**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

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

**FOR THE FISCAL YEAR ENDED MAY 31, 2006**

**OR**

**o**                                  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**FOR THE TRANSITION PERIODFROM        TO        **

**Commission file number: 000-51942**

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**LAWSONSOFTWARE, INC.**

(Exactname of registrant as specified in its charter)

| **DELAWARE**(State or other jurisdiction of  incorporation or organization) |   | **20-3469219**(I.R.S. Employer  Identification Number) |
|-----------------------------------------------------------------------------|--------|--------------------------------------------------------|

 

**380ST. PETER STREETST. PAUL, MINNESOTA 55102**

(Addressof principal executive offices)

**(651) 767-7000**

(Registrant’stelephone number, including area code)

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SECURITIESREGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:**Common Stock, $0.01 Par Value Per SharePreferred Stock Purchase Rights**

SECURITIESREGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: **None**

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Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes x    No o

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes o    Nox

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 of1934 during 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 x    No o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of Registrant’s knowledge, in definitive proxy or information statementsincorporated by Reference in Part III of this Form 10-K or anyamendment to this Form 10-K. x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):

Large accelerated filer     o      Acceleratedfiler     x      Non-acceleratedfiler     o

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act). Yes o    No x

Theaggregate market value of the voting and non-voting common stock held bynon-affiliates of the registrant, based upon the closing sale price of CommonStock on November 30, 2005 as reported on the Nasdaq National Market,was approximately $670,924,388.

Thenumber of shares of the registrant’s common stock outstanding on August 22, 2006was 186,356,976.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of the Proxy Statement for the Registrant’s2006 Annual Meeting of Stockholders to be held October 26, 2006 areincorporated by reference in Part III of this Form 10-K Report.

 

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**LAWSON SOFTWARE, INC.**

**Form 10-K**

**Index**
| **PART I.**   |   |                                                                                                                     |   |   |
|--------------------|--------|--------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1.       |   | Business                                                                                                                 |   | 3      |
| Item 1A.           |   | Risk Factors                                                                                                             |   | 16     |
| Item  1B.          |   | Unresolved  Staff Comments                                                                                               |   | 25     |
| Item 2.       |   | Properties                                                                                                               |   | 25     |
| Item 3.       |   | Legal  Proceedings                                                                                                       |   | 25     |
| Item 4.       |   | Submission  of Matters to a Vote of Security Holders                                                                     |   | 25     |
| **PART II.**  |   |                                                                                                                     |   |   |
| Item 5.       |   | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |   | 27     |
| Item 6.       |   | Selected  Consolidated Financial Data                                                                                    |   | 28     |
| Item 7.       |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              |   | 30     |
| Item 7A.      |   | Qualitative  and Quantitative Disclosures About Market Risk                                                              |   | 50     |
| Item 8.       |   | Consolidated  Financial Statements and Supplementary Data                                                                |   | 51     |
| Item 9.       |   | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure                                    |   | 51     |
| Item 9A.      |   | Controls  and Procedures                                                                                                 |   | 51     |
| Item 9B.      |   | Other Information                                                                                                        |   |   |
| **PART III.** |   |                                                                                                                     |   |   |
| Item 10.      |   | Directors  and Executive Officers of the Registrant                                                                      |   | 53     |
| Item 11.      |   | Executive  Compensation                                                                                                  |   | 53     |
| Item 12.      |   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                         |   | 53     |
| Item 13.      |   | Certain  Relationships and Related Transactions                                                                          |   | 53     |
| Item 14.      |   | Principal  Accounting Fees and Services                                                                                  |   | 53     |
| **PART IV.**  |   |                                                                                                                     |   |   |
| Item 15.      |   | Exhibits,  Financial Statement Schedules                                                                                 |   | 54     |
|               |   | SIGNATURES                                                                                                               |   | 59     |

 

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**Forward-LookingStatements**

In addition to historicalinformation, this Annual Report on Form 10-K containsforward-looking statements. The forward-looking statements are made in relianceupon the safe harbor provisions of the Private Securities Litigation Reform Actof 1995. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,”“project,” “should” and similar expressions are intended to identify “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. Forward looking statements include, among others, statements about ourfuture performance, the continuation of historical trends, the sufficiency ofour sources of capital for future needs, the effects of acquisitions and theexpected impact of recently issued accounting pronouncements. Theforward-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 Item 1A “Risk Factors.” Readers arecautioned not to place undue reliance on these forward-looking statements,which reflect management’s opinions only as of the date hereof. The Companyundertakes no obligation to revise or publicly release the results of anyrevision to these forward-looking statements. Readers should carefully reviewthe risk factors described in this Annual Report on Form 10-K and inother documents the Company files from time to time with the Securities andExchange Commission.

**Part I**

**Item 1.**                        Business

**GENERAL**

Lawson Software is a global provider of enterprisesoftware. We provide business application software, services and maintenance tocustomers primarily in the services sector, trade industries, and manufacturing/distributionsectors. Within these broad sectors, we specialize in specific marketsincluding healthcare, public services, retail, financial services, food andbeverage, and wholesale distribution. In the manufacturing sector we serve bothprocess manufacturing and discrete manufacturing customers. In the servicesector we serve both asset-intensive and labor-intensive services enterprises. Ourgoal is to be the leading global Enterprise Resource Planning (ERP) softwareprovider in our target markets, with a particular focus on meeting the needs ofresource-strained and mid-market customers.

On April 25, 2006, we completed our acquisitionof Intentia International AB (“Intentia”), a Stockholm, Sweden-based providerof enterprise software, in an all-stock transaction valued at $458.6 million.Through this acquisition our newly combined company has greater operationalscale, a broader product portfolio, and broader geographic reach with which tocompete in the global enterprise application market. For additional informationregarding this transaction, refer to Note 4 of Notes to Consolidated FinancialStatements.

Lawson serves customers in three geographic regions:the Americas; Europe, Middle East, and Africa (EMEA); and the Asia-Pacificregion including Australia and New Zealand (APAC). We provide software in 20languages to more than 4,000 customers in 40 countries and have 3,400 employeeslocated throughout the world.

Our software solutions include enterprise financialmanagement, human capital management, business intelligence, asset management,enterprise performance management, supply chain management, service management,manufacturing operations, business project management and industry-tailoredapplications. Lawson solutions assist customers in simplifying their businessesor organizations by helping them streamline processes and reduce costsresulting in enhanced business or operational performance. Lawson solutionshelp automate and integrate critical business processes, aiding incollaboration among our customers and their partners, suppliers and employees.Through our consulting services we primarily 

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help our customersimplement Lawson applications. Through our maintenance services we provideongoing support, upgrades, and assistance to our customers.

We generate revenue through software license fees,fees for consulting, including training and implementation services, and feesfor customer support and maintenance. We market and sell our software andservices primarily through a direct sales force, which is augmented by channelpartners and resellers.

Lawson was founded and incorporated in 1975. In February 2001,we reincorporated in Delaware through a merger with our predecessor, LawsonAssociates, Inc., a Minnesota corporation. We established a new Delawarecorporation as our parent company as part of the acquisition of Intentia in April 2006.

Lawson has more than 40offices around the world. Our principal executive offices are located at380 Saint Peter Street, St. Paul, Minnesota 55102-1302. Ourmain telephone number at that location is 651-767-7000. Our websiteis at www.lawson.com. Other than the information expressly set forth in thisannual report, the information contained or referred to on our website is notpart of this annual report.

**ENVIRONMENT**

We face a competitive andchallenging environment for sales of our software and services. Industryconsolidation continues to be a primary factor shaping the selling environment.Our vertical market focus and low total cost of ownership continue to bedifferentiators on which Lawson competes in the market.

**Consolidation**

In recent years, the enterprise software industry hasseen numerous consolidations, mergers and acquisitions. This activity hasincluded acquisitions made by larger companies seeking to acquire customers orto fill out their product line as well as consolidations of companies ofsimilar size joining forces in order to better compete in the market. Forexample, in 2003, J.D. Edwards & Company was acquired by PeopleSoftInc. Subsequently in 2005, PeopleSoft was acquired by Oracle Corporation.Oracle also acquired Retek Inc. in 2005 and Seibel Systems, Inc. in 2006.In July 2006, Infor Global Solutions closed the previously announcedacquisition of SSA Global and may become another major provider of enterprisesoftware in the industry.

While these combinationshave resulted in larger competitors with broader product lines, it has alsoresulted in fewer competitors and less choice for customers. We believe theindustry consolidation has created a void in the market, particularly forcustomers with I/T resource or budget constraints, which generates anopportunity for Lawson. As a result, Lawson opted to combine forces withanother company to fill this market gap and better compete on a global scale.This resulted in Lawson’s April 2006 acquisition of Intentia. Through thisacquisition, Lawson now has greater operational scale, a broader productportfolio, expanded industry vertical market capabilities and broadergeographic reach with which to compete in the global enterprise applicationmarket. We believe that many of our target customers are interested in moresoftware choices than two or three vendors and that Lawson is a competitivechoice compared with the large horizontal players on one end of the industryspectrum and the smaller niche players on the other end. For additionalinformation regarding the Intentia transaction, refer to Note 4 of Notes toConsolidated Financial Statements.

**Vertical Market and Customer Focus**

For the past decade, Lawson and Intentia focused onspecializing in several vertical industry markets including healthcare, publicservices, retail, financial services, food and beverage, manufacturing andwholesale distribution. We believe an industry-specific focus is fundamental toour ability to help our customers achieve their desired results from theirenterprise application investments. Expanding our 

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vertical market capabilityand worldwide customer base was a driving force behind Lawson’s combinationwith Intentia. 

While we develop expertise in the markets we serve, wemanage our company as a single business unit with leaders who are knowledgeablein the sale of our products and services, and support of customers of all sizesacross all industry verticals. Many of our products have applications acrossmultiple industries and are well-suited for customers outside of our targetedverticals. For example, our human capital management, enterprise financialmanagement, business intelligence and asset management solutions have broadapplication across many industries. We have customers both inside and outsideof our targeted verticals with business needs that are well addressed by ourproducts and solutions. We have experienced sales account executives andconsultants that focus on these customers, and a significant part of ourbusiness is conducted outside of our targeted verticals. In order to achievegreater operational scale and leverage costs we intend to continue to operateas one business segment and integrate the operations of the Intentia and thelegacy Lawson under one leadership structure for all verticals.

We believe we have established a respected expertisein the markets and with the customer segments we serve. Because many businessesin our target markets are mid-to-large-size, we also have developed anexpertise serving the mid-market, which comprises the vast majority of ourcustomer base. We consider the mid-market to have strong growth potential forERP vendors during the next five years. Increasingly, businesses within thiscategory are looking to buy, add to or replace the systems that they are usingto help manage their financial, human resources, procurement, distribution orother business management processes.

Lawson’s industry-specificfocus and flexible product design enable fast and easy deployment of oursoftware. We believe our expertise within our markets allows our services teamsto simplify the process of deploying our applications. As a result, ourcustomers save time, effort and expense in implementing, maintaining and usingLawson applications. In addition, Lawson’s professional services organizationprovides industry-specific implementation advice focused on best practices andvalue delivery for our customers. Our industry-specific orientation, flexibleproduct design and customer focus helps differentiate Lawson in the competitiveenterprise applications market from larger competitors.

**COMPETITION**

The enterpriseapplications software industry is intensely competitive, rapidly changing andsignificantly affected by new product offerings and other market activities. Someof our competitors have an advantage over us due to their larger customerbases, larger technical staffs, greater brand name recognition, greaterinternational presence and substantially greater financial and marketingresources. We believe that the principal competitive factors affecting ourmarket include:

·       Productfeatures, functionality, performance and price

·       Knowledgeof a customer’s industry and tailored solutions

·       Companystability, resources and reputation

·       Easeof integration and speed of implementation

·       Levelof customer service

·       Salesand marketing efforts

·       Newproduct and technology introductions

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Webelieve Lawson has competitive advantages over a number of our competitors.Some of these advantages include:

·       31 years of experienceserving mid-market customers

·       Low total cost of ownership

·       Industry-specificexperience

·       Industry-focused solutions

·       Openness and flexibility ofour software’s architecture

Through our April 2006acquisition of Intentia, Lawson has greater operational scale, a broaderproduct portfolio, expanded industry vertical market capabilities and broadergeographic reach with which to compete in the global enterprise applicationmarket. We believe this acquisition better positions Lawson to compete againstour two largest competitors, SAP AG and Oracle Corporation. Both are largeglobal ERP vendors that are increasingly targeting mid-sized businesses astheir traditional larger-customer market becomes saturated. We believe there ismarket demand for an alternative vendor that can offer scalable applicationsthat are simpler to implement and operate than the more complex applications ofSAP and Oracle. Our focus is on delivering simpler solutions with lower totalownership costs.

As a larger, strongercompany, Lawson is now better positioned to compete and win against SAP andOracle in all customer engagements, but especially for resource-constrainedmid-sized organizations. Our newly combined product portfolio now spans allcore enterprise applications, and mid-sized organizations account for themajority of our installed customer base. By increasing our scale and the rangeof our products, we believe that Lawson will also provide a compelling alternativeto attempts by Microsoft, another significant competitor, to move into themiddle-market segment.

In addition to thecombination with Intentia, during fiscal 2006, Lawson also strengthenedits competitive position by launching Lawson System Foundation 9, our newtechnology platform; launching Landmark, our new open standards basedarchitecture; and improving our consulting and maintenance services.

**PRODUCTS AND SOLUTIONS**

Lawson’s enterprisesoftware solutions focus on delivering competitive advantage and businessflexibility. Lawson customers demand sophisticated, global businessapplications and services to manage their business processes more efficiently—allat a low total cost of ownership. Lawson’s solutions fall within two main productlines:  “Lawson S3” and “Lawson M3,” withmany of the solutions in each product line having broad, cross-industryapplication.

**Lawson S3Products and Solutions**—Applications in the S3 product line (legacyLawson applications) help customers “staff, source and serve” in theirrespective markets. The S3 applications include human capital management,enterprise financial management, supply chain management, enterpriseperformance management, and overall system foundation. The Lawson S3 EnterpriseManagement System is specifically designed for services-centric industries.

**Lawson M3Products and Solutions**—Applications in the M3 product line(the Intentia applications) provide solutions for customers who “make, move andmaintain” goods or equipment in their markets. The M3 application suitesinclude financial management, manufacturing operations, enterprise assetmanagement, supply chain management, customer sales and service, enterpriseperformance management, business process management, and overall systemfoundation. The Lawson M3 product line is geared for product-centric andtrade-oriented businesses facing resource constraints and whose processes areoften complex and industry-specific.

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**Benefits of OurSolutions**

We provide business application software in over 40countries that helps automate and improve our customers’ business processes.The open architecture of our software gives customers a choice to deploy apre-configured application or to customize the application in order to conformto unique business processes. The benefits of our software include:

*Automation,Collaboration, and Analysis.*   Our softwareautomates business processes, enables collaboration among process participantsand can deliver detailed analyses of process results. In addition, ourback-office software suites can be implemented with our front-office solutionsand tools to deliver broader organizational benefits. For example, our serviceautomation software can enable authorized staff to assess critical informationon service projects. The system can be configured to enable managers toidentify and assign the appropriate personnel to projects based on skills andavailability. The service automation software has been designed to allowpersonnel to enter their time and expenses associated with a project into oursoftware, which allows these entries to be processed through our financialmanagement software to assist with project accounting; our payroll applicationto update time records; our accounts payable application to reimburse employeeexpenses; and our enterprise performance management application to deliverfinancial, project and resource performance reports to appropriate managers.

*Industry-TailoredSolutions.*   We use our expertise in targetedvertical industries to provide pre-configured functionality that addresses thespecific business needs of these industries, thus increasing the “out-of-the-box”utility of our applications. For example, our healthcare supply chain softwarehelps streamline and optimize the supply chain operations from start to finishfor one hospital or an entire network and our fashion and apparel solution isdesigned for companies that need to manage goods identified by such attributes asstyle, size, and color.

*Flexible,Web-Based Architecture.*   Our software can bedeployed into a customer’s system with pre-configured functionality orcustomized to conform to the customer’s business processes using our softwareextension tools. Our flexible architecture enables our software to run on mostleading hardware and operating system platforms and to operate with the leadingrelational database management systems. This allows our customers to choose themost appropriate platforms independently from selecting our applications.Furthermore, our applications can interface with most legacy systems throughstandard interfaces and integration protocols. The only required non-Lawsonsoftware is IBM Websphere. Because many of our applications do not requiresoftware to reside on the desktop computer and are accessed directly through astandard Web-browser or a supported wireless device, we believe many of ourapplications can be deployed and used without extensive training. Our softwareenables deployment in large, global enterprises and in small and medium-sized businesses.

*Rapid and Cost-EffectiveImplementation.*   Our industry focus and flexiblesoftware can enable fast, efficient deployment. We believe our knowledge of ourtargeted industries allows our industry-focused consulting services teams toimplement our software with an in-depth understanding of the business needs ofthe customer, thereby in many cases reducing time, effort and expense.

**Types of Software**

Our S3 and M3 softwareproduct lines are comprised of core business applications, enterpriseperformance management applications and software extension tools.

**Lawson S3 Software**

*LawsonEnterprise Financial Management.**  *TheLawson S3 Financials Suite helps organizations drive enterprise value withenhanced information and a platform for sustainable compliance. All financialsuite applications are integrated and share common master data whereappropriate. The Lawson Financials 

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Suite providessolutions for the full cycle of finance from budgeting and forecasting throughthe management of projects and activities to the reporting of results.

*LawsonHuman Capital Management.**  *The Lawson S3 Human Capital Management Suite isa full suite of products to help transform the role of the Human Resourcesprofessional from an administrative and policy enforcing role to that of astrategic business partner. Within the Human Capital Management Suite, theLawson HR product group is designed to deliver simple and comprehensiveproducts that offer an alternative to large complex ERP and stand-alone HRsolutions. Lawson offers a stand-alone Human Capital Management solution or anintegrated ERP to mid- and upper mid-market companies that seek alignment ofpeople and processes with low total ownership cost.

*LawsonSupply Chain Management.**  *The Lawson S3 Supply Chain Management Suite is afull suite of integrated procurement and distribution solutions with low totalcost of ownership to mid- and upper-mid-market companies who seek reduced coststhrough enhanced supply chain processes and more effective supply management.

*LawsonSoftware for Retailers.**  *Lawson’s S3 retail-specific software applications arebuilt for high-volume retail enterprises to manage item information, categoryplanning and review, assortment, pricing, promotions, warehouse replenishment,multi-channel ordering, store replenishment, forecasting and orderdetermination. Lawson retail applications can help retailers select store locations,find the right product mix, and run successful promotions.

*LawsonServices Management.**  *TheLawson S3 Services Management Suite includes Services Automation, whichprovides professional services organizations with tools to manage work,resources, time, expenses, and finances; Portfolio Manager, which analyzesactive and prospective engagements to help determine which ones will deliverthe best returns; and Time and Expense, which captures time and expense data inone place for employees, non-employees, offsite workers, and internationalstaff.

*LawsonEnterprise Performance Management (“EPM”).**  *The Lawson S3 Enterprise Performance Management Suite isan integrated suite of capabilities and applications designed to optimizecorporate performance and corporate governance. It can access a variety ofcommon data sources including both Lawson and non-Lawson applications. LawsonEPM provides actionable, role-based self-service information from a single datasource to aid decisions throughout an enterprise. Within the EPM Suite, the Lawson Business Intelligence product can**help streamline the way organizationsgather, analyze, share, and act on business data.

*LawsonBusiness Process Management.*   The**Lawson S3Business Process Management Suite canbe added to almost any Lawson application to tailor the application to acustomer’s specific needs. These include User Productivity Tools, which provideadditional information sharing, collection, and process/analysis capabilities;Data Integration Tools, which connect Lawson software with legacy systems,transaction systems, custom applications, and handheld devices; DevelopmentTools, which allow developers to customize Lawson’s interface, and deploy Lawsonsoftware in new ways; System Tools, which allow an IT team to monitor andmanage an organization’s Lawson system; and Workflow Tools, which allowsorganizations to notify employee’s of action in the system that needs theirapproval based on their business processes.

*LawsonSystem Foundation.**  *TheLawson S3 System Foundation**is thetechnical foundation that determines, to a substantial degree, the performanceand value of the customer’s business software. Lawson has developed astandards-based, open run time infrastructure, Lawson System Foundation, whichconsolidates our core technology with other world-class technologies includingmiddleware from IBM in order to meet or exceed customer’s expectations for easeof implementation, application performance, investment protection, security,scalability, total cost of ownership, and return on investment.

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*Industry-TailoredSolutions.***  **Lawson S3has also utilized our industry-expertise in targeted industries to providefunctionality that addresses the specific business needs of these industries.Examples of these industry-tailored applications for the S3 product lineindustry solutions include: Surgical Instrument Management, Par and CycleCounting, Receiving and Delivery, Retail Operations, and Grant Management.

**Lawson M3 Software**

*LawsonFinancial Management.**  *TheLawson M3 Finance Suite enables customers to capture, analyze and manage financialinformation related to their companies’ operations. M3 finance includesaccounting, costing, cash management, budgeting, consolidation and transactionmanagement functionality. Its flexible accounting structures and processes aredesigned to operate in multiple currencies and manage local legal and taxrequirements.

*LawsonManufacturing Operations.**  *TheLawson M3 Manufacturing Operations Suite enables organizations tocentrally manage product data and control the manufacturing execution process. Itcan manage complex configured and attribute-controlled products and directlysupports costing, planning and execution. Advanced functions support bestpractices such as lean manufacturing and meeting complex regulatoryrequirements (such as traceability and shelf life).

*LawsonSupply Chain Management.**  *TheLawson M3 Supply Chain Management Suite is designed to increase visibilityand improve material flow through the supply chain, in order to optimize theuse of resources and inventory. Supply Chain encompasses sophisticated planningand optimization tools, configurable warehouse execution functions, advancedprocurement applications, and comprehensive fulfillment and scheduling options.

*LawsonEnterprise Asset Management.**  *TheLawson M3 Enterprise Asset Management (EAM) Suite is a preconfiguredmaintenance solution that provides asset data management, preventivemaintenance, work order control, diagnostics management and statisticalanalysis which can significantly enhance the management of operational assets.

*LawsonEnterprise Performance Management.**  *TheLawson M3 Enterprise Performance Management Suite is a set of applicationsthat cross functional and process boundaries to consolidate, integrate andadministrate data in an organization and make this data available in anappropriate format to those who need it. The suite extracts and consolidatesdata generated by dispersed systems and uses pre-built information models tospeed up both the design and delivery time of key measurements to informationusers.

*LawsonCustomer Sales and Service.**  *TheLawson M3 Customer Sales and Service Suite offers a solution for marketdevelopment, sales and after-sales service processes, particularly inmulti-channel sales environments. Applications include sales and marketingautomation, e-sales, sales management, service management, rental management,maintenance order management, and project management.

*LawsonBusiness Process Management.**  *TheLawson M3 Business Process Management Suite provides companies the meansto connect, configure and customize their enterprise application system. Thissuite permits the customization of role-based portals and user interaction,application-to-application integration and business-to-business communication,thereby ensuring that customers’ enterprise needs for business process modelingare fully supported.

*Lawson System Foundation.**  *The Lawson M3 System Foundation Suite providesand manages the essential applications and functions necessary to run andoperate the M3 Enterprise Management System. It combines an industry-standard,open-run-time environment with the tools for managing deployment, security andperformance for all M3 applications.

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**SERVICES**

**Maintenance and Customer Support**

Given Lawson’s focus on seeking to provide the lowestcost of ownership for our customers, we offer a comprehensive customer careprogram called Lawson Total Care. This includes software upgrades, updates, andcorrections for the software under maintenance, as well as various levels ofsupport including access to our knowledge base and the Lawson support team,technical advice, and application management.

Lawson’s maintenance andcustomer support is delivered through Lawson’s Support and Deliveryorganization of approximately 300 employees operating from product and supportcenters located around the world, supporting our global customers in more than20 languages. State-of-the-art infrastructure provides for efficientcollaboration with the customers’ internal support centers as well as withpartners.

**Consulting Services**

Lawson offers a broad range of services to ourcustomers in some 40 countries throughout the world. From the initialassessment and planning, to the implementation, through an upgrade and evenproviding extended support, we leverage Lawson applications to best enable ourcustomer’s desired business outcomes. Our consulting services focus on quickimplementation that lowers the total cost of ownership. We do this throughsimplified delivery methods including pre-configured solutions and deliverythrough global solution centers.

Lawson Learning providesthe training and tools required to quickly and cost-effectively train on Lawsonapplications. Software users can access a large library of training solutionsdelivered via e-learning, attend a class, or take role-based training.

**TECHNOLOGYARCHITECTURE**

**New TechnologyPlatform**

Lawson provides flexible,open, standards-based software solutions. We believe that the open architectureof Lawson’s solutions provides superior quality, a low total cost of ownership,and a path to a Services Oriented Architecture (SOA). Launched in 2006, Lawson’stechnology platform—“Lawson System Foundation 9”—combines Lawson’s newesttechnology with middleware from IBM for a high-performance, standards-basedsolution that provides comprehensive security, scalability, and usability. Italso preserves customers’ choice of hardware platform while providing afoundation for next-generation Lawson applications designed for use within SOAenvironments.

**New ApplicationArchitecture**

In 2006, we launched a new standards-based technologyapplication platform called “Landmark,” which will be used for productsdeveloped and released in the future. The new platform was designed to deliverbusiness applications that are simple, adaptable and manageable. A Lawson innovation,Landmark is our new technology and pattern-driven applications constructionmodel designed to help customers mitigate application complexity by reducingthe lines of instructions required to design and build Lawson softwareapplications. In addition to reducing development time, Landmark generates Javacode, which should help reduce the risk of errors. This Java-based codedelivers interoperability that protects and extends Lawson customers’ existingIT investments while working to ensure compatibility with future applicationsand technologies.

This new business applications platform is designed toincrease overall application quality and improve the product lifecycleexperience for Lawson customers, from construction to deployment, 

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implementation, integration,maintenance, and upgrades. Based on a Service Oriented Architecture (SOA),Landmark is designed to enable Lawson and its customers to quickly and easilymodify and customize business processes for rapidly changing business needs. Thesignificant reduction in lines of code errors and the move to an entirely openand standards-based technology will also help reduce implementation times andfurther lower total cost of ownership.

Landmark-developed applications and Web services willshare the same data repository as customers’ existing Lawson applications whichwill enable customers to more easily transition to the new platform withfewer costs.

We plan to develop futureLawson products using Landmark, for both our M3 and S3 product lines. Thoseproducts are expected to run on an industry standard J2EE applications server.Under our expanded partnership with IBM, we plan to optimize our applicationsto work with IBM’s WebSphere Application Server. Lawson will offer a backboneof standards-based Web Services for SOA environments built on IBM middleware.Landmark supports key standards such as simple object access protocol (SOAP),web-service description language (WSDL), and extensible markup language(XML).

**Principles**

Lawson’s technology architecture is based on theconcept of “Separation of Concerns”, in which there is a clear separation ofthe application and technology layers: the user interface, Web services,application components, database services, and connections to external systems.This approach gives Lawson the flexibility to deliver releases for thetechnology or application layers on different schedules, adopt new technologiesand standards more readily, and develop industry-specific applications. Lawsonhelps protect customer investment and reduce the risks of transition to newreleases. Lawson’s technology architecture adheres to the following principles:

*Simplicity.**  *We believe most of the problems in the softwareindustry are caused by the overwhelming complexity of applications. We seek tosolve the complex problems of our customers with the simplest possiblesolution. Lawson’s applications are designed for simplicity of use fromimplementation through life cycle management; in the user interfaces, inbusiness processes, and through support and maintenance.

*OpenStandards-Based Architecture.*   Lawson pursuesopen standards and a service-oriented architecture for applications. Servicessuch as Internet Object Services and Business Component Integrator (“BCI”) canhelp our customers connect their other systems to Lawson, allowing ourcustomers to work with the computing platforms and technologies they prefer ormust maintain, such as custom-built legacy systems. With Lawson’s openarchitecture, there is no need for customers to abandon other technologyinvestments or rebuild infrastructure to fit Lawson. Lawson’s systems operateon most industry standard hardware platforms including IBM, Sun, andHewlett-Packard, and industry standard operating systems, including IBM i5,UNIX, and Windows on Intel servers.

*RichUser Experience.**  *Lawsonprovides a consistent, easy-to-use, self-evident user experience. Many ofLawson’s products use thin-client architecture, which means that a customer’s internet,intranet, or extranet connection gives quick, easy, and secure access to thoseapplications. Thin-client architecture may reduce staff training time, speedimplementation, ease administration costs, and can give customers a more rapidreturn on their Lawson investment.

*Scalability.*   Ourarchitecture is designed to grow with our customers and meet their evolvingstrategic needs. Lawson applications are designed to be personalized, extended,and integrated to meet the changing needs of an organization.

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*Security.*   Lawson’sapplication and technology infrastructure can allow customers to build securitypolicies as simple or complex as needed to meet the organization’s securityrequirements. Security policies can be created that authorize end users toaccess only the Lawson applications required to get their job done. Once an enduser is authorized to access a Lawson application, even more restrictivesecurity policies can be created that limit the end user to specific functionsrequired to perform their job.

**Architecture Model**

Lawson’s architecture isbased on scalable industry standard J2EE environments. Our solutions areoffered across multiple configurations, giving customers choices for theirplatform, operating system, and database.

***User Access Layer***

*Thin Client.**  *Provides user access via a PC,desktop, laptop, or mobile device. Browsers and thin clients that connect viaan Internet/intranet connection, accesses the Lawson Portal and applicationcomponents.

***Web Server Layer***

*WebServices.*   Lawson supports industrystandards-based connectivity to application components. The Web server,Internet Object Services and the Lawson Portal are key components for deployingLawson applications via the Internet. By using multiple configurations ofLawson System Foundation which uses IBM’s WebSphere Application Server, Lawsondelivers scalability for high volume processing.

*Lawson Portal.*   Providesa single place for users to access all Lawson applications, Lawson extensions,non-Lawson applications, and other sources of information such as Web sites.

***Application/Database Server Layer***

*InternetObject Services.*   Provides the connection betweenLawson and the World Wide Web and manages the communication between Lawson’sbrowser-based interfaces and Lawson applications and databases. The three mainservices are: Application Gateway Services, Data Mining Engine, and DrillAround®—a key feature that allows drilling down to sub-detail informationrelated to certain Lawson applications.

*BusinessLogic.**  *Provides a set of integrated businessrules for Lawson core applications. These applications can be deployedseparately or together as integrated solutions.

*Database.*   Providescustomers the flexibility to select their optimal relational database. Current databasessupported include IBM DB2, Oracle and Microsoft SQL Server.

*ActiveObject Repository.*   A dynamic enterprise datamodel that includes Interface Form Definitions, Information Relationships,Process Definitions, Logic Definitions, Security Definitions, TransactionManagement Definitions, and Open Application Interfaces.

*LawsonSystem Foundation.*   The foundation of Lawson’sarchitecture and critical to system performance, scalability, availability, andreliability; oversees all activities on the Lawson application server,including security, system resources, transactions, data access, and jobschedules.

*Application Server.*   Givescustomers flexibility to use whatever platform fits their size, budget orstrategic direction. Lawson products use industry standard middleware from IBMto run on a variety of hardware platforms such as Compaq, Dell, HewlettPackard, IBM, Microsoft, and Sun.

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**SALES AND MARKETING**

We market and sell our software and services solutionsthrough a combination of a direct sales force, strategic alliances with systemsintegrators, and resellers. Our direct sales force and services organization isaligned with our strategy of providing industry-tailored applications. Withineach services industry, we have a sales team dedicated to prospective customersand another team dedicated to sales to existing customers. We also haveregional sales teams that focus on specific geographic territories. Our salesand service offices are located in three geographic regions: the Americas(including the United States, Latin America, and Canada); Europe, Middle East,and Africa (EMEA); and Asia Pacific (APAC).

In addition to our direct sales teams, we enter intostrategic alliances with systems integrators and resellers to benefit from ourpartners’ resources, expertise and customer base. Business partner alliancesallow us to expand our market presence through increased awareness of oursoftware applications within our partners’ organizations and customer bases,and through their personnel who are trained to implement our software. Ourchannel partners market and promote our software products and typically provideimplementation services to their end-users. Channel partners generate salesleads, make initial customer contacts, and assess needs prior to our introduction.In addition, some of our channel partners engage in customer support andlocalization of our products. We also engage in joint marketing programs,presentations of seminars, attendance at trade shows, and the hosting ofconferences with many of our business partners.

We also use applicationservice providers (ASPs) to distribute our products in a hosted environment.ASPs allow us to reach small-to medium-sized businesses that prefer a hostedsolution. Our software’s architecture is easily distributed over the Internetand is highly scalable to serve many customers. It also supports multi-tenancy,which lets ASPs securely host multiple customers on a single set of ourapplications.

**RESEARCH ANDDEVELOPMENT**

Since our inception, we have made substantialinvestments in software product development. We believe that timely developmentof new software applications, enhancements to existing software applicationsand the acquisition of rights to sell or incorporate complementary technologiesand products into our software offerings are essential to maintain ourcompetitive position in the market. The business application software market ischaracterized by rapid technological change, frequent introductions of newproducts, changes in customer demands, and rapidly evolving industry standards.

We are committed to continued investment in R&D toenhance our existing products as well as new applications using our Landmarkdevelopment for both the M3 and S3 product lines.

Our total research anddevelopment expenses were $60.7 million, $62.2 million, and$64.9 million in fiscal 2006, 2005 and 2004, respectively. As ofMay 31, 2006, our research and development organization consisted ofapproximately 600 employees.

**TRADEMARKS**

“Lawson” and “LawsonSoftware” are registered trademarks in the United States and the European Union.Other trademarks and trade names appearing in this document are the property oftheir respective holders.

**IntellectualProperty and Product Liability**

We regard certain aspects of our internal operations,software and documentation as proprietary, and rely on a combination ofcontract, copyright, patent, trademark and trade secret laws and othermeasures, including confidentiality agreements, to protect our proprietaryinformation. Existing copyright laws afford 

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only limited protection.We believe that, because of the rapid pace of technological change in thecomputer software industry, trade secret and copyright protection is lesssignificant than factors such as the knowledge, ability and experience of ouremployees, frequent software product enhancements, and the timeliness andquality of support services. We cannot guarantee that these protections will beadequate, or that our competitors will not independently develop technologiesthat are substantially equivalent or superior to our technology. Historically,we have provided our clients source code for many of our products. We may electto distribute only object code in the future. In either case, we will permitclients to obtain access to our other source code through a source code escrowarrangement. Access to our source code delivered in object format may increasethe likelihood of misappropriation or other misuse of our intellectualproperty. In addition, the laws of certain countries in which our softwareproducts are, or may be licensed, do not protect our software products andintellectual property rights to the same extent as the laws of the UnitedStates and Sweden.

Software companies have increasingly applied for, andrelied on, the protection of patents. To date, we hold one United States patentand have filed several patent applications. These applications may not resultin issued patents and, even if issued will not provide assurance of acompetitive advantage.

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

Our license agreementswith our clients contain provisions designed to limit the exposure to potentialproduct liability claims. It is possible, however, that the limitation ofliability provisions contained in these license agreements may not be valid asa result of certain local country laws or unfavorable judicial decisions.

**Employees**

As of May 31, 2006, we had approximately3,400 employees, including approximately 500 in sales and marketing,approximately 600 in research and development, approximately 1,800 in servicesand customer support and approximately 500 in administration. Our performancedepends to a large extent on our ability to attract, train and retain highlyqualified personnel. None of our employees is represented by a labor union andwe believe our relations with our employees are good.

Ourcurrent executive officers are:

| **Name**            | ** ** | ** ** | ** ** | **Age**                                               | ** ** | **Position** |
|---------------------|------------|------------|------------|-------------------------------------------------------|------------|--------------|
| Harry Debes         |       | 55         |       | President, Chief  Executive Officer, Director         |
| Robert G. Barbieri  |       | 51         |       | Chief  Financial Officer                         |
| James Anderson      |       | 45         |       | Executive Vice  President, Global Services            |
| Dean J. Hager       |       | 39         |       | Senior Vice President,  Product Management            |
| Bruce B. McPheeters |       | 51         |       | Senior Vice President,  Secretary and General Counsel |
| Guenther Tolkmit    |       | 54         |       | Senior Vice President,  Product Development           |
| Kristin Trecker     |       | 41         |       | Senior Vice President, Human Resources                |

* *

*HarryDebes*has served as our president and chief executiveofficer and as a director since June 2005. From November 2003 until June 2005,Mr. Debes was president and chief executive officer of SPL Worldgroup, aleading provider of enterprise software to the electric utility industry. From May 2001until joining SPL Worldgroup, he was employed by JD Edwards & Co., anenterprise software company, where he served as senior vice president Americasuntil JD Edwards was acquired by Peoplesoft, Inc. in August 2003.From 1990 until May 2001, Mr. Debes was employed by GEAC ComputerCorporation, an 

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enterprise softwarecompany. While working for GEAC, Mr. Debes held a variety of positionsincluding managing director of GEAC Asia-Pacific and president of GEACEnterprise Solutions for the Americas.

*RobertG. Barbieri*has served as our chief financial officersince August 2000. From January 1997 until August 2000, Mr. Barbieriwas employed by Apogee Enterprises, Inc., a publicly traded glass,coatings and service technologies company, serving most recently as vicepresident and chief financial officer. From 1984 until joining Apogee, Mr. Barbieriwas employed by Air Products and Chemicals, Inc., a global gases andchemicals company, where he was controller for the general industries divisionof the gases group. Mr. Barbieri is a certified management accountant.

*JamesAnderson*has served as executive vice president ofglobal services since April 2006. He joined Lawson through the merger withIntentia where he was senior vice president of global services for Intentiasince October 2005. From March 2005 until joining Intentia, Mr. Andersonworked as a consultant. From 1994 until August 2003, he worked at J.D.Edwards & Co, an enterprise software company, and was serving as groupvice president of North American services when J.D. Edwards was acquired byPeopleSoft, Inc in August 2003. He then served as a group vice presidentof services for PeopleSoft until they were acquired by Oracle in March 2005.Prior to working at J.D. Edwards, Mr. Anderson worked for AndersenConsulting for nine years.

*DeanJ. Hager*has served as senior vice president ofproduct management since April 2006. Mr. Hager served as our chiefproduct officer from June 2004 until April 2006, executive vicepresident emerging markets from June 2003 until June 2004, executivevice president global products division from February 2001 until May 2002,executive vice president worldwide marketing from June 2000 to February 2001,vice president, e-business marketing from June 1999 until June 2000,and director of marketing for our former AS/400 business unit from May 1998until June 1999. From March 1989 to May 1998, Mr. Hager wasemployed by IBM, where he held several management positions, with his last positionheld as senior program manager with its server products division.

*BruceB. McPheeters*has served as corporate secretary since October 1999,general counsel since April 2000 and senior vice president since June 2002.Mr. McPheeters served as vice president administration from April 2000until May 2002 and corporate counsel from September 1999 until April 2000.From 1981 until joining Lawson in September 1999, Mr. McPheeters wasa business lawyer in private practice, focusing primarily in the areas ofintellectual property, securities, and mergers and acquisitions of privatelyand publicly held companies. From December 1995 until September 1999,he was employed by the law firm of Gray, Plant, Mooty, Mooty &Bennett, P.A.

*GuentherTolkmit*has served as senior vice president of productdevelopment since April 2006. Mr. Tolkmit served as the chieftechnology officer of Intentia from September 2005 until the time of themerger with Lawson in April 2006, and vice president support and deliveryfor Intentia from March 2005 until August 2005. Before joiningIntentia, Mr. Tolkmit served as chief operating officer and chieftechnology officer for Parsytec AG from 2001 until February 2005.Mr. Tolkmit has also served in a number of senior roles at SAP AGincluding vice president of technology management, worldwide chief marketingofficer, and senior vice president of SAP Ventures. He had formerly heldmanagement positions at Software AG, Cullinet Inc., and Siemens AG.

*Kristin Trecker*hasserved as senior vice president of human resources since April 2006 andvice president of human resources from June 2004 until April 2006. Priorto assuming that position, Ms. Trecker held a variety of roles within theLawson human resources organization since 1994. Prior to joining Lawson in1994, Ms. Trecker was employed in a variety of roles in the healthcare andgaming industries.

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**Subsequent Changesin Executive Officers**

On July 27, 2006, weannounced that the chief operating officer position previously occupied byBertrand Sciard had been eliminated effective July 25, 2006 to streamlinethe organization. Also announced was the departure of our chief financialofficer Robert Barbieri, who will leave the company on or before October 31,2006.

**AvailableInformation**

We make available, free ofcharge, on our website (www.lawson.com) our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K,and any amendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934 as soon as reasonablypracticable after we have electronically filed or furnished such materials tothe Securities and Exchange Commission. The information posted on our websiteis not incorporated into this Annual Report on Form 10-K.

**FinancialInformation about Geographic Areas**

For financial informationabout geographic areas see Note 16 of Notes to Consolidated FinancialStatements filed as part of this Annual Report on Form 10-K.

**Item 1A.**                RiskFactors

**Factors That May AffectOur Future Results or the Market Price of Our Stock**

We operate in a rapidlychanging environment that involves numerous uncertainties and risks. Investorsevaluating our company and its business should carefully consider the factorsdescribed below and all other information contained in this report on Form 10-K.This section should be read in conjunction with the Consolidated FinancialStatements and Notes thereto and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations included in this report on Form 10-K.Any of the following factors could materially harm our business, operatingresults and financial condition. Additional factors and uncertainties notcurrently known to us or that we currently consider immaterial could also harmour business, operating results and financial condition. We may makeforward-looking statements from time to time, both written and oral. Weundertake no obligation to revise or publicly release the results of anyrevisions to these forward-looking statements based on circumstances or eventswhich occur in the future. The actual results may differ materially from thoseprojected in any such forward-looking statements due to a number of factors,including those set forth below and elsewhere in this report on Form 10-K.

***The enterprisesoftware business is highly competitive.***

Wecompete with Oracle Corporation, SAP AG, Microsoft Corporation and other largersoftware companies that have advantages over us due to their larger customerbases, greater name recognition, long operating and product developmenthistory, greater international presence and substantially greater financial,technical and marketing resources. If customers or prospects want to reduce thenumber of their software vendors, they may elect to purchase competing productsfrom Oracle, SAP or Microsoft since those larger vendors offer a wider range ofproducts. Furthermore, Oracle and Microsoft are capable of bundling their softwarewith their database applications, which underlie a significant portion of ourinstalled applications. We also compete with a variety of more specializedsoftware and services vendors, including:

·       single-industrysoftware vendors;

·       humanresource management software vendors;

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·       financialmanagement software vendors;

·       manufacturingsoftware vendors;

·       merchandisingsoftware vendors;

·       servicesautomation software vendors;

·       softwareintegrators and outsourced services providers; and

·       Internet(on demand) software vendors.

Some competitors areincreasingly aggressive with their pricing, payment terms and/or issuance ofcontractual warranties, implementation terms or guarantees. Competitors mayentice our customers to switch software vendors by offering those customersfree products or services. We may be unable to continue to compete successfullywith new and existing competitors without lowering prices or offering otherfavorable terms to customers. We expect competition to persist and intensify,which could negatively impact our operating results and market share.

***Our revenues, andin particular our software license revenue, vary each quarter and are difficultto predict.***

Revenuesfrom license fees in any quarter depend substantially upon our licensingactivity with new and existing customers, and our ability to recognize revenuesin that quarter under our revenue recognition policies. If we do not continueto develop or acquire new products, licensing activity with existing customersmay decline. Licensing activity for our products drives maintenance andservices revenues because we sell maintenance and services for only ourproducts. A decrease in licensing activity will typically lead to a decrease inservices revenue in the same or subsequent quarters. If we do not havesufficient licensing activity with new customers each year, our maintenancerevenue for the following year will decline because new customers are needed tooffset the percentage of existing customers who scale back their businesses,reduce licenses and maintenance contracts, are acquired, or otherwise chose notto renew annual maintenance. Our sales force and marketing team must continueto generate sales leads among existing customers and prospective customers. Whenwe “qualify” a lead, that lead becomes part of our sales “pipeline.” If ourpipeline does not continue to grow in our different markets and geographies,our revenues will eventually decline. The rate at which we convert our pipelineinto actual sales can vary greatly from quarter to quarter for the followingreasons:

·       Theperiod between initial customer contact and a purchase by a customer may varyand can be more than one year. During the sales cycle, prospective customersmay decide not to purchase or may scale down purchases because of competingoffers, budgetary constraints or changes in the prospect’s management,strategy, business or industry.

·       Asubstantial number of our existing and prospective customers make theirpurchase decision within the last few weeks or days of each quarter. A delay ordeferral in a small number of large new software license transactions couldcause our quarterly license revenue to fall significantly short of ourpredictions.

·       Prospectivecustomers may decline or defer the purchase of new products if we do not havesufficient customer references for those products.

·       Newproducts or technologies, software industry mergers and other software industrynews may create uncertainty and cause customers and prospective customers tocancel, postpone or reduce capital spending for our products. We have observedthis uncertainty with some of Intentia’s customers who are concerned that wemight not continue to develop and support Intentia’s M3 products (despite ourcontinued commitment to those products).

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Because a substantialportion of our software license revenue contracts are completed in the latterpart of a quarter, and our cost structure is largely fixed in the short term,unexpected revenue shortfalls and deferrals have a disproportionately negativeimpact on our profitability.

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

Our revenue andprofitability depend on the overall demand for enterprise software and relatedmaintenance and services, particularly in the industries and geographies inwhich we sell our products and services. Demand for enterprise software anddemand for our solutions are affected by general economic conditions,competition, product acceptance and technology lifecycles. Regional and globalchanges in the economy, governmental budget deficits and political instabilityin certain geographic areas have resulted in businesses, government agenciesand educational institutions reducing their spending for technology projectsgenerally and delaying or reconsidering potential purchases of our products andrelated services. The uncertainty posed by the long-term effects of the war inthe Middle East, terrorist activities, potential pandemics, natural disastersand related uncertainties and risks and other geopolitical issues may impactthe purchasing decisions of current or potential customers. Because of thesefactors, we believe the level of demand for our products and services, andprojections of future revenue and operating results, will continue to bedifficult to predict.

***We are required todelay revenue recognition into future periods for portions of our license feeactivity.***

Our entire worldwidebusiness is subject to United States generally accepted accounting principles,commonly referred to as “U.S. GAAP.” Under those rules, we are required todefer revenue recognition for license fees in situations that include thefollowing:

·       thecustomer agreement includes products that are under development or has otherundelivered elements;

·       thecustomer agreement includes essential services, including significantmodifications, customization or complex interfaces, (this is more prevalentwith our M3 products);

·       thecustomer agreement includes acceptance criteria;

·       thecustomer agreement includes extended or contingent payment terms or fees;

·       athird-party vendor, whose technology is incorporated into our products, delaysdelivery of its product to the customer;

·       thecustomer agreement includes a fixed-fee service arrangement for which we do nothave vendor specific objective evidence (VSOE) of fair value; or

·       weare not able to establish historical pricing and maintenance renewal rates tomeet the VSOE requirements of these accounting rules.

We expect that we willcontinue to defer portions of our license fee activity because of thesefactors, with deferrals more likely for (a) our M3 products because ofproduct customization (often required due to the nature of the manufacturingand distribution industries) that is frequently included with new sales,(b) sales to governmental entities because those often include fixed feearrangements for which we do not have VSOE of fair value and (c) sales forlarge license fee contracts because it is more difficult to use standardcontract terms. The amount of license fees deferred may be significant and willvary each quarter, depending on the mix of products sold in each market andgeography, and the actual contract terms.

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***The risks to our business vary for each of our marketsand geographies, and we might not achieve the operational efficiencies andsynergies expected from the Intentia merger.***

Sincethe closing of our merger with Intentia in April 2006, we have beenintegrating our two companies and executing on our business plan. Before themerger, Lawson focused primarily on targeted service industries in NorthAmerica, with our S3 products, and Intentia focused primarily on manufacturingand distribution industries in Europe, with its M3 products. Our integrationplan includes certain facility consolidations, operational process improvementsin our consulting organization, optimization of our sales and marketingorganizations, integration of research and development, and general employeeredundancies. The following factors create execution risks for our businessplan in our respective markets and geographies:

·       ***Maintenance and services revenue and margins.***   LegacyLawson had better maintenance revenue and margins, whereas Intentia had betterprofessional services revenue and margins, in part due to its lower number ofnon-billable services consultants. We need to improve the overall maintenanceand consulting services margin of our combined company to achieve our overallprofitability goals. If new customer activity with new maintenance and servicessales are below expectations our maintenance and services margins may declinebecause new customers are needed to offset attrition of existing customers whodo not renew maintenance or who do not purchase additional services.

·       ***Revenue from cross sales***.   Revenue growththrough the cross sale of Lawson S3 and Intentia M3 products to our respectivecustomers and new customers could be a challenge. Achieving our cross salerevenue goals requires an increase in the number of sales personnel trained tosell our broader set of products. This includes building a sales force in theAmericas to allow increased focus on manufacturing and wholesale distributioncustomer prospects. It also includes training sales personnel from the Intentiaon selling Lawson S3 products and training sales personnel from the legacyLawson organization on selling Intentia M3 products. Currently, our S3 businessintelligence products (primarily in English) and M3 enterprise asset managementproducts are available for cross sale. We plan to expand businessintelligence products into other languages and expand other products for crosssale, including, for example our human capital management S3 products(excluding payroll). However, most of these product development projects couldtake more than a year to complete.

·       ***Sales opportunity pipeline to support revenuegrowth*.  **We must continually grow our sales pipeline to beable to achieve our revenue goals. Experienced, trained personnel are animportant source of sales leads in conjunction with company marketing. As aresult, we need to continue hiring sales people to increase our pipeline andoffset attrition.

·       ***Expanded product offerings.  ***Meaningfulpipeline growth also requires that we continue to expand our product offeringsthrough product development and acquisitions. For example, Lawson has beensuccessful in penetrating a substantial portion of the healthcare market in theUnited States. However, because that market is becoming saturated we mustcontinue to expand our healthcare product offerings in that market and growother markets for our products, or our sales prospects could eventuallydecline.

·       ***EMEA pipeline*.  **Our salespipeline for S3 products in the United States has been growing and mustcontinue to grow for us to achieve our S3 revenue goals. The sales pipeline forM3 products in EMEA has not increased to the level required to achieve our M3revenue goals. This requires a renewed focus on existing opportunities in EMEAas well as new opportunities for cross sales of S3 products in EMEA. If we donot increase our EMEA pipeline and in particular our pipeline for newcustomers, we will be challenged to achieve our long term revenue andprofitability goals.

·       ***Asia Pacific Region (APAC) profitability.  ***Intentia’srevenues in the APAC region are not high enough to support the current coststructure. We are exploring ways to increase APAC sales 

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pipeline andrevenues and better align costs in the APAC region, including expanded use ofan indirect sales channel through business partners. Use of an indirect saleschannel is typically at a lower margin and can take several quarters toimplement. We currently plan to continue serving our existing customers in theAPAC region, but changes in our cost structure and delivery methods couldcreate revenue risks.

If we decide to takeadditional restructuring measures to address these risks, we may be required toincur financial charges in the period when we make that decision on futureperiods, which could have a material adverse impact on our results ofoperations for the appropriate period.

***We may not retain or attract customers if we do notdevelop new products and enhance our current products in response totechnological changes and competing products.***

The enterprise softwaremarket is faced with rapid technological change, evolving standards in computerhardware, software development and communications infrastructure, and changingneeds of customers. Building new products require significant developmentinvestment. A substantial portion of our research and development resources aredevoted to product upgrades that address new technology support, regulatory andmaintenance requirements putting constraints on our resources available for newproduct development. We also face uncertainty when we develop or acquire newproducts because there is no assurance that a sufficient market will developfor those products. We have begun producing certain products using a newbusiness application platform we are developing known as “Landmark.” The goalsof Landmark are to simplify software development and improve product quality. Becausewe are in the early stages of utilizing Landmark, it is too early to confirmwhether we will successfully achieve these goals.

***Business disruptionsmay interfere with our ability to conduct business.***

Our operating results andfinancial condition could be adversely affected in the event of a securitybreach, major fire, earthquake, war, terrorist attack, pandemic or othercatastrophic event. Travel restrictions or impaired access or significantdamage to our data center due to such an event could cause a disruption ofbusiness, which could adversely impact results of operations and financialconditions.

***If we areunable to attract and retain qualified personnel, specifically softwaredevelopers, service consultants and sales personnel, we will be unable todevelop new products and increase our revenue.***

We rely on the continued service of our senior management,software developers, service consultants, sales personnel, finance personneland other key employees. In the software industry, there is substantial andcontinuous competition for highly skilled business, product development,technical and other personnel. The failure to attract, train, retain andeffectively manage employees could negatively impact our development and salesefforts and cause a degradation of our customer service. In particular, theloss of sales or consulting personnel could lead to lost revenue opportunitiesbecause it can take several quarters to hire and train replacement sales orconsulting personnel.

***Deteriorationin our relationship with resellers, systems integrators and other third partiesthat market and sell our products could reduce our revenues.***

Currently, a small portion of our new license sales is generatedby partners. Our revenue growth will depend, in part, on adding new partners toexpand our sales channels, as well as leveraging our relationships withexisting partners. If our relationships with these resellers, systemintegrators and strategic and technology partners deteriorate or terminate, wemay lose sales and marketing opportunities. Some current and potentialcustomers rely on third-party systems integrators to implement and manage newand existing applications. These systems integrators may increase theirpromotion of competing enterprise software applications, or may otherwisediscontinue their relationships with us. We also license third-party softwareproducts that we incorporate into, or resell with, our own software products.For 

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example, we incorporate Micro FocusInternational, Inc.’s software in many of our products and have resellerand alliance relationships with IBM, Business Software Incorporated, BusinessObjects, Hyperion Solutions Corporation, StreamServ, Inc., The HackettGroup, Inc. and other businesses that allow us to resell their offeringswith our products and services. These relationships and other technologylicenses are subject to periodic renewal and may include minimum sales requirements.A failure to renew or early termination of these relationships or othertechnology licenses could adversely impact our business.

***Theintegration of Lawson’s and Intentia’s businesses is complex and increases therisks related to our internal controls over financial reporting under Section404 of the Sarbanes-Oxley Act of 2002.***

As a Swedish company,Intentia was not required to comply with the requirements of Section 404 of theSarbanes-Oxley Act of 2002 concerning the effectiveness of internal controlsover financial reporting. Further, Intentia was not required to follow U.S.GAAP. Consequently, Intentia did not have the staff, experience, training orprocedures to comply with these requirements. Since the closing of the mergerin April 2006, we have been integrating our two businesses. As described inItem 9A of this 10-K on page 52 and 53, we have noted certain controldeficiencies which we believe are significant deficiencies. Also described inItem 9A are some transitional controls we have implemented. However if thesetransition controls fail or if we are unable to implement our complianceprocedures for the combined company on a timely basis, we could encounter moresignificant deficiencies or a material weakness in our internal controls. If inthe future we experience a material weakness, are unable to assert that ourinternal control over financial reporting is effective or, if our independentregistered public accounting firm is unable to attest that our management’sreport is fairly stated or they are unable to express an opinion on theeffectiveness of our internal controls, we could lose investor confidence inthe accuracy and completeness of our financial reports, which would have anegative market reaction.

***We may have exposure to additional tax liabilities.***

As a multinationalorganization, we are subject to income taxes as well as non-income based taxes,in both the United States as well as in various foreign jurisdictions. Significantjudgment is required in determining our worldwide income tax provision andother tax liabilities. In the ordinary course of a global business, there aremany intercompany transactions and calculations where the ultimate tax determinationis uncertain. Our intercompany transfer pricing policies have been the subjectof audits in various foreign tax jurisdictions and will likely be subject toadditional audits in the future. Although we believe that our tax estimates arereasonable, there is no assurance that the final determination of tax audits ortax disputes will not be different from what is reflected in our historicalincome tax provisions and accruals. We are also subject to non-income taxes,such as payroll, sales, use, value-added, net worth, property and goods andservices taxes, both in the United States and various foreign jurisdictions.

***Our effective tax rate may increase or fluctuate,which could increase our income tax expense and reduce our net income.***

Oureffective tax rate could be adversely affected by several factors, many ofwhich are outside of our control, including:

·       Changesin the relative proportions of revenues and income before taxes in the variousjurisdictions in which we operate that have differing statutory tax rates;

·       Changingtax laws, regulations, and interpretations in multiple jurisdictions in whichwe operate;

·       Unanticipatedchanges in tax rates;

·       Changesin accounting and tax treatment of stock-based compensation;

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·       Thetax effects of purchase accounting for acquisitions and restructuring chargesthat may cause fluctuations between reporting periods;

·       Changesto the valuation allowance on net deferred tax assets; or

·       Assessments,or any related tax interest or penalties, in the period in which a settlementtakes place.

We report our results ofoperations based on our determinations of the amount of taxes owed in thevarious tax jurisdictions in which we operate. Periodically, we receive noticesthat a tax authority to which we are subject has determined that we owe agreater amount of tax than we have reported to such authority, and we regularlyengage in discussions, and sometimes disputes with these tax authorities. Weare engaged in disputes of this nature at this time. If the ultimatedetermination of our taxes owed in any of these jurisdictions is for an amountin excess of the tax provision we have recorded or reserved for, our operatingresults, cash flows, and financial condition could be adversely affected.

***Combination-related accounting charges may delay orreduce our profitability.***

We accounted for thecombination with Intentia as a purchase following accounting principlesgenerally accepted in the United States. Under the purchase method ofaccounting, the purchase price of Intentia was allocated to the fair value ofthe identifiable tangible and intangible assets and liabilities that we acquiredfrom Intentia. In addition, accounting for the combination of Intentia underthe purchase method required a decrease in deferred revenue to fair value. Theexcess of the purchase price over Intentia’s tangible net assets was allocatedto goodwill and intangible assets. We are required to perform periodicimpairment tests on goodwill and certain intangibles to evaluate whether theintangible assets and goodwill that we acquired from Intentia continue to havefair values that meet or exceed the amounts recorded on our balance sheet. Ifthe fair values of such assets decline below their carrying value on ourbalance sheet, we may be required to recognize an impairment charge related tosuch decline. As of May 31, 2006, we had goodwill of $454.6 million andacquired intangibles of $154.7 million on our Consolidated Balance Sheet. As aresult of the completed merger with Intentia, we have realized a significant increasein goodwill and acquired intangibles. To the extent that we do not generatesufficient cash flows to recover the net amount of the goodwill and intangiblesrecorded, the goodwill and intangibles could be subsequently written-off. Insuch an event, our results of operations in any given period would benegatively impacted, and the market price of our stock could decline.

***International sales and operations subject us to risksthat can adversely affect our operating results.***

We will derive asubstantial portion of our revenues, and have significant operations, outsideof the United States. Our international operations include softwaredevelopment, sales, customer support and administration. We face challenges inmanaging an organization operating in various countries, which can entaillonger payment cycles and difficulties in collecting accounts receivable,fluctuations in currency exchange rates, overlapping tax regimes, difficultiesin transferring funds from certain countries and reduced protection forintellectual property rights in some countries. We must comply with a varietyof international laws and regulations, including trade restrictions, locallabor ordinances, and import and export requirements.

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

During fiscal 2007, wewill invest substantial resources in moving a significant portion of ourproduct development, maintenance and consulting services to a facility in thePhilippines. We are currently in the process of hiring and training employeesfor our Philippines facility. Our ability to improve margins and gainoperational efficiencies depends in part on the successful operation of thisfacility. We have limited experience with the operation of this type offacility, and we may be unable to achieve the anticipated 

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benefitsexpected of this arrangement. In addition, we may be subject to any economic orpolitical instability that may affect the Philippines.

***We may experience foreign currency gains and losses.***

We conduct a portion ofour business in currencies other than the United States dollar. Our revenuesand operating results are adversely affected when the dollar strengthensrelative to other currencies and are positively affected when the dollarweakens. Changes in the value of major foreign currencies, particularly theEuro, Swedish Krona and British Pound relative to the United States dollar cansignificantly affect revenues and our operating results. Our foreign currencytransaction gains and losses are charged against earnings in the periodincurred.

***Our products are deployed in large and complex systemsand may contain defects or security flaws.***

Because our products aredeployed in large and complex systems, 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 customers 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 customer complaints following installationof our products. We are currently a defendant in several lawsuits wherecustomers have raised these types of issues with our products and services. Inaddition, our products are combined with products from other vendors. As aresult, should problems occur, it may be difficult to identify the source ofthe problem. Software and data security are becoming increasingly importantbecause of regulatory restrictions on data privacy and the significant legalexposures and business disruptions stemming from computer viruses and otherunauthorized entry or use of computer systems. We may not be able to avoid orlimit liability for disputes relating to product performance, software securityor the provision of services. Product defects and security flaws could exposeus to product liability and warranty claims and harm our reputation, whichcould impact our future sales of products and services.

***Competitors may take advantage of our limitedintellectual property protection.***

We consider certainaspects of our internal operations, software and documentation to beproprietary, and rely on a combination of contract, copyright, trademark andtrade secret laws to protect this information. In addition, we currently holdone patent in the United States and have filed several patent applications. Outstandingapplications may not result in issued patents and, even if issued, the patentsmay not provide any competitive advantage. Copyright laws afford only limitedprotection because those laws do not protect product ideas. In addition, whenwe license our products to customers, we provide source code for many of ourproducts. Customers may also access source code through a source code escrowarrangement. Access to our source code provides an opportunity for companies tooffer competing maintenance and product modification services to our customers.Defending our intellectual property rights is time consuming and costly.

***Others may claim that we infringe their intellectualproperty rights.***

Many participants in thetechnology industry have an increasing number of patents and have frequentlydemonstrated a readiness to take legal action based on allegations of patentand other intellectual property infringement. These types of claims are timeconsuming and costly to defend. If a successful claim is made against us and wefail to develop or license a substitute technology, our business, results ofoperations, financial condition or cash flows could be adversely affected.

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***We may be unable toidentify or complete suitable acquisitions and investments; and anyacquisitions and investments we do complete may create business difficulties ordilute our stockholders.***

As part of our businessstrategy, we intend to pursue strategic acquisitions. We may be unable toidentify suitable acquisitions or investment candidates. Even if we identifysuitable candidates, we cannot provide assurance that we will be able to makeacquisitions or investments on commercially acceptable terms. If we acquire acompany, we may incur losses in the operations of that company and we may havedifficulty integrating its products, personnel and operations into our business.In addition, its key personnel may decide not to work for us. We may also havedifficulty integrating acquired businesses, products, services and technologiesinto our operations. These difficulties could disrupt our ongoing business,distract our management and workforce, increase our expenses and adverselyaffect our operating results. We may also incorrectly judge the value or worthof an acquired company or business. Furthermore, we may incur significant debtor be required to issue equity securities to pay for future acquisitions orinvestments. The issuance of equity securities may be dilutive to ourstockholders. If the products of an acquired company are not successful, thoseremaining assets could become impaired, which may result in an impairment lossthat could materially adversely impact our financial position and results ofoperations.

***Open source software may diminish our license fees andimpair the ownership of our products.***

The open source communityis comprised of many different formal and informal groups of softwaredevelopers and individuals who have created a wide variety of software and havemade that software available for use, distribution and modification, often freeof charge. Open source software, such as the Linux operating system, has beengaining in popularity among business users. If developers contribute enterpriseapplication software to the open source community, and that software hascompetitive features and scale to business users in our markets, we will needto change our product pricing and distribution strategy to compete. If one ofour developers embedded open source components into one of our products,without our knowledge or authorization, our ownership and licensing of thatproduct could be in jeopardy. Depending on the open source license terms, theuse of an open source component could mean that all products delivered withthat open source component become part of the open source community. In thatcase, we would not own those delivered products and could not charge licensefees for those products. We currently take steps to train our developers andmonitor the content of products in development, but there is no assurance thatthese steps will always be effective.

***We have adoptedanti-takeover defenses that could make it difficult for another company toacquire control of Lawson or limit the price investors might be willing to payfor our stock.***

Provisions in our certificateof incorporation and bylaws, our stockholder rights plan and under Delaware lawcould make it more difficult for other businesses to acquire us, even if doingso would benefit our stockholders. Our certificate of incorporation and bylawscontain the following provisions, among others, which may inhibit anacquisition of our company by a third-party:

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

·       alimitation on who may call stockholder meetings;

·       aprohibition on stockholder action by written consent; and

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

The issuance of stockunder our stockholder rights plan could delay, deter or prevent a takeoverattempt that stockholders might consider in their 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 

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unlessvarious conditions are met, such as approval of the transaction by our board ofdirectors. Any of these restrictions could have the effect of delaying orpreventing a change in control.

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

As of May 31, 2006,our executive officers, directors, and affiliated entities, in the aggregate,beneficially owned 27.6% of our outstanding common stock. These stockholders,if acting together, would be able to significantly influence all mattersrequiring approval by stockholders, including the election of directors and theapproval of mergers or other business combinations. Sale of a portion of theseshares in the public market, or the perception that such sales are likely tooccur, could depress the market price of our common stock and could impair ourability to raise capital through the sale of additional equity securities

***Our stock price could become more volatile and yourinvestment could lose value.***

All of the factorsdiscussed above could affect our stock price, as well as speculation in thepress and the analyst community, changes in recommendations or earningsestimates by financial analysts, changes in analysts’ valuation measures forour stock, and market trends. A significant drop in our stock price could alsoexpose us to the risk of securities class actions lawsuits, which could resultin substantial costs and divert management’s attention and resources, whichcould adversely affect our business.

**Item 1B.**               UnresolvedStaff Comments

None.

**Item 2.**                        Properties

Our corporate headquartersand executive offices are in St. Paul, Minnesota, USA where we leaseapproximately 307,000 square feet of space. The lease on this facility expires July 31,2015. We also lease approximately 128,000 square feet of space, primarily forregional sales and support offices, elsewhere in the United States.Additionally, Lawson through its international headquarters in Stockholm,Sweden, leases approximately 1.1 million square feet of office space inapproximately 28 countries used primarily as sales and services offices.Expiration dates of leases on these offices range from 2007 to 2017. Webelieve that our current domestic and international facilities will besufficient to meet our needs for at least the next 12 months and that, ifrequired, suitable additional or alternative space will be available oncommercially reasonable terms to accommodate expansion of our operations. TheCompany has developed a restructuring plan as a result of the acquisition ofIntentia which involves certain leased properties. See Note 4 BusinessCombinations for further discussion of restructuring activities.

**Item 3.**                        LegalProceedings

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

**Item 4.**                        Submissionof Matters to a Vote of Security Holders

(a)           The Company held itsAnnual Meeting of Stockholders on April 17, 2006.

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(b)          Pursuant to the electionof the six directors listed under Item 4 (c)(1), Harry Debes, David J. Eskra,David R. Hubers, Thomas G. Hudson, H. Richard Lawson, and Michael A. Rocca wereeach elected as directors during the fiscal year ended May 31, 2006 and untiltheir successors are duly elected or appointed. As part of the closing of themerger with Intentia on April 25, 2006, Messrs. Eskra and Hudsonresigned as directors, and Steven C. Chang, Romesh Wadhwani and Paul Wahl, whoeach had been directors of Intentia, were appointed as directors of Lawson.

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

(1)         Proposalto approve a merger and adopt a merger agreement that effects a restructuringof Lawson Software, Inc. into the wholly-owned subsidiary of LawsonHoldings, Inc., a holding company, which restructuring would beconditioned on the satisfaction or waiver of all conditions to the exchangeoffer;

| ** **   | ** ** | **Shares  For** | ** ** | **Shares  Withheld** | ** ** | **Shares  Abstain** | ** ** |
|--------------|------------|-----------------|------------|----------------------|------------|---------------------|------------|
| Proposal (1) |       | 77,624,157      |       | 119,965              |       | 26,334              |       |

 

(2)         Toapprove the issuance of the number of shares of Lawson Holdings’ common stock,par value USD 0.01 per share, sufficient to consummate our proposed combinationwith Intentia International AB, a company incorporated in Sweden, suchcombination to be effected through an exchange offer for all the outstanding Series Aand B shares and warrants of Intentia;

| ** **   | ** ** | **Shares  For** | ** ** | **Shares  Withheld** | ** ** | **Shares  Abstain** | ** ** |
|--------------|------------|-----------------|------------|----------------------|------------|---------------------|------------|
| Proposal (2) |       | 77,115,112      |       | 627,548              |       | 27,796              |       |

 

(3)         Electionof six directors. All directors nominated by the Board of Directors wereelected.

| ** **        | ** ** | **Shares  For** | ** ** | **Shares  Withheld** | ** ** |
|-------------------|------------|-----------------|------------|----------------------|------------|
| Proposal (3)      |       |            |       |                 |       |
| Harry Debes       |       | 100,963,394     |       | 162,397              |       |
| David J. Eskra    |       | 100,967,545     |       | 158,246              |       |
| David R. Hubers   |       | 100,935,676     |       | 190,115              |       |
| Thomas G. Hudson  |       | 98,171,562      |       | 2,954,229            |       |
| H. Richard Lawson |       | 100,723,003     |       | 402,788              |       |
| Michael A. Rocca  |       | 100,971,184     |       | 154,607              |       |

 

(4)         Toratify the appointment of PricewaterhouseCoopers LLP as independent registeredpublic accounting firm for the fiscal year ending May 31, 2006;

| ** **   | ** ** | **Shares  For** | ** ** | **Shares  Withheld** | ** ** | **Shares  Abstain** | ** ** |
|--------------|------------|-----------------|------------|----------------------|------------|---------------------|------------|
| Proposal (4) |       | 100,708,966     |       | 387,050              |       | 29,775              |       |

 

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**Part II**

**Item 5.**                        Marketfor Registrant’s CommonEquity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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

| ** **        | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------|------------|----------|------------|---------|------------|
| Fiscal 2006: |       |     |       |    |       |
| Fourth Quarter    |       | $        | 8.05       |    | $          | 6.56 |   |
| Third Quarter     |       | $        | 8.00       |    | $          | 7.08 |   |
| Second Quarter    |       | $        | 7.91       |    | $          | 6.07 |   |
| First Quarter     |       | $        | 6.49       |    | $          | 5.02 |   |
| Fiscal 2005: |       |     |       |    |       |
| Fourth Quarter    |       | $        | 6.07       |    | $          | 4.92 |   |
| Third Quarter     |       | $        | 7.05       |    | $          | 5.80 |   |
| Second Quarter    |       | $        | 6.50       |    | $          | 4.98 |   |
| First Quarter     |       | $        | 7.46       |    | $          | 5.48 |   |

 

We have never declared or paid any cash dividends onour common stock and do not anticipate paying cash dividends in the foreseeablefuture.

As of August 22, 2006, the approximatenumber of registered stockholders of record was 171.

Between March 1, 2006and May 31, 2006 we issued 330,378 shares of common stock on a netshare basis pursuant to the exercise of outstanding stock options for anaggregate consideration of $257,859 in reliance upon Rule 701 of theSecurities Act of 1933, as amended.

(b)   As of May 31, 2006, we held $60.8 million of netproceeds from our initial public offering in interest-bearing, investment gradesecurities. During the three months ended May 31, 2006, we used $1.5 millionfor capital expenditures, $5.6 million were used for the business acquisitionwith Intentia and approximately $41.5 million for the repayment of debt andinterest.

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**Item 6.**                        SelectedConsolidated Financial Data

| ** **                                             | ** ** | **Year Ended May 31,**                              | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2006(1)**                                                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                             | ** ** | **(in thousands, except per share data)** | ** ** |
| **Consolidated Statements of  Income Data:**           | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| License fees                                           |       | $                                                                  | 71,076     |   | $ | 57,743 |   | $ | 92,338 |   | $ | 77,614 |   | $ | 150,243 |   |
| Maintenance                                            |       | 188,155                                                            |       | 170,723 |   | 154,938 |   | 142,645 |   | 134,966 |   |
| Consulting                                             |       | 131,545                                                            |       | 106,718 |   | 116,307 |   | 124,059 |   | 143,127 |   |
| Total revenues                                         |       | 390,776                                                            |       | 335,184 |   | 363,583 |   | 344,318 |   | 428,336 |   |
| Total cost of revenues                                 |       | 171,542                                                            |       | 150,584 |   | 152,247 |   | 156,084 |   | 184,654 |   |
| Gross profit                                           |       | 219,234                                                            |       | 184,600 |   | 211,336 |   | 188,234 |   | 243,682 |   |
| Operating  expenses:                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Research and development                               |       | 60,711                                                             |       | 62,158 |   | 64,888 |   | 59,115 |   | 66,897 |   |
| Sales and marketing                                    |       | 83,193                                                             |       | 75,637 |   | 93,138 |   | 102,963 |   | 124,630 |   |
| General and administrative(2)                          |       | 54,827                                                             |       | 36,443 |   | 37,721 |   | 29,972 |   | 32,083 |   |
| Other general expenses                                 |       | —                                                             |       | — |   | — |   | — |   | 655 |   |
| Restructuring                                          |       | 1,825                                                              |       | 5,028 |   | 2,210 |   | 6,035 |   | 3,258 |   |
| Amortization of acquired intangibles                   |       | 2,122                                                              |       | 1,545 |   | 1,274 |   | 877 |   | 622 |   |
| Total operating expenses                               |       | 202,678                                                            |       | 180,811 |   | 199,231 |   | 198,962 |   | 228,145 |   |
| Operating income  (loss)                               |       | 16,556                                                             |       | 3,789 |   | 12,105 |   | (10,728 | ) | 15,537 |   |
| Total other  income (expense), net(3)                  |       | 11,111                                                             |       | 4,328 |   | 3,209 |   | 4,457 |   | (1,573 | ) |
| Income (loss)  before income taxes                     |       | 27,667                                                             |       | 8,117 |   | 15,314 |   | (6,271 | ) | 13,964 |   |
| Provision  (benefit) for income taxes                  |       | 11,708                                                             |       | 2,855 |   | 7,323 |   | (2,446 | ) | 5,586 |   |
| Net income (loss)                                      |       | 15,959                                                             |       | 5,262 |   | 7,991 |   | (3,825 | ) | 8,378 |   |
| Accretion on and  conversion of preferred stock(4)     |       | —                                                             |       | — |   | — |   | — |   | (30,098 | ) |
| Net income (loss)  applicable to common stockholders   |       | $                                                                  | 15,959     |   | $ | 5,262 |   | $ | 7,991 |   | $ | (3,825 | ) | $ | (21,720 | ) |
| Net income (loss) per  share:                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                  |       | $                                                                  | 0.14       |   | $ | 0.05 |   | $ | 0.08 |   | $ | (0.04 | ) | $ | (0.27 | ) |
| Diluted                                                |       | $                                                                  | 0.14       |   | $ | 0.05 |   | $ | 0.07 |   | $ | (0.04 | ) | $ | (0.27 | ) |
| Shares used in  computing net income (loss) per share: |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                  |       | 110,995                                                            |       | 99,068 |   | 98,462 |   | 98,165 |   | 79,630 |   |
| Diluted                                                |       | 115,350                                                            |       | 104,623 |   | 107,000 |   | 98,165 |   | 79,630 |   |

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  (1) Fiscal 2006 data includes Intentia results forthe five week period from April 25, 2006 to May 31, 2006.

       (2) In fiscal 2006, general and administrative expenses included $5.7million of Intentia expenses for the five weeks following the acquisition, $6.3million in stock compensation charge relating to an executive separationagreement and approximately $4.9 million of integration related costsassociated with Intentia.

       (3) In fiscal 2006, our average invested balances increased by $53.6million, while average yield increased from 2.1% in 2005 to 4.0% during 2006,increasing interest earned by $6.4 million.

In fiscal 2002, weused $10.2 million of proceeds from our initial public offering to repaysenior subordinated convertible notes. Due to the repayment of the notes priorto the scheduled maturity 

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date, we recordedearly extinguishment of debt expense consisting of the unamortized debtissuance costs and the discount on the notes totaling $2.3 million.

       (4) In fiscal 2002, as a result of the conversion of the Series APreferred Stock to common stock, which accelerated the amortization of thebeneficial conversion feature, we recognized a $30.0 million non-cashcharge to net income available to common stockholders for the unamortized valueof the beneficial conversion feature of our preferred stock. We also recognizedaccretion on the preferred stock of $0.1 million in the fiscal year ended May 31,2002.

| ** **                                        | ** ** | **May 31,**        | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **2006(1)**             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                        | ** ** | **(in thousands)** | ** ** |
| **Consolidated Balance Sheet  Data:**             |       |                    |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents  and marketable securities |       | $                       | 306,581    |   | $ | 234,613 |   | $ | 208,982 |   | $ | 260,512 |   | $ | 229,867 |   |
| Working capital                                   |       | 168,201                 |       | 178,410 |   | 165,336 |   | 213,258 |   | 204,100 |   |
| Total assets                                      |       | 1,170,652               |       | 420,718 |   | 423,598 |   | 432,209 |   | 436,468 |   |
| Long-term debt,  net of current portion      |       | 4,275                   |       | — |   | 990 |   | 255 |   | 904 |   |
| Mandatory  redeemable common stock                |       | —                  |       | — |   | — |   | — |   | 374 |   |
| Total stockholders’  equity                  |       | 791,659                 |       | 293,055 |   | 282,886 |   | 289,399 |   | 285,484 |   |
|                                                   |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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       (1) On April 25, 2006, we completed our acquisition of Intentia inan all-stock transaction valued at $458.6 million. Increases in the balancesheet line items reflect the acquisition.

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**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

*The following should be read in conjunction with ourconsolidated financial statements, the notes to those statements and otherfinancial information appearing elsewhere in this Annual Report on Form 10-K.*

**Business Overview**

We are a global providerof enterprise software. We provide business application software, services andmaintenance to customers primarily in the services sector, trade industries,and manufacturing/distribution sectors. Within these broad sectors, wespecialize in specific markets including healthcare, public services, retail,financial services, food and beverage, manufacturing and wholesaledistribution. In the manufacturing sector we serve both process manufacturingand discrete manufacturing. In service sector we serve both asset-intensiveservices and labor-intensive services. Our goal is to be the leading globalEnterprise Resource Planning (ERP) software provider in our target markets, witha particular focus on meeting the needs of resource-strained and mid-marketcustomers.

**Acquisitions**

The Company’s acquisitionswere accounted for under the purchase method of accounting. Accordingly, theassets and liabilities acquired were recorded at their estimated fair values atthe effective date of the acquisition and the results of operations have beenincluded in the audited consolidated statements of income since the acquisitiondate. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,“*Goodwill and Other Intangible Assets*,”goodwill recorded as a result of these acquisitions is subject to an annualimpairment test and is not amortized. These acquisitions are intended toenhance our focus on targeted vertical markets and to provide additionalvalue-added products and services to our clients.

***Business Combination with Intentia International AB***

On April 25, 2006, Lawson Software, Inc. (“Lawson”)and Intentia International AB (“Intentia”) announced the completion of their combinationin an offer by Lawson to exchange 0.5061 of a newly issued share of commonstock for each outstanding Intentia Series A share (“Series A share”),0.4516 of a newly issued share of common stock for each outstanding Intentia Series Bshare (“Series B share, and with the Series A shares, as the Shares)and 0.2157 of a newly issued share of common stock for each warrant to purchaseSeries B shares (“the Warrant”) that is validly tendered and not properlywithdrawn. The exchange offer wasaccomplished by a newly formed holding company that became the public parentcorporation of Lawson and Intentia following the exchange offer.

Thetotal preliminary purchase price is comprised of (in thousands):

| Value of common  stock issued in exchange for shares and warrants in Intentia: 80,124,336 shares  at $5.54 per share |   | $     | 443,889 |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|-------|---------|--------|
| Estimated cash purchase of shares not tendered                                                                            |   | 4,856 |    |
| Transaction costs                                                                                                         |   | 9,856 |    |
| Total preliminary  purchase price                                                                                         |   | $     | 458,601 |   |

 

*Financial benefitsand potential synergies*

We believe that the combination will provide thecombined business with the opportunity to achieve double digit operating profitmargin after nine months following consummation of the exchange offer,excluding intangible amortization, transaction and integration costs. Operationalefficiencies and synergies are expected to be achieved in the areas of certainfacility consolidations, operational process 

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improvements in theconsulting organization, optimization of the sales and marketing organizations,integration of research and development activities and general employeeredundancies. Our expectations are based on our integration planning,anticipated revenue and expense synergies for the combined company, and currentfinancial and business trends for legacy Lawson and Intentia.

In the long term, we believe that the combinationcreates potential synergies in growth for the combined business. Theseopportunities include leveraging sales channels and cross selling expandedproduct lines across the combined business’ entire customer base. We expect tobe able to enhance the combined business’ product marketing and leverage thecombined business’ competitive position in the markets it serves, and thereby strengthenour brand awareness.

We expect that thecombination will result in increased production and development capabilitiesand a better-positioned enterprise software business. The combination of LawsonSoftware and Intentia creates a more balanced operating model since thecombined business will have a broader product portfolio and expanded customerbase across wider geographies. In addition, the ability to cross-sell into eachcompany’s respective customer base represents revenue enhancement opportunities.

***Other Acquisitions***

On October 15, 2003, we acquired all of theoutstanding capital stock of Apexion Technologies, Inc. (Apexion) for$8.0 million in cash, net of cash acquired. Terms of the initial agreementprovide for additional cash payments ranging from zero to $2.0 million,contingent upon the future performance of Apexion measured annually through November 30, 2005.As of May 31, 2006 with contingent considerations expired, noadditional consideration was earned or recorded under this agreement. Apexionprovided materials and equipment logistics solutions for the healthcareindustry.

On September 30, 2003, we acquired all of theoutstanding capital stock of Closedloop Solutions, Inc. (Closedloop) for$4.2 million in cash, net of cash acquired. Closedloop providedcollaborative budgeting, planning and forecasting solutions using real-time,transactional functionality.

On July 24, 2003, we acquired all of theoutstanding capital stock of Numbercraft Limited (Numbercraft) for$3.7 million in cash, net of cash acquired and $0.3 million in notespayable. Terms of the initial agreement provided for additional cash paymentsranging from zero to $9.0 million contingent upon the future performanceof Numbercraft measured periodically through fiscal 2007. Any contingentconsideration earned is recorded as additional goodwill. During the fiscalyears ended May 31, 2006, 2005 and 2004, $0.2 million,$0.5 million and $1.1 million of additional consideration was earned andrecorded as additional goodwill, respectively. The amount earned in fiscal 2006has been included on the balance sheet in notes payable to the formerprincipals of Numbercraft. On May 4, 2006 the Company and the formerprincipals agreed to terminate the remaining future contingent considerationsof $5.6 million for a payment of $0.9 million. As a result of the agreedtermination, the payment was recorded in general and administrative expenses infiscal 2006. This payment was not recorded to goodwill as it provides no futurevalue to the Company. Numbercraft provided solutions for retailers and consumerpackaged goods companies, which enable a quantitative understanding of consumerdynamics, product and offer performance, and client trends.

*Subsequent Event.*   OnJuly 20, 2006 the Company acquired the equity of Competency AssessmentSolution (“CAS”) to augment its human capital management solutions.  The purchase price consisted of $2.5 milliondollars in cash including the settlement of debt totaling $1.4 million. Thefinal purchase price is subject to adjustment based on the final closingbalance sheet.

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**Purchase of CustomerMaintenance Contracts**

On April 30, 2004, we acquired assetsconsisting of client maintenance contracts and client lists from SiemensMedical Solutions Health Services Corporation (Siemens) for $19.8 millionin cash, $2.6 million in settlement of amounts owed to the Company by Siemensand $1.7 million in deferred revenue assumed. Of the total purchase price,$22.9 million was allocated to the maintenance contracts and is beingamortized over the remaining life of the contracts based on estimated periodiccontractual revenue recognized. The purchase price allocated to the client listof $1.0 million is being amortized on a straight-line basis over7 years. The remaining purchase price of $0.2 million in transitionalsupport costs was charged to cost of services as the services were performedin 2004.

The asset purchaseagreement was part of an overall restructuring of a 10-year partner agreementbetween Siemens and legacy Lawson. Under the asset purchase agreement, weassumed responsibility for supporting customers who use our softwareapplications previously supported by Siemens.

**Critical AccountingPolicies and Estimates**

Our discussion and analysis of financial condition andresults of operations are based upon our audited consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities at the date of the financialstatements, the reported amounts of revenues and expenses during the reportingperiods, and related disclosures of contingent assets and liabilities. TheNotes to Consolidated Financial Statements contained herein describe oursignificant accounting polices used in the preparation of the consolidatedfinancial statements. On an on-going basis, we evaluate our estimates,including, but not limited to, those related to bad debt, intangible assets andcontingencies. We base our estimates on historical experience and on variousother assumptions that we believe to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results could differ from these estimates.

We believe the critical accounting polices listed belowreflect our more significant judgments, estimates and assumptions used in thepreparation of our consolidated financial statements.

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

The significant judgmentsfor revenue recognition typically involve whether collectibility can beconsidered probable and whether fees are fixed or determinable. In addition,our transactions often consist of multiple element arrangements, whichtypically include license fees, maintenance and support fees and consulting servicefees. These multiple element arrangements must be analyzed to determine therelative fair value of each element, the amount of revenue to be recognizedupon shipment, if any, and the period and conditions under which deferredrevenue should be recognized.

We recognize revenue inaccordance with the provisions of the American Institute of Certified Public Accountants (AICPA)Statement of Position (SOP) 97-2, *Software RevenueRecognition*, as amended, and SOP 98-9, *Modificationof SOP 97-2, Software Revenue Recognition, With Respect to CertainTransactions*, as well as Technical Practice Aids issued from time totime by the AICPA, and in accordance with the Securities and ExchangeCommission Staff Accounting Bulletin (SAB) No. 104, *Revenue Recognition*. We license software undernon-cancelable license agreements and provide related consulting services,including training, and implementation services, as well as ongoing customersupport and maintenance. 

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When our consulting, training and implementationservices are not considered essential to the functionality of our softwareproducts, are sold separately and also are available from a number ofthird-party service providers our revenues from these services are generallyrecorded separately from license fees and recognized as the services areperformed. Software arrangements which include certain fixed-fee servicecomponents are usually recognized as the services are performed whilecorresponding costs to provide these services are expensed as incurred.Software arrangements including services that are essential to thefunctionality of our software products are recognized in accordance with SOP 81-1,*Accounting for Performance of Construction-Type andCertain Production-Type Contracts*, using contract accounting and thepercentage-of-completion methodology based on labor hours input. The amounts ofrevenue and related expenses reported in the consolidated financial statementsmay vary, due to the amount of judgment required to address significantassumptions, risks and uncertainties in applying the application of thepercentage-of-completion methodology. Our specific revenue recognition policiesare as follows:

·       SoftwareLicense Fees—License fee revenues from end-users are recognized when thesoftware product has been shipped, provided a non-cancelable license agreementhas been signed, there are no uncertainties surrounding product acceptance, thefees are fixed or determinable and collection of the related receivable isconsidered probable. Provided the above criteria are met, license fee revenuesfrom resellers are recognized when there is a sell-through by a reseller to anend-user. A sell-through is determined when we receive an order form from a resellerfor a specific end-user sale. We do not generally offer rights of return,acceptance clauses or price protection to our customers. In situations wheresoftware license contracts include rights of return or acceptance clauses,revenue is deferred until the clause expires. Typically, our software licensefees are due within a 12-month period from the date of shipment. If thefee due from the customer is not fixed or determinable, including payment termsgreater than twelve months from shipment, revenue is recognized as paymentsbecome due and all other conditions for revenue recognition have beensatisfied. In software arrangements that include rights to multiple deliveredelements such as software products or specified upgrades and undelivered elementssuch as support or services, we allocate the total arrangement fee according tothe fair value of each element using vendor-specific objective evidence.Vendor-specific objective evidence of fair value is determined using the pricecharged when that element is sold separately. In software arrangements in whichwe have fair value of all undelivered elements but not of a delivered element,we use the residual method to record revenue. Under the residual method, thefair value of the undelivered elements is deferred and the remaining portion ofthe arrangement fee is allocated to the delivered element 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.

·       Maintenanceand Support—Revenues from customer maintenance and  support contracts are deferred and recognizedratably over the term of the agreements. Revenues for maintenance and supportthat are bundled with license fees are deferred based on the vendor specificobjective evidence of fair value of the bundled maintenance and support andrecognized over the term of the agreement. Vendor specific objective evidenceof fair value is based on the renewal rate for continued maintenance andsupport arrangements.

·       ConsultingServices—Revenues from consulting services (including training andimplementation services) are recognized as services are provided to customers.Revenues for consulting services that are bundled with license fees aredeferred based on the vendor-specific objective evidence of fair value of thebundled services and recognized when the services are performed.Vendor-specific 

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objective evidence of fairvalue is based on the price charged when training and consulting services aresold separately.

*Allowancefor Doubtful Accounts.**  *Wemaintain an allowance for doubtful accounts at an amount we estimate to besufficient to provide adequate protection against losses resulting fromextending credit to our customers. 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 customerreserves 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 affecting future results of operations.

*SalesReturns and Allowances.*   Although we do notprovide a contractual right of return, in the course of arriving at practicalbusiness solutions to various warranty and other claims, we have allowed salesreturns and allowances. We record a provision for estimated sales returns andallowances on licenses in the same period the related revenues are recorded orwhen current information indicates additional amounts are required. These estimatesare based on historical experience determined by analysis of specific returnactivity and other known factors. If the historical data we utilize does notreflect future performance, then a change in the allowances would be necessaryin the period such determination has been made affecting future results ofoperations.

*Valuationof Long-Lived and Intangible Assets and Goodwill.**  *We review identifiable intangible andother long-lived assets for impairment** **inaccordance with SFAS No. 144  *Accounting for the Impairment or Disposal of Long-Lived Assets*,whenever 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 undiscounted cashflows method is used to determine whether the long-lived asset is impaired.Cash flows would include the estimated terminal value of the asset and excludeany interest charges. To the extent the carrying value of the asset exceeds theundiscounted cash flows over the estimated remaining life of the asset; theimpairment is measured using the discounted cash flows method. The discountrate utilized is based on management’s best estimate of the related risks andreturn at the time the impairment assessment is made.

If events or changes in circumstances indicate thecarrying amount of goodwill may not be recoverable, in accordance with SFAS No. 142*Goodwill and Other Intangible Assets*,the first step of the goodwill impairment test, used to identify potentialimpairment, compares the fair value of a reporting unit with its carryingamount, including goodwill. We operate as one reporting unit and thereforecompare our book value to market value. Market value is determined utilizingour market capitalization plus a control premium. If our market value exceedsour book value, goodwill is considered not impaired, thus the second step ofthe impairment test is not necessary. If our book value exceeds our marketvalue, the second step of the goodwill impairment test is performed to measurethe amount of impairment loss, if any. The second step of the goodwillimpairment test, used to measure the amount of impairment loss, compares theimplied fair value of the goodwill with the book value of the goodwill. If thecarrying value of the goodwill exceeds the implied fair value of the goodwill,an impairment loss would be recognized in an amount equal to the excess. Anyloss recognized cannot exceed the carrying amount of goodwill. After a goodwillimpairment loss is recognized, the adjusted carrying amount of goodwill is thenew accounting basis. A subsequent reversal of a previously recognized goodwillimpairment loss is prohibited once the measurement of that loss is completed.

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*IncomeTaxes.**  *Theprovision for income taxes consists of provisions for federal, state, andforeign income taxes. The Company operates in an international environment withsignificant operations in various locations outside of the United States. Accordingly,the consolidated income tax rate is a composite rate reflecting the earnings invarious locations and the applicable rates.

Significant judgment is required in determining ourworldwide income tax provision. In the ordinary course of a global business,there are many transactions and calculations where the ultimate tax outcome isuncertain. Our judgments, assumptions, and estimates relative to the provisionfor income tax take into account current tax laws, our interpretation ofcurrent tax laws, and possible outcomes of current and future audits conductedby foreign and domestic tax authorities. Although we believe that our estimatesare reasonable, the final tax outcome of matters could be different from thatwhich is reflected in our historical income tax provision and accruals. Suchdifferences could have a material effect on the amounts provided in ourConsolidated Balance Sheets and Consolidated Statements of Income.

In conjunction with preparing the global taxprovision, we must assess temporary differences resulting from the differenttreatment of specific items for tax and financial reporting purposes. Thesedifferences result in deferred tax assets and liabilities, which are includedwithin our Consolidated Balance Sheets. As part of this process, we must alsoassess the likelihood that deferred tax assets will be realized from futuretaxable income and, based on this assessment establish a valuation allowance,if required. Our determination of our valuation allowance is based upon anumber of assumptions, judgments, and estimates, including historical operatingresults, forecasted earnings, future taxable income, and the relativeproportions of revenue and income before taxes in the various domestic andinternational jurisdictions in which we operate. To the extent we establish avaluation allowance or change the valuation allowance in a period, except as discussedbelow for pre-acquisition deferred tax assets that had a pre-acquisitionvaluation allowance, we reflect the change with a corresponding increase ordecrease to our tax provision in our Consolidated Statements of Income.

Under the provisions of SFAS No. 109, *Accounting for Income Taxes*, and related interpretations,future period reductions to the valuation allowance related to Intentia’sdeferred tax assets that existed as of the date of the acquisition of Intentiaare first credited against goodwill, then to the other identifiable assetsexisting at the date of acquisition, and then, once these assets have beenreduced to zero, credited to the income tax provision. A provision benefit willnot be realized for amounts credited against goodwill and other identifiableassets.

*Contingencies.**  *The Company is subject to thepossibility of various loss contingencies in the normal course of business. TheCompany accrues for loss contingencies when a loss is estimatable and probable.

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**Results ofOperations**

Thefollowing table sets forth certain line items in our Consolidated Statements ofIncome as a percentage of total revenues and the percentage of periodover period growth for the periods indicated:

| ** **                           | ** ** | **Year Ended May 31,  Percent of Total Revenue** | ** ** | **Percent of Dollar Change  Year over Year** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                                                       | ** ** | **2005**                                                              | ** ** | **2004** | ** ** | **2006/2005** | ** ** | **2005/2004** | ** ** |
| Revenues:                            |       |                                                                           |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| License fees                         |       | 18.2                                                                           | %          | 17.2                                                                  | %          | 25.4 | % |   | 23.1 | % |   |   | (37.5 | )% |   |
| Maintenance                          |       | 48.1                                                                           |       | 50.9                                                                  |       | 42.6 |   |   | 10.2 |   |   |   | 10.2 |   |   |
| Consulting                           |       | 33.7                                                                           |       | 31.9                                                                  |       | 32.0 |   |   | 23.3 |   |   |   | (8.2 | ) |   |
| Total revenues                       |       | 100.0                                                                          |       | 100.0                                                                 |       | 100.0 |   |   | 16.6 | % |   |   | (7.8 | ) |   |
| Cost of revenues:                    |       |                                                                           |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Cost of license fees                 |       | 3.4                                                                            |       | 3.0                                                                   |       | 4.4 |   |   | 34.0 |   |   |   | (37.5 | ) |   |
| Cost of maintenance                  |       | 7.8                                                                            |       | 9.4                                                                   |       | 7.5 |   |   | (3.4 | ) |   |   | 14.9 |   |   |
| Cost of consulting                   |       | 32.7                                                                           |       | 32.5                                                                  |       | 30.0 |   |   | 17.1 |   |   |   | 0.2 |   |   |
| Total cost of revenues               |       | 43.9                                                                           |       | 44.9                                                                  |       | 41.9 |   |   | 13.9 |   |   |   | (1.1 | ) |   |
| Gross profit                         |       | 56.1                                                                           |       | 55.1                                                                  |       | 58.1 |   |   | 18.8 |   |   |   | (12.7 | ) |   |
| Operating expenses:                  |       |                                                                           |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Research and development             |       | 15.5                                                                           |       | 18.5                                                                  |       | 17.8 |   |   | (2.3 | ) |   |   | (4.2 | ) |   |
| Sales and marketing                  |       | 21.3                                                                           |       | 22.6                                                                  |       | 25.6 |   |   | 10.0 |   |   |   | (18.8 | ) |   |
| General and administrative           |       | 14.1                                                                           |       | 10.9                                                                  |       | 10.4 |   |   | 50.4 |   |   |   | (3.4 | ) |   |
| Restructuring                        |       | 0.5                                                                            |       | 1.5                                                                   |       | 0.6 |   |   | (63.7 | ) |   |   | (127.5 | ) |   |
| Amortization of acquired intangibles |       | 0.5                                                                            |       | 0.5                                                                   |       | 0.4 |   |   | 37.3 |   |   |   | 21.3 |   |   |
| Total operating expenses             |       | 51.9                                                                           |       | 54.0                                                                  |       | 54.8 |   |   | 12.1 |   |   |   | (9.2 | ) |   |
| Operating income                     |       | 4.2                                                                            |       | 1.1                                                                   |       | 3.3 |   |   | 336.9 |   |   |   | (68.7 | ) |   |
| Total other  income, net             |       | 2.9                                                                            |       | 1.3                                                                   |       | 0.9 |   |   | 156.7 |   |   |   | 34.9 |   |   |
| Income before income taxes           |       | 7.1                                                                            |       | 2.4                                                                   |       | 4.2 |   |   | 240.8 |   |   |   | (47.0 | ) |   |
| Provision for  income taxes          |       | 3.0                                                                            |       | 0.8                                                                   |       | 2.0 |   |   | 310.1 |   |   |   | (61.0 | ) |   |
| Net income                           |       | 4.1                                                                            | %          | 1.6                                                                   | %          | 2.2 | % |   | 203.3 | % |   |   | (34.2 | )% |   |

 

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On April 24, 2006 we completed the acquisition ofIntentia International AB. As a result of this combination, our operatingresults for fiscal 2006 include the operating results of the Intentia for thefive weeks leading up to May 31, 2006. Intentia’s operating results forthis five week period has significantly impacted our fiscal 2006 operatingresults. The following table summarizes the impact of Intentia on our fiscal2006:

| ** **                            | ** ** | **Year Ended May 31, 2006**                       | ** **         |
|---------------------------------------|------------|-----------------------------------------------------------------------|--------------------|
| ** **                            | ** ** | **Legacy  Lawson  twelve months  ended May 31,  2006** | ** **         | **Intentia  five weeks  ended May 31,  2006** | ** ** | **Lawson  Consolidated  May 31, 2006** | ** ** |
| Revenues:                             |       |                                                                  | **(in thousands)** |   |   |
| License fees                          |       |                                                                  | $                  | 70,203 |   |   |   | $ | 873 |   |   |   | $ | 71,076 |   |   |
| Maintenance                           |       |                                                                  | 180,835            |   |   |   | 7,320 |   |   |   | 188,155 |   |   |
| Consulting                            |       |                                                                  | 108,248            |   |   |   | 23,297 |   |   |   | 131,545 |   |   |
| Total revenues                        |       |                                                                  | 359,286            |   |   |   | 31,490 |   |   |   | 390,776 |   |   |
| Cost of revenues:                     |       |                                                                  |               |   |   |   |   |   |   |   |   |   |   |
| Cost of license fees                  |       |                                                                  | 12,121             |   |   |   | 1,223 |   |   |   | 13,344 |   |   |
| Cost of maintenance                   |       |                                                                  | 28,435             |   |   |   | 1,930 |   |   |   | 30,365 |   |   |
| Cost of consulting                    |       |                                                                  | 105,411            |   |   |   | 22,422 |   |   |   | 127,833 |   |   |
| Total cost of revenues                |       |                                                                  | 145,967            |   |   |   | 25,575 |   |   |   | 171,542 |   |   |
| Gross profit                          |       |                                                                  | 213,319            |   |   |   | 5,915 |   |   |   | 219,234 |   |   |
| Operating expenses:                   |       |                                                                  |               |   |   |   |   |   |   |   |   |   |   |
| Research and development              |       |                                                                  | 57,160             |   |   |   | 3,551 |   |   |   | 60,711 |   |   |
| Sales and marketing                   |       |                                                                  | 74,997             |   |   |   | 8,196 |   |   |   | 83,193 |   |   |
| General and  administrative           |       |                                                                  | 49,096             |   |   |   | 5,731 |   |   |   | 54,827 |   |   |
| Restructuring                         |       |                                                                  | 1,825              |   |   |   | — |   |   |   | 1,825 |   |   |
| Amortization of acquired  intangibles |       |                                                                  | 1,427              |   |   |   | 695 |   |   |   | 2,122 |   |   |
| Total operating expenses              |       |                                                                  | 184,505            |   |   |   | 18,173 |   |   |   | 202,678 |   |   |
| Operating income (loss)               |       |                                                                  | 28,814             |   |   |   | (12,258 | ) |   |   | 16,556 |   |   |
| Total other income  (loss), net       |       |                                                                  | 10,639             |   |   |   | 472 |   |   |   | 11,111 |   |   |
| Income (loss) before  income taxes    |       |                                                                  | 39,453             |   |   |   | (11,786 | ) |   |   | 27,667 |   |   |
| Provision for income  taxes           |       |                                                                  | 11,708             |   |   |   | — |   |   |   | 11,708 |   |   |
| Net income (loss)                     |       |                                                                  | $                  | 27,745 |   |   |   | $ | (11,786 | ) |   |   | $ | 15,959 |   |   |

 

**Intentia 5 Week Results**

The five week period from Intentia included within theoperating results above are not representative of a pro-rata portion of atypical quarter or annual period for Intentia. Intentia can experience a meaningfulincrease in license fees activity in the days leading up to a quarter end.Because the five week period included in these results did not include the weekleading up to a traditional quarter end for Intentia, many of the revenue, costof revenue and resulting gross profit line items are below a pro-rata portionof typical quarterly or annual results. Also, as a result of purchaseaccounting, all deferred license revenue was eliminated. This exceeded $200million. This significantly impacted Intentia’s license revenues for the fiveweek period and is expected to continue to have a significant effect for mostof our fiscal 2007, although at a declining rate as we obtain new orders. Additionally,many of the expenses within the cost of consulting line item are fixed. Thisfact, when combined with lower revenues in the five week period, caused grossprofit to be significantly lower than the prior period. Maintenance andconsulting revenues were adversely affected by the fair value adjustment madeto the purchased deferred maintenance and consulting revenue by approximately $2.3million. Additionally, consulting personnel at Intentia incurred a larger thannormal amount of non-billable time around the purchase date related tointegration activities which led to a reduced amount of consulting activity incomeimproved over historical periods because of the reduction in interest expenserelated to the $36.7 million long-term debt pay-off shortly after the 

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acquisition. Operatingexpenses were in line with historical levels with the exception of an increasein amortization of intangibles established with the purchase of Intentia.

In our discussion ofchanges in results of operations from fiscal 2005 to fiscal 2006, we includethe contribution of Intentia’s revenues, costs and expenses where applicable. Wedo not anticipate providing financial information by legacy entity in fiscal2007 and beyond as our integration efforts will preclude us from separatelyidentifying all revenues, costs and expenses associated with the Intentiaoperations. Further, as described in Note 16 to the Consolidated Financial Statements,we intend to operate as one business segment as such this information will notbe available.

***Revenues***

| ** **     | ** ** | **Year Ended May 31, 2006** | ** ** | **2006 vs. 2005** | ** ** | **2005 vs. 2004** | ** ** |
|----------------|------------|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **     | ** ** | **2006**                                        | ** ** | **2005**                    | ** ** | **2004**                    | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Revenues:      |       | **(in  thousands, except %)**                   |       |
| License fees   |       | $                                               | 71,076     |                        | $          | 57,743                      |       | $ | 92,338 |   | $ | 13,333 |   |   | 23.1 | % |   | $ | (34,595 | ) |   | (37.5 | )% |   |
| Maintenance    |       | 188,155                                         |       | 170,723                     |       | 154,938                     |       | 17,432 |   |   | 10.2 | % |   | 15,785 |   |   | 10.2 | % |   |
| Consulting     |       | 131,545                                         |       | 106,718                     |       | 116,307                     |       | 24,827 |   |   | 23.3 | % |   | (9,589 | ) |   | (8.2 | )% |   |
| Total revenues |       | $                                               | 390,776    |                        | $          | 335,184                     |       | $ | 363,583 |   | $ | 55,592 |   |   | 16.6 | % |   | $ | (28,399 | ) |   | (7.8 | )% |   |

* *

*Total Revenues.**  *We generate revenues from licensing software,providing maintenance for previously licensed products and providing consultingservices. We generally utilize written contracts as the means to establish theterms and conditions by which our products, maintenance and consulting servicesare sold to our customers. Because our maintenance and consulting services areprimarily attributable to our licensed products, growth in our maintenance andconsulting services is directly tied to the success in our license feeactivity.

Our total revenuesincreased 16.6% in fiscal 2006 over fiscal 2005 of which 9.4% was attributableto Intentia’s five week total revenues. Excluding Intentia’s five week totalrevenues, we experienced increases in license fees and maintenance. Consultingrevenue increased in fiscal 2006 over fiscal 2005 slightly as well. Totalrevenues declined by 7.8% in fiscal 2005 from fiscal 2004. This decline waslargely due to a $35.0 million or 37.5% decline in license fees.

*License Fees.**  *Our license fees primarily consistof fees resulting from products licensed to customers on a perpetual basis.Product license fees result from a customer’s licensing of a given softwareproduct for the first time or with a customer’s purchase of additional usersfor previously licensed products.

License fees increased23.1% in fiscal 2006 over fiscal 2005 of which 1.5% related to Intentia’s fiveweek license revenues. Excluding Intentia’s five weeks license revenues,license fees increased 21.6% in fiscal 2006 which represented a rebound fromthe decline experienced in fiscal 2005. License fees were particularly strongerwithin our retail and industry market customers in fiscal 2006 as compared tofiscal 2005. From a product perspective, license fees for our Human Resources,Financials and Budgeting and Planning product lines represented the largestportion of growth over fiscal 2005. The number of licensing transactions withnew clients increased to 67 in the current year period up from 59 in the prioryear. The average deal size with new customers increased to $531,000, comparedto $358,000 in fiscal 2005. The increase in new client sales is due in partbecause of a return to traditional buying patterns that were slowed in fiscal2005 due to industry consolidation. Additionally, many of our targeted publiccompany clients completed their initial year of Sarbanes-Oxley compliance infiscal 2005, which freed up their time and resources to facilitate some of theincrease during fiscal 2006 sales activity

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In fiscal 2005, license fee revenue was down sharplyfrom fiscal 2004. License fees were down in all industry verticals and in allproduct lines in fiscal 2005 when compared to fiscal 2004. The number oflicensing transactions with new customers was 59 in fiscal 2005 compared to 84in fiscal 2004. The average deal size with new customers decreased to $358,000in fiscal 2005, compared to $543,000 in fiscal 2004. We believe this overallreduction in demand was attributable to uncertainty in the market place surroundingmultiple significant mergers between ERP software vendors, as well as competingcorporate priorities such as Sarbanes-Oxley compliance which slowed investmentin our applications. License fee revenue as a percentage of totalrevenues, for fiscal 2006, 2005, and 2004, were 18.2%, 17.2% and25.4%, respectively.

*Maintenance.**  *Our maintenance revenues represent the ratablerecognition of fees to enroll and renew licensed products in our maintenanceprogram. This program entitles our customers to product enhancements, technicalsupport services, and ongoing compatibility with third-party operating systems,databases and hardware. These fees are typically charged annually and are basedon the license fees initially paid by the customer. Maintenance revenues canhave fluctuations based on the timing of contracts, renewal rates, priceincreases and the number of new license contracts.

In fiscal 2006, our maintenance revenues increased by10.2% over fiscal 2005. Of this increase, 4.3% was attributable to Intentia’sfive weeks of maintenance revenues included within our fiscal 2006 maintenancerevenues. Without the addition of Intentia’s maintenance revenues in fiscal2006, annual price increases to renewals along with the addition of newcustomers in fiscal 2006 led to the increase over fiscal 2005. The maintenancerevenues for Intentia in fiscal 2006 were generated primarily from the deferredmaintenance revenue balance acquired in April 2006. Accordingly, therevenues recorded during this period also reflect the pro-rata portion of thefair value purchase accounting reductions made to the deferred maintenancebalance acquired in April 2006. The impact of the fair value purchase accountingadjustments to maintenance revenues relating to the deferred balances acquiredin April 2006 resulted in a reduction in deferred revenue and will largelyimpact the first 12 months after the acquisition date. In fiscal 2005,maintenance revenues increased by 10.2% over fiscal 2004. This increase wasprimarily due to a $10.1 million increase in revenue earned on maintenancecontracts purchased in April 2004, and to a lesser extent, an increase inrevenue resulting from increased prices. Maintenance revenue as a percentage oftotal revenues for fiscal 2006, 2005 and 2004 were 48.1%, 50.9% and 42.6%,respectively.

*Consulting.**  *Our consulting revenues consist ofservices related to software installations, software implementations,customized development, and training services to customers who have licensedour products.

Consulting revenuesincreased by 23.3% in fiscal 2006 over fiscal 2005 levels. Of this increase, 21.8%resulted from the addition of Intentia’s five weeks of consulting revenue. Increasedcontracting activity in 2006 lead to increases in our consulting revenue towardsthe end of the fiscal year. Much of this increase resulted from an increase inthird-party consulting services. Lawson’s consulting revenues in fiscal 2006 were partially generatedfrom the deferred consulting revenue balance acquired from Intentia in April 2006.Accordingly, some of the consulting revenue amounts recorded during this periodalso reflect fair value purchase accounting reductions made to the deferredconsulting balance acquired in April 2006. Intentia’s businessmodel has traditionally relied on a higher percentage of consulting revenuesthan Lawson’s traditional model. Accordingly, we expect consulting revenues togrow significantly in fiscal 2007 as a result of the consulting contractsacquired from Intentia. Our consulting revenues in fiscal 2005 declined by 8.2%from fiscal 2004 levels as a result of the sharp decline in license fees in thesame period. Consulting revenues as a percentage of total revenues forfiscal 2006, 2005 and 2004 were 33.7%, 31.8% and 32.0%, respectively.

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***Cost of Revenues***

| ** **             | ** ** | **Year Ended May 31, 2006** | ** ** | **2006 vs. 2005** | ** ** | **2005 vs. 2004** | ** ** |
|------------------------|------------|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **             | ** ** | **2006**                                        | ** ** | **2005**                    | ** ** | **2004**                    | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| ** **             | ** ** | **(in thousands, except %)**                    | ** ** |
| Cost of revenues:      |       |                                            |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Cost of license  fees  |       | $                                               | 13,344     |                        | $          | 9,961                       |       | $ | 15,948 |   | $ | 3,383 |   |   | 34.0 | % |   | $ | (5,987 | ) | (37.5 | )% |
| Cost of maintenance    |       | 30,365                                          |       | 31,419                      |       | 27,336                      |       | (1,054 | ) |   | (3.4 | )% |   | 4,083 |   | 14.9 | % |
| Cost of consulting     |       | 127,833                                         |       | 109,204                     |       | 108,963                     |       | 18,629 |   |   | 17.1 | % |   | 241 |   | 0.2 | % |
| Total cost of revenues |       | $                                               | 171,542    |                        | $          | 150,584                     |       | $ | 152,247 |   | $ | 20,958 |   |   | 13.9 | % |   | $ | (1,663 | ) | (1.1 | )% |
| Gross Profit:          |       |                                            |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| License Fees           |       | $                                               | 57,732     |                        | $          | 47,782                      |       | $ | 76,390 |   | $ | 9,950 |   |   | 20.8 | % |   | $ | (28,608 | ) | (37.4 | )% |
| Maintenance            |       | 157,790                                         |       | 139,304                     |       | 127,602                     |       | 18,486 |   |   | 13.3 | % |   | 11,702 |   | 9.2 | % |
| Consulting             |       | 3,712                                           |       | (2,486                      | )          | 7,344                       |       | 6,198 |   |   | 249.3 | % |   | (9,830 | ) | (133.9 | )% |
| Total                  |       | $                                               | 219,234    |                        | $          | 184,600                     |       | $ | 211,336 |   | $ | 34,634 |   |   | 18.8 | % |   | $ | (26,736 | ) | (12.7 | )% |
| Gross Margin:          |       |                                            |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| License Fees           |       | 81.2                                            | %          | 82.7                        | %          | 82.7                        | %          |   |   |   |   |   |   |   |   |   |   |
| Maintenance            |       | 83.9                                            | %          | 81.6                        | %          | 82.4                        | %          |   |   |   |   |   |   |   |   |   |   |
| Consulting             |       | 2.8                                             | %          | (2.3                        | )%         | 6.3                         | %          |   |   |   |   |   |   |   |   |   |   |
| Total                  |       | 56.1                                            | %          | 55.1                        | %          | 58.1                        | %          |   |   |   |   |   |   |   |   |   |   |

 

*Cost of License Fees.**  *Cost of license fees includesroyalties to third parties, amortization of acquired software, and softwaredelivery expenses. Our software solutions may include embedded components ofthird-party vendors, for which a fee is paid to the vendor upon the sale of ourproducts. In addition, we resell third-party products in conjunction with thelicense of our software solutions, which also results in a fee. The cost oflicense fees is higher when we resell products of third-party vendors. As aresult, gross margins will vary depending on the proportion of third-partyproduct sales in our revenue mix.

Cost of license feesincreased 34.0% in fiscal 2006 over fiscal 2005 of which 12.3% was attributableto Intentia’s five weeks cost of license fees. Excluding Intentia’s five weekscost of license fees, cost of license fees increased 21.7% over fiscal 2005 asa result of increased license fee revenue. The cost of license fees as apercentage of license fees increased from 17.3% in fiscal 2005 to 18.8% infiscal 2006. This increase is the result of a higher level of third-partyroyalties incurred in fiscal 2006, primarily from embedded third-partycomponents. In fiscal 2005, cost of license fees decreased by 37.5% primarilydue to the 37.5% decline in license fee revenue. Cost of license fees as apercentage of total revenues for fiscal 2006, 2005 and fiscal 2004 were 3.4 %,3.0% and 4.4%, respectively.

*Cost of Maintenance.**  *Cost of maintenance includes salaries,employee benefits, and related travel and overhead costs for providing supportservices to clients, as well as intangible asset amortization on supportcontracts purchased in April 2004. Cost of maintenance does not includecosts categorized as research and development, consistent with industrypractice.

Cost of maintenancedecreased 3.4% from fiscal 2005 to fiscal 2006. Excluding the impact ofIntentia’s five weeks cost of maintenance amounts, the decrease would have been9.5%. The cost of maintenance decline is primarily attributable to thefull-year effect of workforce reductions primarily related to restructuringinitiatives and attrition that occurred during fiscal 2005. This declinecoupled with the maintenance revenue growth generated the improvement tomaintenance gross margin. In fiscal 2005, cost of maintenance increased by14.9% as a result of a $3.7 million increase in amortization related to supportcontracts purchased in April 2004. Cost of maintenance, as a percentage oftotal revenues, for fiscal 2006, 2005 and 2004 was 7.8 %, 9.4% and 7.5%,respectively.

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*Cost of Consulting.**  *Cost of consulting includes salaries, employeebenefits, third-party consulting costs and related travel and overhead costsfor providing implementation, installation, training and education services toclients.

In fiscal 2006, the costof consulting increased 17.1% over fiscal 2005. Excluding the impact ofIntentia’s five weeks cost of consulting amounts, cost of consulting would havedecreased by 3.5%. This decline was primarily attributable to the full-yeareffect of workforce reductions primarily related to restructuring initiativesand attrition that occurred during fiscal 2005. Additionally, a shift to thirdparty resources overseas resulted in lower costs associated with servicesperformed in fiscal 2006. In fiscal 2005, cost of consulting increased bythird-party consulting costs that were offset by lower personnel costsresulting from workforce reductions related to restructuring initiatives. Costof consulting, as a percentage of total revenues, for fiscal 2006, 2005 and2004 was 32.7%, 32.6% and 30.0%, respectively. Services margins in fiscal 2006and 2005 were below management’s expectations. Lower utilization rates forservices professionals during these periods have caused these lower margins. Managementis currently taking steps to improve the utilization rates which should improvemargins in the future periods.

***Operating Expenses***

| ** **                            | ** ** | **Year Ended May 31, 2006** | ** ** | **2006 vs. 2005** | ** ** | **2005 vs. 2004** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **2006**                                        | ** ** | **2005**                    | ** ** | **2004**                    | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| ** **                            | ** ** | **(in thousands, except %)**                    | ** ** |
| Operating Expenses                    |       |                                            |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Research and development              |       | $                                               | 60,711     |                        | $          | 62,158                      |       | $ | 64,888 |   | $ | (1,447 | ) | (2.3 | )% | $ | (2,730 | ) | (4.2 | )% |
| Sales and   marketing                 |       | 83,193                                          |       | 75,637                      |       | 93,138                      |       | 7,556 |   | 10.0 | % | (17,501 | ) | (18.8 | )% |
| General and  administrative           |       | 54,827                                          |       | 36,443                      |       | 37,721                      |       | 18,384 |   | 50.4 | % | (1,278 | ) | (3.4 | )% |
| Restructuring                         |       | 1,825                                           |       | 5,028                       |       | 2,210                       |       | (3,203 | ) | (63.7 | )% | 2,818 |   | 127.5 | % |
| Amortization of acquired  intangibles |       | 2,122                                           |       | 1,545                       |       | 1,274                       |       | 577 |   | 37.3 | % | 271 |   | 21.3 | % |
| Total operating expenses              |       | $                                               | 202,678    |                        | $          | 180,811                     |       | $ | 199,231 |   | $ | 21,867 |   | 12.1 | % | $ | (18,420 | ) | (9.2 | )% |

 

*Research and Development.**  *Research and development expensesconsist primarily of salaries, employee benefits, related overhead costs, andconsulting fees associated with product development, enhancements and upgradesprovided to existing customers under maintenance plans and to new customers,testing, quality assurance, and documentation.

Research and developmentexpenses decreased 2.3% from fiscal 2005 to fiscal 2006. Excluding the impactof Intentia’s five weeks of research and development expenses, the decreasewould have been 8.0%. This decrease was primarily due to a $4.5 millionreduction in contract personnel and a $2.2 million decrease in employee costsresulting from workforce reductions primarily related to prior yearrestructuring initiatives. These decreases were partially offset by an increaseof $2.6 million in costs associated with outsourcing research and developmentactivities through our global sourcing partner relationship. In fiscal 2005,research and development expenses decreased by 4.2% from fiscal 2004 largely asa result of a full year impact from the restructuring activities in fiscal2004. Research and development expenses as a percentage of total revenues forfiscal 2006, 2005 and 2004 were 15.5%, 18.5% and 17.8%, respectively.

*Sales and Marketing.**  *Sales and marketing expensesconsist primarily of salaries and incentive compensation, employee benefits,travel, and overhead costs related to our sales and marketing personnel, aswell as trade show activities, advertising costs, and other costs associatedwith marketing our company.

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In fiscal 2006, sales and marketing expenses increased10.0% over fiscal 2005. Excluding the impact of Intentia’s five week sales andmarketing amounts, sales and marketing expenses would have decreased by 0.8%. Thisdecrease in sales and marketing expenses was primarily due to a $6.0 millionreduction in advertising costs, a reduction in consulting fees and a reductionfor travel expenses due to reduced headcount and cost reduction initiatives. Partiallyoffsetting these decreases was a net increase of $5.3 million in employeeand related costs due to sales incentives. In fiscal 2005, sales and marketingexpenses declined by 18.8% from fiscal 2004. This decline was largely due todeclines in sales and marketing personnel related to the restructuringactivities in fiscal 2004, and a decline in incentive compensation that wascaused by a 37.5% decline in license fees over the same period. Sales andmarketing expenses as a percentage of total revenues for fiscal 2006, 2005 and2004 were 21.3% and 22.6% and 25.6%, respectively.

*Generaland Administrative.**  *Generaland administrative expenses consist primarily of salaries, employee benefitsand related overhead costs for administrative employees, as well as legal andaccounting expenses, consulting fees and bad debt expense.

General and administrative expenses increased by 50.4%in fiscal 2006 over fiscal 2005. Excluding the impact of Intentia’s five weeksgeneral and administrative expenses, the increase was 34.7%. The increase excludingIntentia’s five weeks was primarily driven by a $6.3 million non-cash chargefor option expense relating to the former president and CEO’s negotiatedseparation agreement. Additionally, an increase of $6.9 million in accountingand finance personnel and related contract personnel primarily contributed tothe remaining increase in general and administrative expenses in fiscal 2006.These increases were offset by a $3.1 million decrease in bad debt expenseprimarily driven by improved aging of receivables due to strong collectionefforts and lower specific reserves. General and administrative expensesdeclined by 3.4% in fiscal 2005 from 2004 largely due to decreases in employeerelated costs, other administrative expenses and settlements, that were offsetin part by increases in professional fees related to the SEC’s informalinvestigation and professional fees related to our Sarbanes-Oxley complianceinitiatives. General and administrative expenses as a percentage of totalrevenues for fiscal 2006, 2005 and 2004 were 14.1% and 10.9% and 10.4%,respectively.

*Restructuring.**  *During 2006, we recorded $1.8 million inrestructuring charges compared with $5.0 million and $2.2 million inrestructuring charges for fiscal 2005 and 2004, respectively.

On April 26, 2006, in conjunction with thebusiness combination we approved a plan designed to eliminate employeeredundancies in both Intentia as well as legacy Lawson. The plan for legacyLawson includes the reduction of 60 employees in the United States and UnitedKingdom that resulted in a charge for severance and related benefits of $1.8million as of May 31, 2006. The reduction will include employees who workin operations, marketing, sales, research and development, maintenance andservices of which actions are expected to take place during the period from May 2006to February 2007. The plan for Intentia includes the reduction ofapproximately 110 employees through APAC and EMEA and includes employees in allfunctional areas of the company and resulted in a charge for severance andrelated benefits of $12.7 million. The plan for Intentia also includes certainfacility closings resulting in a charge for lease exit costs of $16.8 million.These charges were not reflected in the income statement but instead werereflected as part of the purchase price in the business combination. Theserestructuring reserves are not final as of May 31, 2006 and we anticipatethat they could be adjusted for modifications in the restructuring plan andadjustments in amounts estimated. The Company anticipates that therestructuring plans will be final by the end of the third quarter of fiscal2007. The Company expects to see cost savings as a result of the restructuringplans with a reduction in cost of revenue and operating expenses in futureperiods resulting from lower facility lease expense and reduced headcount.

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The fiscal 2005 and 2004 plans included initiatives torealign projected expenses with anticipated revenue levels. As of May 31, 2006,remaining reserve balances related to prior years’ restructurings consist of$0.1 million in employee related costs.

See Note 3 of Notes to Consolidated FinancialStatements for additional information on restructuring activity.

*Amortization of AcquiredIntangibles.**  *Amortizationof acquired intangibles for fiscal 2006 was $2.1 million compared with the$1.5 million for 2005 and $1.3 million for 2004. The increase over fiscal 2005primarily results from the amortization of intangibles acquired in the Intentiamerger. The increase in fiscal 2005 over 2004 primarily reflects the full yearincreases in amortization of intangibles associated with companies acquiredduring fiscal 2004.

***Other Income, net***

Other income, net, whichis primarily composed of interest income earned from cash and marketablesecurities, increased to $11.1 million for fiscal 2006 from $4.3 million forfiscal 2005 and $3.2 million for fiscal 2004. The $6.8 million increase inother income, net in fiscal 2006 was due primarily to a $53.6 million increasein average invested balances and an increase in average yields, which were 4.0%and 1.8% for fiscal 2006 and 2005, respectively, and $0.4 million in interestincome received on a tax refund. The increase in fiscal 2005 over 2004primarily resulted from an increase in the average yield on investmentspartially offset by approximate $20.9 million decrease in average investedbalances compared to fiscal 2004.

***Provision for Income Taxes***

Our global provision for income taxes for fiscal 2006was $11.7 million, compared to $2.9 million for fiscal 2005. During fiscal year2006, the Company decreased deferred tax valuation allowances by $1.3 millionand also decreased the tax reserve by $2.3 million, which both caused adecrease to the tax provision; however, for the year, there was an overallincrease in income tax expense due to an increase in pre-tax consolidated bookincome, including accounting for the impact on the global tax provision relatedto the acquisition of Intentia.

Our global effective income tax rate for fiscal 2006was 42.3%, compared to 35.2% for fiscal 2005. This increase in our effectivetax rate was due primarily to the acquisition of Intentia. As of the date of acquisition,many of the Intentia legal entities had net operating loss carryforwards withfull valuation allowances applied against them. Under the provisions of SFAS109, if acquired net operating losses are ultimately realized this will notresult in a tax benefit but rather a non-cash tax expense and a reductionto goodwill.

Our annual global effective tax rate may fluctuatefrom year to year due primarily to changes in the amount and mix of domesticand foreign income, changes in our amount of federal tax credits, tax-exemptincome, other permanent book-tax differences, changes in our valuationallowance related to deferred tax assets, and changes in tax legislation includingthe expiration for federal tax purposes of the research and development taxcredit as of December 31, 2005.

As Lawson’s global operations continue to become moreprofitable, Lawson does not anticipate paying significant local country cashtaxes, except in a few jurisdictions, until such time as foreign net operatinglosses have either been fully utilized, or where applicable, have expired.

During fiscal years 2006 and 2005, we recorded incometax benefits of $3.9 million and $4.2 million, respectively, related todeductions for employee stock option exercises. This tax benefit, whichdecreased current income taxes payable and decreased additional paid-in capitalby equal amounts, had no effect on 

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our provision for incometaxes; however, it did result in a significant decrease in the amount of cashtax outlay.

Our provision for income taxes for fiscal 2005was $2.9 million, compared to $7.3 million for fiscal 2004. Thisdecrease in income tax expense was due to a decrease in income before income taxesand a decrease in our effective income tax rate.

Our effective income tax rate for fiscal 2005 was35.2%, compared to 47.8% for fiscal 2004. This decrease in our effectivetax rate was due primarily to increased tax benefits as a percentage ofincome before income taxes from research and development tax credits andtax-exempt income. Additionally, a decrease in the change in the valuationallowance related to state and federal tax carryforwards contributed to thedecrease in the effective tax rate.

During fiscalyears 2005 and 2004, we recorded income tax benefits of$4.2 million and $11.6 million, respectively, related to deductionsfor employee stock option exercises. This tax benefit, which decreased currentincome taxes payable and decreased additional paid-in capital had no effect onour provision for income taxes.

**Liquidity and Capital Resources**

| ** **                                             | ** ** | **As of and for the Fiscal Year Ended May 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                                                                     | ** ** | **Change** | ** ** | **2005** | ** ** | **Change** | ** ** | **2004** | ** ** |
| ** **                                             | ** ** | **(in thousands, except %)**                                                  | ** ** |
| Working capital                                        |       | $                                                                                            | 168,201    |   | (5.7 | )% | $ | 178,410 |   |   | 7.9 | % |   | $ | 165,336 |   |
| Cash and cash  equivalents and marketable securities   |       | $                                                                                            | 306,581    |   | 30.7 | % | $ | 234,613 |   |   | 12.3 | % |   | $ | 208,982 |   |
| Cash provided by  operating activities                 |       | $                                                                                            | 76,486     |   | 132.5 | % | $ | 32,898 |   |   | 84.5 | % |   | $ | 17,833 |   |
| Cash (used in) provided  by investing activities  |       | $                                                                                            | (23,758    | ) | (128.9 | )% | $ | 82,222 |   |   | 399.1 | % |   | $ | (27,491 | ) |
| Cash (used in) provided by financing activities        |       | $                                                                                            | (32,645    | ) | *NM |   | $ | 228 |   |   | 100.8 | % |   | $ | (27,817 | ) |

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      *   Percentagenot meaningful

As of May 31, 2006, we had$306.6 million in cash, cash equivalents and marketable securities and $168.2 millionin working capital. Our most significant source of operating cash flows isderived from license fees, maintenance and consulting services to our clients.Days sales outstanding (“DSO”) for legacy Lawson, calculated as net receivablesat period-end divided by revenue for the quarter times 90 days in thequarter, was 50 and 45 as of May 31, 2006 and May 31, 2005,respectively. Because the acquisition occurred late in the quarter, a combinedDSO including Intentia was not meaningful. The increase in the DSO for thethree months ended May 31, 2006 for legacy Lawson as compared withthe three months ended May 31, 2005, is reflective of a $9.2 millionincrease in accounts receivable associated with the combined effects ofincreased revenues and a decrease in the allowance for doubtful accounts. Ourprimary uses of cash from operating activities are for employee costs,third-party costs for licenses and maintenance and support and consultingservices, and facilities.

We believe that cash flowsfrom operations, together with our cash, cash equivalents and marketablesecurities, will be sufficient to meet our cash requirements for workingcapital, capital expenditures, restructuring activities and investments for theforeseeable future. We anticipate that the cash outflows relating to therestructuring reserves established for the acquisition of Intentia will occurduring fiscal 2007. We also anticipate that costs to integrate theacquisition will not go beyond the end of fiscal 2007. As part of our businessstrategy, we may acquire companies or products from time to time to enhance ourproduct lines. On April 25, 2006 we consummated our agreement to combinewith Stockholm, Sweden-based Intentia International AB. Although theacquisition was an all-stock transaction, cash was 

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used tofund aspects of the transaction including $8.5 million of acquisition relatedcosts, $40.5 million in settlement of loans and interest assumed in the mergerand $5.4 million in integration costs. We estimate the purchase of Intentiacommon shares not tendered in the exchange offer and continuing integrationactivities will require additional cash outlays totaling $4.9 million andapproximately $22 million, respectively, over the next 12 months. The cashoutlay for shares is subject to arbitration and therefore may change.

*Subsequent Event.*   OnJuly 20, 2006 the Company acquired the equity of Competency AssessmentSolution (“CAS”), to augment its human capital management solutions for $2.5million in cash. The final purchase price is subject to adjustment based on thefinal closing balance sheet. We believe we have sufficient cash to fund thesebusiness transactions. For additional information refer to Note 18, of Notes toConsolidated Financial Statements.

***Cash flows fromoperating activities:***

Net cash provided byoperating activities was $76.5 million for fiscal 2006 compared with$32.9 million for fiscal 2005. Cash flows from operating activities werelargely generated from our net income of $16.0 million and increased by $23.8million in non-cash charges before working capital changes. Non-cash chargesprimarily consist of $16.2 million of depreciation and amortization, a $6.4million stock compensation charge related to a negotiated separation agreementwith the Company’s former president and CEO, and a $4.0 million tax benefitfrom stockholder transactions for option activity. The $36.7 million in networking capital changes increased the overall cash provided to $76.5 million.

The activity in workingcapital changes for fiscal 2006, excluding the impact of the Intentia acquiredworking capital balances, primarily relates to a $10.2 million increase in cashreceived resulting from accounts receivable, a $22.0 million decrease inprepaid expenses and other assets, a $11.3 million increase in deferred revenueand customer deposits and a $1.0 million increase in cash payments related toincome taxes payable. These were partially offset by a decrease in accrued andother liabilities in the amount of $6.6 million and a decrease in accountspayable of $1.3 million.

The $11.3 million increasein deferred revenue and customer deposits is primarily due to the switch to aJune 1st common renewal date for maintenance. The $22.0 million reduction inprepaid and other assets is primarily due to a collection of a income taxrefund. The $10.2 million reduction of trade accounts receivable is primarilydue to a $17.1 million reduction in Intentia receivable that was partiallyoffset by an increase of $6.9 million increase in legacy Lawson which was theresult of the strong Q4 results. The $6.6 million decrease in accrued and otherliabilities was primarily driven by a $12.1 million decrease in accruedcompensation and benefits from Intentia that was partially offset by anincrease of $3.4 million in legacy Lawson.

The significant activityin cash flows from working capital changes for fiscal 2005 primarilyrelated to a $21.2 million increase in cash from trade accountsreceivable, which was partially offset by a $6.9 million decrease indeferred revenue and client deposits and a $4.4 million net decrease inaccrued expenses and other liabilities. The $21.2 million increase in cashfrom the decrease in trade accounts receivable was due primarily to focusedcollection efforts as well as the effects from a general decrease in revenues.

The $4.4 milliondecrease in accrued expenses and other liabilities was due primarily torestructuring related cash payments and the payment of fiscal 2004incentive compensation in the first quarter of fiscal 2005.Fiscal 2005 incentive compensation payments were lower due to partial objectivesbeing met. The $6.9 million decrease in deferred revenue and clientdeposits was primarily due to a decrease in cash received on support billingsas a result of a change in client billing cycles. The change in client billingcycles resulted in initially smaller client invoices due to pro-rata billingsin an effort to get individual multiple client support billings to a commonrenewal date. The cash collections generated by the pro-rata billings willfluctuate according to renewal periods identified by our clients.

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***Cash flows from investing activities:***

Net cash used in investing activities was $23.8million for fiscal 2006 compared with $82.2 million of cash provided for fiscal2005. The decrease in cash from investing activities for fiscal 2006 primarilyrelated to $49.0 million of cash used in net purchases of marketable securitiesas well as $4.9 million of cash paid for property and equipment purchases. Thiswas partially offset by $30.1 million of net cash received in conjunction withthe acquisition of Intentia. Refer to Note 4 of Notes to Consolidated FinancialStatements for additional information

Net cash provided byinvesting activities was $82.2 million for fiscal 2005 compared withnet cash used in investing activities of $27.5 million for fiscal 2004.Cash provided by investing activities for fiscal 2005 primarily related to$89.6 million in proceeds received from sales and maturities of marketablesecurities net of purchases.

***Cash flows from financing activities:***

Net cash used in financing activities was $32.6million for fiscal 2006 compared with net cash provided by financing activitiesof $0.2 million for fiscal 2005. The financing activities for fiscal 2006primarily related to $40.5 million in cash payment of long term debt which wasassumed in the acquisition of Intentia. This was partially offset by $7.1 millionin cash received from the exercise of stock options and $3.6 million in cashreceived from employee contributions to our employee stock purchase plan.

Net cash provided byfinancing activities was $0.2 million for fiscal 2005 compared withnet cash used in financing activities of $27.8 million forfiscal 2004. Cash provided by financing activities for fiscal 2005primarily related to $7.6 million in cash received from the exercise ofstock options, and $3.9 million in cash received from employeecontributions to our employee stock purchase plan that was primarily offset by$10.0 million in cash used to fund the repurchase of common stock and$1.4 million used for repayment of debt.

***Repurchase of common shares***

In June 2003, our Board of Directors authorizedus to repurchase up to $50.0 million of our common shares. Shares wererepurchased as market conditions warranted either through open markettransactions, block purchases, private transactions or other means. No timelimit had been set for the completion of the program. During fiscal 2004,a total of 4.9 million shares were repurchased for $40.0 million incash and $0.1 million in non-cash transactions. During fiscal 2005 wecompleted the authorized stock repurchase plan by purchasing 1.4 millionshares for $10.0 million in cash.

Cash proceeds obtainedfrom maturities of marketable securities, the exercise of employee stockoptions, and contributions to the employee stock purchase plan largely fundedthe share repurchases. The repurchased shares are recorded as treasury stockand result in a reduction to stockholders equity. The shares will be used forgeneral corporate purposes.

***Contingent cash commitments***

In fiscal 2005, the Company and International BusinessMachines Corporation (IBM) entered into an OEM Software Agreement that wasmodified in the second quarter of fiscal 2006, along with a Master RelationshipAgreement (MRA). Under these agreements, we resell our business applications inconjunction with IBM’s open standards-based software, and the companies jointlymarket these software solutions. The MRA governs the joint marketing activitiesand has a three-year term. During the term of the modified OEM SoftwareAgreement, we pay royalties to IBM for the licensing of IBM programs to eachapplicable existing and new customer of the Company, and we pay IBM annualmaintenance fees for each applicable customer. The royalty and maintenancepayments to IBM are based on transactions with 

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each applicable Lawsoncustomer. The modified OEM Software Agreement has an initial term of threeyears commencing September 2005 and may be extended by the Company for twoadditional one-year terms. During the initial three-year term, we have agreedto pay certain minimum quarterly and annual royalties to IBM. Total commitmentsunder the modified OEM Software Agreement approximate $9.5 million overthe three-year term. We may elect to terminate the OEM Software Agreement forconvenience upon 90 days advance notice to IBM. If we elect early terminationat any time during the initial three-year term, the terms of the Agreementrequire us to pay IBM any unpaid minimum royalties through the date oftermination plus a prorated share of the guaranteed annual minimum payment duefor the year in which the termination occurred. We made cash payments of $2.6million according to terms of the modified OEM Software Agreement during fiscal2006 recorded as other assets—long-term. In addition, we recorded $0.6 millionas other accrued liabilities on the May 31, 2006 Consolidated BalanceSheet, representing the annual minimum owed per the terms of the contract. Inaccordance with SFAS No. 86 *Accounting for the Costsof Computer Software to Be Sold, Leased, or Otherwise Marketed* (“SFASNo. 86”), the fees paid and accrued to date will be amortized to costs oflicense fees over the earlier of the time period in which units are sold or theuseful life.

On May 9, 2005, the Company and The Hackett Group, Inc.,a wholly-owned subsidiary of Answerthink Inc. (“Hackett”), entered into anAdvisory Alliance Agreement (the “Agreement”). The Agreement identifies jointprograms in which Hackett will provide the Company and its customers andprospects with, among other things, access to Hackett benchmark tools,best-practices research and business advisory services in exchange for thepayment of specified program fees. The term of the Agreement commenced on May 9, 2005,and continues until May 31, 2008, unless terminated earlier inaccordance with the provisions of the Agreement. The Company and Hackett havethe option to extend the terms of the programs upon mutual written agreement,and Hackett has agreed to provide certain exclusivity rights to us inconnection with certain of its programs. Under the Agreement, we paid $1.6 millionin fiscal 2006, and are contractually committed to pay an additional $0.5million within the next twelve months that has been recorded as other accruedliabilities at May 31, 2006. In addition, we will pay additional fees whensales volumes meet established criteria throughout the term of the contract. OnJune 14, 2006, we amended the Agreement with Hackett. The amendment did notchange the amount owed to Hackett under the Agreement but instead reallocatedthe committed payments to the program associated with providing the productoffering to our customers and provides a greater range of membership levelsthat the Company can offer to its customers.

On May 5, 2005, Intentia entered a MasterOffshoring Agreement with Symphony Service Corp., referred to as SymphonyServices, an affiliate of Symphony Technology Group, LLC, a shareholder ofLawson and Symphony Technology II-A,L.P., pursuant to which Symphony Servicesagreed to provide Intentia both product development and customer supportresources for an initial five year term. The agreement was not affected by theconsummation of the business combination with Lawson. It is believed that thisAgreement that was part of a business transformation plan approved by Intentiain July 2004, will enable the Company to achieve significant qualityimprovements and better customer service without increasing total spending onproduct development and customer support. Under terms of the Agreement we arecontractually obligated to pay for a stated minimum level of resources employedto provide services for the first three years of the Agreement, after whicheither party may terminate the Agreement by delivery of a six-month advancedwritten notification. If we elected to terminate after the first three years,we would be required to pay a buyout fee equal to six months of resource costsunder the agreement. As of May 31, 2006 our remaining minimum obligationlevel is approximately $3.5 million in each of the next two years and is likelyto continue through the final two years of the Agreement which ends in May 2010.Symphony has been paid $3.6 million since the Agreement’s inception through May 31,2006. Romesh Wadwani is a member of the Board of Directors of Lawson and is apartner of Symphony Technology Group, LLC.

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On May 5, 2005,Intentia and IBM Svenska AB (“IBM”), entered into a Master Offshoring Agreementin which IBM agreed to provide Intentia cost efficient, high quality softwaredevelopment services and governs the joint development activities. TheAgreement has an initial term of five years, and may be extended in one or moreadditional 18 month period(s), provided that the parties mutually agree to suchrenewal in writing at least six month prior to the expiration of the then-currentterm. The agreement was not affected bythe consummation of the business combination with Lawson. For theduration of the term of the Agreement, the Company is obligated for minimumstaffing levels and resources defined by the Agreement at an annual cost ofapproximately $1.2 million. After completion of two and a half years from theAgreement Date, we may terminate the Agreement for convenience with six monthadvance written notice. However, if the Agreement is terminated for conveniencebefore the completion of five years, we remain obligated to pay IBM any unpaidamounts due for services performed up to the termination or the minimumstaffing levels, whichever is greater. As of May 31, 2006 the Company’stotal remaining minimum obligation under the Agreement is $4.8 million. IBM hasbeen paid $1.9 million since the Agreement’s inception through May 31,2006.

**Disclosures aboutContractual Obligations and Commercial Commitments**

Thefollowing summarizes our contractual obligations at May 31, 2006, andthe effect these contractual obligations are expected to have on our liquidityand cash flows in future periods (in thousands):

| ** **                                  | ** ** | **Total** | ** ** | **1 Year or  Less** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
|---------------------------------------------|------------|-----------|------------|-------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| **Balance  Sheet Contractual Obligations:** |       |      |       |                          |       |               |       |               |       |                             |       |   |   |
| Debt                                        |       | $         | 4,755      |                          | $          | 2,027              |       | $                  | 2,728      |                             | $          | — |   |   | $ | — |   |   |
| Capital leases                              |       | 2,995     |       | 1,448                         |       | 1,248              |       | 168                |       |                             | 131        |   |   |
| Strategic partner  commitments(2)(3)        |       | 1,100     |       | 1,100                         |       | —             |       | —             |       |                             | —     |   |   |
| Total                                       |       | $         | 8,850      |                          | $          | 4,575              |       | $                  | 3,976      |                             | $          | 168 |   |   | $ | 131 |   |   |
| **Other  Contractual Obligations:**         |       |      |       |                          |       |               |       |               |       |                             |       |   |   |
| Operating leases                            |       | $         | 123,614    |                          | $          | 24,807             |       | $                  | 43,061     |                             | $          | 26,110 |   |   | $ | 29,636 |   |   |
| Purchase  obligations(1)(4)(5)              |       | 18,732    |       | 8,661                         |       | 8,732              |       | 1,339              |       |                             | —     |   |   |
| Total                                       |       | $         | 142,346    |                          | $          | 33,468             |       | $                  | 51,793     |                             | $          | 27,449 |   |   | $ | 29,636 |   |   |
| **Total  Contractual Obligations**          |       | $         | 151,196    |                          | $          | 38,043             |       | $                  | 55,769     |                             | $          | 27,617 |   |   | $ | 29,767 |   |   |

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

       (2) Under the Agreement with Hackett that commenced May 9, 2005, wepaid $1.6 million during fiscal 2006, and are contractually committed to pay anadditional $0.5 million within the next twelve months. We will pay additionalfees if sales volumes meet established criteria throughout the term of thecontract. The Agreement identifies joint programs in which Hackett will providethe Company and its customers and prospects with, among other things, access toHackett benchmark tools, best-practices research and business advisoryservices.

       (3) During the initial three-year term, we have agreed to pay certain minimumquarterly and annual royalties to IBM. Total commitments under the modified OEMSoftware Agreement approximate $9.5 million over the three-year term. We mayelect to terminate the OEM Software Agreement for convenience upon 90 daysadvance notice to IBM. If we elect early termination at any time during theinitial three-year term, we would pay IBM any unpaid minimum royalties throughthe date of termination plus a prorated share of the guaranteed annual minimumpayment due for the year in which the termination occurred. The Company hasmade cash payments of $2.6 million according to terms of the modified OEMSoftware Agreement during the fiscal year ended May 31, 2006 recorded 

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as other assets—long-term.In addition, we recorded $0.6 million as other accrued liabilities on the May 31,2006 Consolidated Balance Sheet, representing the annual minimum owed in theinitial year of the contract.

       (4) On May 5, 2005, Intentia entered an agreement with SymphonyService Corp., referred to as Symphony Services, an affiliate of SymphonyTechnology Group, LLC, a shareholder of Lawson and Symphony TechnologyII-A,L.P., pursuant to which Symphony Services agreed to provide Intentia bothproduct development and customer support resources for an initial five yearterm. The agreement was not affected by the consummation of the businesscombination with Lawson. Under terms of the Agreement we are contractuallyobligated to pay for a stated minimum level of resources employed to provideservices for the first three years of the Agreement, after which either partymay terminate the Agreement by delivery of a six-month advanced writtennotification. If we elect to terminate after the first three years, we would berequired to pay a buyout fee equal to six months of resource costs under theagreement. As of May 31, 2006 the Company’s remaining obligation under theAgreement is $7.0 million.

       (5) On May 5, 2005, Intentia entered into afive year Master Offshoring Agreement with IBM, in which Intentia is obligatedto pay certain stated minimum level of expenses for each of the five years. The agreement was not affected by theconsummation of the business combination with Lawson. After two and ahalf years from the Agreement date, we may terminate the Agreement by deliveryof a six-month advance written notice; however we remain obligated forthe minimum expense level. As of May 31, 2006 the Company’s remainingobligation under the Agreement is $4.8 million.

**Off-Balance-SheetArrangements**

We do not use off-balance-sheet arrangements withunconsolidated entities, related parties or other forms of off-balance-sheetarrangements such as research and development arrangements. Accordingly, ourliquidity and capital resources are not subject to off-balance-sheet risks fromunconsolidated entities. As of May 31, 2006, we did not have anyoff-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SECRegulation S-K.

We have entered intooperating leases for most U.S. and international sales and support offices andcertain equipment in the normal course of business. These arrangements areoften referred to as a form of off-balance-sheet financing. As of May 31, 2006,we leased facilities and certain equipment under non-cancelable operatingleases expiring between 2007 and 2017. Rent expense under operating leasesfor fiscal 2006, 2005 and 2004 was $16.4 million,$14.2 million and $14.4 million, respectively. Future minimum leasepayments under our operating leases as of May 31, 2006 are detailedabove in “Disclosures about Contractual Obligations and Commercial Commitments.”

**Recent AccountingPronouncements**

In December 2004 the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standard No. 123(revised 2004), *Share-Based Payment(SFAS No. 123(R))*. SFAS No. 123(R) requirescompensation cost relating to unvested share-based payment transactions thatare outstanding as of the effective date and newly issued transactions to berecognized in the financial statements. The cost will be measured based on thefair value of the equity or liability instruments issued. SFAS No. 123(R) coversa wide range of share-based compensation arrangements including share options,restricted share plans, performance-based awards, share appreciation rights andemployee share purchase plans. SFAS No. 123(R) supersedes SFAS No. 123,*Accounting for Stock-Based Compensation*(SFAS No. 123), andsupersedes Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*(Opinion 25)*.*SFAS No. 123, as originally issued in 1995, establisheda fair-value-based method of accounting for share-based payment transactionswith employees. However, SFAS No. 123 

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permitted entities theoption of continuing to apply the guidance in Opinion 25, as long as thefootnotes to financial statements disclosed what net income would have been hadthe fair-value-based method been used. We elected the option of disclosure onlyunder SFAS No. 123. In our disclosures, we have historically used theBlack-Scholes option pricing model to determine the fair value of its sharebased compensation arrangements. Upon the adoption of SFAS No. 123(R), wewill continue to utilize the Black-Scholes model. Public entities are requiredto apply SFAS No. 123(R) as of the first annual reporting period thatbegins after June 15, 2005, which is effective with our first quarterof fiscal 2007. Based on the significant amount of our unvestedshare-based payment awards, the adoption of this statement is anticipated tohave a material impact on our Consolidated Statements of Income. The Companyestimates that this statement will result in an additional pretax compensationcharge of approximately $7.0 million to $9.0 million in fiscal 2007.

In May 2005, the FASB issued SFAS No 154, *Accounting Changes and Error Corrections—A replacement of APB OpinionNo 20 and FASB Statement No. 3* (SFAS 154). SFAS 154 changes therequirement for the accounting for and reporting of a change in accountingprinciple. This statement applies to all voluntary changes in accounting principlesand changes required by an accounting pronouncement in the unusual instancethat the pronouncement does not include specific transition provisions. Theprovisions in SFAS 154 are effective for accounting changes and correction oferrors made in fiscal years beginning after December 15, 2005, whichis effective with our first quarter of fiscal 2007. The Company does notbelieve that, upon adoption, SFAS No. 154 will have a material impact onour Consolidated Financial Statements, however, after adoption, if a change inaccounting principle is made, SFAS no. 154 could have a material impact on ourConsolidated Financial Statements.

In June 2006, theFASB issued Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.*Interpretation 48 clarifies the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements in accordance withStatement 109, *Accounting for Income Taxes.* ThisInterpretation prescribes a recognition threshold and measurement attribute forfinancial statement recognition, measurement and disclosure of tax positionsthat a company has taken or expects to be taken on a tax return. Additionally,Interpretation 48 provides guidance on derecognition, classification, interestand penalties, accounting in interim periods and transition. Interpretation 48is effective for fiscal years beginning after December 15, 2006, withearly adoption permitted. We are currently evaluating whether the adoption ofInterpretation 48 will have a material effect on our consolidated financialstatements.

**Item 7A.**                Qualitativeand Quantitative Disclosures About Market Risk

*ForeignCurrency.*   The Company’s market risk includes thepotential loss arising from adverse changes in foreign currency exchange rates.As of the fiscal year ended May 31, 2006 approximately 10% of our revenuewas denominated in a foreign currency. This includes approximately one month ofrevenues for the Intentia which was acquired on April 25, 2006. SinceIntentia’s revenues are predominately denominated in foreign currencies, weexpect the percentage to be significantly higher in the future resulting in thepotential for a more significant market risk due to foreign currencies.

As a result of the acquisition of Intentia and anincrease in transactions denominated in foreign currencies, we expect anincrease in foreign currency exposure in fiscal 2007. We will manage foreigncurrency market risk, from time to time, using forward contracts to offset therisk associated with the effects of certain foreign currency exposures. Theseforeign currency exposures are primarily associated with inter-companytransactions in our non-functional currencies. Increases or decreases in ourforeign currency exposures are expected to be offset by gains or losses onforward contracts. This is expected to mitigate the possibility of significantforeign currency transaction gains or losses in future periods.

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We do not use forward contracts for trading purposes. Alloutstanding foreign currency forward contracts are marked to market at the endof the period with unrealized gains and losses included in the income statement.Our ultimate realized gain or loss with respect to currency fluctuations willdepend on the currency exchange rates and other factors in effect as thecontracts mature. Net foreign exchange transaction gains (losses) related toforward contracts recorded in the accompanying consolidated statements ofincome as of May 31, 2006 was $0.1 million. At May 31, 2006 the fairvalue of foreign currency forward contracts that were in a gain positiontotaled $0.3 million and the fair value of foreign currency forward contractsthat were in a loss position totaled $0.4 million. For prior fiscal years, wedid not employ derivative financial instruments.

*InterestRates.*   Our investments consist of financialinstruments, primarily money market funds and highly liquid debt securities ofcorporations and municipalities. These investments are denominated primarily inU.S. dollars as of May 31, 2006. Investments with original maturities ofthree months or less are classified as cash and cash equivalents. As of May 31, 2006,the average maturity of our investment securities was less than three monthsand all investment securities had maturities less than 24 months. As of May 31, 2006,we consider the reported amounts of these investments to be reasonableapproximations of fair values. Changes in the market interest rates will nothave a material impact on our financial position.

**Item 8.**                        ConsolidatedFinancial Statements and Supplementary Data

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

**Item 9.**                        ChangesIn and Disagreements With Accountants on Accounting and Financial Disclosure

None.

**Item 9A.**                Controlsand Procedures

*Disclosure Controls and Procedures*—*As of the end of the period covered bythis report (the Evaluation Date), the Company carried out an evaluation, underthe supervision and with the participation of management, including the ChiefExecutive Officer and the Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures (as defined byRule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the 1934Act)). Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that, as of the Evaluation Date, our disclosurecontrols and procedures were effective.*

*Management’s Report on Internal Control Over FinancialReporting*—*The management of Lawson Software, Inc. isresponsible for establishing and maintaining adequate internal control overfinancial reporting.  Internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles.*

*Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate due to changes in conditions, orthat the degree of compliance with the policies or procedures may deteriorate.*

*Managementassessed the effectiveness of our internal control over financial reporting asof May 31, 2006. In making this assessment, it used criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control*—*Integrated Framework. Based upon this assessment,management has concluded that as of May 31, 2006, our internal control overfinancial reporting was effective based on those criteria. Management hasexcluded Intentia from its assessment of internal control over financialreporting as of May 31, 2006 as outlined in the SEC responses to frequently*

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*asked questions regarding the evaluation of internalcontrols of entities subject to a business combination.  Intentia’s assets and revenues representapproximately 63% and 8%, respectively, of consolidated total assets andrevenues of Lawson as of and for the year ended May 31, 2006.*

*Management’sassessment of the effectiveness of internal controls over financial reportingas of May 31, 2006 has been audited by PricewaterhouseCoopers LLP, anindependent registered public accounting firm, as stated in their report whichappears on pages F-1 and F-2.*

*Changes in Internal Control Over Financial Reporting*—*During our fourth quarter of fiscal2006, there were significant changes in our internal control over financialreporting (as defined in Rule 13(a)-15(f) under the Exchange Act) as a resultof the acquisition of Intentia, as discussed below. While these changes weresignificant, management believes that our internal control over financialreporting continues to remain effective.*

*Acquisition of Intentia*—*Although our assessment of internalcontrol over financial reporting excluded Intentia, management has identified asignificant deficiency relating to the financial reporting process at Intentia.The significant deficiency identified relates to the insufficient full-timestaff at Intentia to meet prescribed timelines and that have an adequateunderstanding of US GAAP requirements. As of and for the year ended May 31,2006, management instituted transitional controls at the corporate level whichcompensate for this deficiency.  Thetransitional controls instituted include:*

*(1)   Shifting responsibility to the Lawsonaccounting team for addressing accounting principle differences between US GAAPand International Financial Reporting Standards (IFRS).*

*(2)   Deploying two senior accounting and financedirectors on temporary assignments to lead the Intentia accounting team inidentifying US GAAP and IFRS accounting differences and educating the localaccounting teams on US GAAP requirements.*

*(3)   Engaging outside contractors with US GAAP technicalaccounting knowledge within the local offices in order to institute US GAAPprocesses.*

*(4)   Adding a vice president of taxation with theexpertise needed to ensure appropriate processes are adopted to effectivelyidentify and support international taxation activities.*

*In orderto remediate the aforementioned control deficiency, management will take thefollowing additional actions:*

*(1)   Hiring additional permanent accountingpersonnel with technical accounting expertise, as needed, to ensure that thereare appropriate resources in place to properly account for transactions inaccordance with US GAAP requirements as well as ensure prescribed closingtimelines can be met. *

*(2)   Providing additional education and trainingto the Intentia accounting team.*

*(3)   Expanding the legacy Lawson internalfinancial controls and processes to Intentia processes, including changes tothe record keeping processes that support US GAAP standards.*

*Management believes that these actions as well as otherchanges in our control environment will address the aforementioned controldeficiency and will strengthen our internal control environment in the future.As disclosed on page 21 in our Risk Factors, the integration of Intentia iscomplex and is made more challenging given that Intentia will be within thescope of our assessment of internal control over financial reporting underSection 404 of the Sarbanes-Oxley Act of 2002 in fiscal 2007.*

**Part III**

The information requiredby Items 10 through 13 is incorporated by reference from our definitiveProxy Statement pursuant to general instruction G (3), with theexception of the executive officers 

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section ofItem 10, which is included in Part I of this Form 10-K. Wewill file our definitive 2006 Proxy Statement pursuant toRegulation 14A no later than 120 days after the end of the fiscal year coveredby this Annual Report on Form 10-K.

**Item 10.**                 Directorsand Executive Officers of the Registrant

The information concerning our officers required bythis item is included in Part I hereof under the heading “Employees.” Theinformation called for by Item 10, as to compliance with Section 16(a) ofthe Securities Exchange Act of 1934, is incorporated by reference inthe 2006 Proxy Statement to be filed with the Securities and ExchangeCommission pursuant to Regulation 14A under the heading “Section 16(a) BeneficialOwnership Reporting Compliance.” The information called for by Item 10, asto the audit committee and the audit committee financial expert, isincorporated by reference to that Proxy Statement under the headings “Item 1:Election of Directors” and “Audit Committee Report.”

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

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

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

**Item 11.**                 ExecutiveCompensation

Information required underthis item is contained in the sections entitled “Executive Compensation andother Information” and “Employment Agreements” in our 2006 Proxy Statementand is incorporated herein by reference.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required underthis item is contained in the sections entitled “Securities Authorized forIssuance Under Equity Compensation Plans” and “Security Ownership of PrincipalStockholders, Directors and Management” in our 2006 Proxy Statement and isincorporated herein by reference.

**Item 13.**                 CertainRelationships and Related Transactions

Information required underthis item is contained in the section entitled “Certain Transactions” inour 2006 Proxy Statement and is incorporated herein by reference.

**Item 14.**                 PrincipalAccounting Fees and Services

The information requiredby this item is incorporated by reference to the Proxy Statement under theheading “Ratification of Selection of Independent Registered Public AccountingFirm.”

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**Part IV**

**Item 15.**                 Exhibits,Financial Statement Schedules

(a)   Consolidated Financial Statements,Consolidated Financial Statement Schedules and Exhibits.

1.     *Financial Statements.  *The followingConsolidated Financial Statements, and the related Notes thereto, and theReport of Independent Registered Public Accounting Firm are filed as a part ofthis Annual Report on Form 10-K.

2.     *Financial Statement Schedules.  *Scheduleshave been omitted because they are not applicable or are not required or theinformation required to be set forth in those schedules is included in thefinancial statements or related notes.

3.     *Exhibits.  *The exhibits filed orincorporated by reference in response to Item 601 of Regulation S-Kare listed in the Index to Exhibits.

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**Indexto Financial Statements and Financial Statement Schedules (Item 15-(a1))**
| Report of Independent  Registered Public Accounting Firm                                                                                              |   | F-1  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------|
| Consolidated Balance Sheets at  May 31, 2006 and 2005                                                                                  |   | F-3  |
| Consolidated Statements of  Income for the years ended May 31, 2006, 2005 and 2004                                                     |   | F-4  |
| Consolidated Statements of  Stockholders’ Equity and Comprehensive Income (Loss) for the years ended  May 31, 2006, 2005 and 2004 |   | F-5  |
| Consolidated Statements of  Cash Flows for the years ended May 31, 2006, 2005 and 2004                                                 |   | F-6  |
| Notes to Consolidated  Financial Statements                                                                                                           |   | F-7  |
| Supplemental  Quarterly Financial Information                                                                                                         |   | F-45 |

 

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**Indexto Exhibits (Item 15(a3))**
| Number    | ** ** | ** **                                                                                                                                                                                                                                                                   | ** ** | **Description** |
|-----------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 2.2(3)    |       | Merger Agreement between  Lawson Software, Inc., Everest Acquisition, Inc., Apexion  Technologies, Inc., and Maher Hakim, Muwaffa Lahham and Gene Barduson.                                                                                                   |
| 2.3(7)    |       | Asset Purchase and Sale  Agreement dated April 30, 2004 among Siemens Medical Solutions  Health Services Corporation, Siemens Medical Solutions USA, Inc. and  Lawson Software, Inc.                                                                     |
| 3.1(12)   |       | Certificate of  Incorporation of the Company.                                                                                                                                                                                                                                |
| 3.2(12)   |       | Bylaws of the Company.                                                                                                                                                                                                                                                       |
| 4.1(12)   |       | Form of Certificate  of Common Stock of the Company.                                                                                                                                                                                                                    |
| 4.2(5)    |       | Rights Agreement dated  July 28, 2004.                                                                                                                                                                                                                             |
| 4.3(6)    |       | First Amendment to the  Rights Agreement dated June 2, 2005.                                                                                                                                                                                                       |
| 4.4(12)   |       | Certificate of  Designations of Series B Junior Participating Preferred Stock of the  Company.                                                                                                                                                                          |
| 10.1(1)   |       | Amended and Restated  1996 Stock Incentive Plan.                                                                                                                                                                                                                             |
| 10.2(2)   |       | 2001 Stock Incentive  Plan (amended and restated) (incorporated by reference to Exhibit 10.2  to the predecessor’s Amendment No. 2 to the Form S-1  Registration Statement filed with the securities and Exchange Commission on  October 26, 2001). |
| 10.3(11)  |       | Consulting Agreement  between the Company and Symphony Technology Group, LLC dated May 15,  2006.                                                                                                                                                                       |
| 10.4(1)   |       | 2001 Employee Stock  Purchase Plan.                                                                                                                                                                                                                                          |
| 10.5(10)  |       | Modified Master  Relationship Agreement and an OEM Software Agreement between Lawson  Software, Inc. and International Business Machines Corporation.                                                                                                                   |
| 10.6(4)   |       | Value Added Reseller  Agreement, effective January 29, 2004, between the Company and Micro  Focus International Holdings LTD, Inc. and its Affiliates.                                                                                                        |
| 10.7(4)   |       | Master Offshore  Agreement, effective February 1, 2004, between the Company and  Xansa (India) Ltd.                                                                                                                                                           |
| 10.8(14)  |       | Separation and  Non-compete Agreement and Mutual Release by and between Robert G. Barbieri  and Lawson Software, Inc.                                                                                                                                                   |
| 10.9(12)  |       | Reseller Agreement  between Business Objects S.A. (formerly Crystal Decisions, Inc) and Lawson  Software, Inc.                                                                                                                                                          |
| 10.10(12) |       | Amended and Restated  Reseller Agreement between StreamServ, Inc. and Intentia International  AB.                                                                                                                                                                       |
| 10.11(12) |       | Form of Restricted  Stock Unit Agreement under 1996 Stock Incentive Plan.                                                                                                                                                                                               |
| 10.12     |       | [Reserved]                                                                                                                                                                                                                                                                   |
| 10.13(1)  |       | Director Indemnification  Agreement, dated March 19, 2001, between the Company and  David S. B. Lang.                                                                                                                                                         |
| 10.14(1)  |       | Stock Purchase and  Exchange Agreement, dated February 23, 2001, between the Company and the  investors named therein.                                                                                                                                                  |
| 10.15(1)  |       | Registration Rights  Agreement, dated February 23, 2001, between the Company and the  stockholders, investors and founders named therein.                                                                                                                               |
| 10.16(1)  |       | Stockholders’ Agreement,  dated February 23, 2001, between the Company and the stockholders,  investors and founders named therein.                                                                                                                                |
| 10.17(3)  |       | Form of Change of  Control Agreement dated August 11, 2003 with Certain Executive Officers.                                                                                                                                                                        |
| 10.18(8)  |       | Form of Stock  Option Agreement under 2001 Stock Incentive Plan.                                                                                                                                                                                                        |
| 10.19(8)  |       | Form of Stock  Option Agreement under 2001 Stock Incentive Plan (with additional terms  regarding acceleration of vesting).                                                                                                                                             |
| 10.20(9)  |       | Form of Manifesto  Stock Option Agreement under 2001 Stock Incentive Plan.                                                                                                                                                                                              |
| 10.21(1)  |       | Lease of real property  located at 380 St. Peter St., St. Paul, MN 55102.                                                                                                                                                                                               |

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| 10.22(9)  |   | Executive Change in  Control Severance Pay Plan for Tier 1 Executives.                                                                                                                                          |
|-----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.23     |   | [Reserved]                                                                                                                                                                                                      |
| 10.24     |   | [Reserved]                                                                                                                                                                                                      |
| 10.25(1)  |   | Application Partner  Agreement, dated December 31, 1996, between the Company and Arbor  Software Corporation (n/k/a Hyperion Solutions Corporation), as amended to  date.                                  |
| 10.26(6)  |   | Transaction Agreement  dated June 2, 2005 between Lawson Software, Inc. and Intentia  International AB.                                                                                          |
| 10.27(6)  |   | Stockholder Irrevocable  Undertaking by and between Intentia International AB (publ) and Lawson  Software, Inc.                                                                                            |
| 10.28(6)  |   | Stockholder Irrevocable  Undertaking by and between Lawson Software, Inc. and Intentia  International AB.                                                                                                  |
| 10.29(6)  |   | Separation and  Non-compete Agreement and Mutual Release by and between John J. Coughlan and  Lawson Software, Inc.                                                                                        |
| 10.30(6)  |   | Employment Agreement  between Lawson Software, Inc. and Harry Debes.                                                                                                                                       |
| 10.31(6)  |   | Stock Option Agreement  between Lawson Software, Inc. and Harry Debes.                                                                                                                                     |
| 10.32(6)  |   | Restricted Stock Award  Agreement between Lawson Software, Inc. and Harry Debes.                                                                                                                           |
| 10.33(6)  |   | Notice of Amendment of  “Out-Of-The-Money” Stock Options Held by Officers Subject to Section 16  of the Securities Exchange Act as of June 1, 2005.                                    |
| 10.34(12) |   | Addendum to Employment  Agreement with Harry Debes.                                                                                                                                                             |
| 10.35(12) |   | Employment Agreement  with Bertrand Sciard dated May 4, 2004, Addendum Nos. 1 and 2 to that  agreement, Amendment to Letter Agreement dated November 15, 2005, and  Addendum dated June 1, 2006. |
| 10.36(13) |   | Master Offshoring  Agreement dated May 5, 2005 between Intentia International AB and  Symphony Service Corporation.                                                                                        |
| 21.1(12)  |   | Subsidiaries of Lawson  Software, Inc.                                                                                                                                                                     |
| 23.1(12)  |   | Consent of  PricewaterhouseCoopers LLP.                                                                                                                                                                         |
| 23.2(12)  |   | Consent of Appraisal  Firm.                                                                                                                                                                                     |
| 24.1      |   | Powers of Attorney  (included on signature page).                                                                                                                                                               |
| 31.1(12)  |   | Certification Pursuant  to Section 302 of Sarbanes-Oxley Act—Harry Debes.                                                                                                                             |
| 31.2(12)  |   | Certification Pursuant  to Section 302 of Sarbanes-Oxley Act—Robert G. Barbieri.                                                                                                                 |
| 32.1(12)  |   | Certification Pursuant  to Section 906 of Sarbanes-Oxley Act—Harry Debes.                                                                                                                             |
| 32.2(12)  |   | Certification Pursuant to Section 906 of  Sarbanes-Oxley Act—Robert G. Barbieri.                                                                                                                 |

----

       (1) Incorporated by reference to a similarly numbered exhibit to theCompany’s Form S-1 Registration Statement (File No. 333-63394)filed on June 20, 2001.

       (2) Incorporated by reference to Exhibit 10.2 to the predecessor’sAmendment No. 2 to the Form S-1 Registration Statement filedwith the Securities and Exchange Commission on October 26, 2001.

       (3) Incorporated by reference to the Form 10-Q filed on October 9,2003.

       (4) Incorporated by reference to the Form 10-Q filed on April 12, 2004.

       (5) Incorporated by reference to the Form 8-A filed by LawsonSoftware Americas, Inc. (the predecessor registrant to the Registrant) on July 28, 2004.

57

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       (6) Incorporated by reference to the Form 8-K filed by LawsonSoftware Americas, Inc. (the predecessor registrant to the Registrant) on June 7, 2005.
| Exhibit 4.4   |   | First Amendment to the  Rights Agreement originally filed as exhibit 4.1.                            |
|--------------------|--------|------------------------------------------------------------------------------------------------------|
| Exhibit 10.26 |   | Transaction Agreement  originally filed as exhibit 10.1.                                             |
| Exhibit 10.27 |   | Stockholder Irrevocable  Undertaking originally filed as exhibit 10.2.                               |
| Exhibit 10.28 |   | Stockholder Irrevocable  Undertaking originally filed as exhibit 10.3.                               |
| Exhibit 10.29 |   | Separation and  Non-compete Agreement originally filed as exhibit 10.4.                              |
| Exhibit 10.30 |   | Employment Agreement  originally filed as exhibit 10.5.                                              |
| Exhibit 10.31 |   | Stock Option Agreement  originally filed as exhibit 10.6.                                            |
| Exhibit 10.32 |   | Restricted Stock Award  Agreement originally filed as exhibit 10.7.                                  |
| Exhibit 10.33 |   | Notice of Amendment of  “Out-Of-The-Money” Stock Options originally filed as exhibit 10.8. |

 

       (7) Incorporated by reference to the Form 10-K filed on July 29, 2004.

       (8) Incorporated by reference to the Form 10-K filed on January 7, 2005.

       (9) Incorporated by reference to the Form 8-K filed on January 19, 2005.

(10) Incorporated by reference to the Form 10-Q filed on October 10,2005.

(11) Incorporated by reference to the Form 8-K filed on May 17,2006.

(12) Filed herewith.

(13) Filed herewith. Confidential information is omitted from thisexhibit and filed separately with the Securities and Exchange Commission accompaniedby a confidential treatment request pursuant to Rule 22b-2 under theSecurities Exchange Act of 1934, as amended.

(14) Incorporated by reference to the Form 8-K filed on July 31,2006

58

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities andExchange Act of 1934, the Registrant has duly caused this Report to be signedon its behalf by the undersigned, thereunto duly authorized.
|        | LAWSON SOFTWARE, INC. |
|--------|----------------------------|
|   | By:                        | /s/ ROBERT G. BARBIERI |   |
|   |                       | Robert G. Barbieri |
|   | * *                   | *Chief Financial Officer  (principal financial and accounting officer)* |

 

Dated: August 29,2006

**POWER OF ATTORNEY**

KNOW ALL PERSONS BY THESE PRESENTS, that each personwhose signature appears below hereby constitutes and appoints Harry Debes andRobert G. Barbieri, and each of them, his true and lawful attorney-in-fact andagents, with full powers of substitution and resubstitution, for him and in hisname, place and stead, in any and all capacities, to sign any and allamendments to this Form 10-K and to file the same, with exhibitsthereto and other documents in connection therewith, with the Securities andExchange Commission, and hereby grants to such attorneys-in-fact and agentsfull power and authority to do and perform each and every act and thingrequisite or necessary to be done, as fully to all intents and purposes as hemight or could do in person, hereby ratifying and confirming all that saidattorneys-in-fact and agents or his substitute or substitutes may lawfully door cause to be done by virtue hereof.

Pursuant to therequirements of the Securities Act of 1934, the following persons in thecapacities and on the dates indicated have signed this Annual Report on Form 10-K.
|                       | **Signature** | ** **                                         | ** ** | ** **           | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|-----------------------|---------------|----------------------------------------------------|------------|----------------------|-----------|------------|------------|------------|----------|------------|
| /s/ H. RICHARD LAWSON |          | Co-Chairman                                        |       | August 29, 2006 |
| H. Richard Lawson     |          |                                               |       |                 |
| /s/ ROMESH WADHWANI   |          | Co-Chairman                                        |       | August 29, 2006 |
| Romesh Wadhwani       |          |                                               |       |                 |
| /s/ HARRY DEBES       |          | President and Chief Executive Officer and Director |       | August 29, 2006 |
| Harry Debes           | * *      | *(principal executive officer)*                    |       |                 |
| /s/ STEVEN  CHANG     |          | Director                                           |       | August 29, 2006 |
| Steven Chang          |          |                                               |       |                 |
| /s/ DAVID R. HUBERS   |          | Director                                           |       | August 29, 2006 |
| David R. Hubers       |          |                                               |       |                 |

59

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| /s/ MICHAEL A. ROCCA   |   | Director |   | August 29, 2006 |
|------------------------|--------|----------|--------|----------------------|
| Michael A. Rocca       |   |     |   |                 |
| /s/ PAUL WAHL          |   | Director |   | August 29, 2006 |
| Paul Wahl              |   |     |   |                 |
| /s/ PETER GYENES       |   | Director |   | August 29, 2006 |
| Peter Gyenes           |   |     |   |                 |
| ROBERT  A. SCHRIESHEIM |   | Director |   | August 29, 2006 |
| Robert A.  Schriesheim |   |     |   |                 |

 

60

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**Report ofIndependent Registered Public Accounting Firm**

Tothe Board of Directors and Stockholders of

Lawson Software, Inc:

We have completedintegrated audits of Lawson Software, Inc.’s 2006 and 2005 consolidatedfinancial statements and of its internal control over financial reporting as ofMay 31, 2006 and an audit of its 2004 consolidated financial statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Our opinions, based on our audits, are presented below.

*Consolidated Financial statements*

In our opinion, theaccompanying consolidated financial statements listed in the index appearingunder Item 15(a)(1) present fairly, in all material respects, thefinancial position of Lawson Software, Inc and its subsidiaries at May 31,2006 and 2005, and the results of their operations and their****cash flows for each of the three years in the period ended May 31,2006 in conformity with accounting principles generally accepted in the UnitedStates of America. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits. We conducted our audits of thesestatements in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit of financial statementsincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

*Internal controlover financial reporting*

Also, in our opinion, management’s assessment,included in Management’s report on internal control over financial reportingappearing under Item 9A, that the Company maintained effective internal controlover financial reporting as of May 31, 2006 based on criteria establishedin *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), is fairly stated, in all material respects, based on those criteria. Furthermore,in our opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of May 31, 2006, based oncriteria established in *Internal Control—IntegratedFramework* issued by the COSO. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express opinions on management’s assessmentand on the effectiveness of the Company’s internal control over financialreporting based on our audit. We conducted our audit of internal control overfinancial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances. We believe thatour audit provides a reasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance 

F-1

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of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

Asdescribed in Management’s report on internal control over financial reportingappearing under Item 9A, management has excluded Intentia International AB fromits assessment of internal control over financial reporting as of May 31,2006 because it was acquired by the Company in a purchase business combinationduring 2006. We have also excluded Intentia International AB from our audit ofinternal control over financial reporting. Intentia International AB is awholly-owned subsidiary whose total assets represent 63% and total revenues,which includes five weeks of Intentia’s post-combination operations represent 8%of the related consolidated financial statement amounts as of and for the yearended May 31, 2006.

| /s/ PRICEWATERHOUSECOOPERS LLP |   |
|--------------------------------|--------|
| Minneapolis,  Minnesota        |
| August 28,  2006          |

 

F-2

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

| ** **                                                                                                                                                                                                   | ** ** | **May 31, 2006** | ** ** | **May 31, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ASSETS                                                                                                                                                                                                       |       |                       |       |                       |       |   |   |   |   |
| Current assets:                                                                                                                                                                                              |       |                       |       |                       |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                    |       |                       | $          | 210,154                    |       |   |   | $ | 187,744 |   |   |
| Marketable securities                                                                                                                                                                                        |       |                       | 90,348     |                       |       |   | 43,099 |   |   |
| Trade accounts  receivable, net                                                                                                                                                                              |       |                       | 141,001    |                       |       |   | 42,907 |   |   |
| Income taxes receivable                                                                                                                                                                                      |       |                       | 4,577      |                       |       |   | 8,507 |   |   |
| Deferred income taxes                                                                                                                                                                                        |       |                       | 21,465     |                       |       |   | 9,314 |   |   |
| Prepaid expenses and  other assets                                                                                                                                                                           |       |                       | 47,017     |                       |       |   | 10,753 |   |   |
| Total current assets                                                                                                                                                                                         |       |                       | 514,562    |                       |       |   | 302,324 |   |   |
| Long-term marketable  securities                                                                                                                                                                             |       |                       | 6,079      |                       |       |   | 3,770 |   |   |
| Property and equipment,  net                                                                                                                                                                                 |       |                       | 26,189     |                       |       |   | 13,574 |   |   |
| Goodwill                                                                                                                                                                                                     |       |                       | 454,550    |                       |       |   | 43,407 |   |   |
| Other intangible assets,  net                                                                                                                                                                                |       |                       | 154,695    |                       |       |   | 31,939 |   |   |
| Deferred income taxes                                                                                                                                                                                        |       |                       | 9,294      |                       |       |   | 21,385 |   |   |
| Other assets                                                                                                                                                                                                 |       |                       | 5,283      |                       |       |   | 4,319 |   |   |
| Total assets                                                                                                                                                                                                 |       |                       | $          | 1,170,652                  |       |   |   | $ | 420,718 |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                    |       |                       |       |                       |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                                         |       |                       |       |                       |       |   |   |   |   |
| Current portion of  long-term debt                                                                                                                                                                           |       |                       | $          | 3,475                      |       |   |   | $ | 1,836 |   |   |
| Accounts payable                                                                                                                                                                                             |       |                       | 26,137     |                       |       |   | 8,280 |   |   |
| Accrued compensation and  benefits                                                                                                                                                                           |       |                       | 84,564     |                       |       |   | 20,969 |   |   |
| Other accrued liabilities                                                                                                                                                                                    |       |                       | 78,563     |                       |       |   | 14,840 |   |   |
| Income taxes payable                                                                                                                                                                                         |       |                       | 3,195      |                       |       |   | 1,418 |   |   |
| Deferred income taxes                                                                                                                                                                                        |       |                       | 4,221      |                       |       |   | — |   |   |
| Deferred revenue                                                                                                                                                                                             |       |                       | 146,206    |                       |       |   | 76,571 |   |   |
| Total current liabilities                                                                                                                                                                                    |       |                       | 346,361    |                       |       |   | 123,914 |   |   |
| Long-term debt net of  current portion                                                                                                                                                                       |       |                       | 4,275      |                       |       |   | — |   |   |
| Deferred income taxes                                                                                                                                                                                        |       |                       | 9,039      |                       |       |   | — |   |   |
| Long-term deferred  revenue                                                                                                                                                                                  |       |                       | 10,840     |                       |       |   | 1,284 |   |   |
| Other long-term  liabilities                                                                                                                                                                                 |       |                       | 8,478      |                       |       |   | 2,465 |   |   |
| Total liabilities                                                                                                                                                                                            |       |                       | 378,993    |                       |       |   | 127,663 |   |   |
| Commitments and contingencies (Note 15)                                                                                                                                                                 |       |                       |       |                       |       |   |   |   |   |
| Stockholders’ equity:                                                                                                                                                                                   |       |                       |       |                       |       |   |   |   |   |
| Preferred stock; $0.01  par value; 42,562 shares authorized; no shares issued or outstanding                                                                                                                 |       |                       | —     |                       |       |   | — |   |   |
| Common stock; $0.01 par  value; 750,000 shares authorized; 196,105 and 112,414 shares issued,  respectively; 185,651 and 100,619 shares outstanding, at  May 31, 2006 and 2005, respectively. |       |                       | 1,961      |                       |       |   | 1,124 |   |   |
| Additional paid-in  capital                                                                                                                                                                                  |       |                       | 800,168    |                       |       |   | 338,666 |   |   |
| Treasury stock, at cost;  10,454 and 11,795 shares at May 31, 2006 and 2005, respectively.                                                                                                         |       |                       | (69,237    | )                          |       |   | (72,348 | ) |   |
| Deferred stock-based  compensation                                                                                                                                                                           |       |                       | (131       | )                          |       |   | (41 | ) |   |
| Retained earnings                                                                                                                                                                                            |       |                       | 38,692     |                       |       |   | 22,733 |   |   |
| Accumulated other  comprehensive income                                                                                                                                                                      |       |                       | 20,206     |                       |       |   | 2,921 |   |   |
| Total stockholders’  equity                                                                                                                                                                             |       |                       | 791,659    |                       |       |   | 293,055 |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                                              |       |                       | $          | 1,170,652                  |       |   |   | $ | 420,718 |   |   |

 

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

F-3

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

| ** **                                      | ** ** | **Year Ended May 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                      | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                       |       |                                  |       |   |   |   |   |
| License fees                                    |       | $                                     | 71,076     |   | $ | 57,743 |   | $ | 92,338 |   |
| Maintenance                                     |       | 188,155                               |       | 170,723 |   | 154,938 |   |
| Consulting                                      |       | 131,545                               |       | 106,718 |   | 116,307 |   |
| Total revenues                                  |       | 390,776                               |       | 335,184 |   | 363,583 |   |
| Cost of revenues:                               |       |                                  |       |   |   |   |   |
| Cost of license fees                            |       | 13,344                                |       | 9,961 |   | 15,948 |   |
| Cost of maintenance                             |       | 30,365                                |       | 31,419 |   | 27,336 |   |
| Cost of consulting                              |       | 127,833                               |       | 109,204 |   | 108,963 |   |
| Total cost of revenues                          |       | 171,542                               |       | 150,584 |   | 152,247 |   |
| Gross profit                                    |       | 219,234                               |       | 184,600 |   | 211,336 |   |
| Operating  expenses:                            |       |                                  |       |   |   |   |   |
| Research and development                        |       | 60,711                                |       | 62,158 |   | 64,888 |   |
| Sales and marketing                             |       | 83,193                                |       | 75,637 |   | 93,138 |   |
| General and administrative                      |       | 54,827                                |       | 36,443 |   | 37,721 |   |
| Restructuring (Note 3)                          |       | 1,825                                 |       | 5,028 |   | 2,210 |   |
| Amortization of acquired intangibles            |       | 2,122                                 |       | 1,545 |   | 1,274 |   |
| Total operating expenses                        |       | 202,678                               |       | 180,811 |   | 199,231 |   |
| Operating income                                |       | 16,556                                |       | 3,789 |   | 12,105 |   |
| Other income:                                   |       |                                  |       |   |   |   |   |
| Interest income                                 |       | 10,769                                |       | 4,377 |   | 3,279 |   |
| Interest expense                                |       | (53                                   | )          | (49 | ) | (70 | ) |
| Other income, net                               |       | 395                                   |       | — |   | — |   |
| Total other income                              |       | 11,111                                |       | 4,328 |   | 3,209 |   |
| Income before income taxes                      |       | 27,667                                |       | 8,117 |   | 15,314 |   |
| Provision for  income taxes                     |       | 11,708                                |       | 2,855 |   | 7,323 |   |
| Net income                                      |       | $                                     | 15,959     |   | $ | 5,262 |   | $ | 7,991 |   |
| Net income per  share:                          |       |                                  |       |   |   |   |   |
| Basic                                           |       | $                                     | 0.14       |   | $ | 0.05 |   | $ | 0.08 |   |
| Diluted                                         |       | $                                     | 0.14       |   | $ | 0.05 |   | $ | 0.07 |   |
| Shares used in  computing net income per share: |       |                                  |       |   |   |   |   |
| Basic                                           |       | 110,995                               |       | 99,068 |   | 98,462 |   |
| Diluted                                         |       | 115,350                               |       | 104,623 |   | 107,000 |   |

 

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

F-4

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**LAWSON SOFTWARE, INC.**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**AND COMPREHENSIVE INCOME(LOSS)**

**(in thousands)**

| ** **                                                               | ** ** | **Common**  | ** ** | **Additional  Paid-In** | ** ** | **Treasury** | ** ** | **Deferred  Stock-Based** | ** **  | **Retained**     | ** ** | **Accumulated  Other  Comprehensive** | ** **  | **Total  Stockholders’** | ** ** | **Comprehensive** | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------|-------------------------|------------|--------------|------------|---------------------------|-------------|------------------|------------|---------------------------------------|-------------|-------------------------------|------------|-------------------|------------|
| ** **                                                               | ** ** | **Shares**  | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Stock**                 | ** **  | **Compensation** | ** ** | **Earnings**                          | ** **  | **Loss (Income)**        | ** ** | **Equity**        | ** ** | **(Loss) Income** | ** ** |
| **Balance  at May 31, 2003**                                        |       | 97,696      |       |                    | 1,058      |         |       |                      | 309,637     |             |       |                                  | (28,824     | )                             |       |              | (3,117     | ) |   |   | 9,480 |   |   |   | 1,165 |   |   |   | 289,399 |   |   |   | (1,448 | ) |   |
| Deferred  stock-based compensation                                       |       | —      |       |                    | —     |         |       |                      | (966        | )                |       |                                  | —      |                          |       |              | 112        |   |   |   | — |   |   |   | — |   |   |   | (854 | ) |   |   | — |   |   |
| Amortization of  stock-based compensation                                |       | —      |       |                    | —     |         |       |                      | —      |             |       |                                  | —      |                          |       |              | 2,231      |   |   |   | — |   |   |   | — |   |   |   | 2,231 |   |   |   | — |   |   |
| Exercise of stock  options and warrants                                  |       | 4,901       |       |                    | 41         |         |       |                      | 5,348       |             |       |                                  | 1,795       |                          |       |              | —     |   |   |   | — |   |   |   | — |   |   |   | 7,184 |   |   |   | — |   |   |
| Tax benefit from  stockholder transactions                               |       | —      |       |                    | —     |         |       |                      | 11,581      |             |       |                                  | —      |                          |       |              | —     |   |   |   | — |   |   |   | — |   |   |   | 11,581 |   |   |   | — |   |   |
| Employee stock  purchase plan                                            |       | 665         |       |                    | —     |         |       |                      | 2,115       |             |       |                                  | 1,544       |                          |       |              | —     |   |   |   | — |   |   |   | — |   |   |   | 3,659 |   |   |   | — |   |   |
| Repurchase of  common stock                                              |       | (4,916      | )          |                    | —     |         |       |                      | —      |             |       |                                  | (40,070     | )                             |       |              | —     |   |   |   | — |   |   |   | — |   |   |   | (40,070 | ) |   |   | — |   |   |
| Change in net  unrealized gains/losses on investments, net of taxes |       | —      |       |                    | —     |         |       |                      | —      |             |       |                                  | —      |                          |       |              | —     |   |   |   | — |   |   |   | (190 | ) |   |   | (190 | ) |   |   | (190 | ) |   |
| Translation  adjustment                                                  |       | —      |       |                    | —     |         |       |                      | —      |             |       |                                  | —      |                          |       |              | —     |   |   |   | — |   |   |   | 1,955 |   |   |   | 1,955 |   |   |   | 1,955 |   |   |
| Net income                                                               |       | —      |       |                    | —     |         |       |                      | —      |             |       |                                  | —      |                          |       |              | —     |   |   |   | 7,991 |   |   |   | — |   |   |   | 7,991 |   |   |   | 7,991 |   |   |
| **Balance  at May 31, 2004**                                   |       | 98,346      |       |                    | 1,099      |         |       |                      | 327,715     |             |       |                                  | (65,555     | )                             |       |              | (774       | ) |   |   | 17,471 |   |   |   | 2,930 |   |   |   | 282,886 |   |   |   | 9,756 |   |   |
| Deferred  stock-based compensation                                       |       | —      |       |                    | —     |         |       |                      | (471        | )                |       |                                  | —      |                          |       |              | 472        |   |   |   | — |   |   |   | — |   |   |   | 1 |   |   |   | — |   |   |
| Amortization of  stock-based compensation                                |       | —      |       |                    | —     |         |       |                      | —      |             |       |                                  | —      |                          |       |              | 261        |   |   |   | — |   |   |   | — |   |   |   | 261 |   |   |   | — |   |   |
| Exercise of stock  options                                               |       | 3,055       |       |                    | 25         |         |       |                      | 4,807       |             |       |                                  | 1,661       |                          |       |              | —     |   |   |   | — |   |   |   | — |   |   |   | 6,493 |   |   |   | — |   |   |
| Tax benefit from  stockholder transactions                               |       | —      |       |                    | —     |         |       |                      | 4,215       |             |       |                                  | —      |                          |       |              | —     |   |   |   | — |   |   |   | — |   |   |   | 4,215 |   |   |   | — |   |   |
| Employee stock  purchase plan                                            |       | 667         |       |                    | —     |         |       |                      | 2,400       |             |       |                                  | 1,546       |                          |       |              | —     |   |   |   | — |   |   |   | — |   |   |   | 3,946 |   |   |   | — |   |   |
| Repurchase of  common stock                                              |       | (1,449      | )          |                    | —     |         |       |                      | —      |             |       |                                  | (10,000     | )                             |       |              | —     |   |   |   | — |   |   |   | — |   |   |   | (10,000 | ) |   |   | — |   |   |
| Change in net  unrealized gains/losses on investments, net of taxes |       | —      |       |                    | —     |         |       |                      | —      |             |       |                                  | —      |                          |       |              | —     |   |   |   | — |   |   |   | 20 |   |   |   | 20 |   |   |   | 20 |   |   |
| Translation  adjustment                                                  |       | —      |       |                    | —     |         |       |                      | —      |             |       |                                  | —      |                          |       |              | —     |   |   |   | — |   |   |   | (29 | ) |   |   | (29 | ) |   |   | (29 | ) |   |
| Net income                                                               |       | —      |       |                    | —     |         |       |                      | —      |             |       |                                  | —      |                          |       |              | —     |   |   |   | 5,262 |   |   |   | — |   |   |   | 5,262 |   |   |   | 5,262 |   |   |
| **Balance  at May 31, 2005**                                   | ** ** | **100,619** | ** ** | ** **              | **1,124**  |         | ** ** | ** **                | **338,666** |             | ** ** | ** **                            | **(72,348** | )                             | ** ** | ** **        | **(41**    | **)** | ** ** | ** ** | **22,733** |   | ** ** | ** ** | **2,921** | ** ** | ** ** | ** ** | **293,055** |   | ** ** | ** ** | **5,253** |   |   |
| Issuance of common  stock related to a business combination              |       | 80,124      |       |                    | 801        |         |       |                      | 443,088     |             |       | ** **                            | —      |                          | ** ** | ** **        | —     | ** ** | ** ** | ** ** | — |   | ** ** | ** ** | — |   |   |   | 443,889 |   | ** ** | ** ** | — |   |   |
| Issuance of  restricted stock                                            |       | 100         | ** ** | ** **              | —     |         |       |                      | 293         |             |       |                                  | 232         |                          |       |              | (525       | ) | ** ** | ** ** | — |   | ** ** | ** ** | — |   |   |   | — |   | ** ** | ** ** | — |   |   |
| Amortization of  stock-based compensation                                |       | —      | ** ** | ** **              | —     |         |       |                      | —      |             |       |                                  | —      |                          |       |              | 435        | ** ** | ** ** | ** ** | — |   | ** ** | ** ** | — |   |   |   | 435 |   | ** ** | ** ** | — |   |   |
| Exercise of stock  options and warrants                                  |       | 4,070       |       |                    | 36         |         |       |                      | 5,896       |             |       |                                  | 1,166       |                          | ** ** | ** **        | —     | ** ** | ** ** | ** ** | — |   | ** ** | ** ** | — |   |   |   | 7,098 |   | ** ** | ** ** | — |   |   |
| Stock-based compensation  for former executive                           |       | —      | ** ** | ** **              | —     |         |       |                      | 6,368       |             |       | ** **                            | —      |                          | ** ** | ** **        | —     | ** ** | ** ** | ** ** | — |   | ** ** | ** ** | — |   |   |   | 6,368 |   | ** ** | ** ** | — |   |   |
| Tax benefit from  stockholder transactions                               |       | —      | ** ** | ** **              | —     |         |       |                      | 4,016       |             |       | ** **                            | —      |                          | ** ** | ** **        | —     | ** ** | ** ** | ** ** | — |   | ** ** | ** ** | — |   |   |   | 4,016 |   | ** ** | ** ** | — |   |   |
| Employee stock  purchase plan                                            |       | 738         | ** ** | ** **              | —     |         |       |                      | 1,841       |             |       |                                  | 1,713       |                          | ** ** | ** **        | —     | ** ** | ** ** | ** ** | — |   | ** ** | ** ** | — |   |   |   | 3,554 |   | ** ** | ** ** | — |   |   |
| Change in net  unrealized gains/losses on investments, net of taxes |       | —      | ** ** | ** **              | —     |         |       |                      | —      |             |       | ** **                            | —      |                          | ** ** | ** **        | —     | ** ** | ** ** | ** ** | — |   | ** ** | ** ** | **(31** | **)** |   |   | (31 | ) |   |   | (31 | ) |   |
| Translation  adjustment                                                  |       | —      | ** ** | ** **              | —     |         |       |                      | —      |             |       | ** **                            | —      |                          | ** ** | ** **        | —     | ** ** | ** ** | ** ** | — |   |   |   | 17,316 |   |   |   | 17,316 |   |   |   | 17,316 |   |   |
| Net income                                                               |       | —      | ** ** | ** **              | —     |         |       |                      | —      |             |       | ** **                            | —      |                          | ** ** | ** **        | —     |   |   |   | 15,959 |   | ** ** | ** ** | — |   |   |   | 15,959 |   |   |   | 15,959 |   |   |
| **Balance  at May 31, 2006**                                   | ** ** | **185,651** | ** ** | ** **              | **1,961**  |         | ** ** | ** **                | **800,168** |             | ** ** | ** **                            | **(69,237** | )                             | ** ** | ** **        | **(131**   | **)** | ** ** | ** ** | **38,692** |   | ** ** | ** ** | **20,206** | ** ** | ** ** | ** ** | **791,659** |   | ** ** | ** ** | **33,244** |   |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

F-5

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

| ** **                                                                              | ** ** | **Year Ended May 31,**                     | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash flows from operating activities:**                                               | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                              |       | $  15,959                                       |       | $    5,262 |   | $    7,991 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                                                      |       |   |   |   |   |
| Minority interest                                                                       |       | (176                                                      | )          | — |   | — |   |
| Write-off of intangible assets                                                          |       | 268                                                       |       | — |   | — |   |
| Depreciation and amortization                                                           |       | 16,231                                                    |       | 16,065 |   | 13,324 |   |
| Deferred income taxes                                                                   |       | (1,602                                                    | )          | (3,044 | ) | (4,513 | ) |
| Provision for doubtful accounts                                                         |       | (1,154                                                    | )          | 1,141 |   | 3,317 |   |
| Loss on the disposal of assets                                                          |       | —                                                    |       | 104 |   | 149 |   |
| Tax benefit from stockholder transactions for option  activity                          |       | 4,016                                                     |       | 4,215 |   | 11,581 |   |
| Amortization of stock-based compensation                                                |       | 435                                                       |       | 262 |   | 1,377 |   |
| Stock-based compensation                                                                |       | 6,368                                                     |       | — |   | — |   |
| Amortization of discounts on notes payable                                              |       | 13                                                        |       | 88 |   | 68 |   |
| Amortization of discount and premium on marketable  securities                          |       | (590                                                      | )          | 145 |   | 652 |   |
| Changes  in operating assets and liabilities, net of effect from acquisitions:          |       |                                                      |       |   |   |   |   |
| Trade accounts receivable                                                               |       | 10,215                                                    |       | 21,188 |   | (8,161 | ) |
| Prepaid expenses and other assets                                                       |       | 22,042                                                    |       | 748 |   | 2,285 |   |
| Accounts payable                                                                        |       | (1,290                                                    | )          | (2,388 | ) | 838 |   |
| Accrued and other liabilities                                                           |       | (6,560                                                    | )          | (4,371 | ) | (5,529 | ) |
| Income taxes payable                                                                    |       | 1,046                                                     |       | 419 |   | 999 |   |
| Deferred revenue and client deposits                                                    |       | 11,265                                                    |       | (6,936 | ) | (6,545 | ) |
| Net cash provided by operating activities                                               |       | 76,486                                                    |       | 32,898 |   | 17,833 |   |
| **Cash flows from investing activities:**                                               | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash received (paid) in conjunction with  acquisitions, net of cash acquired       |       | 30,137                                                    |       | (3,654 | ) | (15,879 | ) |
| Purchase of maintenance contracts                                                       |       | —                                                    |       | — |   | (19,751 | ) |
| Purchases of marketable securities                                                      |       | (157,126                                                  | )          | (536,717 | ) | (630,699 | ) |
| Maturities of marketable securities                                                     |       | 107,801                                                   |       | 590,562 |   | 564,559 |   |
| Sales of marketable securities                                                          |       | 337                                                       |       | 35,755 |   | 79,225 |   |
| Purchases of property and equipment                                                     |       | (4,907                                                    | )          | (3,724 | ) | (4,946 | ) |
| Net cash (used in) provided by investing activities                                     |       | (23,758                                                   | )          | 82,222 |   | (27,491 | ) |
| **Cash flows from financing activities:**                                               | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Principal payments on long-term debt                                                    |       | (43,185                                                   | )          | (1,358 | ) | (907 | ) |
| Payments on capital lease obligations                                                   |       | (112                                                      | )          | — |   | — |   |
| Exercise of stock options                                                               |       | 7,098                                                     |       | 7,640 |   | 9,431 |   |
| Issuance of treasury shares for employee stock  purchase plan                           |       | 3,554                                                     |       | 3,946 |   | 3,659 |   |
| Repurchase of common stock                                                              |       | —                                                    |       | (10,000 | ) | (40,000 | ) |
| Net cash (used in) provided by financing activities                                     |       | (32,645                                                   | )          | 228 |   | (27,817 | ) |
| Effect of exchange rate changes on cash and cash  equivalents                           |       | 2,327                                                     |       | — |   | — |   |
| Increase (decrease) in cash and cash equivalents                                        |       | 22,410                                                    |       | 115,348 |   | (37,475 | ) |
| Cash and cash equivalents at beginning of year                                          |       | 187,744                                                   |       | 72,396 |   | 109,871 |   |
| Cash and cash equivalents at end of year                                                |       | $210,154                                                  |       | $187,744 |   | $  72,396 |   |
| Supplemental  disclosures:                                                              |       |                                                      |       |   |   |   |   |
| Interest paid                                                                           |       | $         19 |       | $         11 |   | $         39 |   |
| Income taxes  refunded, net                                                             |       | $  (9,482                                       | )          | $       (57 | ) | $     (514 | ) |

 

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

F-6

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

**1.**                 BusinessDescription

Lawson Software, Inc.(the “Company”) provides business application software, services andmaintenance to customers primarily in the services sector, trade industries,and manufacturing/distribution sectors. The Company operates as one businesssegment focused on broad sectors. We specialize in specific markets includinghealthcare, public services, retail, financial services, food and beverage,manufacturing and wholesale distribution. In the manufacturing sector we serveboth process manufacturing and discrete manufacturing. In service sector weserve both asset-intensive and labor-intensive services. The Company’s softwareincludes enterprise financial management, human capital management, businessintelligence, asset management, enterprise performance management, supply chainmanagement, service management, manufacturing operations, business projectmanagement and industry-tailored applications. The Company’s applications helpautomate and integrate critical business processes, aiding in collaborationamong its clients and their partners, suppliers and employees. Through ourconsulting services we primarily help our clients implement their Lawsonapplications. Through our support services we provide ongoing maintenance and assistanceto our clients.

**2.**                 Summaryof Significant Accounting Policies

***Basis of Presentation***

The consolidated financialstatements include the accounts of the Company and its branches andmajority-owned subsidiaries operating in the United States of America, Europeand Asia. All significant intercompany accounts and transactions have beeneliminated. The Company’s subsidiaries that are not majority-owned areaccounted for under the equity method. The accompanying consolidated financialstatements for prior fiscal years contain reclassifications to conform prioryear’s data to the current presentation. These reclassifications of prior yearbalances include: a balance sheet reclassification of insurance premiums,withholding and other taxes from accounts payable to accrued compensation andrelated benefits and other current liabilities; a balance sheetreclassification to disclose income tax payable and long-term deferred revenueseparately; and a cash flow statement reclassification of restructuring and taxcommitment from exercise of stock options from a separate disclosure toinclusion with accrued and other liabilities within cash provided by operatingactivities. These reclassifications had no effect on previously reported netearnings, stockholders’ equity or cash flows.

***Use of Estimates***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. On an on-going basis, the Company evaluates its estimates,including those related to revenue recognition, provision for doubtful accountsand sales returns, fair value of investments, fair value of acquired intangibleassets and goodwill, useful lives of intangible assets and property andequipment, income taxes, restructuring obligations and contingencies andlitigation, among others. The Company bases its estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities. Actual resultscould differ from those estimates.

F-7

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

***Fair Value of Financial Instruments***

The Company’s financialinstruments consist primarily of cash, marketable securities, trade accountsreceivable and accounts payable for which the current carrying amountsapproximate fair market value. Additionally, the borrowing rates currentlyavailable to the Company approximate current rates for debt agreements withsimilar terms and average maturities.

***Cash Equivalents***

All highly liquidinvestments with an original maturity of three months or less are considered tobe cash equivalents. The Company’s cash equivalents consist primarily of moneymarket instruments and highly liquid securities of corporations andmunicipalities. The carrying amount of cash equivalents approximates fair valuedue to the short maturity of these instruments.

***Accounts Receivable and Allowance for DoubtfulAccounts***

Accounts receivable areinitially recorded at fair value upon the sale of software licenses andservices to customers. The Company maintains an allowance for doubtful accountsat an amount estimated to be sufficient to provide adequate protection againstlosses resulting from extending credit to the Company’s clients. In judging theadequacy of the allowance for doubtful accounts, the Company considers multiplefactors including historical bad debt experience, the general economicenvironment, the need for specific client reserves and the aging of the Company’sreceivables. A considerable amount of judgment is required in assessing thesefactors. If the factors utilized in determining the allowance do not reflectfuture performance, then a change in the allowance for doubtful accounts wouldbe necessary in the period such determination has been made impacting futureresults of operations. This provision is included in operating expenses as ageneral and administrative expense in the Consolidated Statements of Income.

***Marketable Securities***

The Company accounts for marketable securities inaccordance with provisions of Statement of Financial Accounting Standards SFAS No. 115,*Accounting for Certain Investments in Debt andEquity Securities*. SFAS No. 115 addresses the accounting andreporting for investments in fixed maturity securities and for equitysecurities with readily determinable fair values. Management determines theappropriate classification of debt securities at the time of purchase andreevaluates such designation as of each balance sheet date. Currently, allmarketable securities held by the Company are classified as available-for-sale.Available-for-sale securities are carried at fair value asdetermined by quoted market prices, with unrealized gains and losses, net oftax, reported as a separate component of stockholders’ equity. If an unrealizedloss for any investment is considered to be other-than-temporary, the loss willbe recognized in the Consolidated Statements of Income in the period thedetermination is made. The cost basis of securities sold is determined usingthe specific identification method. Interest and dividends on securitiesclassified as available-for-sale are included in interest income. As of May 31, 2006,$90.3 million of total investments mature within one year and$6.1 million mature beyond one year and within two years. Gross realizedand unrealized gains and losses for the years ended May 31, 2006, 2005, and 2004were not material.

F-8

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

As of May 31, 2006and 2005, the Company’s debt and marketable securities were as follows:

| ** **                           | ** ** | **May 31, 2006** | ** ** | **May 31, 2005** | ** ** |
|--------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | **Cost**                   | ** ** | **Aggregate  Fair  Value** | ** ** | **Net  Unrealized  Gains  (Losses)** | ** ** | **Cost** | ** ** | **Aggregate  Fair  Value** | ** ** | **Net  Unrealized  Gains  (Losses)** | ** ** |
| State and local  municipalities debt |       | $                          | —     |                       |       | $ | — |   |   |   | $ | — |   |   | $ | 3,535 |   |   | $ | 3,511 |   |   |   | $ | (24 | ) |   |
| US Agency                            |       | 38,267                     |       |                       | 38,471     |   |   |   | 204 |   |   | 6,492 |   |   | 6,505 |   |   |   | 13 |   |   |
| Corporate debt                       |       | 57,821                     |       |                       | 57,956     |   |   |   | 135 |   |   | 36,855 |   |   | 36,853 |   |   |   | (2 | ) |   |
| Total                                |       | $                          | 96,088     |                       |       | $ | 96,427 |   |   |   | $ | 339 |   |   | $ | 46,882 |   |   | $ | 46,869 |   |   |   | $ | (13 | ) |   |
| Current                              |       | $                          | 90,107     |                       |       | $ | 90,348 |   |   |   | $ | 241 |   |   | $ | 43,123 |   |   | $ | 43,099 |   |   |   | $ | (24 | ) |   |
| Non-current                          |       | $                          | 5,981      |                       |       | $ | 6,079 |   |   |   | $ | 98 |   |   | $ | 3,759 |   |   | $ | 3,770 |   |   |   | $ | 11 |   |   |

 

***Property and Equipment***

Property and equipmentincludes equipment, office furniture and automobiles, which is stated at costless accumulated depreciation. Depreciation is computed using the straight-lineapproach over the estimated useful lives of the assets, which generally rangefrom one to seven years. Property and equipment also includes leaseholdimprovements which are stated at cost less accumulated amortization.Amortization is computed over the shorter of the economic life or the term ofthe underlying facility lease, which generally ranges from 3 to 16 years.Depreciation and amortization expense was $5.8 million, $7.3 million,and $9.0 million for the years ended May 31, 2006, 2005,and 2004, respectively.

***Lease Obligations***

The Company recognizeslease obligations with scheduled rent increases over the term of the lease on astraight-line basis in accordance with Financial Accounting Standards BoardTechnical Bulletin 85-3 *Accounting for OperatingLeases with Scheduled Rent Increases*. Accordingly, the total amountof base rentals over the term of the Company’s leases is charged to expense ona straight-line method, with the amount of rental expense in excess of leasepayments recorded as a deferred rent liability. As of May 31, 2006and 2005, the Company has deferred rent liabilities of $3.0 millionand $2.0 million, respectively, all of which are classified in otherlong-term liabilities. The Company also recognizes capital lease obligationsand records the underlying assets and liabilities in the balance sheet. SeeNote 15 for disclosure of capital lease obligations.

***Revenue Recognition***

The Companyrecognizes revenue in accordance with the provisions of the American Instituteof Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2,*Software Revenue Recognition*, as amended, and SOP 98-9,*Modification of SOP 97-2, Software RevenueRecognition, With Respect to Certain Transactions*as well asTechnical Practice Aids issued from time to time by the AICPA, and inaccordance with the Securities and Exchange Commission Staff AccountingBulletin (SAB) No. 104, *Revenue Recognition*.The Company licenses software under non-cancelable license agreements andprovides related consulting services, including training and implementationservices, as well as ongoing customer support and maintenance. When consulting,training and implementation services are not considered 

F-9

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

essentialto the functionality of the Company’s software products, are sold separatelyand also are available from a number of third-party service providers, theCompany’s revenues from these services are generally recorded separately fromlicense fees and recognized as the services are performed. Softwarearrangements which include certain fixed-fee service components are usuallyrecognized as the services are performed while corresponding costs to providethese services are expensed as incurred. Software arrangements includingservices that are essential to the functionality of the Company’s softwareproducts are recognized in accordance with SOP 81-1, *Accounting for Performance of Construction-Type andCertain Production-Type Contracts*, using contract accounting and thepercentage-of-completion methodology based on labor hours input. The amounts ofrevenue and related expenses reported in the consolidated financial statementsmay vary, due to the amount of judgment required to address significantassumptions, risks and uncertainties in applying the application of the percentage-of-completionmethodology. The Company’s specific revenue recognition policies are asfollows:

·       SoftwareLicense Fees—License fee revenues from end-users are recognized when thesoftware product has been shipped, provided a non-cancelable license agreementhas been signed, there are no uncertainties surrounding product acceptance, thefees are fixed or determinable and collection of the related receivable isconsidered probable. Provided the above criteria are met, license fee revenuesfrom resellers are recognized when there is a sell-through by a reseller to anend-user. A sell-through is determined when the Company receives an order formfrom a reseller for a specific end-user sale. The Company does not generallyoffer rights of return, acceptance clauses or price protection to itscustomers. In situations where software license contracts include rights ofreturn or acceptance clauses, revenue is deferred until the clause expires.Typically, the Company’s software license fees are due within a 12-monthperiod from the date of shipment. If the fee due from the customer is not fixedor determinable, including payment terms greater than twelve months fromshipment, revenue is recognized as payments become due and all other conditionsfor revenue recognition have been satisfied. In software arrangements thatinclude rights to multiple delivered elements such as software products orspecified upgrades and undelivered elements such as support or services, theCompany allocates the total arrangement fee according to the fair value of eachelement using vendor-specific objective evidence. Vendor-specific objectiveevidence of fair value is determined using the price charged when that elementis sold separately. In software arrangements in which the Company has fairvalue of all undelivered elements but not of a delivered element, it uses theresidual 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 and is recognized asrevenue.  In software arrangements inwhich the Company does not have vendor-specific objective evidence of fairvalue of all undelivered elements, revenue is deferred until fair value isdetermined or all elements for which the Company does not have vendor-specificobjective evidence of fair value, have been delivered.

·       Maintenanceand Support—Revenues from customer maintenance and support contracts aredeferred and recognized ratably over the term of the agreements. Revenues formaintenance and support that are bundled with license fees are deferred basedon the vendor specific objective evidence of fair value of the bundledmaintenance and support and recognized over the term of the agreement. Vendorspecific objective evidence of fair value is based on the renewal rate forcontinued maintenance and support arrangements.

F-10

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

·       Consulting Services—Revenuesfrom consulting services (including training and implementation services) arerecognized as services are provided to customers. Revenues for consultingservices that are bundled with license fees are deferred based on thevendor-specific objective evidence of fair value of the bundled services andrecognized when the services are performed. Vendor-specific objective evidenceof fair value is based on the price charged when training and consultingservices are sold separately.

***Sales Returns and Allowances***

Although the Company doesnot generally provide a contractual right of return, in the course of arrivingat practical business solutions to various warranty and other claims, theCompany has allowed sales returns and allowances. The Company records aprovision for estimated sales returns and allowances on licenses in the sameperiod the related revenues are recorded or when current information indicatesadditional amounts are required. These estimates are based on historicalexperience determined by analysis of specific return activity and other knownfactors.

***Research and Development***

Expenditures for softwareresearch and development are expensed as incurred. These expenses consistprimarily of salaries, employee benefits, related overhead costs, andconsulting fees associated with product development, enhancements and upgradesfor existing customers under maintenance and for new customers, testing,quality assurance, and documentation. Such costs are required to be expenseduntil the point that technological feasibility of the software is established.To date, the time period between the establishment of technological feasibilityand completion of software development has been short, and no significantdevelopment costs have been incurred during that period. Accordingly, theCompany has not capitalized any software development costs to date. The Company’ssoftware research and development costs primarily relate to softwaredevelopment during the period prior to technological feasibility and arecharged to operations as incurred.

***Advertising Expense***

The Company expensesadvertising costs as incurred. Advertising expenses of $10.4 million,$11.3 million, and $9.9 million were charged to sales and marketingexpenses during the years ended May 31, 2006, 2005,and 2004, respectively.

***Income Taxes***

The Company provides forincome taxes using the liability method under SFAS No. 109, “*Accounting for Income Taxes*,” which requires recognition ofdeferred tax assets and liabilities for the expected future tax consequences ofevents that have been included in the financial statements. Under thisstatement, deferred tax assets and liabilities are determined based on thedifference between the financial statement and tax basis of assets andliabilities, using enacted tax rates in effect for the year in which thedifferences are expected to reverse. Deferred tax assets are reduced by avaluation allowance when it is more likely than not that some component or allof the deferred tax assets will not be realized. Tax rate changes are reflectedin income during the period such changes are enacted.

F-11

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

***Concentrations of Credit Risks***

Financial instruments that potentially subject theCompany to concentrations of credit risk consist primarily of cash and cashequivalents and trade accounts receivable. Cash equivalents consist primarilyof money market instruments and highly liquid debt securities of corporationsand municipalities, with an original maturity of three months or less at thedated of purchase and are readily convertible into cash.

The Company grants creditto clients in the ordinary course of business. Concentrations of credit riskwith respect to trade accounts receivable are limited due to the large numberof clients comprising the Company’s client base and their dispersion acrossdifferent industries and geographic areas. No single client accounted for 10% ormore of revenues for fiscal 2006, 2005 or 2004 or of tradeaccounts receivable at May 31, 2006 or 2005.

***Contingent Liabilities***

The Company from time to time may have unresolvedregulatory, legal and tax matters, as discussed further inNote 15. The Company provides for contingent liabilities inaccordance with SFAS No. 5 *Accounting forContingencies* (SFAS No. 5). In accordance with SFAS No. 5,a loss contingency is charged to income when (i) it is probable that anasset has been impaired or a liability has been incurred at the date of thefinancial statements and (ii) the amount of the loss can be reasonablyestimated. Disclosure in the notes to the financial statements is required forloss contingencies that do not meet both those conditions if there is areasonable possibility that a loss may have been incurred. Gain contingenciesare not recorded until realized. The Company expenses all legal costs incurredto resolve regulatory, legal and tax matters as incurred.

Periodically, the Companyreviews the status of each significant matter to assess the potential financialexposure. If a potential loss is considered probable and the amount can bereasonably estimated as defined by SFAS No. 5, the Company reflects theestimated loss in its results of operations. Significant judgment is requiredto determine the probability that a liability has been incurred and whethersuch liability can be reasonably estimated. Because of uncertainties related tothese matters, accruals are based on the best information available at thetime. Further, estimates of this nature are highly subjective, and the finaloutcome of these matters could vary significantly from the amounts that havebeen included in the accompanying consolidated financial statements. Asadditional information becomes available, the Company reassesses the potentialliability related to its pending claims and litigation and may revise itsestimates accordingly. Such revisions in the estimates of the potentialliabilities could have a material impact on the Company’s results of operationsand financial position.

***Long-Lived Assets***

In accordance with SFAS No. 144*Accounting for the Impairment or Disposal ofLong-Lived Assets*, the Company reviews long-lived assets forimpairment whenever events or changes in circumstances indicate the carryingamount may not be recoverable. Events or changes in circumstances that indicatethe carrying 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 undiscounted cashflows method is used to determine whether the asset is impaired. Cash flowswould include the estimated terminal value of the asset and exclude any 

F-12

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

interestcharges. To the extent the carrying value of the asset exceeds the undiscountedcash flows over the estimated remaining life of the asset, the impairment ismeasured using the discounted cash flows. The discount rate utilized would bebased on management’s best estimate of the related risks and return at the timethe impairment assessment is made.

***Goodwill and Other Intangible Assets***

Thechanges in the carrying amount of goodwill for the year ended May 31, 2006and 2005 are as follows:

| ** **                               | ** ** | **May 31,** | ** ** |
|------------------------------------------|------------|------------------|------------|
| ** **                               | ** ** | **2006**         | ** ** | **2005** | ** ** |
| Balance as of the  beginning of the year |       | $                | 43,407     |   | $ | 43,042 |   |
| Goodwill acquired during the year        |       | 397,931          |       | — |   |
| Contingent consideration earned          |       | 184              |       | 496 |   |
| Currency translation effect gain (loss)  |       | 13,028           |       | (131 | ) |
| Balance as of the end of  the year       |       | $                | 454,550    |   | $ | 43,407 |   |

 

Acquiredintangible assets subject to amortization are as follows:

| ** **              | ** ** | **May 31, 2006**   | ** ** | **May 31, 2005**    | ** ** | ** ** | ** ** |
|-------------------------|------------|------------------------------|------------|-------------------------------|------------|------------|------------|
| ** **              | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** | **Net**    | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  useful lives** | ** ** |
| Maintenance  contracts  |       | $                            | 22,940     |                          |       | $          | 8,266      |   |   | $ | 14,674 |   | $ | 22,940 |   |   | $ | 4,316 |   |   | $ | 18,624 |   | Term |   |
| Technology              |       | 85,348                       |       |                          | 11,452     |       |       | 73,896 |   | 14,234 |   |   | 8,417 |   |   | 5,817 |   | 3-10  years |   |
| Client lists            |       | 10,634                       |       |                          | 4,736      |       |       | 5,898 |   | 11,217 |   |   | 3,879 |   |   | 7,338 |   | 4-10  years |   |
| Customer  relationships |       | 47,393                       |       |                          | 372        |       |       | 47,021 |   | — |   |   | — |   |   | — |   | 12  years |   |
| Trademarks              |       | 5,063                        |       |                          | 181        |       |       | 4,882 |   | — |   |   | — |   |   | — |   | 2  years |   |
| Order backlog           |       | 5,627                        |       |                          | 469        |       |       | 5,158 |   | — |   |   | — |   |   | — |   | 1  year |   |
| Non-compete  agreements |       | 3,518                        |       |                          | 352        |       |       | 3,166 |   | 628 |   |   | 468 |   |   | 160 |   | 5  years |   |
|                    |       | $                            | 180,523    |                          |       | $          | 25,828     |   |   | $ | 154,695 |   | $ | 49,019 |   |   | $ | 17,080 |   |   | $ | 31,939 |   |   |   |

 

The company amortizes its intangible assets, usingaccelerated and straight line methods which approximates the proportion offuture cash flows estimated to be generated in each period over the estimateduseful life of the applicable asset. The increase in intangible assets at May 31,2006 is a result of the acquisition of Intentia on April 24, 2006. SeeNote 4, of Notes to Consolidated Financial Statements.

F-13

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

Thetable below shows the activity of intangible assets over the past two years,including the acquisition of Intentia:

| ** **                 | ** ** | **Balance at** | ** ** | ** ** | ** ** | ** **         | ** ** | **Balance at** | ** ** |
|----------------------------|------------|---------------------|------------|------------|------------|--------------------|------------|---------------------|------------|
| ** **                 | ** ** | **May 31,**    | ** ** | ** ** | ** ** | **Other net** | ** ** | **May 31,**    | ** ** |
| **Intangible Assets** | ** ** | ** **          | ** ** | **2005**   | ** ** | **Additions**      | ** ** | **adjustments**     | ** ** | **2006** | ** ** |
| Maintenance contracts      |       |                | $22,940    |       |       |               |       |                |       |   |   | $ | 22,940 |   |
| Technology                 |       |                | 14,234     |       |       | 69,079             |       |                | 2,035      |   |   | 85,348 |   |
| Client lists               |       |                | 11,217     |       |       |               |       |                | (583       | ) |   | 10,634 |   |
| Customer relationships     |       |                | —     |       |       | 45,876             |       |                | 1,517      |   |   | 47,393 |   |
| Trademarks                 |       |                | —     |       |       | 4,906              |       |                | 157        |   |   | 5,063 |   |
| Order backlog              |       |                | —     |       |       | 5,437              |       |                | 190        |   |   | 5,627 |   |
| Non-compete agreements     |       |                | 628        |       |       | 3,182              |       |                | (292       | ) |   | 3,518 |   |
| **Total**                  |       |                | $          | 49,019     |       |               | $          | 128,480             |       |   | $ | 3,024 |   |   | $ | 180,523 |   |
|                            |            |                     |            |            |            |                    |            |                     |            |  |  |  |  |  |  |  |  |  |  |

 

| ** **                 | ** ** | **Balance at** | ** ** | ** ** | ** ** | ** **         | ** ** | **Balance at** | ** ** |
|----------------------------|------------|---------------------|------------|------------|------------|--------------------|------------|---------------------|------------|
| ** **                 | ** ** | **May 31,**    | ** ** | ** ** | ** ** | **Other net** | ** ** | **May 31,**    | ** ** |
| **Intangible Assets** | ** ** | ** **          | ** ** | **2004**   | ** ** | **Additions**      | ** ** | **adjustments**     | ** ** | **2005** | ** ** |
| Maintenance  contracts     |       |                | $          | 22,940     |       |               |       |                |       |   |   |   |   |   |   | $ | 22,940 |   |   |
| Technology                 |       |                | 14,272     |       |       |               |       |                |       |   | (38 | ) |   |   | 14,234 |   |   |
| Client lists               |       |                | 11,254     |       |       |               |       |                |       |   | (37 | ) |   |   | 11,217 |   |   |
| Customer  relationships    |       |                | —     |       |       |               |       |                |       |   |   |   |   |   | — |   |   |
| Trademarks                 |       |                | —     |       |       |               |       |                |       |   |   |   |   |   | — |   |   |
| Order backlog              |       |                | —     |       |       |               |       |                |       |   |   |   |   |   | — |   |   |
| Non-compete  agreements    |       |                | 632        |       |       |               |       |                |       |   | (4 | ) |   |   | 628 |   |   |
| **Total**                  |       |                | $          | 49,098     |       |               |       | $                   | —     |   |   |   | $ | (79 | ) |   |   | $ | 49,019 |   |   |
|                            |            |                     |            |            |            |                    |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                        | ** ** | **Balance at** | ** ** | ** ** | ** ** | ** **         | ** ** | **Balance at** | ** ** |
|-----------------------------------|------------|---------------------|------------|------------|------------|--------------------|------------|---------------------|------------|
| ** **                        | ** ** | **May 31,**    | ** ** | ** ** | ** ** | **Other net** | ** ** | **May 31,**    | ** ** |
| **Accumulated Amortization** | ** ** | ** **          | ** ** | **2005**   | ** ** | **Amortization**   | ** ** | **adjustments**     | ** ** | **2006** | ** ** |
| Maintenance  contracts            |       | $                   | (4,316     | )          |       | $                  | (3,950     | )                   |       |   | $ | — |   |   | $ | (8,266 | ) |
| Technology                        |       | (8,417              | )          |       | (3,895     | )                  |       |                | 860        |   |   | (11,452 | ) |
| Client lists                      |       | (3,879              | )          |       | (1,286     | )                  |       |                | 429        |   |   | (4,736 | ) |
| Customer  relationships           |       | —              |       |       | (370       | )                  |       |                | (2         | ) |   | (372 | ) |
| Trademarks                        |       | —              |       |       | (180       | )                  |       |                | (1         | ) |   | (181 | ) |
| Order backlog                     |       | —              |       |       | (467       | )                  |       |                | (2         | ) |   | (469 | ) |
| Non-compete  agreements           |       | (468                | )          |       | (292       | )                  |       |                | 408        |   |   | (352 | ) |
| **Total**                         |       | $                   | (17,080    | )          |       | $                  | (10,440    | )                   |       |   | $ | 1,692 |   |   | $ | (25,828 | ) |
|                                   |            |                     |            |            |            |                    |            |                     |            |  |  |  |  |  |  |  |  |  |  |

 

F-14

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

| ** **                        | ** ** | **Balance at** | ** ** | ** ** | ** ** | ** **         | ** ** | **Balance at** | ** ** |
|-----------------------------------|------------|---------------------|------------|------------|------------|--------------------|------------|---------------------|------------|
| ** **                        | ** ** | **May 31,**    | ** ** | ** ** | ** ** | **Other net** | ** ** | **May 31,**    | ** ** |
| **Accumulated Amortization** | ** ** | ** **          | ** ** | **2004**   | ** ** | **Amortization**   | ** ** | **adjustments**     | ** ** | **2005** | ** ** |
| Maintenance  contracts            |       |                | $          | (324       | )          |               |       | $                   | (3,992     | ) |   |   |   |   |   | $ | (4,316 | ) |
| Technology                        |       |                | (5,183     | )          |       |               | (3,268     | )                   |       |   | 34 |   |   | (8,417 | ) |
| Client lists                      |       |                | (2,594     | )          |       |               | (1,304     | )                   |       |   | 19 |   |   | (3,879 | ) |
| Customer  relationships           |       |                | —     |       |       |               |       |                |       |   |   |   |   | — |   |
| Trademarks                        |       |                | —     |       |       |               |       |                |       |   |   |   |   | — |   |
| Order backlog                     |       |                | —     |       |       |               |       |                |       |   |   |   |   | — |   |
| Non-compete  agreements           |       |                | (230       | )          |       |               | (240       | )                   |       |   | 2 |   |   | (468 | ) |
| **Total**                         |       |                | $          | (8,331     | )          |               |       | $                   | (8,804     | ) |   |   | $ | 55 |   |   | $ | (17,080 | ) |
|                                   |            |                     |            |            |            |                    |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Amortization expense for the fiscal years endedMay 31, 2006, 2005 and 2004 was $10.4 million,$8.8 million and $4.3 million, respectively. Amortization expense isreported in cost of revenues and amortization of acquired intangibles, in theaccompanying Consolidated Statements of Income. Other net adjustments primarilyrelate to foreign currency translation and $0.3 million write-off ofNumbercraft intangible assets. See Note 4 of Notes to ConsolidatedFinancial Statements.

Theestimated future annual amortization expense for identified intangible assetsis as follows:

| 2007       |   | $      | 28,840  |   |
|------------|--------|--------|---------|--------|
| 2008       |   | 26,422 |    |
| 2009       |   | 19,998 |    |
| 2010       |   | 16,848 |    |
| 2011       |   | 14,298 |    |
| Thereafter |   | 48,289 |    |
|       |   | $      | 154,695 |   |

 

The Company accounts forgoodwill and other intangible assets in accordance with the provisions of SFAS No. 142,*Goodwill and Other Intangible Assets*.Under SFAS No. 142, goodwill and intangible assets with indefinitelives are not amortized to expense and must be reviewed for impairment annuallyor more frequently if events or changes in circumstances indicate that theasset might be impaired. The first step of the goodwill impairment test, usedto identify potential impairment, compares the fair value of a reporting unitwith its carrying amount, including goodwill. The Company operates as onereporting unit and therefore compares the book value to the market value.Market value is determined utilizing our market capitalization plus a controlpremium. If the market value exceeds the book value, goodwill is considered notimpaired, thus the second step of the impairment test is not necessary. If theCompany’s book value exceeds the market value, the second step of the goodwillimpairment test shall be performed to measure the amount of impairment loss, ifany. The second step of the goodwill impairment test, used to measure theamount of impairment loss, compares the implied fair value of the goodwill withthe book value of the goodwill. If the carrying value of the goodwill exceedsthe implied fair value of the goodwill, an impairment loss would be recognizedin an amount equal to the excess. Any loss recognized cannot exceed thecarrying amount of goodwill. After a goodwill impairment loss is recognized,the adjusted carrying amount of goodwill is its new accounting basis.Subsequent reversal of a previously recognized goodwill impairment loss isprohibited once the measurement of that loss is completed. The Companycompleted the annual 

F-15

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

goodwillimpairment assessment as of May 31, 2006 and 2005, upon which noimpairment was recorded. As of May 31, 2006 and 2005,approximately $21.5 million and $15.5 million of the Company’s goodwillrelates to acquisitions where the goodwill is expected to be deductible for taxpurposes.

***Stock-Based Compensation***

The Company accounts for stock-based employeecompensation arrangements in accordance with the provisions of AccountingPrinciples Board Opinion No. 25, *Accounting for StockIssued to Employees*, and complies with the disclosure provisions ofSFAS No. 123, *Accounting for Stock-BasedCompensation* 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 SFAS No. 123,the Company’s net income would have been adjusted to the pro forma amounts asindicated below:

| ** **                                                                                                              | ** ** | **Year Ended May 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income:                                                                                                             |       |                                  |       |   |   |   |   |
| As reported                                                                                                             |       | $                                     | 15,959     |   | $ | 5,262 |   | $ | 7,991 |   |
| Add: Stock-based  employee compensation expense included in reported net income, net of  taxes                     |       | 4,164                                 |       | 159 |   | 840 |   |
| Deduct: Total  stock-based compensation expense determined under fair value based method for  all rewards, net of taxes |       | (6,102                                | )          | (6,768 | ) | (7,015 | ) |
| Pro forma net income (loss)                                                                                             |       | $                                     | 14,021     |   | $ | (1,347 | ) | $ | 1,816 |   |
| Net income (loss) per share:                                                                                       |       |                                  |       |   |   |   |   |
| Basic:                                                                                                                  |       |                                  |       |   |   |   |   |
| As reported                                                                                                             |       | $                                     | 0.14       |   | $ | 0.05 |   | $ | 0.08 |   |
| Pro forma                                                                                                               |       | $                                     | 0.13       |   | $ | (0.01 | ) | $ | 0.02 |   |
| Diluted:                                                                                                                |       |                                  |       |   |   |   |   |
| As reported                                                                                                             |       | $                                     | 0.14       |   | $ | 0.05 |   | $ | 0.07 |   |
| Pro forma                                                                                                               |       | $                                     | 0.12       |   | $ | (0.01 | ) | $ | 0.02 |   |

 

During the fiscal year ended May 31, 2006, theCompany recognized $4.2 million of after-tax stock-based employeecompensation expense that included a $3.8 million non-cash charge resultingfrom a negotiated separation agreement with its former president and chiefexecutive officer. The agreement was deemed to be a modification of previouslygranted options and therefore resulted in an intrinsic value charge for optionexpense under APB No. 25. In calculating the pro forma net income (loss)under SFAS No.123 for the fiscal year ended May 31, 2006, $6.1million, net of related tax effects, was deducted from net income representingthe total stock-based employee compensation expense that was determined underthe fair value based method for all awards. The options for the formerpresident and chief executive officer that were deemed modified were 100%vested and therefore under the fair value based method only $0.4 million, netof related tax effects, in option expense was included as expense in the proforma 

F-16

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

calculation relating tothe incremental value of the modified options as compared with the optionsbefore modification for fiscal year ended May 31, 2006.

Additionally, during the fiscal year ended May 31,2006, all “out-of-the-money” options for all Section 16b officers anddirectors as of June 1, 2005 were modified to permit a two year exercisewindow after termination. While this required no charge in the Company’s incomestatement under APB No. 25, there was an after-tax fair value chargeincluded in the pro forma charge above of $0.3 million for the fiscal yearended May 31, 2006. The total of both modifications under SFAS No. 123was $0.7 million for the fiscal year ended May 31, 2006.

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model with the following weighted-averageassumptions and results:

| ** **                                         | ** ** | **2006**  | ** ** | **2005**     | ** ** | **2004**     | ** ** |
|----------------------------------------------------|------------|-----------|------------|--------------|------------|--------------|------------|
| Dividend yield                                     |       | —    |       | —       |       | —       |       |
| Risk free  interest rate                           |       | 4.4       | %          | 3.6          | %          | 3.6          | %          |
| Expected life                                      |       | 5.4 years |       | 5 years |       | 5 years |       |
| Expected  volatility                               |       | 52.0      | %          | 56.0         | %          | 65.0         | %          |
| Estimated fair value of  options granted per share |       | $         | 3.58       |         | $          | 3.17         |       | $ | 4.08 |   |
|                                                    |            |           |            |              |            |              |            |  |  |  |

 

***Foreign Currency Translation***

All assets and liabilitiesof the Company’s foreign branches and subsidiaries are translated from localcurrencies to United States dollars at period end rates of exchange, whilerevenues and expenses are translated at the average exchange rate during theperiod. The functional currency for each of the Company’s foreign branches andsubsidiaries is the respective local currency. Translation adjustments arisingfrom the translation of net assets located outside of the United States intoUnited States dollars are recorded as a separate component of stockholders’equity. The amounts included in the Consolidated Statements of Income relatedto foreign currency transactions for the years ended May 31, 2006, 2005,and 2004 were a net gain of $0.7 million, a net gain of$0.1 million, and a net loss of $0.8 million, respectively.

***Derivatives***

We account for derivativeinstruments, consisting of foreign currency forward contracts, pursuant toStatement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accountingfor Derivative Instruments and Hedging Activities”, as amended. SFAS 133requires that derivative instruments be recorded in the balance sheet as eitheran asset or liability measured at its fair value. We employ derivativefinancial instruments to offset recognized non-functional currency transactionexposures. Gains and losses resulting from changes in the fair value of ourderivative portfolio are recorded in each accounting period. These gains andlosses largely offset gains and losses from non-functional currency balancesheet exposures previously recognized. We do not use derivative instruments fortrading purposes and do not employ hedge accounting. At May 31, 2006, thefair value of our derivatives was $0.3 million and is included in prepaidexpenses and other assets and $0.3 million is included in other accruedliabilities.

F-17

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

***Comprehensive Income (Loss)***

Comprehensive income (loss) as defined by SFAS No. 130,*Reporting Comprehensive Income*, includesnet income and items defined as other comprehensive income (loss). SFAS No. 130requires that items defined as other comprehensive income (loss), such asforeign currency translation adjustments and unrealized gains and losses oncertain marketable securities, be separately classified in the financialstatements. The foreign currency translation adjustment for fiscal 2006 reflectsthe acquisition of Intentia. Such items are reported in the ConsolidatedStatements of Stockholders’ Equity as comprehensive income (loss).

Thefollowing table summarizes the components of accumulated other comprehensiveincome, net of income taxes:

| ** **                                                                                                  | ** ** | **Year Ended May 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                                                                                                  |       | $                                     | 15,959     |   | $ | 5,262 |   | $ | 7,991 |   |
| Unrealized gain  (loss) on available-for-sale investments, net of taxes (benefit) of $(20),  $13 and $(126) |       | (31                                   | )          | 20 |   | (190 | ) |
| Foreign currency  translation adjustment                                                                    |       | 17,316                                |       | (29 | ) | 1,955 |   |
| Other  comprehensive income (loss)                                                                          |       | 17,285                                |       | (9 | ) | 1,765 |   |
| Comprehensive income                                                                                        |       | $                                     | 33,244     |   | $ | 5,253 |   | $ | 9,756 |   |

 

Totalaccumulated other comprehensive income and its components at May 31, 2006and 2005 are as follows:

| ** **                                                | ** ** | **May 31,** | ** ** |
|-----------------------------------------------------------|------------|------------------|------------|
| ** **                                                | ** ** | **2006**         | ** ** | **2005** | ** ** |
| Foreign currency  translation adjustment                  |       | $                | 20,245     |   | $ | 2,929 |   |
| Unrealized gain  (loss) on available-for-sale investments |       | (39              | )          | (8 | ) |
| Accumulated other  comprehensive income                   |       | $                | 20,206     |   | $ | 2,921 |   |

 

***Per Share Data***

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

F-18

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

Thefollowing table sets forth the computation of basic and diluted net income(loss) per share:

| ** **                                  | ** ** | **Year Ended May 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Basic earnings per share  computation:      |       |                                  |       |   |   |   |   |
| Net income                                  |       | $                                     | 15,959     |   | $ | 5,262 |   | $ | 7,991 |   |
| Weighted average common  shares—basic  |       | 110,995                               |       | 99,068 |   | 98,462 |   |
| Basic net income per  share                 |       | $                                     | 0.14       |   | $ | 0.05 |   | $ | 0.08 |   |
| Diluted earnings per  share computation:    |       |                                  |       |   |   |   |   |
| Net income                                  |       | $                                     | 15,959     |   | $ | 5,262 |   | $ | 7,991 |   |
| Shares computation:                         |       |                                  |       |   |   |   |   |
| Weighted average common shares              |       | 110,995                               |       | 99,068 |   | 98,462 |   |
| Effect of dilutive stock options            |       | 4,234                                 |       | 5,338 |   | 7,964 |   |
| Effect of restricted stock                  |       | 100                                   |       | — |   | — |   |
| Effect of dilutive warrants                 |       | 21                                    |       | 217 |   | 574 |   |
| Weighted average common shares—diluted |       | 115,350                               |       | 104,623 |   | 107,000 |   |
| Diluted net income per share                |       | $                                     | 0.14       |   | $ | 0.05 |   | $ | 0.07 |   |

 

Potential dilutive sharesof common stock excluded from the diluted net income per share computationswere 1.9 million, 5.6 million and 0.6 million for the yearsended May 31, 2006, 2005 and 2004, respectively. Certainpotential dilutive shares of common stock were excluded from the dilutedearnings per share computation because their exercise prices were greater thanthe average market price of the common shares during the period and weretherefore not dilutive.

***New Accounting Pronouncements***

In December 2004 the Financial Accounting StandardsBoard (FASB) issued Statement of Financial Accounting Standard No. 123(revised 2004), *Share-Based Payment (“SFASNo. 123(R)”)*. SFAS No. 123(R) requirescompensation cost relating to unvested share-based payment transactions thatare outstanding as of the effective date and newly issued transactions to berecognized in the financial statements. That cost will be measured based on thefair value of the equity or liability instruments issued. SFAS No. 123(R) coversa wide range of share-based compensation arrangements including share options,restricted share plans, performance-based awards, share appreciation rights andemployee share purchase plans. SFAS No. 123(R) supersedes SFAS No. 123,*Accounting for Stock-Based Compensation*(“SFAS No. 123”), and supersedesAccounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*(“Opinion 25”)*.*SFAS No. 123, as originally issued in 1995,established a fair-value-based method of accounting for share-basedpayment transactions with employees. However, SFAS No. 123 permittedentities the option of continuing to apply the guidance in Opinion 25, as longas the footnotes to financial statements disclosed what net income would havebeen had the fair-value-based method been used. The Company elected the optionof disclosure only under SFAS No. 123. In its disclosures, the Company hashistorically used the Black-Scholes option pricing model to determine the fairvalue of its share based compensation arrangements. Upon the adoption of SFAS No. 123(R),the Company will continue to utilize the Black-Scholes model and will adopt themodified-prospective method. Public entities will be required to apply SFAS No. 123(R) asof the first annual reporting period that begins after June 15, 2005,which is effective with the Company’s first quarter of fiscal 2007. Basedon the 

F-19

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

Company’s significantamount of unvested share-based payment awards, the adoption of this statementis anticipated to have a material impact on the Company’s ConsolidatedStatements of Income. The Company estimates that this statement will result inan additional pretax compensation charge of approximately $7.0 million to $10.0million in fiscal 2007.

In May 2005, the FASB issued SFAS No 154, *Accounting Changes and Error Corrections—A replacement of APB OpinionNo 20 and FASB Statement No. 30* (SFAS 154). SFAS 154 changesthe requirement for the accounting for and reporting of a change in accountingprinciple. This statement applies to all voluntary changes in accountingprinciples and changes required by an accounting pronouncement in the unusualinstance that the pronouncement does not include specific transition provisions.The provisions in SFAS 154 are effective for accounting changes and correctionof errors made in fiscal years beginning after December 15, 2005,which is effective with the Company’s first quarter of fiscal 2007. We donot believe that, upon adoption, SFAS No. 154 will have a material impacton our Consolidated Financial Statements, however, after adoption, if a change inaccounting principle is made, SFAS no. 154 could have a material impact on ourConsolidated Financial Statements.

On July 13, 2006, theFASB issued Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.*Interpretation 48 clarifies the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements in accordance withStatement 109, *Accounting for Income Taxes.* ThisInterpretation prescribes a recognition threshold and measurement attribute forfinancial statement recognition, measurement and disclosure of tax positionsthat a company has taken or expects to be take on a tax return. Additionally,Interpretation 48 provides guidance on derecognition, classification, interestand penalties, accounting in interim periods and transition. Interpretation 48is effective for fiscal years beginning after December 15, 2006, withearly adoption permitted. The Company is currently evaluating whether theadoption of Interpretation 48 will have a material effect on its consolidatedresults of operations and financial condition.

**3.      Restructuring**

Thefollowing table sets forth the reserve activity for the fiscal year, related toeach of the restructuring plans and the remaining balances, which are includedin accrued compensation and benefits in the Consolidated Balance Sheet as of May 31,2006:

| **Severance and Related Benefits** | ** ** | ** ** | ** ** | **Total** | ** ** | **Fiscal  2006** | ** ** | **Fiscal  2005  Phase I** | ** ** | **Fiscal  2005  Phase II** | ** ** | **Fiscal  2004** | ** ** | **Fiscal  2002** | ** ** |
|---------------------------------------------------|------------|------------|------------|-----------|------------|------------------|------------|--------------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Balance,  May 31, 2005                       |       | $          | 235        |      | $          | —           |       |                           | $          | 29                              |       |             |       | $                | 114        |   |   | $ | 62 |   |   | $ | 30 |   |   |
| Provision for restructuring                       |       | 1,836      |       | 1,836     |       |             | —     |                           |       |                            | —     |             |       | —           |       |   | — |   |   |
| Cash payments                                     |       | (770       | )          | (647      | )          |             | —     |                           |       |                            | (14        | )                |       | (104             | )          |   | (5 | ) |   |
| Adjustments to provision                          |       | (10        | )          | —    |       |             | (2         | )                              |       |                            | (25        | )                |       | 42               |       |   | (25 | ) |   |
| Balance, May 31,  2006                       |       | $          | 1,291      |      | $          | 1,189            |       |                           | $          | 27                              |       |             |       | $                | 75         |   |   | $ | — |   |   | $ | — |   |   |

 

***Fiscal 2006 Restructuring***

On April 26,2006, in conjunction with the business combination with Intentia, the Companyapproved a plan designed to eliminate employee redundancies. The plan includesthe reduction of 60 employees in the United States and United Kingdom andresulted in a charge for severance and related benefits of 

F-20

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

$1.8 million as of May 31, 2006. Thereductions are scheduled to take place during the period of May 2006 to February 2007and include employees who work in operations, marketing, sales, research anddevelopment, maintenance and services. Cash payments made during fiscal 2006were $0.6 million. The remaining cash payments will be made periodicallythrough the third quarter of fiscal 2007.

Additionally, the Companyrecorded $29.5 million in costs associated with the restructuring plan for Intentia.These costs were reflected as a part of the purchase price in the businesscombination. The plan for Intentia included the reduction of 124 employeesthrough APAC and EMEA and included employees in all functional areas of thecompany as well as certain facility closings. See Note 4 of Notes toConsolidated Financial Statements for additional information on restructuringactivity for Intentia.

***Fiscal 2005Restructuring***

On September 28, 2004,the Company approved a plan designed to enhance the Company’s operatingeffectiveness and profitability. Under the restructuring plan (Phase I), theCompany streamlined structure, consolidated leadership and reduced long-termcosts to realign projected expenses with anticipated revenue levels. The planincluded the reduction of 107 employees in fiscal 2005 in the UnitedStates and the United Kingdom, which in accordance with SFAS No. 112,resulted in a charge for severance and related benefits of $2.9 million.The reduction included employees who worked in operations, marketing, sales,research and development, maintenance and services. There were no cash paymentsmade during fiscal 2006. The remaining cash payments are expected to becompleted during the first half of fiscal 2007.

At November 30, 2004,the Company also accrued for a restructuring plan (Phase II) that includedinitiatives to further reduce costs and realign projected expenses withanticipated revenue levels. It included a reduction of 68 employees in theUnited States and the United Kingdom, and because the Company was able todetermine probability at the end of the second quarter of fiscal 2005, therestructuring resulted in a charge of approximately $2.2 million, net of areversal of $0.3 million subsequent to the initial charge for severanceand related benefits, in accordance with SFAS No. 112. The reductionincluded employees who worked in sales, research and development and services.Cash payments during fiscal 2006 for the Phase II plan were$0.01 million. All employee reductions and related cash payments weresubstantially completed as of February 28, 2005. The remaining cashpayments are expected to be completed during the first half offiscal 2007.

***Fiscal 2004Restructuring***

In September 2003,the Company approved a restructuring plan to realign projected expenses withanticipated lower revenue levels and incurred restructuring charges of$2.3 million for severance and related benefits. The fiscal 2004 planresulted in the reduction of 93 employees in the second quarter offiscal 2004, from various functions including research and development,general and administrative and sales and marketing, primarily in the UnitedStates. During fiscal 2005, the Company recorded a $0.03 million reversalof restructuring charges for certain employee costs it determined would not beincurred. There was $0.1 million in final cash payments made during the threemonths ended November 30, 2005. The Company then adjusted the remainingaccrual to cover additional costs that were incurred in the final cash paymentsunder the plan.

F-21

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

***Fiscal 2003Restructuring***

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

***Fiscal 2002Restructuring***

In May 2002, theCompany approved a restructuring plan in response to the general economicdownturn and incurred $3.3 million in restructuring charges, which included$3.0 million for severance related benefits and $0.3 million for the closure ofa leased office facility. During fiscal 2003, the Company recorded $0.2 millionin additional charges associated with finalization of lease terminationagreements. The plan resulted in the reduction of 111 employees in variousfunctions including administrative, professional and managerial, primarily inthe United States. There was a final cash payment made during the three monthsended August 31, 2005. The Company adjusted the remaining accrualcompleting its obligation under the plan. No further adjustments have been madein fiscal 2006.

**4**.                 BusinessCombinations

On April 25, 2006,Lawson and Intentia International AB completed a business combination of thetwo companies. Lawson believes that the combination provides opportunities toleverage sales channels and to cross sell expanded product lines across thecombined business’s entire customer base. Holders of shares and warrants inIntentia, representing 5,119,604 shares of series A, 160,593,504 shares ofseries B, and 23,000,000 warrants, corresponding to approximately 99.0 percentof the shares and approximately 99.2 percent of the votes in Intentia on afully diluted basis accepted Lawson’s offer to exchange their shares andwarrants for newly issued shares of Lawson common stock (the “Exchange Offer”).Lawson has also completed a reorganization merger in connection with thecombination. All conditions for the completion of the Exchange Offer have beensatisfied and settlement of the Exchange Offer, whereby holders of shares andwarrants in Intentia will receive VPC-registered Lawson common stock inexchange. The total preliminary purchase price is composed of: 

| Value of common  stock issued in exchange for shares and warrants in Intentia: 80,124,336 shares  at $5.54 per share |   | $     | 443,889 |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|-------|---------|--------|
| Estimated cash purchase of shares not tendered                                                                            |   | 4,856 |    |
| Transaction costs (net of tax benefits of $2,322)                                                                         |   | 9,856 |    |
| Total preliminary  purchase price                                                                                         |   | $     | 458,601 |   |

 

Lawson Software andIntentia completed the businesses combination in a strategic transactionpursuant to which Lawson Holdings, a newly formed Delaware corporation that isa wholly owned subsidiary of Lawson Software, Inc., acquired all of theoutstanding Series A and B shares and warrants to 

F-22

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

purchaseSeries B shares of Intentia. Under terms of the exchange offer, LawsonHoldings offered to exchange 0.5061 of a newly issued share of Lawson Holdingscommon stock for each outstanding Series A share, 0.4519 of a newlyissued share of Lawson Holdings common stock for each outstanding Series Bshare and 0.2157 of a newly issued share of Lawson Holdings common stock foreach warrant. The results of operations of Intentia are included in thestatement of operations of the Company from the date of acquisition.

*Acquisition Related Transaction Costs*

Acquisition relatedtransaction costs include estimated investment banking fees, legal andaccounting fees and other external costs directly related to the acquisition.

*Preliminary Purchase Price Allocation*

Theacquisition was accounted for under SFAS No. 141 using the purchase methodof accounting. Under the purchase method of accounting, the estimated purchaseprice was allocated to Intentia’s tangible and intangible assets acquired andliabilities assumed based on their estimated fair values as of the closing dateof the transaction, with any excess being ascribed to goodwill. Management isprimarily responsible for determining the fair values of these assets.Management has estimated the fair values of the acquired assets based on anumber of factors, including third-party valuations and its own assumptionswhich are subject to change. Goodwill is recognized as the excess purchaseprice over the fair value of net assets acquired. This acquisition resulted ingoodwill primarily from operational efficiencies and synergies. As of May 31,2006, the purchase price is still preliminary as the Company is still in theprocess of valuing certain assets and liabilities. The areas of the purchaseprice allocation that are not yet finalized relate to the valuation of deferredrevenues, intangible assets, selected accruals, restructuring costs, certainlegal matters, favorable or unfavorable operating lease arrangements anddeferred taxes. The Company anticipates that the purchase price will be finalat the end of the second quarter of fiscal 2007. The final purchase price willbe calculated in accordance with EITF 99-12.

| Cash and cash  equivalents              |   | $        | 38,661  |   |
|-----------------------------------------|--------|----------|---------|--------|
| Trade accounts  receivable              |   | 103,702  |    |
| Prepaid and other current  assets       |   | 47,232   |    |
| Property and equipment                  |   | 12,968   |    |
| Goodwill                                |   | 397,931  |    |
| Other intangible assets                 |   | 128,480  |    |
| Long term deferred tax  assets          |   | 3,911    |    |
| Other non-current assets                |   | 2,122    |    |
| Short-term debt                         |   | (3,106   | )       |
| Accounts payable                        |   | (18,531  | )       |
| Other payables and  accrued liabilities |   | (101,982 | )       |
| Restructuring liabilities               |   | (29,480  | )       |
| Deferred revenue                        |   | (65,370  | )       |
| Long-term debt                          |   | (44,323  | )       |
| Long term deferred tax  liability       |   | (9,087   | )       |
| Other long-term  obligations            |   | (4,351   | )       |
| Minority interest                       |   | (176     | )       |
| Total                                   |   | $        | 458,601 |   |

 

F-23

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

Subsequent to theacquisition, Lawson paid off approximately $36 million in debt classified aslong-term as included in the summary above.

*Goodwill andIntangible Assets*

Acquiredassets and liabilities are recorded at their estimated fair values on themerger date. An appraisal firm, Duff & Phelps, LLC, performed avaluation of identified intangible assets, which consist of a customer list,trade names, order backlog, non-compete agreements and acquired technology.Goodwill and identified intangible assets with indefinite lives will not beamortized and will be reviewed for impairment on at least an annual basis. Approximately$6.0 million of goodwill is expected to be deductible for tax purposes. Thefair value assigned to identified intangible assets subject to amortization isas follows:

| ** **                                           | ** ** | ** ** | ** ** | **Useful Life** | ** **  |
|------------------------------------------------------|------------|------------|------------|----------------------|-------------|
| Existing  technology/proprietary technology          |       | $          | 69,080     |                 | 6-10  years |   |
| Existing customer  relationships (including backlog) |       | 51,312     |       | 1-12  years          |        |
| Trademarks/trade  names                              |       | 4,906      |       | 2  years             |        |
| Non compete  agreements                              |       | 3,182      |       | 5  years             |        |
| Total                                                |       | $          | 128,480    |                 |        |   |

 

Intangible assets areamortized on an accelerated basis over their estimated periods benefited. Theweighted average life of the acquired intangibles of Intentia is 9.2 years intotal, with technology having a weighted average life of 8.7 years, existingcustomer relationships (including backlog) having a weighted average life of10.8 years, trademarks and trade names having a weighted average life of 2.0years and non compete agreements having a weighted average life of 5.0 years.

*Deferred taxliability*

The Company recognizeddeferred tax liabilities of $24.8 million related to other acquired intangibleassets.

*Deferred Revenue*

In connection with thepreliminary purchase price allocation, we have estimated the fair value of ourdeferred revenue associated with service and maintenance obligations. We basedour determination of the fair value of the service and maintenance obligations,in part, on a valuation completed by Duff & Phelps, LLC usingestimates and assumptions provided by management. The estimated fair value ofthe services and maintenance bligations was determined utilizing a top downapproach. The majority of deferred revenue is related to maintenance contractsof which the majority will roll out in the next twelve to eighteen months.

*Pre-AcquisitionContingencies*

We have currently notidentified any material pre-merger contingencies. If we identify a material pre-acquisitioncontingency during the remainder of the purchase price allocation period, wewill attempt to determine its fair value and include it in the purchase priceallocation. If, as of the end of the purchase price allocation period, we areunable to determine its fair value, we will apply FASB Statement No. 5, 

F-24

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

*Accountingfor Contingencies*(SFAS No. 5), and the amountdetermined by applying SFAS No. 5 to such item will be included in thepurchase price allocation. 

*RestructuringActivities*

In conjunction with thebusiness combination we approved a plan designed to eliminate employeeredundancies in both Intentia as well as legacy Lawson. The plan for legacyLawson includes the reduction of 60 employees in the United States and UnitedKingdom that resulted in a charge for severance and related benefits of $1.8million as of May 31, 2006. The reduction includes employees who work inoperations, marketing, sales, research and development, maintenance andservices of which actions are expected to take place during the period from May 2006to February 2007. The plan for Intentia includes the reduction of 124employees through APAC and EMEA and includes employees in all functional areasof the company and resulted in a charge for severance and related benefits of$12.7 million. The plan for Intentia also includes certain facility closingsresulting in a charge for lease exit costs of $16.8 million. These charges werenot reflected in the income statement but instead were reflected as part of thepurchase price in the business combination. These restructuring reserves arenot final as of May 31, 2006 and we anticipate that they could be adjustedfor modifications in the restructuring plan and adjustments in amountsestimated. The Company anticipates that the restructuring plans will be finalby the end of the third quarter of fiscal 2007. 

*Pro Forma FinancialInformation (Unaudited)*

Theunaudited financial information in the table below summarizes the combinedresults of operations Lawson and Intentia, on a pro forma basis, as though thecompanies had been combined as of the beginning of each of the periodspresented. Pro forma financial information is presented for informationalpurposes only and is not indicative of the results of operations that wouldhave been achieved if the acquisition had taken place at the beginning of eachof the periods presented. The pro forma financial information for allperiods presented also includes the business combination accounting effect onhistorical revenues, any U.S. GAAP adjustments, amortization of acquiredintangible assets, adjustments to interest expense and related tax effects. 

| ** **                                | ** ** | **Year ended May 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|
| ** **                                | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Total revenues                            |       | $                                     | 874,203    |   | $ | 795,968 |   |
| Net income (loss)                         |       | $                                     | 49,607     |   | $ | (23,363 | ) |
| Net income (loss)  per share—basic   |       | $                                     | 0.45       |   | $ | (0.13 | ) |
| Net income (loss) per  share—diluted |       | $                                     | 0.43       |   | $ | (0.13 |   |

 

**Other Acquisitions**

On October 15, 2003, the Company acquired allof the outstanding capital stock of Apexion Technologies, Inc. (“Apexion”)for $8.0 million in cash, net of cash acquired. The excess purchase priceover the fair value of the net tangible assets acquired of $8.6 millionwas allocated to the following assets: $2.9 million to acquiredtechnology, $0.2 million to a client list, $0.1 million to anon-compete clause and $5.4 million to goodwill. The amount of goodwillrecognized is not tax deductible. The acquired technology, client list andnon-compete clause are being amortized on a straight-line basis over their 

F-25

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

estimated useful lives offour, seven and two years, respectively. Terms of the initial agreementprovided for additional cash payments ranging from zero to $2.0 millioncontingent upon the future performance of Apexion measured annually through November 30, 2005.As of May 31, 2006 the contingent considerations expired, and noadditional consideration had been earned or recorded under this agreement.Apexion provided materials and equipment logistics solutions for the healthcareindustry.

On September 30, 2003, the Company acquiredall of the outstanding capital stock of Closedloop Solutions, Inc. (“Closedloop”)for $4.2 million in cash, net of cash acquired. The excess purchase priceover the fair value of the net tangible assets acquired of $5.0 millionwas allocated to the following assets: $2.5 million to acquiredtechnology, $0.5 million to a client list, $0.1 million to anon-compete clause and $1.9 million to goodwill. The amount of goodwill recognizedis tax deductible. The acquired technology, client list and non-compete clauseare being amortized on a straight-line basis over their estimated useful livesof four, seven and two years, respectively. Closedloop provided collaborativebudgeting, planning and forecasting solutions using real-time, transactionalfunctionality.

Thefollowing table summarizes the estimated fair values of the assets acquired andliabilities assumed at the date of the acquisition:

| ** **                 | ** ** | **September 30,  2003** | ** ** |
|----------------------------|------------|------------------------------|------------|
| Current assets             |       |                         | $          | 927 |   |   |
| Intangible assets          |       |                         | 3,100      |   |   |
| Goodwill                   |       |                         | 1,922      |   |   |
| Total assets acquired      |       |                         | 5,949      |   |   |
| Total liabilities  assumed |       |                         | (1,709     | ) |   |
| Net assets acquired        |       |                         | 4,240      |   |   |
| Less cash  acquired        |       |                         | (85        | ) |   |
| Net cash paid              |       |                         | $          | 4,155 |   |   |

 

On July 24, 2003,the Company acquired all of the outstanding capital stock of NumbercraftLimited (“Numbercraft”) for $3.7 million in cash, net of cash acquired and$0.3 million in notes payable. The excess purchase price over the fairvalue of the net tangible assets acquired of $4.1 million was allocated tothe following assets: $0.9 million to acquired technology,$0.6 million to a client list, $0.3 million to a non-competeclause and $2.3 million to goodwill. The amount of goodwill recognized istax deductible. The acquired technology, client list and non-compete clause arebeing amortized on a straight-line basis over their estimated useful lives ofthree, four and three years, respectively. Terms of the initial agreementprovide for additional cash payments ranging from zero to $9.0 millioncontingent upon the future performance of Numbercraft measured periodicallythrough 2007. Any contingent consideration earned is recorded asadditional goodwill. During the fiscal years ended May 31, 2006, 2005and 2004, $0.2 million, $0.5 million and $1.1 million of additionalconsideration was earned and recorded as additional goodwill, respectively. Theamount earned in fiscal 2006 has been included on the balance sheet in notespayable to the former principals of Numbercraft. On May 4, 2006 theCompany and the former principals agreed to terminate the remaining futurecontingent considerations of $5.6 million for a payment of $0.9 million. Thepayment was included in general and administrative expenses in fiscal 2006.This payment was not recorded to goodwill as it provides no future value to theCompany. As a result of the termination the 

F-26

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

Companywrote off intangible assets totaling $0.3 million. Numbercraft providedsolutions for retailers and consumer packaged goods companies, which enable aquantitative understanding of consumer dynamics, product and offer performance,and client trends.

**Purchase of CustomersMaintenance Contracts**

On April 30, 2004, the Company acquiredassets consisting of client maintenance contracts and client lists from SiemensMedical Solutions Health Services Corporation (“Siemens”) for$19.8 million in cash, $2.6 million in settlement of amounts owed to theCompany by Siemens and $1.7 million in deferred revenue assumed. Of the totalpurchase price, $22.9 million was allocated to the maintenance contractsand is being amortized over the remaining life of the contracts based onestimated periodic contractual revenue recognized. The purchase price allocatedto the client list of $1.0 million is being amortized on a straight-linebasis over 7 years. The remaining purchase price of $0.2 million intransitional support costs was charged to cost of services as the services wereperformed in 2004.

The asset purchaseagreement was part of an overall restructuring of an existing partner agreementbetween the Company and Siemens. Under the asset purchase agreement, theCompany has assumed responsibility for supporting clients using its softwareapplications previously supported by Siemens. The asset purchase agreement didnot qualify as a business combination under the criteria established in SFAS No. 141*Business Combinations*. 

**5.**                 FinancialStatement Components

Supplementaldisclosures of non-cash investing and financing transactions:

| ** **                                             | ** ** | **May 31,** | ** ** |
|--------------------------------------------------------|------------|------------------|------------|
| ** **                                             | ** ** | **2006**         | ** ** | **2005** | ** ** | **2004** | ** ** |
| Stock option  exercises using common stock             |       | $                | 4,857      |   | $ | 1,147 |   | $ | 70 |   |
| Notes payable  issued in conjunction with acquisitions |       | —           |       | 863 |   | 2,399 |   |
| Treasury stock  exchanged for warrants                 |       | —           |       | — |   | 1,428 |   |
| Assets acquired  under capital leases                  |       | 183              |       | — |   | — |   |
| Assets acquired  through settlement of receivables     |       | —           |       | — |   | 2,657 |   |
| Issuance of  common shares for acquisition             |       | 443,889          |       | — |   | — |   |
| Issuance of restricted  stock                          |       | $                | 232        |   | $ | — |   | $ | — |   |

 

Cashpaid for acquisitions during the years ended May 31, 2004:

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

 

F-27

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

***Acquisition Related Costs***

During fiscal year endedMay 31, 2006 and 2005, the Company incurred acquisition costs of$8.5 million and $3.7 million, respectively, related to the businesscombination with Intentia. The Company has included these costs within cashflows from investing activities as cash paid in conjunction with acquisitionsin the accompanying Consolidated Statements of Cash Flows for fiscal 2006and 2005.

***AccountsReceivable, net***

| ** **                             | ** ** | **May 31,** | ** ** |
|----------------------------------------|------------|------------------|------------|
| ** **                             | ** ** | **2006**         | ** ** | **2005** | ** ** |
| Trade accounts  receivable             |       | $                | 160,949    |   | $ | 46,090 |   |
| Less: allowance  for doubtful accounts |       | (19,948          | )          | (3,183 | ) |
| Accounts receivable, net               |       | $                | 141,001    |   | $ | 42,907 |   |

 

**Rollforward of the allowance for doubtful accounts:**

| Balance,  May 31, 2003 |   | $      | 6,440  |   |
|----------------------------------|--------|--------|--------|--------|
| Provision                        |   | 3,317  |   |
| Write-offs                       |   | (5,166 | )      |
| Recoveries                       |   | 741    |   |
| Translation adjustment           |   | 301    |   |
| Balance,  May 31, 2004 |   | 5,633  |   |
| Provision                        |   | 1,141  |   |
| Write-offs                       |   | (4,083 | )      |
| Recoveries                       |   | 475    |   |
| Translation adjustment           |   | 17     |   |
| Balance,  May 31, 2005 |   | 3,183  |   |
| Acquired in business combination |   | 17,940 |   |
| Provision                        |   | (1,147 | )      |
| Write-offs                       |   | (624   | )      |
| Recoveries                       |   | 26     |   |
| Translation adjustment           |   | 570    |   |
| Balance,  May 31, 2006 |   | $      | 19,948 |   |

 

F-28

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

***Property andEquipment, Net***

| ** **                                      | ** ** | **May 31,** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------------|------------|------------|------------|
| ** **                                      | ** ** | **2006**         | ** ** | **2005**   | ** ** | **Useful Lives** | ** ** |
| Buildings                                       |       | $                | 322        |       | $          | — |   | 50 years |   |
| Automobiles                                     |       | 4,554            |       | —     |       | 3-5 years |   |
| Equipment                                       |       | 49,429           |       | 45,675     |       | 1-5 years |   |
| Office furniture                                |       | 16,302           |       | 11,252     |       | 5-7 years |   |
| Leasehold  improvements                         |       | 11,356           |       | 9,503      |       | 3-16 years |   |
| Property under  capital leases                  |       | 2,881            |       | —     |       | 3-7 years |   |
|                                            |       | 84,844           |       | 66,430     |       |   |   |
| Less accumulated  depreciation and amortization |       | (58,655          | )          | (52,856    | )          |   |   |
|                                            |       | $                | 26,189     |       | $          | 13,574 |   |   |   |

 

Property under capital lease consists of $2.9 millionin equipment. The accumulated amortization for capital lease assets is notmaterial for fiscal 2006.

***Deferred Revenueand Client Deposits***

| ** **                                                 | ** ** | **May 31,** | ** ** |
|------------------------------------------------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **2006**         | ** ** | **2005** | ** ** |
| License                                                    |       | $                | 11,095     |   | $ | 7,535 |   |
| Services                                                   |       | 7,485            |       | 795 |   |
| Maintenance                                                |       | 138,144          |       | 68,635 |   |
| Client deposits                                            |       | 322              |       | 890 |   |
| Total deferred  revenue and client deposits                |       | 157,046          |       | 77,855 |   |
| Less current portion                                       |       | (146,206         | )          | (76,571 | ) |
| Long-term portion of  deferred revenue and client deposits |       | $                | 10,840     |   | $ | 1,284 |   |

 

Included in the deferredrevenue balances at May 31, 2006 is $2.8 million and $52.4 million indeferred revenue balances for services and maintenance, respectively that wereacquired through the acquisition of Intentia. In connection with purchase priceallocations related to the acquisition of Intentia, we have estimated the fairvalues of our deferred revenue associated with service and maintenanceobligations. We based our determination of the fair value of the service andmaintenance obligations, in part, on a valuation completed by Duffs &Phelps, LLC using estimates and assumptions provided by management. Theestimated fair value of the service and maintenance obligations was determinedutilizing a top down approach. In applying the top down approach we startedwith the initial carrying value of the obligations adjusted for collectibilityassumptions. We then applied an adjustment for third party sales commissionsnet of third party training costs required to assume responsibility of theobligations. For additional information on the acquisition of Intentia refer toNote 4 of Notes to Consolidated Financial Statements.

F-29

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

**6.**                 Long-TermDebt and Credit Facilities

Long-termdebt consists of the following:

| ** **                                                                                                                             | ** ** | **May 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                             | ** ** | **2006**         | ** ** | **2005** | ** ** |
| Note payable  associated with Numbercraft acquisition, interest at variable rate due  in installments payable July 2006 |       | $                | 201        |   | $ | 1,836 |   |
| Car loans,  interest at average rate of 3.2% due in 3 years                                                                            |       | 4,554            |       | — |   |
| Capital lease  obligations, interest at 7.9% due in 5 to 9 years                                                                       |       | 2,995            |       | — |   |
|                                                                                                                                   |       | 7,750            |       | 1,836 |   |
| Less current  maturities                                                                                                               |       | (3,475           | )          | (1,836 | ) |
| Total Long-term debt                                                                                                                   |       | $                | 4,275      |   | $ | — |   |

 

Theaggregate maturities of long-term debt for each of the five years subsequent toMay 31, 2006 are as follows:

| 2007                  |   | $     | 3,475  |   |
|-----------------------|--------|-------|--------|--------|
| 2008                  |   | 2,299 |   |
| 2009                  |   | 1,677 |   |
| 2010                  |   | 136   |   |
| 2011                  |   | 32    |   |
| Thereafter            |   | 131   |   |
| Total long-term  debt |   | $     | 7,750  |   |

 

As of May 31, 2006 we had a short-term creditfacility that was entered into by Intentia on November 1, 2004. The creditfacility consists of an overdraft facility and guarantee line withSkandinaviska Enskilda Banken (SEB) in the amount of $5.5 million and $5.5million, respectively (Swedish Kroner (SEK) 40 million and 40 million). Borrowingsunder the overdraft facility bear interest at SEB’s base rate plus 350 basispoints. The credit facilities are secured by a pledge of shares of the subsidiariesof Lawson Software International AB and a floating charge on the assets ofIntentia Consulting Sweden AB. As of May 31, 2006, $2.5 million wasoutstanding under the guarantee facility and $3.0 million was available for use.No borrowings were outstanding under the overdraft facility. Subsequent to May 31,2006 effective June 7, 2006, we cancelled the overdraft facility andrenegotiated the term of the $5.5 million (SEK 40 million) guarantee facility.

Additionally, we have a bank overdraft line of $0.7million. As of May 31, 2006 there was no overdraft balance. The Companyalso has various other outstanding guarantees totaling $0.2 million. See Note15 Commitments and Contingencies for further discussion on guarantees.

Interest paid was $0.02million, $0.01 million and $0.04 million in fiscal years ended May 31,2006, 2005 and 2004, respectively.

F-30

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

**7.**                 MinorityInterest and Investment in Unconsolidated Subsidiaries

*MinorityInterest*   The Company has an 87% interest in itssubsidiary in Norway that was acquired in the acquisition of Intentia. Theminority interest as of May 31, 2006 is in deficit position and thereforethere is no amount recorded on the balance sheet.

*Investment inUnconsolidated Subsidiaries*   The Companyreflected $0.7 million of equity in earnings from investments in unconsolidatedsubsidiaries in fiscal 2006 with the acquisition of Intentia and all ofIntentia’s subsidiaries. Net sales recorded were not material. The equitymethod of accounting is used for companies and other investments in which theCompany has significant influence, which generally represents common stockownership or partnership equity of at least 20% and not more than 50%. As ofthe fiscal year ended May 31, 2006, the Company’s investment inunconsolidated subsidiaries included a 30% interest in Intentia Thailand Co.Ltd., a 34% interest in Merit Consulting A/S and a 43% interest in Scase A/S.All three of these companies are involved in the sale of Movex, Intentia’slegacy software, and the supporting services associated with the software. Asthe Company has only one reporting segment, all of the revenue and equity investmentsare reported in the one segment. Investments in unconsolidated subsidiaries areincluded in the Consolidated Balance Sheet.

**8.**                 CommonStock

In June 2003, the Company’s Board of Directorsauthorized the repurchase of up to $50.0 million of its common shares.Shares were repurchased from time to time as market conditions warranted eitherthrough open market transactions, block purchases, private transactions orother means. No time limit was set for the completion of the program. Duringfiscal 2004, a total of 4.9 million shares were repurchased for$40.0 million in cash and $0.1 million in non-cash transactions.During fiscal 2005, the Company completed the authorized stock purchaseplan by purchasing 1.4 million shares for $10.0 million in cash.

Cash proceeds obtainedfrom the maturities of marketable securities, the exercise of employee stockoptions and contributions to the employee stock purchase plan, largely fundedthe share repurchases. The repurchased common shares are recorded as treasury stockand result in a reduction of stockholders’ equity. The shares will be used forgeneral corporate purposes.

**9.**                 ShareholderRights Plan

On July 26, 2004, the Company’s Board ofDirectors adopted a Shareholder Rights Plan in which preferred stock purchaserights were distributed as a non-taxable dividend at the rate of one Right foreach share of Common Stock held as of the close of business onJuly 28, 2004. Each Right will entitle stockholders to buy one-onehundredth of a newly issued share of Series B Junior Participating Stockof the Company at an exercise price of $29.00. The Rights will be exercisableonly if a person or group, other than an exempted person, acquires beneficialownership of, or makes a tender for, 15 percent or more of the Company’soutstanding Common Stock.

If any person, other than an exempted person becomesthe beneficial owner of 15 percent or more of the Company’s outstandingCommon Stock, each Right not owned by such person or certain related partieswill entitle its holder to purchase at the Right’s then current exercise priceshares of the Company’s Common Stock having a market value equal to twice thethen current exercise price. In addition, if after a person becomes thebeneficial owner of 15 percent or more of the Company’s outstanding CommonStock, 

F-31

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

the Company is involved ina merger or other business combination transaction with another person afterwhich its Common Stock does not remain outstanding, or sells 50 percent ormore of its assets or earning power to another person, each Right will entitleits holder to purchase at the Right’s then current exercise price shares ofcommon stock of such other person having a market value equal to twice the thencurrent exercise price.

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

In conjunction with the business combination withIntentia International AB. The Company amended the Shareholder Rights Plan onJune 2, 2005 so that the announced transactions with Intentia and itsaffiliates will be exempt and will not cause any distribution of Rights underthe plan.

**10.**          StockOption Plans and Restricted Stock Award

The Company’s 1996 Stock Incentive Plan reserves atotal of 27.7 million shares of common stock for issuance of stock optionsto employees. In addition, the Company has also historically granted toemployees individual stock options, which were not under a stock option plan.The total number of stock options outstanding outside the stock option planwere 0.0 million, 0.5 million and 0.9 million at May 31, 2006, 2005and 2004, respectively. Option grants may be of incentive or non-qualifiedstock options for the purchase of shares of the Company’s common stock atexercise prices determined by the Company’s Board of Directors. Generally,options granted to employees vest over a four-year to six-year period subjectto acceleration under certain events and expire seven to ten years after thedate of grant. Prior to the initial public offering, the Company historicallydetermined the exercise price of stock options granted by reference to the mostrecent independent valuation performed in conjunction with the Company’s ESOP.After the initial public offering, the Company determines the exercise priceusing the closing market value.

The 2001 StockIncentive Plan provides for the granting of stock options, including incentivestock options and non-qualified stock options, restricted stock, performanceawards and other stock-based awards. There were 35.0 million shares of theCompany’s common stock reserved for issuance under the plan.

***Amendments to Stock Option Agreements***

Effective on June 1, 2005, the Companyamended the stock options held by each of its non-employee directors to: (1) fullyvest and eliminate the Company’s call right to purchase shares issued afterexercise and (2) allow those options to be exercised until the earlier oftwo years after resignation as a director or ten years after the date of grant.This change resulted in recognizing $0.1 million in compensation expensein first quarter of fiscal 2006 due to the fact that these options were “in-the-money”at the time they were immediately vested.

Effective on June 1, 2005,the Company amended the stock options compensation that have an exercise priceper share greater than or equal to $5.95 (the closing price on Nasdaq on June 1, 2005)and that are held by each officer who is currently subject to the reportingrequirements of Section 16 of the Securities Exchange Act of 1934, toallow that officer to exercise the options that are unexercised and vested asof that officer’s employment termination date until the earlier of two years aftertermination of 

F-32

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

employmentor ten years after the date of grant. Stock options previously granted to any Section 16reporting person with an exercise price per share less than $5.95 were notamended.

*Stock Options*

Thefollowing summarizes employee stock option activity under and outside of theplan:

| ** **                           | ** ** | **Number  of Shares** | ** ** | **Range of  Exercise  Price** | ** ** | **Weighted-  Average  Exercise  Price** | ** **             |
|--------------------------------------|------------|----------------------------|------------|------------------------------------|------------|-----------------------------------------|------------------------|
| Outstanding,  May 31, 2003 |       |                       | 20,703     |                               |       | $                                       | 0.54-$16.26            |   |   | $ | 2.83 |   |   |
| Canceled                             |       |                       | (786       | )                                  |       | $                                       | 2.25-$14.00            |   |   | $ | 5.74 |   |   |
| Granted at fair market value         |       |                       | 4,078      |                               |       | $                                       | 5.09-$  9.77 |   |   | $ | 7.08 |   |   |
| Exercised                            |       |                       | (4,586     | )                                  |       | $                                       | 0.54-$  8.10 |   |   | $ | 2.07 |   |   |
| Outstanding,  May 31, 2004 |       |                       | 19,409     |                               |       | $                                       | 0.54-$16.26            |   |   | $ | 3.77 |   |   |
| Canceled                             |       |                       | (1,782     | )                                  |       | $                                       | 2.25-$16.26            |   |   | $ | 6.54 |   |   |
| Granted at fair market value         |       |                       | 2,574      |                               |       | $                                       | 5.72-$  9.77 |   |   | $ | 6.17 |   |   |
| Exercised                            |       |                       | (3,229     | )                                  |       | $                                       | 0.54-$  6.49 |   |   | $ | 2.37 |   |   |
| Outstanding,  May 31, 2005 |       |                       | 16,972     |                               |       | $                                       | 0.54-$14.00            |   |   | $ | 4.11 |   |   |
| Canceled                             |       |                       | (1,815     | )                                  |       | $                                       | 2.25-$14.00            |   |   | $ | 6.62 |   |   |
| Granted at fair market value         |       |                       | 4,270      |                               |       | $                                       | 5.15-$  7.95 |   |   | $ | 6.59 |   |   |
| Exercised                            |       |                       | (4,755     | )                                  |       | $                                       | 0.54-$  7.20 |   |   | $ | 2.76 |   |   |
| Outstanding,  May 31, 2006 |       |                       | 14,672     |                               |       | $                                       | 1.23-$14.00            |   |   | $ | 4.96 |   |   |

----

  (1) 1.2 million stock options were granted toemployees as a result of the acquisition of Intentia.

Stock options exercisable at May 31, 2006, 2005,and 2004 were 8.9 million, 12.1 million, and 12.4 million,respectively.

Thefollowing table summarizes fixed-price stock options outstanding at May 31, 2006:

| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**            | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | ** **                   | ** ** | **Number  of Shares  Outstanding** | ** ** | **Weighted-  Average  Remaining  Contractual  Life (Yrs)** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number  of Shares  Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| $  1.23-$  1.87         |       |                         | 124        |                                    |       |   | 1.53 |   |   |   | $ | 1.34 |   |   |   | 124 |   |   |   | $ | 1.34 |   |   |
| $  2.25-$  2.32         |       |                         | 3,890      |                                    |       |   | 4.22 |   |   |   | $ | 2.27 |   |   |   | 3,890 |   |   |   | $ | 2.27 |   |   |
| $  2.97                           |       |                         | 1,291      |                                    |       |   | 5.17 |   |   |   | $ | 2.97 |   |   |   | 1,291 |   |   |   | $ | 2.97 |   |   |
| $  3.99-$  7.19         |       |                         | 6,274      |                                    |       |   | 8.16 |   |   |   | $ | 5.82 |   |   |   | 2,555 |   |   |   | $ | 5.56 |   |   |
| $  7.20-$  9.77         |       |                         | 3,074      |                                    |       |   | 8.84 |   |   |   | $ | 7.55 |   |   |   | 1,000 |   |   |   | $ | 7.52 |   |   |
| $14.00                                      |       |                         | 19         |                                    |       |   | 5.44 |   |   |   | $ | 14.00 |   |   |   | 19 |   |   |   | $ | 14.00 |   |   |
| $  1.23-$14.00                    |       |                         | 14,672     |                                    |       |   | 6.94 |   |   |   | $ | 4.96 |   |   |   | 8,879 |   |   |   | $ | 3.92 |   |   |
|                                             |            |                              |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

There was no deferred compensation relating to stockoptions granted below fair market value in the years ended May 31, 2006, 2005,and 2004. Compensation expense recognized relating to stock options 

F-33

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

granted below fair marketvalue in prior years was $6.8 million, $0.3 million, and$1.4 million during the years ended May 31, 2006, 2005,and 2004, respectively.

See Summary of SignificantAccounting Policies in the Notes to Consolidated Financial Statements for theimpact of stock based compensation on pro forma net income and net income pershare.

***Restricted stock award***

On June 2, 2005, theCompany granted a restricted stock award of 100,000 shares of common stock toits newly appointed president and chief executive officer. The shares, with a$0.5 million market value at date of grant, shall vest in two 50,000 shareincrements on June 1, 2006 and 2007, subject to acceleration upon certainevents. The market value of the restricted stock was recorded as unearnedcompensation, a component of stockholders’ equity, and is being amortized overthe respective vesting periods. For the fiscal year ended May 31, 2006amortization of the unearned compensation related to restricted stock was $0.4million.

**11.**          StockWarrants Issued to Non-Employees

At May 31, 2005, the Company had oneoutstanding fully vested stock warrant. The warrant, issued in fiscal 2000with a five-year life, expired July 18, 2005 and allowed the holderto purchase 1.0 million shares of the Company’s common stock at anexercise price of $4.64 per share. On July 18, 2005, the warrantissued was exercised on a net basis, resulting in the issuance of0.1 million shares of common stock from treasury, which resulted in a $0.3 millionreduction to additional paid-in capital in the first quarter offiscal 2006. As of May 31, 2006 there were no more warrantsoutstanding.

In January 2004, a stock warrant issued in 2000,with a four-year life was exercised by its holder. The warrant allowed theholder to purchase 1.2 million shares of the Company’s common stock at anexercise price of $4.64. The warrant was exercised on a net basis, resulting inthe issuance of 0.6 million shares of common stock from treasury, whichresulted in a $1.4 million reduction to additional paid-in capital.

As of May 31, 2006there were no more warrants outstanding.

**12.**          ProfitSharing and 401(k) Retirement Plan

The Company has a defined contribution profit sharingplan, which conforms to IRS provisions for 401(k) plans. Employees areeligible to participate in the plan upon employment and are eligible for theCompany match after completing one year of service. Participants may contributeup to 15% of their gross earnings to the plan. The Company matches 50% of thefirst 4% of employee contributions and may make additional contributions asdetermined by the Board of Directors. The Company recorded 401(k) matchingcontribution expense of approximately $2.3 million, $2.2 million, and$2.4 million for the years ended May 31, 2006, 2005,and 2004, respectively.

Certain of the Company’ssubsidiaries have defined contribution and defined benefit pension plans forcertain of its employees. These plans generally provide pension benefits basedon years of service and compensation level. The defined benefit plans are notmaterial to the Company’s financial statements. Total pension expense for theseplans recorded as of May 31, 2006 was not material.

F-34

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

**13.**          EmployeeStock Purchase Plan

In February 2001, thestockholders of the Company approved the 2001 Employee Stock PurchasePlan, which was effective as of the Company’s initial public offering. Thepurchase plan is intended to qualify as an employee stock purchase plan withinthe meaning of Section 423 of the Internal Revenue Code of 1986, asamended. The plan allows eligible employees to purchase common stock at a priceequal to 85% of the fair market value of the common stock at the end of eachquarter of the offering period. The plan will terminate when all of the shares reservedunder the plan have been purchased or five years from the effective date unlessthe Board of Directors resolves to extend the purchase plan for one or moreadditional periods of five years each. In June 2006 the Board of Directorsapproved a five year amendment to the plan subject to stockholder approval.There are 20.8 million shares of the Company’s common stock reserved forissuance under the plan, of which 17.4 million shares were available forissuance as of May 31, 2006. Shares issued under this plan were 0.7million, 0.7 million, and 0.6 million shares in the fiscal years ended May 31, 2006, 2005,and 2004, respectively.

**14.**          IncomeTaxes

The profitbefore taxes consists of the following components:

| ** **                | ** ** | **Year Ended May 31,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|
| ** **                | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States             |       | $                                     | 39,724     |   | $ | 8,117 |   | $ | 15,314 |   |
| International  Operations |       | (12,057                               | )          | — |   | — |   |
|                      |       | $                                     | 27,667     |   | $ | 8,117 |   | $ | 15,314 |   |

 

Theprovision (benefit) for income taxes consists of the following components:

| ** **                        | ** ** | **Year Ended May 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|
| ** **                        | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:                          |       |                                  |       |   |   |   |   |
| Federal                           |       | $12,081                               |       | $ | 5,376 |   | $ | 9,552 |   |
| State                             |       | 2,077                                 |       | 466 |   | 2,284 |   |
| Foreign                           |       | (848                                  | )          | 57 |   | — |   |
| Total Current  Provision          |       | 13,310                                |       | 5,899 |   | 11,836 |   |
| Deferred:                         |       |                                  |       |   |   |   |   |
| Federal                           |       | (257                                  | )          | (3,050 | ) | (4,604 | ) |
| State                             |       | (986                                  | )          | 6 |   | 91 |   |
| Foreign                           |       | (359                                  | )          | — |   | — |   |
| Total Deferred  Provision         |       | (1,602                                | )          | (3,044 | ) | (4,513 | ) |
| Total Provision  for Income Taxes |       | $                                     | 11,708     |   | $ | 2,855 |   | $ | 7,323 |   |
|                                   |            |                                       |            |  |  |  |  |  |  |  |

 

 

F-35

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

A reconciliation of theexpected income tax provision (benefit) at the U.S. statutory rate with theprovision for income taxes is as follows:

| ** **                                                      | ** ** | **Year Ended May 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Taxes computed at  statutory rate                               |       | 35.0                                  | %          | 35.0 | % | 35.0 | % |
| Valuation allowance                                             |       | 8.8                                   |       | 4.6 |   | 7.8 |   |
| Foreign withholding taxes                                       |       | 0.1                                   |       | 0.4 |   | 0.2 |   |
| Foreign earnings at  other than U.S. statutory rates            |       | 2.0                                   |       | — |   | — |   |
| Non-deductible expenses                                         |       | 1.4                                   |       | 6.8 |   | 5.1 |   |
| State taxes, net of  federal benefit                            |       | 5.3                                   |       | 3.8 |   | 3.9 |   |
| Tax exempt income,  including extraterritorial income exclusion |       | (0.8                                  | )          | (9.7 | ) | (4.9 | ) |
| Change in tax reserve                                           |       | (8.2                                  | )          | — |   | — |   |
| Tax credits                                                     |       | (1.4                                  | )          | (5.7 | ) | (1.5 | ) |
| Other, net                                                      |       | 0.1                                   |       | — |   | 2.2 |   |
|                                                            |       | 42.3                                  | %          | 35.2 | % | 47.8 | % |

 

Temporarydifferences comprising net deferred tax assets are as follows:

| ** **                                 | ** ** | **May 31,** | ** ** |
|--------------------------------------------|------------|------------------|------------|
| ** **                                 | ** ** | **2006**         | ** ** | **2005** | ** ** |
| Current:                                   |       |             |       |   |   |
| Allowance for doubtful accounts            |       | $                | 1,422      |   | $ | 1,241 |   |
| Accrued compensation                       |       | 9,024            |       | 3,326 |   |
| Accrued liabilities and other              |       | 9,402            |       | 2,075 |   |
| Deferred revenue                           |       | (1,586           | )          | 2,672 |   |
| Net operating loss carryforwards           |       | 7,160            |       | — |   |
| Tax credit carryforwards                   |       | 3,135            |       | — |   |
| Total gross current deferred tax assets    |       | $                | 28,557     |   | $ | 9,314 |   |
| Noncurrent:                                |       |             |       |   |   |
| Depreciation and amortization              |       | $                | 6,942      |   | $ | (1,821 | ) |
| Identified intangible amortization         |       | (18,523          | )          | — |   |
| Stock-based compensation                   |       | 3,250            |       | 5,481 |   |
| Long-term lease and other                  |       | (1,904           | )          | 558 |   |
| Deferred revenue                           |       | (49              | )          | 501 |   |
| Deferred rent                              |       | 740              |       | 707 |   |
| Net operating loss carryforwards           |       | 85,163           |       | 15,173 |   |
| Tax credit carryforwards                   |       | —           |       | 2,121 |   |
| Total gross noncurrent deferred tax assets |       | 75,619           |       | 22,720 |   |
| Total gross  deferred tax assets           |       | 104,176          |       | 32,034 |   |
| Valuation  allowance                       |       | (86,677          | )          | (1,335 | ) |
| Total net  deferred tax assets             |       | $                | 17,499     |   | $ | 30,699 |   |

 

F-36

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

Thefollowing summarizes the rollforward of the deferred tax asset valuationallowance:

| Balance,  May 31, 2003              |   | $      | — |   |
|------------------------------------------|--------|--------|--------|--------|
| Provisions for  valuation allowance:     |   |   |   |
| Domestic                                 |   | 971    |   |
| Balance, May 31, 2004               |   | $      | 971    |   |
| Provisions for  valuation allowance:     |   |   |   |
| Domestic                                 |   | 364    |   |
| Balance, May 31, 2005               |   | $      | 1,335  |   |
| Acquired in  business combinations       |   | 78,459 |   |
| Release of  domestic valuation allowance |   | (1,335 | )      |
| Provisions for  valuation allowance:     |   |   |   |
| Foreign                                  |   | 8,218  |   |
| Balance May 31,  2006               |   | $      | 86,677 |   |

 

As of May 31, 2006, the Company had U.S.federal and state net operating loss carryforwards of approximately $17.4million and $29.4 million, respectively. The federal and state losses expire in2007 through 2025 if not utilized. The net operating loss carryforwards aresubject to an annual limitation under Internal Revenue Code Section 382,but are expected to be fully realized. 

As of May 31, 2006, the Company has approximately$85.2 million of foreign net operating losses some of which expire in variousyears and some of which will carry forward indefinitely depending on thejurisdiction. The valuation allowance has been provided against a majority ofthe foreign net operating losses. In addition, the Company has approximately$3.1 million of federal and state research and development credit that expirein the years 2007 - 2025 and alternative minimum tax carryforwards that do notexpire. There was no valuation allowance related to these deferred tax asset asof May 31, 2006.

Under the provisions of SFAS No. 109, “Accountingfor Income Taxes”, and related interpretations, future period reductions to thevaluation allowance related to Intentia’s deferred tax assets that existed asof the date of acquisition of Intentia are first credited against goodwill,then to other identifiable intangible assets existing at the date ofacquisition, and then, once the assets have been reduced to zero, credited tothe income tax provision.

In fiscal 2006, Lawson reversed to the tax provisionits domestic valuation allowance of $1.3 million, as it became more likely thannot that its historical deferred tax assets would be realized.

The Company has in effect a temporary favorable taxruling for its Swiss finance company. The tax ruling provides for a reducedincome tax rate which approximates 9.0% and a reduced rate on capital taxes.

Lawson has not provided U.S. income taxes on theexcess of its book basis in the shares of its foreign subsidiaries which isattributed primarily to purchase accounting and undistributed earnings ofsubsidiaries. U.S. tax has not been provided on this basis difference as it isconsidered permanent in nature and is not expected to reverse in theforeseeable future. This basis difference could be subject to additional U.S.tax upon the sale or liquidation of these subsidiaries, dividend repatriation,or other events. Given 

F-37

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

that the Intentia purchaseaccounting, the underlying valuation report and related income taxes arepreliminary as described in Note 4, the Company has not yet quantified thebasis difference at this time.

The Company’s annual effective tax rate may fluctuatefrom year to year due primarily to change in the amount and mix of domestic andforeign income. The Company may continue to have a higher than 35% federalstatutory rate due to the effect of not recording tax benefits for losses incountries with a history of losses. The higher rate does not correspond withcash taxes due.

The Company is subject to income tax audits by theIRS, and other tax authorities. These audits usually cover multiple years. Dueto varying statutes of limitation for the commencement of an audit, it may be anumber of years before a particular tax year is free from challenge. As anaudit progresses, the Company assesses the likelihood of adverse outcomesresulting from these examinations to determine the adequacy of the provisionfor income taxes. The Company believes it has adequately provided for any knownadverse income tax audit adjustments.

During the year ended May31, 2006 it was concluded that the Company’s tax reserve should be decreasedfrom previous years by $2.3 million. This decrease was primarily related to afavorable conclusion of certain tax audits, the closing of a United States statuteof limitations on certain tax years, and for various tax matters for which taxreserves were no longer deemed necessary.

**15.**          Commitmentsand Contingencies

***Employment Agreements***

The Company has enteredinto various employment agreements with certain executives and employees of theCompany, which provide for severance payments subject to certain conditions andevents.

***Operating andCapital Leases***

The Company rents officespace and certain office equipment under operating and capital leases. Inaddition to minimum lease payments, the office leases require payment of aproportionate share of real estate taxes and building operating expenses.Certain lease agreements include escalation clauses. The total amount of baserentals over the term of the Company’s leases is charged to expense on astraight line method, with the amount of the rental expense in excess of leasepayments recorded as a deferred rent liability. Rent expense under operatingleases was approximately $16.4 million, $14.2 million, and$14.4 million for the years ended May 31, 2006, 2005,and 2004, respectively.

Futureminimum lease payments are summarized as follows:

| 2007                         |   | $      | 24,807  |   |
|------------------------------|--------|--------|---------|--------|
| 2008                         |   | 22,395 |    |
| 2009                         |   | 20,666 |    |
| 2010                         |   | 15,395 |    |
| 2011                         |   | 10,715 |    |
| Thereafter                   |   | 29,636 |    |
| Total minimum lease payments |   | $      | 123,614 |   |

 

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

Futureminimum lease payments under capital leases are as follows:

| 2007                                      |   | $      | 1,888  |   |
|-------------------------------------------|--------|--------|--------|--------|
| 2008                                      |   | 1,086  |   |
| 2009                                      |   | 614    |   |
| 2010                                      |   | 230    |   |
| 2011                                      |   | 107    |   |
| Thereafter                                |   | 414    |   |
| Total minimum lease  payments             |   | 4,339  |   |
| Less amounts  representing interest       |   | (1,344 | )      |
| Present value of net  minimum obligations |   | 2,995  |   |
| Less current portion                      |   | (1,448 | )      |
| Long-term capital lease obligations       |   | $      | 1,547  |   |

 

***Indemnification andGuarantee Agreements***

The Company licenses itssoftware products to customers under end user license agreements and to certainresellers or other business partners under business partner agreements. Theseagreements generally include certain provisions for indemnifying the customeror business partner against losses, expenses and liabilities from damages thatmay be awarded against them if our software, or the third-party-owned softwarethe Company resells, is found to infringe a patent, copyright, trademark orother proprietary right of a third-party. These agreements generally limit theCompany’s indemnification obligations based on industry-standards andgeographical parameters, and give the Company the right to replace aninfringing product. The maximum potential amount of future payments the Companycould be required to make under these indemnification agreements is unlimited;however, the Company believes its internal development processes and otherpractices limit its exposure under these indemnification provisions. Inaddition, the invention and nondisclosure agreements signed by the Company’semployees, assign to it various intellectual property rights. There is nopending litigation for which the Company is required to provide indemnificationunder these agreements. As a result, management believes the estimated fairvalue of these agreements is minimal. Accordingly, there are no liabilitiesrecorded for these agreements as of May 31, 2006.

The Company enters intoservices agreements with customers for the implementation of its software. TheCompany also may subcontract those services to its business partners. From timeto time, the Company includes in those services agreements, certain provisionsfor indemnifying the customer against losses, expenses and liabilities fromthose services, including, for example, personal injury or tangible propertydamage. Lease agreements and other contracts with the Company’s vendors mayalso impose similar indemnification obligations on the Company for personalinjury, tangible property damage or other claims. The maximum potential amountof future payments the Company could be required to make under theseindemnification agreements is unlimited; however, the Company has generalliability and umbrella insurance policies that enable it to recover a portionof certain amounts paid. This is no pending litigation for which the Company isrequired to provide indemnification under these agreement. As a result,management believes the estimated fair value of these agreements is minimal.Accordingly, there are no liabilities recorded for these agreements as of May 31, 2006.

The Company hasarrangements with certain vendors whereby it guarantees the expenses incurredby certain of its employees. The term is from execution of the arrangementuntil cancellation and payment of 

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

anyoutstanding amounts. Unless otherwise limited in the contract, the Companywould be required to pay any unsettled employee expenses upon notification fromthe vendor. The maximum potential amount of future payments the Company couldbe required to make under these indemnification agreements is not significant.As a result, management believes the estimated fair value of these agreementsis minimal. Accordingly, there are no liabilities recorded for these agreementsas of May 31, 2006.

The Company hasarrangements with certain customers whereby it guarantees the products andservices purchased will operate materially and substantially as described inthe documentation that is provided. The Company has bank guarantees for thecustomer if the product or service purchased is under performing. As of May 31,2006 bank guarantees are $2.5 million.

When a customer purchasessupport for the Company’s software products, the Company generally warrantsthat those products then eligible for support will operate materially andsubstantially as described in the documentation that is provided with thatsoftware. The Company also generally warrants that its services will beprovided by trained personnel and in a professional manner using commerciallyreasonable efforts. If necessary, the Company provides for the estimated costof product and service warranties based on specific warranty claims and claimhistory.

***Legal***

The Company is involved invarious claims and legal actions in the normal course of business. Managementis of the opinion that the outcome of such legal actions will not have asignificant adverse effect on the Company’s financial position, results ofoperations or cash flows. Notwithstanding management’s belief, an unfavorableresolution of some or all of these matters could materially affect our futureresults of operations or cash flows.

***IBMAgreement***

In fiscal 2005, theCompany and International Business Machines Corporation (IBM) entered into anOEM Software Agreement that was modified in the second quarter of fiscal 2006,and a Master Relationship Agreement (MRA). Under these agreements, the Companyresells its business applications in conjunction with IBM’s openstandards-based software, and the companies jointly market these softwaresolutions. The MRA governs the joint marketing activities and has a three-yearterm. During the term of the modified OEM Software Agreement, the Company paysroyalties to IBM for the licensing of IBM programs to each applicable existingand new customer of the Company, and pays IBM annual maintenance fees for eachapplicable customer. The royalty and maintenance payments to IBM are based ontransactions with each applicable Lawson customer. The modified OEM SoftwareAgreement has an initial term of three years commencing September 2005 andmay be extended by the Company for two additional one-year terms. During theinitial three-year term, the Company has agreed to pay certain minimumquarterly and annual royalties to IBM. Total commitments under the modified OEMSoftware Agreement approximate $9.5 million over the three-year term. TheCompany may elect to terminate the OEM Software Agreement for convenience upon90 days advance notice to IBM. If the Company elects early termination at anytime during the initial three-year term, the terms of the Agreement require theCompany to pay IBM any unpaid minimum royalties through the date of terminationplus a prorated share of the guaranteed annual minimum payment due for the yearin which the termination occurred. The Company has made cash payments of $2.6million according to terms of the modified OEM Software Agreement during thefiscal year ended May 31, 2006 recorded as other assets—long-term. As of May 31,

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

2006,the Company amortized $1.5 million of royalties to cost of revenues. Inaddition, the Company recorded $0.6 million as other accrued liabilities on theMay 31, 2006 Consolidated Balance Sheet, representing the annual minimumowed per the terms of the contract. In accordance with SFAS No. 86 *Accounting for the Costs of Computer Software to Be Sold, Leased, orOtherwise Marketed* (“SFAS No. 86”), the fees paid and accruedto date will be amortized to costs of license fees over the earlier of the timeperiod in which units are sold or the useful life.

***Hackett GroupAgreement***

On May 9, 2005, the Company andThe Hackett Group, Inc., a wholly owned subsidiary of Answerthink Inc.(Hackett), entered into an Advisory Alliance Agreement (the Agreement). TheAgreement identifies joint programs in which Hackett will provide theCompany and its customers and prospects with, among other things, accessto Hackett benchmark tools, best-practices research and business advisoryservices in exchange for the payment of specified program fees. The term of theAgreement commenced on May 9, 2005, and continues until May 31, 2008,unless terminated earlier in accordance with the provisions of the Agreement.The Company and Hackett have the option to extend the terms of the programsupon mutual written agreement, and Hackett has agreed to provide certainexclusivity rights to the Company in connection with certain of its programs.On June 14, 2006 the Company and Hackett amended the Agreement. The amendmentdid not change the amount owed to Hackett under the Agreement but insteadreallocated the committed payments to the program associated with providing theproduct offering to our customers and provides a greater range of membershiplevels that the Company can offer to its customers.

Under the Agreement, the Company paid $1.6million during the fiscal year ended May 31, 2006, and is contractuallycommitted to pay an additional $0.5 million within the next twelve months,which is recorded as other accrued liabilities at May 31, 2006. Inaddition, the Company will pay additional fees if sales volumes meetestablished criteria throughout the term of the contract. For the year endedMay 31, 2006, approximately $1.0 million was reflected as sales andmarketing expenses and $0.8 million was reflected as cost of license fees.

***Symphony Agreementwith Intentia***

In May 2005,Intentia entered a Master Offshoring Agreement with Symphony Service Corp.,referred to as Symphony Services, an affiliate of Symphony Technology Group,LLC, a shareholder of Lawson and Symphony Technology II-A,L.P., pursuant towhich Symphony Services agreed to provide Intentia both product development andcustomer support resources for an initial five year term. The agreement was notaffected by the consummation of the business combination with Lawson. It isbelieved that this Agreement will enable the Company to achieve significantquality improvements and better customer service without increasing totalspending on product development and customer support and was part of a businesstransformation plan approved by Intentia in July 2004. Under terms of theAgreement, we are contractually obligated to pay for a stated minimum level ofresources employed to provide services for the first three years of theAgreement, after which either party may terminate the Agreement by delivery ofa six-month advanced written notification. If we elect to terminate after thefirst three years, we would be required to pay a buyout fee equal to six monthsof resource costs under the agreement. As of May 31, 2006 our remainingminimum obligation level is approximately $3.5 million in each of the next twoyears and is likely to continue through the final two years of the Agreementwhich ends in May 2010. Symphony has been paid $2.7 million since theAgreement’s inception through May 31, 2006. Romesh Wadwani is a member ofthe Board of Directors of Lawson and is a partner of Symphony Technology Group,LLC.

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

***IBM Agreement with Intentia***

In May 5, 2005,Intentia and IBM Svenska AB (“IBM”), entered into a Master Offshoring Agreementin which IBM agreed to provide Intentia cost efficient, high quality softwaredevelopment services and governs the joint development activities. TheAgreement has an initial term of five years, and may be extended in one or moreadditional eighteen month period(s), provided that the parties mutually agreeto such renewal in writing at least six month prior to the expiration of thethen-current term. The agreement wasnot affected by the consummation of the business combination with Lawson. Forthe duration of the term of the Agreement, the Company is obligated for minimumstaffing levels and resources defined by the Agreement at an annual cost ofapproximately $1.2 million. After completion of two and a half years from theAgreement Date, we may terminate the Agreement for convenience with six monthadvance written notice. However, if the Agreement is terminated for conveniencebefore the completion of five years, we remain obligated to pay IBM any unpaidamounts due for services performed up to the termination or the minimumstaffing levels, whichever is greater. As of May 31, 2006 the Company’stotal remaining minimum obligation under the Agreement is $4.8 million. IBM hasbeen paid $2.2 million since the Agreement’s inception through May 31,2006.

**16.**          Segmentand Geographic Areas

The Company views its operations and manages itsbusiness as one reportable segment, the development and marketing of computersoftware and related services including consulting and maintenance and customersupport. Factors used to identify the Company’s single operating segmentinclude the financial information available for evaluation by the chiefoperating decision maker in making decisions about how to allocate resourcesand assess performance. In an effort to achieve greater operational scale andleverage costs with the acquisition of Intentia, the Company has and willcontinue to integrate the operations that support the Intentia M3 products andthe legacy Lawson S3 products under one leadership structure for all verticals.As a result, the financial information utilized to evaluate the businessoperations combines M3 and S3 initiatives for all verticals for product sales,consulting services and maintenance and customer support. The Company marketsits products and services through the Company’s offices in the United Statesand its wholly owned branches and subsidiaries operating in the Americas(including the United States, Latin America, and Canada); Europe, Middle East,and Africa (EMEA); and Asia Pacific (APAC).

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

Thefollowing table presents revenues for license fees, maintenance and consultingservices by geographical region:

| ** **        | ** ** | **Geographical Region** | ** ** |
|-------------------|------------|------------------------------|------------|
| ** **        | ** ** | **Americas**                 | ** ** | **APAC** | ** ** | **EMEA** | ** ** | **Total** | ** ** |
| **Revenues**      |       |                         |       |   |   |   |   |   |   |
| **Fiscal  2006:** |       |                         |       |   |   |   |   |   |   |
| License fees      |       | $                            | 69,248     |   | $ | 77 |   | $ | 1,751 |   | $ | 71,076 |   |
| Services:         |       |                         |       |   |   |   |   |   |   |
| Maintenance       |       | 176,267                      |       | 561 |   | 11,327 |   | 188,155 |   |
| Consulting        |       | 106,764                      |       | 1,771 |   | 23,010 |   | 131,545 |   |
| Total services    |       | 283,031                      |       | 2,332 |   | 34,337 |   | 319,700 |   |
| Total revenues    |       | $                            | 352,279    |   | $ | 2,409 |   | $ | 36,088 |   | $ | 390,776 |   |
| **Fiscal 2005:**  |       |                         |       |   |   |   |   |   |   |
| License fees      |       | $                            | 56,838     |   | $ | — |   | $ | 905 |   | $ | 57,743 |   |
| Services:         |       |                         |       |   |   |   |   |   |   |
| Maintenance       |       | 165,723                      |       | — |   | 5,000 |   | 170,723 |   |
| Consulting        |       | 102,335                      |       | — |   | 4,383 |   | 106,718 |   |
| Total services    |       | 268,058                      |       | — |   | 9,383 |   | 277,441 |   |
| Total revenues    |       | $                            | 324,896    |   | $ | — |   | $ | 10,288 |   | $ | 335,184 |   |
| **Fiscal 2004:**  |       |                         |       |   |   |   |   |   |   |
| License fees      |       | $                            | 90,558     |   | $ | — |   | $ | 1,780 |   | $ | 92,338 |   |
| Services:         |       |                         |       |   |   |   |   |   |   |
| Maintenance       |       | 148,531                      |       | — |   | 6,407 |   | 154,938 |   |
| Consulting        |       | 108,866                      |       | — |   | 7,441 |   | 116,307 |   |
| Total services    |       | 257,397                      |       | — |   | 13,848 |   | 271,245 |   |
| Total revenues    |       | $                            | 347,955    |   | $ | — |   | $ | 15,628 |   | $ | 363,583 |   |

 

Total revenues for the U.S. were $343.3 million, $317.9million and $340.3 million for the fiscal years ended May 31, 2006, 2005and 2004, respectively. No other countries revenues exceeded 10% of theconsolidated revenues.

Thefollowing table presents long-lived assets summarized by geographic region:

| ** **                           | ** ** | **Geographical Region** | ** ** |
|--------------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **Americas**                 | ** ** | **APAC** | ** ** | **EMEA** | ** ** | **Total** | ** ** |
| **Long-lived  assets**               |       |                         |       |   |   |   |   |   |   |
| Fiscal year ended  May 31, 2006 |       | $                            | 80,880     |   | $ | 77,087 |   | $ | 477,467 |   | $ | 635,434 |   |
| Fiscal year ended  May 31, 2005 |       | $                            | 73,925     |   | $ | — |   | $ | 14,995 |   | $ | 88,920 |   |

 

Long-lived assets consist of property and equipmentand goodwill and other intangible assets.

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

The long-lived assets forthe U.S. were $73.9 million and $65.6 million for the fiscal years ended May 31,2006 and 2005 respectively, and the long-lived assets for Sweden were $234.5million for the fiscal year ended May 31, 2006.

**17.**          RelatedParties

On May 15, 2006, the Company and SymphonyTechnology Group, LLC (“Symphony”), a stockholder of the Company, entered intoa three—month consulting agreement, under which an employee of Symphonyprovided part time project management services. Lawson paid all out-of-pocketexpenses but did not pay any fees for the employee services. Amounts paid toSymphony during the period through May 31, 2006 under the agreement werenominal. Romesh Wadwani is a member of the Board of Directors of Lawson and isa partner of Symphony. Mr. Wadhwani did not personally perform any of theservices under the consulting agreement.

In May 2005, Intentiaentered an agreement with Symphony Service Corp., referred to as SymphonyServices, an affiliate of Symphony Technology Group, LLC, pursuant to whichSymphony Services agreed to provide Intentia both product development andcustomer support resources for an initial five year term. Intentia believedthis agreement will help enable it to achieve significant quality improvementsand better customer service without increasing total spending on productdevelopment and customer support and was part of a business transformation planapproved by Intentia in July 2004. The agreement was not affected by theconsummation of the business combination with Lawson. During the periodfive-week period following the Intentia merger, the Company paid SymphonyServices $0.3 million for services under the agreement.

**18.**          SubsequentEvent

***Acquisition***

On July 20, 2006 the Company acquired the equityof Competency Assessment Solution (“CAS”) to augment its human capitalmanagement solutions. The purchase price consisted of $2.5 million dollars incash including the settlement of debt totaling $1.4 million. The final purchaseprice is subject to adjustment based on the final closing balance sheet.

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

**19.**          SupplementalQuarterly Financial Information (Unaudited):

Summarizedquarterly supplemental consolidated financial information for fiscal 2006and 2005 are as follows:

| ** **                         | ** ** | **Quarter Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **August 31**     | ** ** | **November 30** | ** ** | **February 28** | ** ** | **May 31** | ** ** |
| **Fiscal 2006**               |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenues                     |       |                   | $          | 87,914 |   |   |   | $ | 89,037 |   |   |   | $ | 87,695 |   |   | $ | 126,130 |   |
| Gross profit                       |       |                   | 52,773     |   |   |   | 52,346 |   |   |   | 52,392 |   |   | 61,723 |   |
| Restructuring                      |       |                   | 10         |   |   |   | (5 | ) |   |   | — |   |   | 1,820 |   |
| Operating  expenses                |       |                   | 50,718     |   |   |   | 43,911 |   |   |   | 41,970 |   |   | 64,254 |   |
| Income (loss)  before income taxes |       |                   | 4,344      |   |   |   | 10,788 |   |   |   | 13,235 |   |   | (700 | ) |
| Net income (loss)                  |       |                   | $          | 4,177 |   |   |   | $ | 6,556 |   |   |   | $ | 10,007 |   |   | $ | (4,781 | ) |
| Net income (loss)  per share:      |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                              |       |                   | $          | 0.04 |   |   |   | $ | 0.06 |   |   |   | $ | 0.10 |   |   | $ | (0.03 | ) |
| Diluted                            |       |                   | $          | 0.04 |   |   |   | $ | 0.06 |   |   |   | $ | 0.09 |   |   | $ | (0.03 | ) |
| **Fiscal 2005**               |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenues                     |       |                   | $          | 82,685 |   |   |   | $ | 82,999 |   |   |   | $ | 82,714 |   |   | $ | 86,786 |   |
| Gross profit                       |       |                   | 43,854     |   |   |   | 43,047 |   |   |   | 46,222 |   |   | 51,477 |   |
| Restructuring                      |       |                   | (75        | ) |   |   | 5,465 |   |   |   | (153 | ) |   | (209 | ) |
| Operating  expenses                |       |                   | 45,239     |   |   |   | 43,527 |   |   |   | 43,924 |   |   | 42,675 |   |
| (Loss) income  before income taxes |       |                   | (666       | ) |   |   | (5,053 | ) |   |   | 3,721 |   |   | 10,115 |   |
| Net (loss) income                  |       |                   | $          | (417 | ) |   |   | $ | (3,020 | ) |   |   | $ | 2,760 |   |   | $ | 5,939 |   |
| Net (loss) income  per share:      |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                              |       |                   | $          | 0.00 |   |   |   | $ | (0.03 | ) |   |   | $ | 0.03 |   |   | $ | 0.06 |   |
| Diluted                            |       |                   | $          | 0.00 |   |   |   | $ | (0.03 | ) |   |   | $ | 0.03 |   |   | $ | 0.06 |   |

 

No cash dividends have been declared or paid in anyperiod presented. The quarter ended May 31, 2006 includes operatingresults of Intentia from April 25, 2006, the date of merger.

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