8%, respectively.

 

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***Cost of Revenues***

 

*Cost of License Fees.*   Costof license fees decreased to $5.3 million for the six months ended November 30,2004 from $8.1 million for the six months ended November 30, 2003,representing a decrease of 34.7%.  The$2.8 million decrease was primarily due to a 33.8% decline in license fees aswell as a decline in the proportion of third-party product sales in our revenuemix. Cost of license fees as a percentage of total revenues for the six monthsended November 30, 2004 and 2003 were 3.2% and 4.7%, respectively. Grossmargin on revenue from license fees was 80.0% and 79.8% for the six monthsended November 30, 2004 and 2003, respectively.

 

*Cost ofServices. *Costof services increased to $73.5 million for the six months ended November 30,2004 from $65.8 million for the six months ended November 30, 2003,representing an increase of 11.7%.  The $7.7million increase in cost of services was primarily due to a $3.4 millionincrease in third-party consulting costs as a result of a higher proportion ofthird-party services in our revenue mix; a $2.4 million increase in employeerelated costs, with annual salary increases being the largest singlecontributing factor; a $2.0 million increase in amortization related to supportcontracts purchased in April 2004; and a $0.6 million increase in third-partymaintenance costs.  These increases werepartially offset by a $0.3 million reduction in our sales reward program; and a$0.2 million decrease related to general cost containment activities.  Cost of services as a percentage of totalrevenues for the six months ended November 30, 2004 and 2003 were 44.4%and 38.2%, respectively.  Gross margin onservices revenues were 47.2% and 50.2% for the six months ended November 30,2004 and 2003, respectively.

 

***Operating Expenses***

 

*Research andDevelopment.*    Research anddevelopment expenses increased to $31.3 million for the six months ended November 30,2004 from $30.2 million for the six months ended November 30, 2003,representing an increase of 3.7%. The $1.1 million increase in researchand development was primarily due to $2.1 million in costs associated withcorporate initiatives, including $1.1 million related to the third-partyoffshore software support services agreement we entered into in February 2004;and a $0.6 million increase in employee related costs, with annual salaryincreases being the largest single contributing factor.  These increases were partially offset by a $1.2million decrease in incentive compensation; and a $0.4 million favorable impactfrom restructuring activities. Research and development expenses as apercentage of total revenues for the six months ended November 30, 2004and 2003 were 18.9% and 17.5%, respectively.

 

*Sales and Marketing.*    Sales and marketing expenses decreased to$40.5 million for the six months ended November 30, 2004 from$44.5 million for the six months ended November 30, 2003,representing a decrease of 8.9%.

 

The $4.0 million decrease in sales andmarketing expenses was primarily due to a $2.5 million decrease in  incentive compensation; a $2.4 milliondecrease in employee related costs driven primarily by reductions in headcountand favorable impacts resulting from restructuring activities; a $1.3 millionfavorable impact related to general cost containment activities; a $0.2 milliondecrease in sales reward program costs; and a $0.5 million decrease in othercosts, primarily rent.  These decreaseswere partially offset by a $3.0 million increase in costs primarily associatedwith marketing initiatives, including event spending, public relations costsand industry analyst costs.  Sales andmarketing expenses as a percentage of total revenues for the six months ended November 30,2004 and 2003 were 24.4% and 25.9%, respectively.

 

*General and Administrative.*      General and administrative expenses decreasedto $16.2 million for the six months ended November 30, 2004 from$19.3 million for the six months ended November 30, 2003,representing a decrease of 16.3%.

 

The $3.1 million decrease in general and administrativeexpenses was primarily due to a $2.3 million decrease in legal related costs; a$1.4 million decline in bad debt expense reflecting a general decrease inaccounts receivable; and a $1.3 million reduction in incentive compensation.These decreases were partially offset by a $0.8 million increase due tocorporate initiatives designed to increase efficiencies; a $0.6 millionincrease in fees and expenses related to the SEC's informal investigation; and$0.4 million in costs associated with Sarbanes-Oxley compliance initiatives.  General and administrative expenses as apercentage of total revenues for the six months ended November 30, 2004and 2003 were 9.8% and 11.2%, respectively.

 

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*Restructuring.*   Duringthe six months ended November 30, 2004, we recorded $5.5 million ofrestructuring charges related to corporate restructuring initiatives designedto enhance operating effectiveness and profitability.  Partially offsetting these charges was the reversalof $0.08 million of restructuring charges recorded in previous periods that wedetermined would not be incurred. During the six months ended November 30,2003, we recorded $2.3 million of restructuring charges related to corporaterestructuring initiatives designed to enhance operating effectiveness andprofitability.  Partially offsettingthese charges was the reversal of $0.04 million of restructuring chargesrecorded in previous periods that we determined would not be incurred.  For additional information related to ourrestructuring initiatives refer to the above discussion regarding *Restructuring* under our summary of results of operations forThree Months Ended November 30,2004 Compared To Three Months Ended November 30, 2003.

 

Cash payments for the2004 restructuring plans (Phase I and II) were $2.3 million.  The remaining cash payments for the 2004restructuring plans are expected to be completed during fiscal 2005.  Although the restructuring plans for fiscal2003 and 2002 have been fully executed, we continue to make cash payments forcontinuing lease and employee related costs. During the six months ended November 30,2004, we made cash payments totaling $0.1 million. During the six months ended November 2003,we made cash payments totaling $2.7 million. The remaining cash payments for the fiscal 2003 and 2002 restructuringplans are expected to be completed during fiscal 2006.

 

*Amortization ofAcquired Intangibles. * Amortization of acquiredintangibles increased to $0.8 million for the six months ended November 30,2004 from $0.6 million for the six months ended November 30, 2003. The $0.2million increase in amortization expense is primarily due to increases inamortization of intangibles associated with companies acquired since the prioryear period. The companies acquired include, Numbercraft Limited acquired in July 2003,Closedloop Solutions, Inc. acquired in September 2003 and ApexionTechnologies, Inc. acquired in October 2003.

 

***Other Income, Net***

 

Other income, net, which is primarily comprisedof interest income earned from cash, marketable securities and long-terminvestments decreased to $1.5 million for the six months ended November 30,2004 from $1.6 million for the six months ended November 30, 2003.  The $0.1 million decrease in interest incomeis due to an approximate $28 million decrease in average invested balancescompared to the same prior year period partially offset by an increase in theaverage yield on investments.

 

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

 

We recognized an income tax (benefit) of $2.3 millionfor the six months ended November 30, 2004 compared to an income taxprovision of $1.3 million for the six months ended November 30, 2003. Ourincome tax (benefit) provision is based on pretax (loss) income and consists primarilyof federal and state income taxes. Our effective tax rate was 39.9% and 39.0%for the six months ended November 30, 2004 and 2003, respectively. Thedecrease in the effective tax rate was primarily due to the impact of changesin actual and forecasted permanent book to tax differences. We review oureffective tax rate on a quarterly basis and make necessary changes.

 

**Liquidity and Capital Resources**

 

As of November 30, 2004, we had $208.9million in cash, cash equivalents and marketable securities and $170.8 millionin working capital. Our most significant source of operating cash flows isderived from license fees and services to our clients. Days sales outstanding,which is calculated as net receivables at period end divided by revenue for thequarter times 90 days in the quarter, was 52 and 59 as of November 30,2004 and May 31, 2004, respectively. The decrease was due primarily to adecrease in net receivables as a result of focused collection efforts for thethree months ended November 30, 2004 compared to the fourth quarter offiscal 2004.  Our primary uses of cashfrom operating activities are for employee costs, third-party costs forlicenses and services and facilities.

 

We believe that cash, cash equivalents andmarketable securities will be sufficient to meet our cash requirements forworking capital, capital expenditures and investments for at least the nexttwelve months.

 

***Cash flows fromoperating activities:***

 

Net cash provided by operating activities was$5.9 million for the six months ended November 30, 2004 compared with cashused in operating activities of $0.8 million for the sixmonths ended November 30, 2003. Our net loss of $3.4 million was morethan offset by noncash charges resulting in $12.7 million of cash fromoperations before working capital changes. The net working capital changes of$6.8 million reduced the overall cash provided to $5.9 million. The

 

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significant activity in cash flows from working capital changes for thesix months ended November 30, 2004 primarily related to a $16.1 millionincrease in cash from trade accounts receivable that was offset by an $8.1million decrease in accrued expenses and an $8.8 million decrease in deferredrevenue and client deposits.

 

The $16.1 million increase in cash from tradeaccounts receivable was due to focused collection efforts.  The $8.1 million decrease in accrued expenseswas due to the payment of fiscal 2004 incentive compensation in the firstquarter fiscal 2005.  The $8.8 milliondecrease in deferred revenue and client deposits was primarily due to adecrease in cash received on support billings as a result of a change in clientbilling cycles and other delayed collections. The change in client billing cycles resulted in initially smaller clientinvoices due to pro-rata billings in an effort to get individual multipleclient support billings to a common renewal date. In the first quarter offiscal 2005, we experienced an approximately $18.0 million decrease in deferredmaintenance as a result of the pro-rata billings and other delayedcollections.  In the second quarter offiscal 2005, we experienced a $9.4 million recovery in deferredmaintenance.  The recovery was due to thecatch up on delayed collections for the first quarter fiscal 2005 billings andcollections for the third quarter fiscal 2005 billings that were offset by theimpacts of regular amortization and the impacts from pro-rata billings for thesecond quarter fiscal 2005. The cash collections generated by the pro-ratabillings will fluctuate according to renewal periods identified by our clients.

 

***Cash flows frominvesting activities:***

 

Net cash provided by investing activities was$38.1 million for the six months ended November 30, 2004 compared with$10.3 million for the six months ended November 30, 2003. The increase incash from investing activities for the six months ended November 30, 2004primarily related to $39.7 million of cash received from netmaturities of marketable securities.  Aportion of the cash from maturities of securities was used to invest in shorterterm investments that are included in cash equivalents at November 30, 2004. The remaining proceeds from thematurities and sales of marketable securities were used to augment cash flowsfrom operations and to fund capital expenditures, share repurchases, and torepay debt.

 

***Cash flows fromfinancing activities***:

 

Net cash used in financing activities was$4.3 million for the six months ended November 30, 2004 compared with$11.8 million for the six months ended November 30,2003.  The decrease in cash used infinancing activities for the six months ended November 30, 2004 primarily related to $10.0 million in cash used to fundthe repurchase of common stock that was offset by $3.8 million in cash receivedfrom the exercise of stock option, and $2.4 million in cash received fromemployee contributions to our employee stock purchase plan.

 

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

#### *** ***

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

 

**New Accounting Pronouncements**

 

In December 2004 the FinancialAccounting Standards Board (FASB) issued Statement of Financial AccountingStandard No. 123 (revised 2004), *Share-BasedPayment (SFAS No. 123(R))*. SFAS No. 123(R) requires compensationcost relating to unvested share-based payment transactions that are outstandingas of the effective date and newly issued transactions to be recognized in thefinancial statements. That cost will be measured based on the fair value of theequity or liability instruments issued. SFAS No. 123(R) covers a wide range ofshare-based compensation arrangements including share options, restricted shareplans, performance-based awards, share appreciation rights and employee sharepurchase plans. SFAS No. 123(R) replaces SFAS No. 123, *Accounting for Stock-Based Compensation*(SFAS No. 123), and supersedesAccounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees*(Opinion 25)*.*SFAS No. 123, as originally issued in1995, established a fair-value-based method of accounting for share-basedpayment transactions with employees. However, that Statement permitted entitiesthe option 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. As disclosed in footnote 2, we elected the option of disclosure onlyunder SFAS No. 123.  Public entities willbe required to apply SFAS No. 123(R) as of the first interim or annualreporting period that begins after June 15, 2005, which is effective withour second quarter of fiscal 2006. Based on our significant amount of unvested share-basedpayment awards,

 

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the adoption of this statement is anticipated to have a material impacton our results of operations, however we are currently evaluating the impact ofthis statement.

 

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

 

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

** **

**       The following summarizes our contractualobligations at November 30, 2004, and the effect these contractual obligationsare expected to have on our liquidity and cash flows in future periods (inthousands):**
| ** **               | ** ** | **Total** | ** ** | **1 Year  or Less** | ** ** | **1-3  Years** | ** ** | **3 –5  Years** | ** ** | **More than  5 Years** | ** ** |
|--------------------------|------------|-----------|------------|---------------------|------------|----------------|------------|----------------------|------------|------------------------|------------|
| Operating leases         |       | $         | 77,785     |                | $          | 9,094          |       | $                    | 15,819     |                   | $          | 15,929 |   | $ | 36,943 |   |
| Debt                     |       | 2,155     |       | 2,155               |       | —         |       | —               |       | —                 |       |
| Purchase obligations (1) |       | 9,765     |       | 6,701               |       | 2,896          |       | 168                  |       | —                 |       |
| Total                    |       | $         | 89,705     |                | $          | 17,950         |       | $                    | 18,715     |                   | $          | 16,097 |   | $ | 36,943 |   |

** **

**         **(1) Our purchase obligations represent thosecommitments greater than $50,000. Included in Purchase obligations is $1.6million of fees and expenses incurred in relation to the informal SECinvestigation. We have incurred approximately $2.2 million of fees andexpenses, of which $0.6 million was incurred during the second quarter fiscal2005.

 

**Factors That May Affect Future Results or the Market Price ofOur Stock**

 

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

 

***Economic, political and market conditionscan 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 enterprise software and demand forour solutions are affected by general economic conditions, competition, productacceptance and technology lifecycles. Regional and global changes in the economy, governmental budget deficitsand political instability in certain geographic areas have resulted incompanies, government agencies and educational institutions reducing theirspending for technology projects generally and delaying or reconsideringpotential purchases of our products and related services. The uncertainty posedby the long-term effects of the war in the Middle East, terrorist activitiesand related uncertainties and risks and other geopolitical issues may impactthe purchasing decisions of current or potential customers.   Because of these factors, we believe thelevel of demand for our products and services, and projections of futurerevenue and operating results, will continue to be difficult to predict.  During fiscal 2005 and the prior three fiscalyears, we took measures to realign our projected expenses with anticipatedrevenue, and incurred restructuring charges for severance and related benefits,facility closure or consolidation charges. There is no assurance that these cost reduction measures will besufficient to offset any future revenue declines.  Future declines in demand for our productsand/or services could adversely affect our revenues and operating results.

 

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

 

We face competition from a number ofsoftware companies that have advantages over us due to their larger clientbases, greater name recognition, long operating and product developmenthistory, greater international presence and substantially greater financial,technical and marketing resources. These competitors include well-establishedcompanies such as Oracle Corporation, PeopleSoft, Inc. and SAP AG, all ofwhich have larger installed client bases. If clients or prospects want toreduce the number of their software vendors, they may elect to purchasecompeting products from Oracle, PeopleSoft or SAP since those larger vendorsoffer a wider range of products.  Whencompleted, Oracle’s pending acquisition of PeopleSoft will further increase thesize and scope of Oracle’s business. Furthermore, Oracle is capable of bundling its software with itsdatabase applications, which underlie a significant portion of our installedapplications.

 

In addition, we compete with a varietyof more specialized software and services vendors, including:

 

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•                  Internet (on demand) software vendors;

 

•                  single-industry software vendors;

 

•                  emerging enterprise resource optimizationsoftware vendors;

 

•                  human resource management software vendors;

 

•                  financial management software vendors;

 

•                  merchandising software vendors;

 

•                  services automation software vendors; and

 

•                  outsourced services providers.

 

As a result, the market for enterprisesoftware applications 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. Weexpect competition to persist and intensify, which could negatively impact ouroperating results and market share.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

In addition, to the extent we determinethat new technologies and equipment are required to remain competitive, thedevelopment, acquisition and implementation of such technologies may require usto make significant capital investments. We may not be able to obtain capitalfor these purposes and investments in new technologies may not result incommercially viable technological products. The loss of revenue and increasedcosts to us from such changing technologies would adversely affect our businessand operating results.

 

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

 

We currently account for the issuanceof stock options under APB Opinion No. 25, “Accounting for Stock Issued toEmployees”. The FASB has issued SFAS No. 123(R), “Share-Based Payment” thatchanges the accounting treatment for grants of options, sale of shares underour employee stock purchase plan and other equity instruments issued toemployees. The provisions of SFAS No. 123(R) require us to value equityinstruments issued to employees and liability-classified awards at grant datefair value or based upon certain valuation methods that approximate grant datefair value, and to record those values as compensation expense in our statementof operations. We will be required to expense all outstanding non-vested stockoptions as of September 1, 2005 and stock options and other applicable equityinstruments issued to employees on or after September 1, 2005.  Due to the significant number of outstandingunvested stock options as of September 1, 2005, we expect to incur materialcompensation expense after September 1, 2005 as those options vest or in theevent we decide to accelerate vesting.  Wemay decide to change our stock based compensation plan strategy for futuregrants. This could affect our ability to retain existing employees and attractqualified candidates, and also could increase the cash compensation. Note 2 ofNotes to the Condensed Consolidated Financial Statements describes the pro formaimpact of a change to fair value accounting on earnings and earnings per sharefor the three and six months ended November 30, 2004 and 2003.

 

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

 

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

 

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

 

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

 

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

 

•                  we have historically had a higherconcentration of licensing activities in the second half of our fiscal year dueto the nature of our sales personnel compensation programs, but there is noassurance that this pattern will or will not continue;

 

•                  the size of license transactions can varysignificantly;

 

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

 

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

 

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

 

•                  client evaluations and purchasing processesvary significantly from company to company, and a client’s internal approvaland expenditure authorization process can be difficult and time consuming to

 

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complete, even after selection of a vendor;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

•                  reduced demand for enterprisesoftware solutions;

 

•                  introduction of products by ourcompetitors;

 

•                  lower prices offered by ourcompetitors;

 

•                  changes in budgets and purchasingpriorities; and

 

•                  reduced need to upgrade existingsystems.

 

Our existing and prospective clients routinely require education regardingthe use and benefits of our products. This may also lead to delays in receiving clients’ orders.

 

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

 

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

 

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

 

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

 

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

 

Our ability to maintain or increaseservice revenue primarily depends on our ability to increase the number of ourlicensing agreements. Variances or slowdowns in licensing activity mayadversely impact our consulting, training and support service revenues infuture periods.

 

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

 

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

 

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

 

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

 

While we currently anticipate being able to satisfy therequirements of Section 404 in a timely fashion, we cannot be certain as to thetiming of completion of our evaluation, testing and any required remediationdue in large part to the fact that there is no precedent available by which tomeasure compliance with the new Auditing Standard No. 2.

 

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

 

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

 

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

 

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

 

•                  the transaction includes acceptance criteria;

 

•                  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 client;

 

•                  weare required to accept a fixed-fee services contract; 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 andother specific requirements under accounting principles generally accepted inthe United States for software revenue recognition, we must have very preciseterms in 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 verticles including,government and education and healthcare, often include the terms summarizedabove, the contracts result in revenue deferrals.

 

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

 

The accounting profession andregulatory agencies continue to address and discuss accounting standards andinterpretations covering revenue recognition for the software industry with theobjective 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.

 

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

 

On November 30, 2004, thecondensed consolidated balance sheet includes net deferred tax assets in theamount of $27.5 million. Each quarter, we must assess the likelihood thatour net deferred tax assets will be recovered from future taxable income and tothe extent we believe that recovery is not likely, we must establish avaluation allowance. To the extent we establish a valuation allowance, we mustinclude an expense within the tax provision in the statement of operations. Forthe year ended May 31, 2004, we recorded a valuation allowance of$1.2 million associated primarily with federal contribution carryforwards,state net operating loss carryforwards and certain federal tax creditcarryforwards that are estimated to expire prior to utilization.  No****additionalvaluation allowance was determined to be necessary for the three and six monthsended November 30, 2004.

 

In the event that we adjust our estimates offuture taxable income or tax deductions from the exercise of stock options; orour stock price increases significantly without a corresponding increase intaxable income, we may need to establish an additional valuation allowance, whichcould materially adversely impact our financial position and results ofoperations. We currently expect the second half of fiscal 2005 to be profitable;however if it were not, we would likely be required to fully reserve ourdeferred tax assets.

 

***We may experience fluctuations in quarterly results that couldadversely impact our annual effective tax rate.***

 

Ourrevenues and operating results are difficult to predict and may fluctuatesubstantially from quarter to quarter. Since we must estimate our annual effective tax rate each quarter basedon a combination of actual results and forecasted results of subsequentquarters, any significant change in our actual quarterly or forecasted annualresults may adversely impact the computation of the estimated effective taxrate for the year.  Our estimated annualeffective tax rate may fluctuate for a variety of reasons, including thefollowing:

 

•                  changes in forecasted annual operatingincome;

 

•                  changes to the valuation allowance on netdeferred tax assets;

 

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

 

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

 

•                  impacts from tax law changes.

 

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

 

The trading price of our common stockhas fluctuated significantly in the past. Changes in our business, operationsor prospects, regulatory considerations, general market and economicconditions, or other factors may affect the price of our common stock. Many ofthese factors are beyond our control. The future trading price of our commonstock is likely to be volatile and could be subject to wide price fluctuationsin response to such factors, including:

 

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

 

•                  developments in the pending SEC investigation;

 

•                  announcements of technological innovations byus or our competitors;

 

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

 

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

 

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

 

•                  changes in management;

 

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

 

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

 

•                  the mix of products and services sold by us;

 

•                  the timing of significant orders by us;

 

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

 

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•                  adoption of new accounting standardsaffecting the software industry;

 

•                  acts of war or terrorism; and

 

•                  general market 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 restatedcertificate of incorporation and bylaws, our stockholder rights plan and underDelaware law could make it more difficult for other companies to acquire us,even if doing so would benefit our stockholders.  Our amended and restated certificate ofincorporation and bylaws contain the following provisions, among others, whichmay inhibit an acquisition of our company by a third party:

 

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

 

•                  alimitation on who may call stockholder meetings;

 

•                  aprohibition on stockholder action by written consent; and

 

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

 

The issuance of stock under our stockholder rights plan coulddelay, deter or prevent a takeover attempt that stockholders might consider intheir best interests.  We are alsosubject to provisions of Delaware law that prohibit us from engaging in anybusiness combination with any “interested stockholder,” meaning generally thata stockholder who beneficially owns more than 15% of our stock cannot acquireus for a period of three years from the date this person became an interestedstockholder unless various conditions are met, such as approval of thetransaction by our board of directors. 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 softwareproducts that we incorporate into, or resell with, our own software products.For example, we incorporate Micro Focus International, Inc.’s software in manyof our products and have reseller relationships with Business SoftwareIncorporated, Business Objects, Hyperion Solutions Corporation and other companiesthat allow us to resell their technology with our products. These licenses andother technology licenses are subject to periodic renewal and may includeminimum sales requirements. A failure to renew, or early termination of theselicenses or other technology licenses could adversely impact our business. Ifany 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 complementary software, which may not be available onattractive terms or at all, or may not be as widely accepted or as effective asthe software provided by our existing vendors. Our relationships with these andother third-party vendors are an important part of our business, and adeterioration of these relationships could adversely impact our business andoperating results.

 

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

 

Our ability to achieve revenue growthwill depend in large part on adding new partners to expand our sales channels,as well as leveraging our relationships with existing partners. If ourrelationships with these resellers, system integrators and strategic andtechnology partners deteriorate or terminate, we may lose important sales andmarketing opportunities. Our reseller arrangements may from time to time giverise to disputes regarding marketing strategy, sales of competing products,exclusive territories, payment of fees and client relationships, which couldnegatively affect our business or result in costly litigation.

 

 

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Our current and potential clients oftenrely on third-party systems integrators to implement and manage new andexisting applications. These systems integrators may increase their promotionof competing enterprise software applications, or may otherwise discontinuetheir relationships with or support of us.

 

We also may enter into jointarrangements with strategic partners to develop new software products orextensions, sell our software as part of integrated products or serve as anapplication service provider for our products. Our business may be adverselyaffected if these strategic partners change their business priorities orexperience difficulties in their operations, which in either case causes themto terminate or reduce their support for the joint arrangements. Furthermore,the financial condition of our channel partners impacts our business. If ourpartners are unable to recruit and adequately train a sufficient number ofconsulting personnel to support the implementation of our software products, orthey otherwise do not adequately perform implementation services, we may loseclients. Our relationships with resellers, systems integrators and otherthird-party vendors are an important part of our business, and a deteriorationof these relationships could adversely impact our business and operatingresults.

 

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

 

Our software programs are often deployed in large and complex computernetworks. Because of the nature of these programs, they can only be fullytested for reliability when deployed in networks for long periods of time. Oursoftware programs may contain undetected defects when first introduced or asnew versions are released, and our clients may discover defects in ourproducts, experience corruption of their data or encounter performance orscaling problems only after our software programs have been deployed. As aconsequence, from time to time we have received client complaints followinginstallation of our products. We are currently a defendant in several lawsuitswhere clients have raised these types of issues with our products andservices.  In addition, our products arecombined with products from other vendors. As a result, should problems occur,it may be difficult to identify the source of the problem. Software and datasecurity are becoming increasingly important because of regulatory restrictionson data privacy and the significant legal exposures and business disruptionsstemming from computer viruses and other unauthorized entry or use of computersystems. These conditions increase the risk that we could experience, amongother things:

 

•                  loss of clients;

 

•                  damage to our brand reputation;

 

•                  failure to attract new clients or achievemarket acceptance;

 

•                  diversion of development and servicesresources; and

 

•                  legalactions by our clients or government regulators.

 

In addition, we may not be able toavoid or limit liability for disputes relating to product performance, softwaresecurity or the provision of services. The occurrence of any one or more of theforegoing factors could cause us to experience losses, incur liabilities andadversely affect our operating results.

 

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

 

Maintaining the security of computersand computer networks is an issue of critical importance for our clients.Attempts by experienced computer programmers, or hackers, to penetrate clientnetwork security 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 securityvulnerabilities in our products (or the Internet in general) could lead someclients to seek to reduce or delay future purchases or to purchase competitors’products which are not Internet-based applications. Clients may also increasetheir spending to protect their computer networks from attack, which coulddelay adoption of new technologies. Any of these actions by clients couldadversely affect our revenues.

 

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***We may be required to undertake a costlyredesign of our products if third party software development tools become anindustry standard or cause obsolescence of our toolsets.***

 

While no industry standard exists forsoftware development tools, several companies 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 emerge as a clearly established and widelyaccepted industry standard or if rising expectations of toolsets ofapplications cause our toolsets to become obsolete, we may not be able to adaptour tools appropriately or rapidly enough to satisfy market demand. Inaddition, we could be forced to abandon or modify our tools or to redesign oursoftware products to accommodate the new industry standard. This would beexpensive and time consuming and may adversely affect results of operations andthe financial condition of our business. Our failure to drive or adapt to newand changing industry standards or third party interfaces could adverselyaffect sales of our products and services.

 

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

 

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

 

•                  lack of experience in a particular geographicmarket;

 

•                  significant presence of our competitors ininternational markets;

 

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

 

•                  inability to recruit personnel in a specificcountry or region;

 

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

 

•                  differing foreign technical standards; and

 

•                  regulatory,social, political, labor or economic conditions in a specific country orregion.

 

Our limited international operationscould become subject to unexpected, uncontrollable and rapidly changing eventsand circumstances in addition to those experienced in the United States. Thefollowing factors, among others, could have an adverse effect on our businessand operating results:

 

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

 

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

 

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

 

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

 

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

 

•                  exposureto different legal standards or risks.

 

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***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, weintend to pursue 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,distract our management and workforce, increase our expenses and adverselyaffect our operating results. We may also incorrectly judge the value or worthof an acquired company or business. Furthermore, we may incur significant debtor be required 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 may be unable to compete effectively inthe application service provider market.***

 

We act as an application serviceprovider for only portions of our products acquired through recentacquisitions.  Revenues from thesearrangements are not material. Some businesses choose to access enterprisesoftware applications through application service providers, or ASPs, which arebusinesses that host applications and provide access to software on asubscription basis. Although we occasionally sell our software to ASPs, we havelimited experience selling our solutions to ASPs and may not be successful ingenerating revenue from this distribution channel. Moreover, the use of ASPs asa distribution channel may occur more rapidly than we anticipate, and we maynot be able to compete effectively in this environment.

 

***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 adverseclaims and litigation alleging infringement by us of the intellectual propertyrights of others. Many participants in the technology industry have anincreasing number of patents and patent applications and have frequentlydemonstrated a readiness to take legal action based on allegations of patentand other intellectual property infringement. Further, as the number andfunctionality of our products increase, we believe that we may becomeincreasingly subject to the risk of infringement claims. If infringement claimsare brought against us, these assertions could distract management and we mayhave to expend potentially significant funds and resources to defend or settlesuch claims. If we are found to infringe on the intellectual property rights ofothers, we could be forced to pay significant license fees or damages forinfringement.

 

As part of our standard license agreements, we agreeto indemnify our clients 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. Provisionsattempting to limit our liability in our standard agreements may be invalidatedby unfavorable judicial decisions or by federal, state, local or foreign lawsor ordinances.

 

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

 

We contract for insurance to coverseveral, but not all, potential risks and liabilities. In the current market,insurance coverage is becoming more restrictive, and, when insurance coverageis offered, the deductible for which we are responsible is larger. In light ofthese circumstances, it may become more difficult to maintain insurancecoverage at historical levels, or if such coverage is available, the cost toobtain or maintain it may increase substantially. This may result in our beingforced to bear 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 intellectualproperty, 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,

 

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todate we hold one patent and have filed several patent applications. Outstandingapplications may not result in issued patents and, even if issued, the patentsmay not provide any competitive advantage. Existing copyright laws afford onlylimited protection. Our competitors may independently develop technologies thatare less expensive or better than our technology. In addition, when we licenseour products to clients, we provide source code for many of our products. Wemay also permit clients to obtain access to our other source code through asource code escrow arrangement. This access to our source code may increase thelikelihood of misappropriation or other misuse of our intellectual property. Inaddition, the laws of some countries in which our software products are or maybe licensed do not protect our software products and intellectual propertyrights to the same extent as the laws of the United States. Defending ourrights could be costly.

 

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

 

Business disruptions could affect ourfuture operating results. Our operating results and financial condition couldbe adversely 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 client support systems and loss of financial data and certainclient data, which could adversely impact results of operations and businessfinancial conditions.

 

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

 

Webelieve that our future success depends upon our ability to continue to train,retain, effectively manage and attract highly skilled technical, managerial,sales and marketing personnel. If our efforts in these areas are notsuccessful, our costs may increase, development and sales efforts may behindered and our client service may be degraded.  There is intense competition for personnel inthe software industry. From time to time, we experience difficulties inlocating enough highly qualified candidates in desired geographic locations, orwith required product development or industry-specific expertise.

 

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

 

To help improve margins and gainoperational efficiencies, many software companies have outsourced portions oftheir support or development efforts to companies located in India or otherparts of the world.  In February 2004,we entered into an offshore agreement with a third-party to provide certainsoftware support services for our products. We have limited experience with this type of outsourcing and may beunable to achieve 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.***

 

In October 2004, we announced thatour Founder and Chairman had entered into a selling plan to sell up to1,750,000 shares during the period October 2004 through August 2005.  In October 2004, we also announced thatour Chief Executive Officer and Chief Financial Officer had each entered intoselling plans, to sell up to 400,000 and 219,000 shares, respectively, duringthe period January 2005 through October 2005.  These executive officers may also elect tosell or transfer other shares apart from the selling plans. Other executiveofficers, directors or principal stockholders could also elect to sell theirshares from time to time. A substantial number of shares of our common stockare held by our founders, their family members, a pre-initial public offeringinvestor, current or former employees, officers or directors. Sale of a portionof these shares in the public market, or the perception that such sales arelikely to occur, could depress the market price of our common stock and couldimpair our ability to raise capital through the sale of additional equitysecurities.

 

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

 

As of November 30, 2004, ourexecutive officers, directors, and affiliated entities, in the aggregate,beneficially owned 18.7% of our outstanding common stock. These stockholders,if acting together, would be able to significantly influence all mattersrequiring approval by stockholders, including the election of directors and theapproval of mergers or other business combinations.

 

***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. These assumptionsare subject to significant uncertainties, and as a matter

 

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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 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 Form 10-K for the fiscal year ended May 31, 2004 for a discussion ofmarket risk for the Company.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

As required by Rule 13a-15(b) under the SecuritiesExchange Act of 1934, as amended we conducted an evaluation under thesupervision and with the participation of our management, including the ChiefExecutive Officer and the Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport. Based on that evaluation, the Chief Executive Officer and the ChiefFinancial Officer concluded that our current disclosure controls and proceduresare effective in ensuring that all information required to be disclosed inreports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission rules and forms. There was no significant change in ourinternal control over financial reporting that occurred during the most recentfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

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

 

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS**

 

(b)Use of Proceeds

 

As of November 30, 2004, we held$119.6 million of net proceeds from our initial public offering ininterest-bearing, investment grade securities. During the three months ended November 30,2004, we used approximately $0.9 million for capital expenditures and $0.4million for the repayment of debt.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None

 

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

 

(a)The Company held its AnnualMeeting of Stockholders on October 28, 2004.

 

(b) Pursuant to the election of the seven directorslisted under Item 4 (c)(1), John J. Coughlan, David J. Eskra, David R. Hubers,Thomas G. Hudson, Richard D. Kreysar, H. Richard Lawson, and Michael A. Roccawere each elected as directors for a term of one year.

 

(c)The Company’s stockholders voted on the following matters: 

(1) Election of seven directors. All directorsnominated by the Board of Directors were elected.

 
| **Nominee**        | ** ** | **Votes  For** | ** ** | **Votes  Withheld** |
|--------------------|------------|----------------|------------|---------------------|
| John J. Coughlan   |       | 92,075,547     |       | 3,699,862           |
| David J. Eskra     |       | 92,209,352     |       | 3,566,057           |
| David R. Hubers    |       | 90,912,190     |       | 4,863,219           |
| Thomas G. Hudson   |       | 88,368,054     |       | 7,407,355           |
| Richard D. Kreysar |       | 92,214,522     |       | 3,560,887           |
| H. Richard Lawson  |       | 90,998,806     |       | 4,776,603           |
| Michael A. Rocca   |       | 89,686,215     |       | 6,089,194           |

 

(2) The stockholders ratified the appointment ofPricewaterhouseCoopers LLP as the Company’s independent registered publicaccounting firm for the fiscal year ending May 31, 2005, with 95,168,175affirmative votes, 51,831 negative votes, and 554,864 votes abstaining.

 

**ITEM 5. OTHER INFORMATION**

 

None

 

**ITEM 6.EXHIBITS**

 
| (a)    |   | Exhibits |
|--------|--------|----------|
|   |   |     |
|   |   | 10.18    | Form of Stock Option  Agreement under 2001 Stock Incentive Plan |
|   |   |     |   |
|   |   | 10.19    | Form of Stock Option  Agreement under 2001 Stock Incentive Plan (with additional terms regarding  acceleration of vesting) |
|   |   |     |   |
|   |   | 31.1     | Certification Pursuant  to Section 302 of the Sarbanes-Oxley Act- John J. Coughlan. |
|   |   |     |   |
|   |   | 31.2     | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act-  Robert G. Barbieri. |
|   |   |     |   |
|   |   | 32.1     | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act-  John J. Coughlan. |
|   |   |     |   |
|   |   | 32.2     | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act-  Robert G. Barbieri. |

 

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**SIGNATURES**

 

Pursuant 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 7, 2005 |                       |
|----------------------------|----------------------------|
|                       |                       |
|                       | LAWSON SOFTWARE, INC. |
|                       |                       |   |
|                       | By:                        | /s/ ROBERT G. BARBIERI |   |
|                       |                       | Robert G. Barbieri*Executive Vice President  and Chief Financial and Performance Officer*(principal financial and accounting officer) |

 

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**EXHIBIT INDEX**

 
| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION OF DOCUMENTS**                                                                                              |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                      |
| 10.18               |       | Form of Stock Option Agreement under 2001 Stock Incentive Plan                                                            |
|                |       |                                                                                                                      |
| 10.19               |       | Form of Stock Option Agreement under 2001 Stock Incentive Plan (with  additional terms regarding acceleration of vesting) |
|                |       |                                                                                                                      |
| 31.1                |       | Certification Pursuant to Section 302  of the Sarbanes-Oxley Act- John J. Coughlan.                                  |
|                |       |                                                                                                                      |
| 31.2                |       | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act-  Robert G. Barbieri.                                |
|                |       |                                                                                                                      |
| 32.1                |       | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act-  John J. Coughlan.                                  |
|                |       |                                                                                                                      |
| 32.2                |       | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act-  Robert G. Barbieri.                                |

 

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