**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 August 31, 2004** |
| ** **                                              |
| **or**                                                  |
|                                                    |
| **o**                                                   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                       |
| ** **                                              |
| ** **                                              | **FOR THE TRANSITION PERIOD FROM                                TO                             ** |
| ** **                                              |
| **Commission file number 000-33335**                    |

 

**LAWSON SOFTWARE, INC.**

(Exactname of registrant as specified in 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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Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YES ý NOo

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act). YES ý NOo

 

Thenumber of shares of the registrant’s common stock outstanding as ofOctober 5, 2004 was 98,246,276.

 

 

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**LAWSONSOFTWARE, INC.**

 

**Form 10-QIndex**

 
| **PART I.** | **FINANCIAL INFORMATION**                                                                                  | **3**  |
|-------------|------------------------------------------------------------------------------------------------------------|--------|
| Item 1.     | Financial Statements                                                                                       | 3      |
|        | Condensed  Consolidated Balance Sheets at August 31, 2004 and May 31, 2004                            | 3      |
|        | Condensed Consolidated  Statements of Operations  for the three months ended August 31, 2004 and 2003 | 4      |
|        | Condensed Consolidated  Statements of Cash Flows  for the three months ended August 31, 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                                                 | 32     |
| Item 4.     | Controls and Procedures                                                                                    | 32     |
|        |                                                                                                       |   |
| PART II.    | OTHER INFORMATION                                                                                          | 32     |
| Item 1.     | Legal Proceedings                                                                                          | 32     |
| Item 2.     | Unregistered Sales of Equity Securities and  Use of Proceeds                                               | 33     |
| Item 3.     | Defaults Upon Senior Securities                                                                            | 33     |
| Item 4.     | Submission of Matters to a Vote of Security  Holders                                                       | 33     |
| Item 5.     | Other Information                                                                                          | 33     |
| Item 6.     | Exhibits                                                                                                   | 34     |
| SIGNATURES  |                                                                                                       | 35     |

 

2

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**PART I. FINANCIAL INFORMATION**

** **

**ITEM1.  FINANCIAL STATEMENTS**

** **

**LAWSONSOFTWARE, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(in thousands)**

**(unaudited)**

 
| ** **                                      | ** ** | **August   31,  2004** | ** ** | **May 31,  2004** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-------------------|------------|
| ASSETS                                          |       |                        |       |              |       |
| Current assets:                                 |       |                        |       |              |       |
| Cash and cash equivalents                       |       | $                           | 112,075    |              | $          | 79,996 |   |
| Marketable securities                           |       | 65,032                      |       | 120,465           |       |
| Trade accounts receivable, net                  |       | 55,920                      |       | 65,236            |       |
| Deferred income taxes                           |       | 15,311                      |       | 15,311            |       |
| Prepaid expenses and other assets               |       | 20,635                      |       | 20,450            |       |
|                                            |       |                        |       |              |       |
| Total current assets                            |       | 268,973                     |       | 301,458           |       |
|                                            |       |                        |       |              |       |
| Long-term marketable securities                 |       | 7,369                       |       | 8,521             |       |
| Property and equipment, net                     |       | 15,978                      |       | 17,235            |       |
| Goodwill                                        |       | 42,606                      |       | 43,042            |       |
| Other intangible assets, net                    |       | 38,516                      |       | 40,767            |       |
| Deferred income taxes                           |       | 12,183                      |       | 12,344            |       |
| Other assets                                    |       | 195                         |       | 231               |       |
|                                            |       |                        |       |              |       |
| Total assets                                    |       | $                           | 385,820    |              | $          | 423,598 |   |
|                                            |       |                        |       |              |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY       |       |                        |       |              |       |
| Current liabilities:                            |       |                        |       |              |       |
| Current portion of long-term debt               |       | $                           | 1,235      |              | $          | 1,652 |   |
| Accounts payable                                |       | 10,836                      |       | 14,391            |       |
| Accrued compensation and benefits               |       | 17,745                      |       | 25,086            |       |
| Other accrued liabilities                       |       | 9,520                       |       | 11,898            |       |
| Deferred revenue and client deposits            |       | 64,870                      |       | 83,095            |       |
| Total current liabilities                       |       | 104,206                     |       | 136,122           |       |
| Long-term debt, less current portion            |       | 996                         |       | 990               |       |
| Other long-term liabilities                     |       | 3,438                       |       | 3,600             |       |
| Total liabilities                               |       | 108,640                     |       | 140,712           |       |
| Commitments and contingencies (Note 8)          |       |                        |       |              |       |
| Stockholders’ equity:                      |       |                        |       |              |       |
| Preferred stock                                 |       | —                      |       | —            |       |
| Common stock                                    |       | 1,106                       |       | 1,099             |       |
| Additional paid-in capital                      |       | 330,950                     |       | 327,715           |       |
| Treasury stock, at cost                         |       | (74,240                     | )          | (65,555           | )          |
| Deferred stock-based compensation               |       | (499                        | )          | (774              | )          |
| Retained earnings                               |       | 17,055                      |       | 17,471            |       |
| Accumulated other comprehensive income          |       | 2,808                       |       | 2,930             |       |
| Total stockholders’ equity                 |       | 277,180                     |       | 282,886           |       |
| Total liabilities and stockholders’ equity |       | $                           | 385,820    |              | $          | 423,598 |   |

 

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

 

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**LAWSON SOFTWARE, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                             | ** ** | **Three Months Ended**    | ** ** |
|--------------------------------------------------------|------------|---------------------------|------------|
| ** **                                             | ** ** | **August 31,  2004** | ** ** | **August 31,  2003** | ** ** |
| Revenues:                                              |       |                      |       |   |   |
| License fees                                           |       | $                         | 13,251     |   | $ | 22,661 |   |
| Services                                               |       | 69,434                    |       | 65,341 |   |
| Total revenues                                         |       | 82,685                    |       | 88,002 |   |
| Cost of revenues:                                      |       |                      |       |   |   |
| Cost of license fees                                   |       | 2,375                     |       | 4,091 |   |
| Cost of services                                       |       | 36,456                    |       | 32,101 |   |
| Total cost of revenues                                 |       | 38,831                    |       | 36,192 |   |
|                                                   |       |                      |       |   |   |
| Gross profit                                           |       | 43,854                    |       | 51,810 |   |
|                                                   |       |                      |       |   |   |
| Operating expenses:                                    |       |                      |       |   |   |
| Research and development                               |       | 15,647                    |       | 14,935 |   |
| Sales and marketing                                    |       | 20,957                    |       | 22,998 |   |
| General and administrative                             |       | 8,250                     |       | 9,225 |   |
| Restructuring                                          |       | (75                       | )          | (40 | ) |
| Amortization of acquired intangibles                   |       | 385                       |       | 245 |   |
| Total operating expenses                               |       | 45,164                    |       | 47,363 |   |
|                                                   |       |                      |       |   |   |
| Operating (loss) income                                |       | (1,310                    | )          | 4,447 |   |
|                                                   |       |                      |       |   |   |
| Other income:                                          |       |                      |       |   |   |
| Interest income                                        |       | 657                       |       | 882 |   |
| Interest expense                                       |       | (13                       | )          | (18 | ) |
| Total other income                                     |       | 644                       |       | 864 |   |
|                                                   |       |                      |       |   |   |
| (Loss) income before income taxes                      |       | (666                      | )          | 5,311 |   |
| (Benefit) provision for income taxes                   |       | (249                      | )          | 2,071 |   |
| Net (loss) income                                      |       | $                         | (417       | ) | $ | 3,240 |   |
|                                                   |       |                      |       |   |   |
| Net (loss) income per share:                           |       |                      |       |   |   |
| Basic                                                  |       | $                         | 0.00       |   | $ | 0.03 |   |
| Diluted                                                |       | $                         | 0.00       |   | $ | 0.03 |   |
| Shares used in computing net (loss) income  per share: |       |                      |       |   |   |
| Basic                                                  |       | 98,294                    |       | 98,465 |   |
| Diluted                                                |       | 98,294                    |       | 107,108 |   |

 

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

 

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**LAWSON SOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**(unaudited)**

 
| ** **                                                                                          | ** ** | **Three Months Ended**    | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                                          | ** ** | **August 31,  2004** | ** ** | **August 31,  2003** | ** ** |
| **Cash flows from  operating activities:**                                                          |       |                      |       |   |   |
| Net (loss) income                                                                                   |       | $                         | (417       | ) | $ | 3,240 |   |
| Adjustments to reconcile net (loss) income  to net cash (used in) provided by operating activities: |       |                      |       |   |   |
| Depreciation and amortization                                                                       |       | 4,232                     |       | 2,708 |   |
| Deferred income taxes                                                                               |       | 161                       |       | — |   |
| Provision for doubtful accounts                                                                     |       | 625                       |       | 1,204 |   |
| Tax benefit from stockholder transactions                                                           |       | 1,067                     |       | 2,126 |   |
| Tax commitment from exercise of stock  options                                                      |       | (651                      | )          | (587 | ) |
| Amortization of stock-based compensation                                                            |       | 22                        |       | 699 |   |
| Amortization of discounts on notes payable                                                          |       | 22                        |       | — |   |
| Amortization of discount and accretion of  premium on marketable securities                         |       | 58                        |       | 380 |   |
| Restructuring                                                                                       |       | (75                       | )          | (40 | ) |
| Changes in operating assets and  liabilities, net of effect from acquisitions:                      |       |                      |       |   |   |
| Trade accounts receivable                                                                           |       | 8,691                     |       | (1,702 | ) |
| Prepaid expenses and other assets                                                                   |       | (164                      | )          | 2,158 |   |
| Accounts payable                                                                                    |       | (3,555                    | )          | (4,152 | ) |
| Accrued and other liabilities                                                                       |       | (8,587                    | )          | (4,451 | ) |
| Income taxes payable                                                                                |       | (988                      | )          | — |   |
| Deferred revenue and client deposits                                                                |       | (18,385                   | )          | (416 | ) |
| Net cash  (used in) provided by operating activities                                                |       | (17,944                   | )          | 1,167 |   |
|                                                                                                |       |                      |       |   |   |
| **Cash flows from  investing activities:**                                                          |       |                      |       |   |   |
| Cash paid in conjunction with acquisitions,  net of cash acquired                                   |       | —                    |       | (3,739 | ) |
| Purchases of marketable securities                                                                  |       | (14,400                   | )          | (7,629 | ) |
| Sales and maturities of marketable  securities                                                      |       | 70,968                    |       | 40,245 |   |
| Purchases of property and equipment                                                                 |       | (833                      | )          | (1,320 | ) |
| Net cash provided by investing activities                                                           |       | 55,735                    |       | 27,557 |   |
|                                                                                                |       |                      |       |   |   |
| **Cash flows from  financing activities:**                                                          |       |                      |       |   |   |
| Principal payments on debt                                                                          |       | (105                      | )          | (272 | ) |
| Exercise of stock options                                                                           |       | 2,025                     |       | 2,444 |   |
| Issuance of treasury shares for employee  stock purchase plan                                       |       | 2,368                     |       | 2,175 |   |
| Repurchase of common stock                                                                          |       | (10,000                   | )          | (5,288 | ) |
| Net cash used in financing activities                                                               |       | (5,712                    | )          | (941 | ) |
| Increase in cash and cash equivalents                                                               |       | 32,079                    |       | 27,783 |   |
| Cash and cash equivalents at beginning of  period                                                   |       | 79,996                    |       | 153,071 |   |
| Cash and cash equivalents at end of period                                                          |       | $                         | 112,075    |   | $ | 180,854 |   |

 

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

 

5

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**LAWSONSOFTWARE, INC.NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(unaudited)**

 

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

 

Theunaudited condensed consolidated financial statements included herein reflectall adjustments, in the opinion of management, necessary to fairly state LawsonSoftware, Inc.’s (the Company’s) consolidated financial position, resultsof operations and cash flows for the periods presented. These adjustmentsconsist of normal, recurring items. The preparation of financial statements inconformity with generally accepted accounting principles in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts therein. Due to the inherent uncertainty involved inmaking estimates, actual results in future periods may differ from thoseestimates. The results of operations for the period ended August 31, 2004are not necessarily indicative of the results to be expected for any subsequentquarter or 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 certain informationincluded in the Company’s annual financial statements and notes. Theaccompanying interim condensed consolidated financial statements should be readin conjunction with the financial statements and related notes included in theCompany’s Annual Report on Form 10-K filed with the Securities andExchange Commission for the fiscal year ended May 31, 2004.

 

**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. Hadcompensation cost for the Company’s stock options been recognized based on thefair value at the grant date consistent with the provisions of SFASNo. 123, the Company’s net (loss) income would have been adjusted to thepro forma amounts indicated below (in thousands, except per share amounts):

 
| ** **                   | ** **                                                                                                     | **Three Months  Ended  August 31,** | ** ** |
|------------------------------|----------------------------------------------------------------------------------------------------------------|------------------------------------------|------------|
| ** **                   | ** **                                                                                                     | **2004**                                 | ** ** | **2003** | ** ** |
| Net (loss) income:           |                                                                                                           |                                     |       |   |   |
|                         | As reported                                                                                                    |                                     | $          | (417 | ) | $ | 3,240 |   |
| Add:                         | Stock-based employee compensation expense included  in reported net (loss) income, net of taxes                |                                     | 14         |   | 426 |   |
| Deduct:                      | Total stock-based compensation expense determined  under fair value based method for all rewards, net of taxes |                                     | (1,993     | ) | (1,584 | ) |
| Pro forma  net (loss) income |                                                                                                           | $                                        | (2,396     | ) | $ | 2,082 |   |
| Net (loss) income per share: |                                                                                                           |                                     |       |   |   |
| Basic:                       |                                                                                                           |                                     |       |   |   |
| As reported                  |                                                                                                           | $                                        | 0.00       |   | $ | 0.03 |   |
| Pro forma                    |                                                                                                           | $                                        | (0.02      | ) | $ | 0.02 |   |
| Diluted:                     |                                                                                                           |                                     |       |   |   |
| As reported                  |                                                                                                           | $                                        | 0.00       |   | $ | 0.03 |   |
| Pro forma                    |                                                                                                           | $                                        | (0.02      | ) | $ | 0.02 |   |

 

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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 share amounts).

 
| ** **                                    | ** ** | **Three Months Ended  August 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                | ** ** | **2003** | ** ** |
| Basic earnings per share computation:         |       |                                    |       |   |   |
|                                          |       |                                    |       |   |   |
| Net (loss) income                             |       | $                                       | (417       | ) | $ | 3,240 |   |
| Weighted average common shares – basic   |       | 98,294                                  |       | 98,465 |   |
| Basic net (loss) income per share             |       | $                                       | 0.00       |   | $ | 0.03 |   |
|                                          |       |                                    |       |   |   |
| Diluted earnings per share computation:       |       |                                    |       |   |   |
|                                          |       |                                    |       |   |   |
| Net (loss) income                             |       | $                                       | (417       | ) | $ | 3,240 |   |
| Shares calculation:                           |       |                                    |       |   |   |
| Weighted average common shares                |       | 98,294                                  |       | 98,465 |   |
| Effect of dilutive stock options              |       | —                                  |       | 8,021 |   |
| Effect of dilutive warrants                   |       | —                                  |       | 622 |   |
| Weighted average common shares – diluted |       | 98,294                                  |       | 107,108 |   |
| Diluted net (loss) income per share           |       | $                                       | 0.00       |   | $ | 0.03 |   |

 

Potential dilutiveshares of common stock excluded from the diluted net (loss) income per sharecomputations were 19.6 million and 0.2 million as of August 31, 2004and 2003, respectively. Certain potential dilutive shares of common stock wereexcluded from the diluted earnings per share computation because their exerciseprices were greater than the average market price of the common shares duringthe period and were therefore not dilutive. In addition, potential dilutiveshares of common stock were excluded from periods with a net loss because theywere anti-dilutive.

 

**4.****                                     ****NEW ACCOUNTING PRONOUNCEMENT**

 

In November 2003 andMarch 2004, the Emerging Issues Task Force (EITF) reached a consensus onEITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments”. The consensus reached requires companiesto apply new guidance for evaluating whether an investment isother-than-temporarily impaired and also requires quantitative and qualitativedisclosures of debt and equity securities, classified as available-for-sale orheld-to-maturity, that are determined to be only temporarily impaired at thebalance sheet date. The Company incorporated the required disclosures forinvestments accounted for under SFAS No. 115, “Accounting for CertainInvestments in Debt and Equity Securities,” as required in the fourth quarterof fiscal year 2004, and chose to early adopt the guidance related toevaluating other-than-temporary impairment. Disclosures for all investmentsoutside the scope of SFAS No. 115 (cost and equity method investments), ofwhich the Company has none, are required in the fourth quarter of fiscal 2005.Adoption of EITF Issue No. 03-01 will not have an impact on the Company’sstatements of consolidated operations, financial position or cash flows.

 

7

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

 

Thefollowing table presents the calculation of comprehensive (loss) income (inthousands, except per share amounts): 

 
| ** **                                                              | ** ** | **Three Months Ended  August 31,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                              | ** ** | **2004**                                | ** ** | **2003** | ** ** |
| Net (loss) income                                                       |       | $                                       | (417       | ) | $ | 3,240 |   |
| Unrealized gain (loss) on  available-for-sale investments, net of taxes |       | 26                                      |       | (60 | ) |
| Foreign currency translation adjustment                                 |       | (148                                    | )          | (770 | ) |
| Other comprehensive loss                                                |       | (122                                    | )          | (830 | ) |
| Comprehensive (loss) income                                             |       | $                                       | (539       | ) | $ | 2,410 |   |

 

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

 

Duringthe three months ended August 31, 2004 and 2003, the Company recordedreversals of restructuring charges of $0.08 million and $0.04 million,respectively, for certain employee costs it determined would not be incurred.

 

***Fiscal 2004 Restructuring***

 

Duringfiscal 2004, the Company approved a restructuring plan to realign projectedexpenses with anticipated lower revenue levels and incurred restructuringcharges of $2.3 million for severance and related benefits. The fiscal 2004plan resulted in the termination of 93 employees in the second quarter offiscal 2004, from various functions including research and development, generaland administrative and sales and marketing, primarily in the United States. TheCompany expects to pay all remaining termination benefits during fiscal 2005**.**

 

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

 
| ** **                    | ** ** | **Severance  and related  benefits** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|
| Balance May 31, 2004          |       | $                                    | 57         |   |
| Adjustment to provision       |       | (26                                  | )          |
| Balance, August 31, 2004 |       | $                                    | 31         |   |

 

***Fiscal 2003 Restructuring***

 

Duringfiscal 2003, the Company approved a restructuring plan to realign projectedexpenses with anticipated lower revenue levels and incurred restructuringcharges of $5.8 million, which included $4.7 million of severance and relatedbenefits and $1.1 million for the closure and consolidation of facilities.The plan included the termination of 244 employees in various functionsincluding administrative, professional and managerial in the United States,Canada and Europe, all of which were terminated during the second quarter offiscal 2003. The Company expects to pay all remaining termination benefitsduring fiscal 2005.

 

8

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Thefollowing table sets forth the restructuring reserve activity related to thefiscal 2003 restructuring plan and the remaining balances as of August 31,2004, which are included in other accrued liabilities (in thousands):

 
| ** **                    | ** ** | **Severance  and related  benefits** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|
| Balance, May 31, 2004         | ** ** | $                                    | 128        |   |
| Cash payments                 | ** ** | (29                                  | )          |
| Adjustment to provision       | ** ** | (49                                  | )          |
| Balance, August 31, 2004 | ** ** | $                                    | 50         |   |

 

***Fiscal 2002 Restructuring***

 

Duringfiscal 2002, the Company approved a restructuring plan in response to thegeneral economic downturn and incurred restructuring charges of $3.3 million,which included $3.0 million for severance related benefits and $0.3 million forthe closure of a leased office facility. The plan included the termination andpayment of severance related benefits for 111 employees in various functionsincluding administrative, professional, and managerial, primarily in the U.S.All terminations and related payments were completed during the first quarterof fiscal 2003. Cash payments relating to facility closure liabilities areexpected to extend through June 2005.

 

Thefollowing table sets forth the restructuring reserve activity related to thefiscal 2002 restructuring plan and the remaining balances as of August 31,2004, which are included in other accrued liabilities (in thousands):

 
| ** **                    | ** ** | **Facilities** | ** ** |
|-------------------------------|------------|----------------|------------|
| Balance, May 31, 2004         | ** ** | $              | 179        |   |
| Cash payments                 | ** ** | (26            | )          |
| Balance, August 31, 2004 | ** ** | $              | 153        |   |

 

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

 

                The changes in the carrying amount of goodwillfor the three months ended August 31, 2004 are as follows (in thousands):

 
| Balance as of May 31, 2004          |   | $      | 43,042 |   |
|-------------------------------------|--------|--------|--------|--------|
| Goodwill acquired during the period |   | — |   |
| Contingent consideration adjustment |   | (289   | )      |
| Currency translation effect         |   | (147   | )      |
| Balance as of August 31, 2004  |   | $      | 42,606 |   |

 

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

 
| ** **             | ** ** | **August 31, 2004**     | ** ** | **May 31, 2004**              | ** ** |
|------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Maintenance contracts  |       | $                            | 22,940     |                          | $          | 1,309 |   | $ | 21,631 |   | $ | 22,940 |   | $ | 324 |   | $ | 22,616 |   |
| Acquired technology    |       | 14,225                       |       | 5,977                         |       | 8,248 |   | 14,272 |   | 5,183 |   | 9,089 |   |
| Client lists           |       | 11,208                       |       | 2,908                         |       | 8,300 |   | 11,254 |   | 2,594 |   | 8,660 |   |
| Non-compete agreements |       | 627                          |       | 290                           |       | 337 |   | 632 |   | 230 |   | 402 |   |
|                   |       | $                            | 49,000     |                          | $          | 10,484 |   | $ | 38,516 |   | $ | 49,098 |   | $ | 8,331 |   | $ | 40,767 |   |

 

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** **

Intangibleassets are amortized on a straight-line basis over the estimated periodsbenefited, generally three to five years for acquired technology, four to tenyears for client lists, and the term of the agreement for non-competeagreements and maintenance contracts. For the three months endedAugust 31, 2004 and 2003, amortization expense for intangible assets was$2.2 million and $0.7 million, respectively.

 

Theestimated future amortization expense for identified intangible assets is asfollows (in thousands):

 
| 2005       |   | $     | 6,499  |   |
|------------|--------|-------|--------|--------|
| 2006       |   | 8,613 |   |
| 2007       |   | 6,941 |   |
| 2008       |   | 4,660 |   |
| 2009       |   | 3,633 |   |
| Thereafter |   | 8,170 |   |
|       |   | $     | 38,516 |   |

 

 

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

 

TheCompany has contingent consideration agreements related to acquisitions rangingin the aggregate from zero to $9.8 million, measured over various periodsthrough fiscal 2007, based on the acquired company’s future performance.Contingent consideration is recorded as additional goodwill. During the threemonths ended August 31, 2004 no additional consideration had been earnedunder these agreements.

 

The Company is involved in variousclaims and legal actions in the normal course of business. Management is of theopinion that the outcome of such legal actions will not have a significantadverse effect on the Company’s financial position, results of operations orcash flows. Notwithstanding management’s belief, an unfavorable resolution ofsome or all of these matters could materially affect the Company’s futureresults of operations 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. Management is of the opinion that the agreement will not beterminated within the twenty-four month period.

 

**9.****                                      SUPPLEMENTALCASH FLOW INFORMATION**

 

Cashpaid for the acquisition of Numbercraft Limited (“Numbercraft”) during thethree months ended August 31, 2003 (in thousands):

 
| ** **                    | ** ** | **Three Months  Ended**  | ** ** |
|-------------------------------|------------|--------------------------|------------|
| ** **                    | ** ** | **August 31, 2003** | ** ** |
| Details of acquisition:       |       |                     |       |
| Fair   value of assets   |       | $                        | 5,580      |   |
| Less liabilities assumed      |       | (1,715                   | )          |
| Cash paid                     |       | 3,865                    |       |
| Less cash acquired            |       | (126                     | )          |
| Net cash paid for acquisition |       | $                        | 3,739      |   |

 

10

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

 

TheCompany views its operations and manages its business as one segment, thedevelopment and marketing of computer software and related services. Factorsused to identify the Company’s single operating segment include the financialinformation available for evaluation by the chief operating decision maker inmaking decisions about how to allocate resources and assess performance.  The Company markets its products and servicesthrough the Company’s offices in the United States and its wholly-ownedbranches and subsidiaries operating in Canada, the United Kingdom, France andthe Netherlands. The following table presents revenues and long-lived assetssummarized by geographic region (in thousands):

 
| ** **               | ** ** | **Three Months Ended  August 31,** | ** ** |
|--------------------------|------------|-----------------------------------------|------------|
| ** **               | ** ** | **2004**                                | ** ** | **2003** | ** ** |
| Revenues:                |       |                                    |       |   |   |
| Domestic operations      |       | $                                       | 77,971     |   | $ | 82,653 |   |
| International operations |       | 4,714                                   |       | 5,349 |   |
| Consolidated             |       | $                                       | 82,685     |   | $ | 88,002 |   |
|                     |       |                                    |       |   |   |
| ** **               | ** ** | **August 31,  2004**               | ** ** | **May 31,  2004** | ** ** |
| Long-lived assets:       |       |                                    |       |   |   |
| Domestic operations      |       | $                                       | 81,569     |   | $ | 84,482 |   |
| International operations |       | 15,531                                  |       | 16,562 |   |
| Consolidated             |       | $                                       | 97,100     |   | $ | 101,044 |   |

 

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

 
| ** **              | ** ** | **Three Months Ended  August 31,** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|
| ** **              | ** ** | **2004**                                | ** ** | **2003** | ** ** |
| Components of revenues: |       |                                    |       |   |   |
| License fees            |       | $                                       | 13,251     |   | $ | 22,661 |   |
| Services:               |       |                                    |       |   |   |
| Maintenance             |       | 40,682                                  |       | 37,224 |   |
| Consulting              |       | 28,752                                  |       | 28,117 |   |
| Total services          |       | 69,434                                  |       | 65,341 |   |
| Total revenues          |       | $                                       | 82,685     |   | $ | 88,002 |   |

 

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

 

In June 2003, the Company’s Board ofDirectors authorized the repurchase, from time to time, up to $50.0 million ofthe Company’s common shares. Shares were repurchased as market conditionswarranted either through open market transactions, block purchases, private transactionsor other means. During the three months ended August 31, 2004, the Companycompleted the authorized stock repurchase plan by purchasing the remaining 1.4million shares for $10.0 million in cash. Cash proceeds obtained from thematurities 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.

 

11

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** **

**12.****                               INCOMETAXES**

 

The annual effective tax rate is forecastedquarterly using actual historical information and forward-lookingestimates.  The Company’s effective taxrate was 37.4% for the three months ended August 31, 2004, 47.8% forfiscal 2004, and 39.0% for the three months ended August 31, 2003.  The change in the effective tax rate from thethree months ended August 31, 2003 was primarily due to the impact ofchanges in actual and forecasted permanent book to tax differences.  The change in the effective tax rate fromfiscal 2004 was primarily a result of the Company recording a $1.2 millionvaluation allowance for net deferred tax assets in fiscal 2004. The Companydetermined no additional valuation allowance was necessary during the threemonths ended August 31, 2004.

 

The Company reviews its annual effective taxrate on a quarterly basis and makes necessary changes. The estimated annualeffective tax rate may fluctuate due to changes in forecasted annual operatingincome; changes to the valuation allowance for net deferred tax assets; changesto actual or forecasted permanent book to tax differences; impacts from futuretax settlements with state, federal or foreign tax authorities; or impacts fromtax law changes.

 

**13.****                              ****SUBSEQUENT EVENT**

 

On September 28,2004, the Company’s Board of Directors approved management’s plan, developed inlate September 2004, that is designed to enhance the Company’s operatingeffectiveness and profitability. Under the plan, the Company will streamline structure,consolidate leadership and reduce long-term costs to realign projected expenseswith anticipated revenue levels. The plan includes a reduction of approximately100 employees in the United States and the United Kingdom, which will result ina charge for severance and related benefits of approximately $2.5 million inthe second quarter ending November 30, 2004. The reduction includesemployees who work in operations, marketing, sales, research and development,maintenance and services. All terminations and related payments are expected tobe completed during fiscal 2005.

 

Management of the Companyis continuing to evaluate other cost reduction opportunities that may result inadditional charges in the second quarter ending November 30, 2004 andduring the remainder of fiscal 2005. Management has not completed itsevaluation and plan, and therefore the probability, nature, amount and timingof any additional charges are not currently determinable.

 

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

 

**Forward-Looking Statements**

 

Inaddition to historical information, this Form 10-Q containsforward-looking statements. These forward-looking statements are made inreliance upon the safe harbor provisions of the Private Securities LitigationReform Act of 1995.  The words “believe,”“expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “should”and similar expressions are intended to identify “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995.Forward looking statements include, among others, statements about our futureperformance, the continuation of historical trends, the sufficiency of oursources 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’s Discussion 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 the datehereof. We undertake no obligation to revise or publicly release the results ofany revision to these forward-looking statements based on circumstances orevents, which occur in the future. Readers should carefully review the riskfactors described in this report on Form 10-Q and in other documents wefile from time to time with the Securities and Exchange Commission.

 

**Business Overview**

 

Weprovide business application software, services and support that help servicesorganizations to manage, analyze and improve their businesses. The markets weserve include healthcare,government and education, retail, financial services (including banking,insurance and other financial services), and professional services.We derive revenues from licensing business application software and providingcomprehensive professional services, including consulting, training andimplementation services, as well as ongoing client support. Consulting,training and implementation services are generally not essential to the functionalityof our software products, are sold separately and also are available from anumber of third-party service providers. Accordingly, revenues from theseservices are generally recorded separately from the license fee. Additionally,we generate a portion of our revenues from reselling our business applicationsoftware through third-party vendors. We have offices and affiliates servingNorth and South America, Europe, Asia, Africa and Australia.

 

**Critical Accounting Policies and Estimates**

 

Ourdiscussion and analysis of financial condition and results of operations arebased upon our unaudited condensed consolidated financial statements, whichhave been prepared in accordance with accounting principles generally acceptedin the United States of America. The preparation of these financial statementsrequires us to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements, the reportedamounts of revenues and expenses during the reporting period, and relateddisclosures of contingent assets and liabilities. The Notes to the CondensedConsolidated Financial Statements contained herein describe our significantaccounting polices used in the preparation of the consolidated financialstatements. On an on-going basis, we evaluate our estimates, including, but notlimited to, those related to bad debt, intangible assets and contingencies. Webase our estimates on historical experience and on various other assumptionsthat we believe to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultscould differ from these estimates.

 

Webelieve the critical accounting polices listed below reflect our moresignificant judgments, estimates and assumptions used in the preparation of ourcondensed consolidated financial statements.

 

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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.

 

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

 

Werecognize revenues in accordance with the provisions of the American Instituteof Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2,“Software Revenue Recognition”, as amended by SOP 98-4, “Deferral of theEffective Date of a Provision of SOP 97-2, Software Revenue Recognition” andSOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respectto Certain Transactions”, as well as Technical Practice Aids issued from timeto time by the AICPA, and in accordance with the Securities and ExchangeCommission Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition”.We license software under non-cancelable license agreements and provide relatedprofessional 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 license fees. Software arrangements whichinclude fixed-fee service components are recognized as the services areperformed and the costs to provide the related services are expensed asincurred. Software arrangements which include services that are essential tothe functionality of our software products are recognized using contractaccounting and the percentage-of-completion methodology based on labor hoursinput. The amount of judgment involved in addressing significant assumptions,risks and uncertainties in applying the application of the percentage-of-completionmethodology can impact the amounts of revenue and related expenses reported inthe consolidated financial statements. Our specific revenue recognitionpolicies are as follows:

 

•                  Software LicenseFees— License fee revenues from end-usersare 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, oursoftware 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—Revenues from training andconsulting services are recognized as services are provided to clients.Revenues from support contracts are deferred and recognized ratably over theterm of the support agreements. Revenues for client support that are bundledwith the initial license fee are deferred based on

 

14

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thefair value of the bundled support services and recognized ratably over the termof the agreement. Fair value is based on the renewal rate for continued supportarrangements.

 

*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 assessthe likelihood that our net deferred tax assets will be recovered from futuretaxable income and to the extent we believe that recovery is not likely, wemust establish a valuation allowance. To the extent we establish a valuationallowance, we must include an expense within the tax provision in the statementof operations. As of May 31, 2004, the condensed consolidated balance sheetincludes net deferred tax assets in the amount of $27.7 million. For the yearended May 31, 2004, we recorded a valuation allowance of $1.2 millionassociated primarily with federal contribution carryforwards, state netoperating loss carryforwards and certain federal tax credit carryforwards thatare estimated to expire prior to our utilization.

 

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Asof August 31, 2004, the condensed consolidated balance sheet includes netdeferred tax assets in the amount of $27.5 million. For the three monthsended August 31, 2004, we determined that no additional valuationallowance was necessary.

 

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.

 

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 therealizability of our deferred tax assets as of May 31, 2004, we consideredevidence regarding our ability to generate sufficient future taxable income torealize our deferred tax assets. The primary evidence considered included thecumulative tax operating loss for the past three years; the cumulative pre-taxincome for financial reporting purposes for the past three years; the estimatedimpact of future tax deductions from the exercise of stock options outstandingas of May 31, 2004; and the estimated future taxable income based on historicaloperating 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$1.2 million for certain deferred tax assets associated primarily with federalcontribution carryforwards, state net operating loss carryforwards and certainfederal tax credit carryforwards.

 

As of August 31, 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 August 31, 2004 as well as theestimated future tax deductions from the exercise of stock options outstandingas of August 31, 2004 would be utilized prior to expiring in greater thanten years. Based on this conclusion, we would require approximately $105million in cumulative future taxable income to be generated at various timesover the next twenty years to realize the related net deferred tax assets of$27.5 million as of August 31, 2004 as well as theestimated future tax deductions from the exercise of stock options outstandingand in-the-money as of August 31, 2004. Additionally, we determined thatit is likely the net deferred tax assets will continue to increase for the nextseveral years prior to utilization of the tax loss carryforwards and couldreach in excess of $40 million if the stock options outstanding andin-the-money as of August 31, 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.

 

*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.

 

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**Results of Operations**

 

Thefollowing table sets forth certain line items in our condensed consolidatedstatements of operations as a percentage of total revenues for the periodsindicated:

 
| ** **                            | ** ** | **Three Months  Ended  August 31,** | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|
| ** **                            | ** ** | **2004**                                 | ** ** | **2003** | ** ** |
|                                  |       |                                     |       |   |   |
| Revenues:                             |       |                                     |       |   |   |
| License fees                          |       | 16.0                                     | %          | 25.8 | % |
| Services                              |       | 84.0                                     |       | 74.2 |   |
| Total revenues                        |       | 100.0                                    |       | 100.0 |   |
|                                  |       |                                     |       |   |   |
| Cost of  revenues:                    |       |                                     |       |   |   |
| Cost of  license fees                 |       | 2.9                                      |       | 4.6 |   |
| Cost of  services                     |       | 44.1                                     |       | 36.5 |   |
| Total cost of  revenues               |       | 47.0                                     |       | 41.1 |   |
|                                  |       |                                     |       |   |   |
| Gross margin                          |       | 53.0                                     |       | 58.9 |   |
|                                  |       |                                     |       |   |   |
| Operating  expenses:                  |       |                                     |       |   |   |
| Research and  development             |       | 18.9                                     |       | 17.0 |   |
| Sales and  marketing                  |       | 25.3                                     |       | 26.1 |   |
| General and  administrative           |       | 10.0                                     |       | 10.5 |   |
| Restructuring                         |       | (0.1                                     | )          | (0.1 | ) |
| Amortization  of acquired intangibles |       | 0.5                                      |       | 0.3 |   |
| Total  operating expenses             |       | 54.6                                     |       | 53.8 |   |
|                                  |       |                                     |       |   |   |
| Operating  (loss) income              |       | (1.6                                     | )          | 5.1 |   |
|                                  |       |                                     |       |   |   |
| Other income                          |       | 0.8                                      |       | 0.9 |   |
| (Loss) income  before income taxes    |       | (0.8                                     | )          | 6.0 |   |
| (Benefit)  provision for income taxes |       | (0.3                                     | )          | 2.3 |   |
| Net (loss)  income                    |       | (0.5                                     | )%         | 3.7 | % |

 

**Three Months Ended August 31, 2004 Compared To Three Months EndedAugust 31, 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 $82.7 million for thethree months ended August 31, 2004 from $88.0 million for the threemonths ended August 31, 2003, representing a decrease of 6.0%. The $5.3million decline in total revenue was attributed to a $9.4 million decline inlicense fees that was partially offset by a $4.1 million increase in services.

 

*License Fees.*    Revenuesfrom license fees decreased to $13.3 million for the three months endedAugust 31, 2004 from $22.7 million for the three months endedAugust 31, 2003, representing a decrease of 41.5%.  The $9.4 million decline in license fees wasdue to lower business activity and longer customer decision cycles as a resultof issues affecting our industry, including the prospect of industryconsolidation and priorities

 

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such as Sarbanes-Oxley reducingcapital spending on software.  Theaverage overall selling price of our licensing transactions decreased 23.1%while the number of licensing transactions decreased 20.3% as compared tofiscal 2004.  Revenues from license feesas a percentage of total revenues for the three months ended August 31, 2004and 2003 were 16.0% and 25.8%, respectively. Although general economic indicators show signs of an improving economy,we are not experiencing the sequential growth each quarter as a result of theissues impacting the software industry.

 

*Services.*    Revenuesfrom services increased to $69.4 million for the three months endedAugust 31, 2004 from $65.3 million for the three months endedAugust 31, 2003, representing an increase of 6.3%.  The $4.1 million increase in services was dueto a $3.5 million increase in support revenue and a $0.6 million increase inconsulting revenue. The $3.5 million increase in support revenue was primarilydue to increased revenue earned on support contracts purchased inApril 2004. The $0.6 million increase in consulting revenue was primarilydue to a greater use of third-party providers as staffing levels were not ableto meet the demand of service opportunities. Services as a percentage of totalrevenues for the three months ended August 31, 2004 and 2003 were 84.0%and 74.2%, 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 the vendorupon sale of our products. In addition, we resell third-party products inconjunction 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.

 

Costof license fees decreased to $2.4 million for the three months endedAugust 31, 2004 from $4.1 million for the three months endedAugust 31, 2003, representing a decrease of 41.9%.  The $1.7 million decrease was primarily dueto a 41.5% decline in license fees as well as a decline in the proportion ofthird-party product sales in our revenue mix. Cost of license fees as apercentage of total revenues for the three months ended August 31, 2004and 2003 were 2.9% and 4.6%, respectively. Gross margin on revenue from licensefees was 82.1% and 81.9% for the three months ended August 31, 2004 and2003, respectively.

 

*Cost of Services. *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 $36.5 millionfor the three months ended August 31, 2004 from $32.1 million for thethree months ended August 31, 2003, representing an increase of13.6%.  The $4.4 million increase in costof services was primarily due to a $2.1 million increase in third-party consultingcosts as a result of a higher proportion of third-party services in our revenuemix; a $0.7 million increase in employee related costs primarily due to hiringemployees during the quarter to meet future service opportunities; a $1.0million increase in amortization related to support contracts purchased inApril 2004; and a $0.4 million increase in third party maintenance costs.Cost of services as a percentage of total revenues for the three months endedAugust 31, 2004 and 2003 were 44.1% and 36.5%, respectively.  Gross margin on services revenues were 47.5%and 50.9% for the three months ended August 31, 2004 and 2003,respectively.

 

***Operating Expenses***

 

*Research and Development.*    Researchand development expenses consist primarily of salaries, employee benefits,related overhead costs and consulting fees relating to product development,enhancements, upgrades, testing, quality assurance and documentation.  Research and development expenses increasedto $15.6 million for the three months ended August 31, 2004 from$14.9 million for the three months ended August 31, 2003,representing an increase of 4.8%. The $0.7 million increase in research anddevelopment was primarily due to $1.0 million in costs associated withcorporate initiatives, including $0.5 million related to the third-partyoffshore software support services agreement we entered in to inFebruary 2004.  The increase waspartially offset by a $0.7 million decrease in incentive compensation.  Research and development expenses as apercentage of total revenues for the three months ended August 31, 2004and 2003 were 18.9% and 17.0%, respectively.

 

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*Sales and Marketing.*   Salesand marketing expenses consist primarily of salaries and incentivecompensation, employee benefits and travel and overhead costs related to oursales and marketing personnel, as well as trade show activities and advertisingcosts.  Sales and marketing expensesdecreased to $21.0 million for the three months ended August 31, 2004 from$23.0 million for the three months ended August 31, 2003,representing a decrease of 8.9%.

 

The$2.0 million decrease in sales and marketing expenses was due to a $1.7 milliondecrease in salaries as a result of a decrease in the number of employees; a$1.8 million decrease in incentive compensation primarily due to the decline inlicense fees; and a $0.3 million decrease in our sales rewards program.  The decrease was partially offset by a $2.0million increase in costs associated with marketing initiatives, includingtrade show activities and advertising costs. Sales and marketing expenses as apercentage of total revenues for the three months ended August 31, 2004and 2003 were 25.3% and 26.1%, 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 $8.3 million for the three months endedAugust 31, 2004 from $9.2 million for the three months endedAugust 31, 2003, representing a decrease of 10.6%.

 

The$0.9 million decrease in general and administrative expenses was primarily dueto a $0.6 million decline in bad debt expense reflecting a general decrease inaccounts receivable; a $0.8 million decrease in incentive compensation; and a $0.5million decrease in legal related costs. The decrease in costs were partially offset by an increase in costs of$0.6 million for corporate initiatives designed to improve efficiencies.General and administrative expenses as a percentage of total revenues for thethree months ended August 31, 2004 and 2003 were 10.0% and 10.5%,respectively.

 

*Restructuring.*   During the three months ended August 31, 2004 and 2003, we recordedreversals of restructuring charges of $0.08 million and $0.04 million, respectively,for certain employee costs that we determined will not be incurred. See Note 6of Notes to Condensed Consolidated Financial Statements for a summary ofactivity for the three months ended August 31, 2004.

 

*Amortization of Acquired Intangibles. * Amortizationof acquired intangibles increased to $0.4 million for the three monthsended August 31, 2004 from $0.2 million for the three months endedAugust 31, 2003. The $0.2 million increase in amortization expense isprimarily due to increases in amortization of intangibles on companies acquiredsince the prior year period. The companies acquired include, NumbercraftLimited acquired in July 2003, Closedloop Solutions, Inc. acquired inSeptember 2003 and Apexion Technologies, Inc. acquired in October 2003.

 

***Other Income, Net***

 

Otherincome, net, which is primarily comprised of interest income earned from cash,marketable securities and long term investments decreased to $0.6 million forthe three months ended August 31, 2004 from $0.9 million for the three monthsended August 31, 2003.  The $0.3million decrease in interest income is due to an approximate $50 milliondecrease in average invested balances compared to the same prior year period.

 

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

 

We recognized an income tax (benefit) of $0.2million for the three months ended August 31, 2004 compared to an income taxprovision of $2.1 million for the three months ended August 31, 2003. Ourincome tax (benefit) provision is based on pretax (loss) income and consistsprimarily of federal and state income taxes. Our effective tax rate was 37.4%and 39.0% for the three months ended August 31, 2004 and 2003, respectively.The decrease in the effective tax rate was primarily due to the impact ofchanges in actual and forecasted permanent book to tax differences. We reviewour effective tax rate on a quarterly basis and make necessary changes.

 

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**Liquidity and Capital Resources**

 

As of August 31, 2004, we had $184.5 millionin cash, cash equivalents and marketable securities and $164.8 million inworking capital. Our most significant source of operating cash flows is derivedfrom license fees and services to our clients. Days sales outstanding, which iscalculated on net receivables at period end divided by revenue for the quartertimes 90 days in the quarter, was 61 and 59 as of August 31, 2004 and May 31,2004, respectively. The increase was due primarily to a decline in revenue forthe three months ended August 31, 2004 compared to the previous quarter. Ourprimary uses of cash from operating activities are for employee costs,third-party costs for licenses and services and facilities.

 

We believe that cash, cash equivalents and marketable securities willbe sufficient to meet our cash requirements for working capital, capitalexpenditures and investments for at least the next twelve months.

 

***Cash flows fromoperating activities:***

 

Net cash used in operating activities was $17.9 million for the threemonths ended August 31, 2004 compared with $1.2 millionin cash provided by operating activities for the three months endedAugust 31, 2003.  The decrease incash flows from operations for the three months ended August 31, 2004primarily related to a decrease in cash received on support billings as aresult of a change in client billing cycles and other delayed collections.  The change resulted in initially smallerclient invoices due to pro-rated billings in an effort to get individualmultiple client support billings to a common renewal date.  Cashlevels generated by this change are expected to be restored in subsequentperiods over the next twelve months as billing cycles become synchronized.

 

Other significant activity in cash from operating activities for thethree months ended August 31, 2004 included an $8.7 millionincrease in cash from trade accounts receivable as a result of collectionefforts; an $8.6 million decrease in cash related to accrued expenses dueprimarily to the payment of fiscal 2004 incentive compensation; and a $3.6 milliondecrease in cash related to accounts payable primarily due to the semi-annualpurchase of common shares under the Employee Stock Purchase Plan.

 

***Cash flows frominvesting activities:***

 

Net cash provided by investing activities was $55.7 million for thethree months ended August 31, 2004 compared with $27.6 millionfor the three months ended August 31, 2003.   The increase in cash from investingactivities for the three months ended August 31, 2004 primarily related to$56.6 million of cashreceived from net maturities of marketable securities.  We have generally used proceeds from thematurities and sales of marketable securities to augment cash flows fromoperations and to fund capital expenditures, share repurchases, and to repaydebt.

 

***Cash flows fromfinancing activities***:

 

Net cash used in financing activities was $5.7 million for the threemonths ended August 31, 2004 compared with $0.1 millionfor the three months ended August 31, 2003.  The decrease in cash from financingactivities for the three months ended August 31, 2004 primarily related to $10.0 million usedto repurchase shares of our common stock. Other significant activity included $2.4 million in cash received fromemployee contributions to our employee stock purchase plan and $2.0 million incash received from the exercise of stock options.

 

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

 

In June 2003, our Board of Directorsauthorized us to repurchase, from time to time, up to $50.0 million of ourcommon shares. Shares were repurchased as market conditions warranted eitherthrough open market transactions, block purchases, private transactions orother means.  During the three monthsended August 31, 2004, we completed the authorized stock repurchase plan bypurchasing the remaining 1.4 million shares for $10.0 million in cash.  Cash proceeds obtained from maturities ofmarketable securities, the exercise of employee stock options and the employeestock purchase plan largely funded the share repurchase. The repurchasedshares, which remain in treasury, will be used for general corporate purposes.

 

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**New Accounting Pronouncement**

 

In November 2003 andMarch 2004, the Emerging Issues Task Force (EITF) reached a consensus onEITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments”. The consensus reached requires companiesto apply new guidance for evaluating whether an investment isother-than-temporarily impaired and also requires quantitative and qualitativedisclosures of debt and equity securities, classified as available-for-sale orheld-to-maturity, that are determined to be only temporarily impaired at thebalance sheet date. We incorporated the required disclosures for investmentsaccounted for under SFAS No. 115, “Accounting for Certain Investments in Debtand Equity Securities,” as required in the fourth quarter of fiscal year 2004,and chose to early adopt the guidance related to evaluatingother-than-temporary impairment. Disclosures for all investments outside thescope of SFAS No. 115 (cost and equity method investments), of which we havenone, are required in the fourth quarter of fiscal 2005. Adoption of EITF IssueNo. 03-01 will not have an impact on our statements of consolidated operations,financial position or cash flows.

 

**Restructuring Charges Subsequent to the First Quarter of Fiscal 2005**

 

On September 28,2004, our Board of Directors approved management’s plan, developed in lateSeptember 2004, that is designed to enhance our operating effectivenessand profitability.  Under the plan, wewill streamline structure, consolidate leadership and reduce long-term costs torealign projected expenses with anticipated revenue levels.  The plan includes a reduction ofapproximately 100 employees in the United States and the United Kingdom, whichwill result in a charge for severance and related benefits of approximately$2.5 million in the second quarter ending November 30, 2004. The reductionincludes employees who work in operations, marketing, sales, research anddevelopment, support and services.  Allterminations and related payments are expected to be completed during fiscal2005.

 

Management is continuingto evaluate other cost reduction opportunities that may result in additionalcharges in the second quarter ending November 30, 2004 and during theremainder of fiscal 2005.   Management hasnot completed its evaluation and plan, and therefore the probability, nature,amount and timing of any additional charges are not currently determinable.

 

**Other Factors That May Affect Future Results or the Market Price of OurStock**

 

Weoperate in a rapidly changing environment that involves numerous uncertaintiesand risks.  Investors evaluating ourcompany and its business should carefully consider the factors described belowand all other information contained in this report on Form 10-Q. Thissection should be read in conjunction with the Condensed ConsolidatedFinancial Statements and Notes thereto and Management’s Discussion and Analysisof Financial Condition and Results of Operations included in this report onForm 10-Q.  Any of the followingfactors could materially harm our business, operating results and financialcondition. Additional factors and uncertainties not currently known to us orthat we currently consider immaterial could also harm our business, operatingresults and financial condition. We may make forward-looking statements fromtime to time, both written and oral. We undertake no obligation to revise orpublicly release the results of any revisions to these forward-lookingstatements based on circumstances or events which occur in the future. Theactual results may differ materially from those projected in any suchforward-looking statements due to a number of factors, including those setforth below and elsewhere in this report on Form 10-Q.

 

***Economic, political and market conditions can adverselyaffect our revenue growth and operating results.***

 

Ourrevenue growth and profitability depend on the overall demand for computersoftware and services, particularly in the industries in which we sell ourproducts and services.  Demand forenterprise software and demand for our solutions are affected by generaleconomic conditions, competition, product acceptance and technologylifecycles.  A general weakening of theeconomy and weakening of business conditions, particularly in informationtechnology and the industries we serve, as well as governmental budgetaryconstraints, could result in delays and decreases of client purchases.  In addition to sales of new softwarelicenses, we derive a significant portion of our revenues from software supportand professional services.  A generalweakening of the economy and weakening of business conditions could result indecreases in our renewal rates for software

 

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support and areduced demand for services.  Despite animproving economic environment, some governmental spending remains constrainedby budgetary limits.  According togeneral economic indicators, corporate spending has begun to increase.  However, clients and prospective clientscontinue to be cautious about technology spending, and may elect to delay,reduce or cancel their information technology projects. For example, we believethat clients and prospects that are subject to the requirements of theSarbanes-Oxley Act may delay or cancel information technology projects andinstead focus on compliance with that Act. If demand for our software andrelated services does not continue to strengthen, our revenue growth andprofitability will be adversely affected. In addition, the war on terrorism and the potential for otherhostilities in various parts of the world continue to contribute to a climateof economic and political uncertainty that could adversely affect our revenuegrowth and results.  Because of thesefactors, we believe the level of demand for our products and services, andprojections of future revenue and operating results, will continue to be difficultto predict. In fiscal 2002, 2003 and 2004, we took measures to realign ourprojected expenses with anticipated revenue, and incurred restructuring chargesfor severance and related benefits and facility closure and consolidationcharges.  In late September 2004, wetook additional measures to realign our projected expenses with anticipatedrevenue, and recorded a $2.5 million restructuring charge for severance andrelated benefits in the second quarter of fiscal 2005. Management iscontinuing to evaluate other cost reduction opportunities that may result inadditional charges in the second quarter ending November 30, 2004 andduring the remainder of fiscal 2005. There is no assurance thatthese cost reduction measures will be sufficient to offset any future revenuedeclines.

 

***A number of our competitors are well-establishedsoftware companies that have advantages over us.***

 

Weface competition from a number of software companies that have advantages overus due to their larger client bases, greater name recognition, long operatingand product development history, greater international presence andsubstantially greater financial, technical and marketing resources. Thesecompetitors include well-established companies such as Oracle Corporation,PeopleSoft, Inc. and SAP AG, all of which have larger installed clientbases. If clients or prospects want to reduce the number of their softwarevendors, they may elect to purchase competing products from Oracle, Peoplesoftor SAP since those larger vendors offer a wider range of products. Furthermore,Oracle is capable of bundling its software with its database applications,which underlie a significant portion of our installed applications.

 

Inaddition, we compete with a variety of more specialized software and servicesvendors, including:

 

•                  Internet 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.

 

Asa result, the market for enterprise software applications has been andcontinues to be intensely competitive. Some competitors have become moreaggressive with their pricing, payment terms and/or issuance of contractualwarranties, implementation terms or guarantees. We may be unable to continue tocompete successfully with new and existing competitors without lowering pricesor offering other favorable terms. We expect competition to persist andintensify, which could negatively impact our operating results and marketshare.

*** ***

***Because our clients are concentrated in targetedservice industries, our operating results may be adversely affected by adversechanges in one or more of these industries.***

 

Asa result of our focus on targeted service industries, our financial resultsdepend, in significant part, upon economic and market conditions in thehealthcare, retail, government and education and financial services industries.Because the healthcare marketplace for our products is maturing, we will needto expand our product offerings to achieve long-term revenue growth. Many stateand local governments are facing budget shortfalls and are reducing capitalspending, including spending on software and services.  In addition, we must continue to developindustry specific functionality for our solutions, which satisfies thechanging, specialized

 

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requirements ofprospective clients in our target industries. This need is becoming moreprevalent as the marketplace for our traditional products is maturing.

 

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

 

Ouractual revenues in a quarter could fall below expectations, which could lead toa decline in our stock price. Our revenues and operating results are difficultto predict and may fluctuate substantially from quarter to quarter. Revenuesfrom license fees in any quarter depend substantially upon our licensingactivity and our ability to recognize revenues in that quarter in accordancewith our revenue recognition policies. Our quarterly license and servicesrevenue may fluctuate and may be difficult to forecast for a variety ofreasons, 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;

 

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

 

•                  the uncertainty caused by OracleCorporation’s offer to purchase PeopleSoft, Inc., or by other  announced potential business combinations inthe software industry may cause clients and prospective clients to cancel,postpone or reduce capital spending projects on software;

 

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

 

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

 

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

 

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

 

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

 

Fluctuationin our quarterly revenues may adversely affect our operating results. In eachfiscal quarter our expense levels, operating costs and hiring plans are basedon projections of future revenues and are relatively fixed. If our actualrevenues fall below expectations we could experience a reduction in operatingresults.

 

***Our lengthy and variable sales cycle makes it difficultto predict our operating results.***

 

Itis difficult for us to forecast the timing and recognition of revenues fromsales of our products because our existing and prospective clients often takesignificant time evaluating our products before licensing them. The periodbetween initial client contact and a purchase by a client may vary from ninemonths to more than one

 

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year. Duringthe evaluation period, prospective clients may decide not to purchase or mayscale down proposed orders of our products for various reasons, including:

 

•                  reduced demand for enterprisesoftware solutions;

 

•                  introduction of products by ourcompetitors;

 

•                  lower prices offered by ourcompetitors;

 

•                  changes in budgets and purchasingpriorities; and

 

•                  reduced need to upgrade existingsystems.

 

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

 

***We may be unable to retain or attract clients if we donot develop new products and enhance our current products in response totechnological changes and competing products.***

 

Asa software company, we have been required to migrate our products and servicesfrom mainframe to client-server to web-based environments. In addition, we havebeen required to adapt our products to emerging standards for operatingsystems, databases and other technologies. We will be unable to competeeffectively 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.

 

Asignificant portion of our research and development resources is devoted toproduct upgrades that address regulatory and support requirements. Theremainder of our limited research and development resources are for newproducts. New products require significant development investment. We faceuncertainty when we develop or acquire new products because there is noassurance that a sufficient market will develop for those products. Forexample, we have made a significant investment in the acquisition anddevelopment of services automation and retail merchandising software products.If we do not attract sufficient client interest in those products, we will notrealize a return on our investment and our operating results will be adverselyaffected.

 

Ourcore technologies face competition from new or revised technologies that mayrender our existing technology less competitive or obsolete, reducing thedemand for our solutions. As a result, we must continually redesign ourproducts to incorporate these new technologies and to adapt our software productsto operate on, and comply with evolving industry standards for hardware andsoftware platforms. Maintaining and upgrading our products to operate onmultiple hardware and database platforms reduces our resources for developingnew products.  In addition, conflictingnew technologies present us with difficult choices of which new technologies toadopt. If we fail to anticipate or respond adequately to technologicaldevelopments, or experience significant delays in product development orintroduction, our business and operating results will be negatively impacted.

 

Inaddition, to the extent we determine that new technologies and equipment arerequired to remain competitive, the development, acquisition and implementationof such technologies may require us to make significant capital investments. Wemay not be able to obtain capital for these purposes and investments in newtechnologies may not result in commercially viable technological products. Theloss of revenue and increased costs to us from such changing technologies wouldadversely affect our business and operating results.

 

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

 

Ourinstalled client base has traditionally generated additional support, licenseand professional service revenues. In future periods, clients may notnecessarily make these purchases. Support is generally renewable

 

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annually at aclient’s option, and there are no mandatory payment obligations or obligationsto license additional software. If our clients decide not to renew theirsupport agreements or license additional products or contract for additionalservices, or if they reduce the scope of the support agreements, our revenuescould decrease and our operating results could be adversely affected.

 

***We may need to change our pricing models to competesuccessfully.***

 

Theintensely competitive markets in which we compete can put pressure on us toreduce our prices.  If our competitorsoffer deep discounts on certain products or services in an effort to recaptureor gain market share or to sell other products or services, we may need tolower prices or offer other favorable terms in order to competesuccessfully.  Any such changes would belikely to reduce margins and could adversely affect operating results.

 

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

 

Ourability to maintain or increase service revenue primarily depends on ourability to increase the number of our licensing agreements. Variances orslowdowns in licensing activity may adversely impact our consulting, trainingand support service revenues in future periods.

 

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

 

Wehave in the past had to, and in the future may have to, defer revenuerecognition for license fees due to several factors, including the followingsituations:

 

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

 

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

 

•                  the transaction includes acceptance criteria;

 

•                  the transaction includes contingent paymentterms or fees;

 

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

 

•                  we are required to accept a fixed-feeservices contract; or

 

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

 

Becauseof the factors listed above and other specific requirements under accountingprinciples generally accepted in the United States for software revenuerecognition, we must have very precise terms in our license agreements torecognize revenue when we initially deliver software or perform services.Negotiation of mutually acceptable terms and conditions can extend the salescycle, and sometimes we do not obtain terms and conditions that permit revenuerecognition at the time of delivery or even as work on the project iscompleted.

 

***Future adjustments in our net deferred tax assets maybe materially adverse to our financial results.***

 

OnAugust 31, 2004, the condensed consolidated balance sheet includes netdeferred tax assets in the amount of $27.5 million. Each quarter, we mustassess the likelihood that our net deferred tax assets will be recovered fromfuture taxable income and to the extent we believe that recovery is not likely,we must establish a valuation allowance. To the extent we establish a valuationallowance, we must include an expense within the tax provision in the statementof operations. For the year ended May 31, 2004, we recorded avaluation allowance of $1.2 million associated primarily with federal contributioncarryforwards, state net operating loss carryforwards and certain federal taxcredit carryforwards that are estimated to expire prior to utilization. Noadditional valuation allowance was determined to be necessary for the threemonths ended August 31, 2004.

 

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In the event that weadjust our estimates of future taxable income or tax deductions from theexercise of stock options; or our stock price increases significantly without acorresponding increase in taxable income, we may need to establish anadditional valuation allowance, which could materially impact our financialposition and results of operations.

 

***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.***

 

Thetrading price of our common stock has fluctuated significantly in the past.Changes in our business, operations or prospects, regulatory considerations,general market and economic conditions, or other factors may affect the priceof our common stock. Many of these factors are beyond our control. The futuretrading price of our common stock is likely to be volatile and could be subjectto wide price fluctuations in response to such factors, including:

 

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

 

•                  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;

 

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•                  conditions and trends in the software industry,or consolidation within the technology industry that may impact our clients,partners, suppliers or competitors;

 

•                  adoption of new accounting standardsaffecting the software industry;

 

•                  acts of war or terrorism; and

 

•                  general market conditions.

 

***We have adopted anti-takeover defenses that could makeit difficult for another company to acquire control of Lawson or limit theprice investors might be willing to pay for our stock.***

 

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

 

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

 

•                  a limitation onwho may call stockholder meetings;

 

•                  a prohibition onstockholder action by written consent; and

 

•                  the ability ofour board of directors to issue shares of preferred stock without a stockholdervote.

 

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.

 

 

***If requirements of a current proposal relating to theaccounting treatment for employee stock purchases and stock options areadopted, or if the Board adopts a policy changing such accounting treatment,our earnings will be affected and we may be forced to change our businesspractices***

 

Wecurrently account for the issuance of stock options under APB OpinionNo. 25, “Accounting for Stock Issued to Employees”. The FASB has issued anExposure Draft, “Share-Based Payment” that would, if adopted, change theaccounting treatment for grants of options, sale of shares under our employeestock purchase plan and other equity instruments issued to employees. Theexposure draft would require us to value equity instruments issued to employeesand liability-classified awards at grant date fair value or based upon certainvaluation methods that approximate grant date fair value, and to record thosevalues as compensation expense in our statement of operations. If adopted asdrafted, the Statement would be effective for us June 1, 2005. In thefuture, the Board of Directors could also elect to adopt a policy that we treatthe value of stock options granted to employees and directors as compensationexpense. If the Board adopts such a policy, or if the exposure draft isadopted, our earnings will be negatively impacted. As a result, we may decideto terminate our employee stock purchase plan, reduce the number of stockoptions granted to employees or to grant options to fewer employees. This couldaffect our ability to retain existing employees and attract qualifiedcandidates, and also could increase the cash compensation we would have to payto them. Note 2 of Notes to the Condensed Consolidated Financial

 

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Statementsdescribes the pro forma impact of a change to fair value accounting on earningsand earnings per share for the three months ended August 31, 2004 and2003.

 

***Changes in the terms on which we license technologiesfrom third-party vendors could result in the loss of potential revenues orincreased costs or delays in the production and improvement of our products.***

 

Welicense third-party software products that we incorporate into, or resell with,our own software products. For example, we incorporate Micro FocusInternational, Inc.’s software in many of our products and have resellerrelationships with Business Software Incorporated, BusinessObjects, Hyperion Solutions Corporation and other companies, that allow usto resell their technology with our products. These licenses and othertechnology licenses are subject to periodic renewal and may include minimumsales requirements. A failure to renew, or early termination of these licensesor other technology licenses could adversely impact our business. If any of thethird-party software vendors change their product offerings or terminate ourlicenses, we may lose potential revenues and may need to incur additionaldevelopment costs and seek alternative third-party relationships. In addition,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 with resellers,systems integrators and other third parties that market and sell our productscould reduce our revenues.***

 

Ourability to achieve revenue growth will depend in large part on adding newpartners to expand our sales channels, as well as leveraging our relationshipswith existing partners. If our relationships with these resellers, systemintegrators and strategic and technology partners deteriorate or terminate, wemay lose important sales and marketing opportunities. Our reseller arrangementsmay from time to time give rise to disputes regarding marketing strategy, salesof competing products, exclusive territories, payment of fees and client relationships,which could negatively affect our business or result in costly litigation.

 

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

 

Wealso may enter into joint arrangements with strategic partners to develop newsoftware products or extensions, sell our software as part of integratedproducts or serve as an application service provider for our products. Ourbusiness may be adversely affected if these strategic partners change theirbusiness priorities or experience difficulties in their operations, which ineither case causes them to terminate or reduce their support for the jointarrangements. Furthermore, the financial condition of our channel partnersimpacts our business. If our partners are unable to recruit and adequatelytrain a sufficient number of consulting personnel to support the implementationof our software products, or they otherwise do not adequately performimplementation services, we may lose clients. Our relationships with resellers,systems integrators and other third-party vendors are an important part of ourbusiness, and a deterioration of these relationships could adversely impact ourbusiness and operating results.

 

***Our programs are deployed in large and complex systemsand may contain defects that are not detected until after our programs havebeen installed, which could damage our reputation and cause us to lose clientsor incur liabilities.***

 

Oursoftware programs are often deployed in large and complex computer networks.Because of the nature of these programs, they can only be fully tested forreliability when deployed in networks for long periods of time. Our softwareprograms may contain undetected defects when first introduced or as newversions are released, and our clients may discover defects in our products,experience corruption of their data or encounter performance or scalingproblems only after our software programs have been deployed. As a consequence,from time to time we have received client complaints following installation ofour products. We are currently a defendant in several lawsuits where clientshave raised these types of issues with our products and services.  In

 

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addition, ourproducts are combined with products from other vendors. As a result, shouldproblems occur, it may be difficult to identify the source of the problem.Software and data security are becoming increasingly important because ofregulatory restrictions on data privacy and the significant legal exposures andbusiness disruptions stemming from computer viruses and other unauthorizedentry or use of computer systems. These conditions increase the risk that wecould experience, among other things:

 

•                  loss of clients;

 

•                  damage to our brand reputation;

 

•                  failure to attract new clients or achievemarket acceptance;

 

•                  diversion of development and servicesresources; and

 

•                  legal actions by our clients or governmentregulators.

 

Inaddition, we may not be able to avoid or limit liability for disputes relatingto product performance, software security or the provision of services. Theoccurrence of any one or more of the foregoing factors could cause us toexperience losses, incur liabilities and adversely affect our operatingresults.

 

***If our clients lose confidence in the security of dataon the Internet, our revenues could be adversely affected.***

 

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

 

***We do not have substantial international operations andmay not be able to develop our international operations successfully.***

 

Wehave only limited international operations. Our products do not meet therequirements of Asia and many other local markets. Factors that could have anadverse effect on our ability to develop our international operations include:

 

•                  lack of experience in a particular geographicmarket;

 

•                  significant presence of our competitors ininternational markets;

 

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

 

•                  inability to recruit personnel in a specificcountry or region;

 

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

 

•                  differing foreign technical standards; and

 

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

 

 

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Ourlimited international operations could become subject to unexpected,uncontrollable and rapidly changing events and circumstances in addition tothose experienced in the United States. The following factors, among others,could have an adverse effect on our business and operating results:

 

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

 

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

 

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

 

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

 

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

 

•                  exposure to different legal standards orrisks.

 

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

 

Aspart of our business strategy, we intend to pursue strategic acquisitions. Wemay be unable to identify suitable acquisitions or investment candidates. Evenif we identify suitable candidates, we cannot provide assurance that we will beable to make acquisitions or investments on commercially acceptable terms. Ifwe acquire a company, we may incur losses in the operations of that company andwe may have difficulty integrating its products, personnel and operations intoour business. In addition, its key personnel may decide not to work for us. Wemay also have difficulty integrating acquired businesses, products, servicesand technologies into our operations. These difficulties could disrupt ourongoing business, distract our management and workforce, increase our expensesand adversely affect our operating results. We may also incorrectly judge thevalue or worth of an acquired company or business. Furthermore, we may incursignificant debt or be required to issue equity securities to pay for futureacquisitions or investments. The issuance of equity securities may be dilutiveto our stockholders. If the products of an acquired company are not successful,those remaining assets could become impaired, which may result in an impairmentloss that could materially adversely impact our financial position and resultsof operations.

 

***We may be unable to compete effectively in theapplication service provider market.***

 

Weact as an application service provider for only portions of our productsacquired through recent acquisitions. Revenues from these arrangements are not material. Some businesseschoose to access enterprise software applications through application serviceproviders, or ASPs, which are businesses that host applications and provideaccess to software on a subscription basis. Although we occasionally sell oursoftware to ASPs, we have limited experience selling our solutions to ASPs andmay not be successful in generating revenue from this distribution channel.Moreover, the use of ASPs as a distribution channel may occur more rapidly thanwe anticipate, and we may not be able to compete effectively in thisenvironment.

 

***In the event our products infringe on the intellectualproperty rights of third parties, our business may suffer if we are sued forinfringement or cannot obtain licenses to these rights on commerciallyacceptable terms.***

 

Weare subject to the risk of adverse claims and litigation alleging infringementby us of the intellectual property rights of others. Many participants in thetechnology industry have an increasing number of patents and patentapplications and have frequently demonstrated a readiness to take legal actionbased on allegations of patent and other intellectual property infringement.Further, as the number and functionality of our products increase, we believethat we may become increasingly subject to the risk of infringement claims. Ifinfringement claims are brought against us, these assertions could distract managementand we may have to expend potentially significant funds and resources to defendor settle such claims. If we are found to infringe on the intellectual propertyrights of others, we could be forced to pay significant license fees or damagesfor infringement.

 

Aspart of our standard license agreements, we agree to indemnify our clients forsome types of infringement claims under the laws of the United States and someforeign jurisdictions that may arise from the

 

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use of ourproducts. If a claim against us were successful, we may be required to incursignificant expense and pay substantial damages, as we are unable to insureagainst this risk. Even if we were to prevail, the accompanying publicity couldadversely impact the demand for our software. Provisions attempting to limitour liability in our standard agreements may be invalidated by unfavorablejudicial decisions or by federal, state, local or foreign laws or ordinances.

 

***It may become increasingly expensive to obtain andmaintain liability insurance.***

 

Wecontract for insurance to cover several, but not all, potential risks andliabilities. In the current market, insurance coverage is becoming morerestrictive, and, when insurance coverage is offered, the deductible for whichwe are responsible is larger. In light of these circumstances, it may becomemore difficult to maintain insurance coverage at historical levels, or if suchcoverage is available, the cost to obtain or maintain it may increasesubstantially. This may result in our being forced to bear the burden of anincreased portion of risks for which we have traditionally been covered byinsurance, which could negatively impact our results of operations.

 

***We have limited protection of our intellectual propertyand, if we fail to adequately protect our intellectual property, we may not beable to compete.***

 

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

 

***Business disruptions may interfere with our ability toconduct business.***

 

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

 

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

 

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

 

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

 

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

 

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

 

InJanuary 2004, we announced that our Chief Executive Officer and ChiefFinancial Officer had each entered into selling plans, to sell up to 335,000and 194,000 shares, respectively, over a period ending November 2004.These executive officers may also elect to sell or transfer other shares apartfrom the selling plans. Other executive officers, directors or principalstockholders could also elect to sell their shares from time to time. A substantialnumber of shares of our common stock are held by our founders, their familymembers, a pre-initial public offering investor, current or former employees,officers or directors. Sale of a portion of these shares in the public market,or the perception that such sales are likely to occur, could depress the marketprice of our common stock and could impair our ability to raise capital throughthe sale of additional equity securities.

 

***Control by existing shareholders could significantlyinfluence matters requiring stockholder approval.***

 

Asof August 31, 2004, our executive officers, directors, and affiliatedentities, in the aggregate, beneficially owned 19.0% of our outstanding commonstock. These stockholders, if acting together, would be able to significantlyinfluence all matters requiring approval by stockholders, including theelection of directors and the approval of mergers or other businesscombinations.

 

***Financial outlook.***

 

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

 

**ITEM 3****. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK**

 

There were no material changes inmarket risk for the Company in the period covered by this report. See theCompany’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004 fora discussion of market risk for the Company.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

Asrequired by Rule 13a-15(b) under the Securities Exchange Act of 1934, asamended we conducted an evaluation under the supervision and with theparticipation of our management, including the Chief Executive Officer and theChief Financial Officer, of the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report. Based on thatevaluation, the Chief Executive Officer and the Chief Financial Officerconcluded that our disclosure controls and procedures are effective in ensuringthat all information required to be disclosed in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission rules andforms. There was no significant change in our internal control over financialreporting that occurred during the most recent fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

Weare, and from time to time may become, involved in litigation in the normalcourse of business concerning our products and services. While the outcome ofthese claims cannot be predicted with certainty, we do not believe that theoutcome of any one of these legal matters will have a material adverse effecton our

 

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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 OF PROCEEDS**

 

(b)Use of Proceeds

 

Asof August 31, 2004, we held $120.0 million of net proceeds from ourinitial public offering in interest-bearing, investment grade securities.During the three months ended August 31, 2004, we used approximately $0.8million for capital expenditures and $0.1 million for the repayment of debt.

 

(c) IssuerPurchases of Equity Securities

 

Thefollowing table provides information as of August 31, 2004 with respect tothe shares of common stock repurchased by the Company during the first quarterof fiscal 2005 (in thousands, except per share data):

 
| **Period**                                    | ** ** | **Total Number of  Common Shares  Purchased** | ** ** | **Average  Price  Paid per  Share** | ** ** | **Total Number of  Common Shares  Purchased as Part  of Publicly  Announced Plans or  Programs (1)** | ** ** | **Approximate Dollar  Value of Shares that  May Yet Be  Purchased Under  the Plans or  Programs** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| June 1,  2004 to June 30, 2004 |       | —                                        |       | —                              |       | —                                                                                               |       | $                                                                                                 | 10,000     |   |
| July 1,  2004 to July 31, 2004 |       | 1,035                                         |       | $                                   | 6.87       |                                                                                                 | 1,035      |                                                                                              | 2,890      |   |
| August 1,  2004 to August 31, 2004  |       | 413                                           |       | $                                   | 6.99       |                                                                                                 | 413        |                                                                                              | —     |   |
| Total                                         |       | 1,448                                         |       |                                |       | 1,448                                                                                                |       | —                                                                                            |       |
|                                               |            |                                               |            |                                     |            |                                                                                                      |            |                                                                                                   |            |  |  |

 

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(1) In June 2003, the Company’sBoard of Directors authorized the repurchase of up to $50.0 million of theCompany’s common shares. The repurchase plan was completed during the threemonths ended August 31, 2004.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None

 

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

 

None

 

**ITEM 5. OTHER INFORMATION**

 

None

 

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**ITEM 6. EXHIBITS**

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

 

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**SIGNATURES**

 

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

 

 
| Date:  October 8, 2004 |                        |
|-----------------------------|-----------------------------|
|                        |                        |
|                        | LAWSON  SOFTWARE, INC. |
|                        |                        |   |
|                        | By:                         | /s/  ROBERT G. BARBIERI |   |
|                        |                        | Robert  G. Barbieri*Executive Vice President  and Chief Financial and Performance Officer*(principal financial and accounting officer) |

 

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**EXHIBIT INDEX**

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

 

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