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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarter ended December 31, 2004



Commission file number: 0-25137



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CONCUR TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)



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State of Incorporation: Delaware

I.R.S. Employer I.D. No.: 91-1608052

Address of principal executive offices: 6222 185th Avenue NE

Redmond, Washington 98052

Telephone number, including area code: 425-702-8808



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).    Yes  x     No ̈



The number of shares outstanding of the registrants common stock as of
January 31, 2005 was 33,315,255



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##### Table of Contents

CONCUR TECHNOLOGIES, INC.



FORM 10-Q

December 31, 2004



INDEX



|                              |  |                                                                                               |  |    |  |  |  |     
|----------------------------- |  | --------------------------------------------------------------------------------------------- |  | -- |  |  |  | ----
|                              |  |                                                                                               |  |    |  |  |  | Page
|                              | 
|PART I. FINANCIAL INFORMATION |  | 3                                                                                            
|                              |  |                                                                                              
|                              |  | ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                                         |  | 3 
|                              |  |                                                                                              
|                              |  | Consolidated Statements of Operations for the three months ended December 31, 2004 and 2003   |  | 3 
|                              |  | Consolidated Balance Sheets as of December 31, 2004 and September 30, 2004                    |  | 4 
|                              |  | Consolidated Statements of Cash Flows for the three months ended December 31, 2004 and 2003   |  | 5 
|                              |  | Notes to Consolidated Financial Statement                                                     |  | 6 
|                              |  |                                                                                              
|                              |  | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 13
|                              |  |                                                                                              
|                              |  | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 32
|                              |  |                                                                                              
|                              |  | ITEM 4. CONTROLS AND PROCEDURES                                                               |  | 32
|                              | 
|PART II. OTHER INFORMATION    |  | 34                                                                                           
|                              |  |                                                                                              
|                              |  | ITEM 1. LEGAL PROCEEDINGS                                                                     |  | 34
|                              |  |                                                                                              
|                              |  | ITEM 6. EXHIBITS                                                                              |  | 34
|                              | 
|SIGNATURE                     |  | 35                                                                                           



2



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PART I. FINANCIAL INFORMATION



ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS



Concur Technologies, Inc.



Consolidated
Statements of Operations

(In thousands, except per share amounts)

(Unaudited)



|                                                    |  |                                |        |   |      |   |        |  
|--------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                    |  | Three Months EndedDecember 31, |       
|                                                    |  | 2004                           |        |   | 2003 |  
|Revenues:                                           |  |                                |        |   |      |   |        |  
|Subscription                                        |  | $                              | 12,061 |   |      | $ | 9,210  |  
|Consulting                                          |  |                                | 3,186  |   |      |   | 3,007  |  
|Other                                               |  |                                | 1,034  |   |      |   | 1,176  |  
|                                                    |  |                                |        |   |      |   |        |  
|Total revenues                                      |  |                                | 16,281 |   |      |   | 13,393 |  
|                                                    |  |                               
|Expenses:                                           |  |                                |        |   |      |   |        |  
|Cost of operations                                  |  |                                | 6,690  |   |      |   | 5,428  |  
|Sales and marketing                                 |  |                                | 4,162  |   |      |   | 3,237  |  
|Research and development                            |  |                                | 2,349  |   |      |   | 2,205  |  
|General and administrative                          |  |                                | 2,375  |   |      |   | 1,721  |  
|Amortization of intangible asset                    |  |                                | 285    |   |      |   | 285    |  
|                                                    |  |                                |        |   |      |   |        |  
|Total expenses                                      |  |                                | 15,861 |   |      |   | 12,876 |  
|                                                    |  |                                |        |   |      |   |        |  
|Income from operations                              |  |                                | 420    |   |      |   | 517    |  
|                                                    |  |                               
|Interest income                                     |  |                                | 98     |   |      |   | 48     |  
|Interest expense                                    |  |                                | (3     | ) |      |   | (9     | )
|Other income (loss), net                            |  |                                | (6     | ) |      |   | 42     |  
|                                                    |  |                                |        |   |      |   |        |  
|Net income                                          |  | $                              | 509    |   |      | $ | 598    |  
|                                                    |  |                                |        |   |      |   |        |  
|Net income per share                                |  |                                |        |   |      |   |        |  
|Basic                                               |  | $                              | 0.02   |   |      | $ | 0.02   |  
|                                                    |  |                                |        |   |      |   |        |  
|Diluted                                             |  | $                              | 0.01   |   |      | $ | 0.02   |  
|                                                    |  |                                |        |   |      |   |        |  
|Shares used in calculation of net income per share: |  |                                |        |   |      |   |        |  
|Basic                                               |  |                                | 33,126 |   |      |   | 32,232 |  
|                                                    |  |                                |        |   |      |   |        |  
|Diluted                                             |  |                                | 36,890 |   |      |   | 36,656 |  
|                                                    |  |                                |        |   |      |   |        |  



See notes to
consolidated financial statements.



3



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Concur Technologies, Inc.



Consolidated
Balance Sheets

(In thousands, except per share amount)

(Unaudited)



|                                                                                                                        |  |                  |          |   |                   |   |          |  
|----------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                        |  | December 31,2004 |          |   | September 30,2004 |  
|Assets                                                                                                                  |  |                  |          |   |                   |   |          |  
|Current assets:                                                                                                         |  |                  |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                               |  | $                | 24,395   |   |                   | $ | 23,735   |  
|Accounts receivable, net of allowances of $421 and $690                                                                 |  |                  | 10,027   |   |                   |   | 10,277   |  
|Prepaid expenses                                                                                                        |  |                  | 1,031    |   |                   |   | 1,127    |  
|Other current assets                                                                                                    |  |                  | 2,603    |   |                   |   | 2,325    |  
|                                                                                                                        |  |                  |          |   |                   |   |          |  
|Total current assets                                                                                                    |  |                  | 38,056   |   |                   |   | 37,464   |  
|                                                                                                                        |  |                 
|Property and equipment, net                                                                                             |  |                  | 6,061    |   |                   |   | 5,003    |  
|Restricted cash                                                                                                         |  |                  | 550      |   |                   |   | 550      |  
|Acquired customer base intangible asset, net of amortization                                                            |  |                  | 2,945    |   |                   |   | 3,230    |  
|Goodwill                                                                                                                |  |                  | 3,704    |   |                   |   | 3,704    |  
|Deposits and other assets                                                                                               |  |                  | 3,860    |   |                   |   | 2,948    |  
|                                                                                                                        |  |                  |          |   |                   |   |          |  
|Total assets                                                                                                            |  | $                | 55,176   |   |                   | $ | 52,899   |  
|                                                                                                                        |  |                  |          |   |                   |   |          |  
|Liabilities and stockholders equity                                                                                    |  |                  |          |   |                   |   |          |  
|Current liabilities:                                                                                                    |  |                  |          |   |                   |   |          |  
|Accounts payable                                                                                                        |  | $                | 1,293    |   |                   | $ | 1,784    |  
|Accrued compensation                                                                                                    |  |                  | 1,610    |   |                   |   | 1,664    |  
|Other accrued liabilities                                                                                               |  |                  | 2,132    |   |                   |   | 2,461    |  
|Current portion of long-term obligations                                                                                |  |                  | 29       |   |                   |   | 252      |  
|Current portion of deferred revenues                                                                                    |  |                  | 12,408   |   |                   |   | 11,576   |  
|                                                                                                                        |  |                  |          |   |                   |   |          |  
|Total current liabilities                                                                                               |  |                  | 17,472   |   |                   |   | 17,737   |  
|Long-term deferred revenues, net of current portion                                                                     |  |                  | 5,944    |   |                   |   | 5,017    |  
|                                                                                                                        |  |                  |          |   |                   |   |          |  
|Total liabilities                                                                                                       |  |                  | 23,416   |   |                   |   | 22,754   |  
|                                                                                                                        |  |                  |          |   |                   |   |          |  
|Contingencies                                                                                                           |  |                  |          |   |                   |   |          |  
|Stockholders equity:                                                                                                   |  |                  |          |   |                   |   |          |  
|Convertible preferred stock, par value $0.001 per share: Authorized shares  5,000; No shares issued or outstanding     |  |                  |         |   |                   |   |         |  
|Common stock, par value $0.001 per share: Authorized shares  60,000; Issued and outstanding shares  33,265 and
32,981 |  |                  | 33       |   |                   |   | 33       |  
|Additional paid-in capital                                                                                              |  |                  | 240,732  |   |                   |   | 239,778  |  
|Accumulated other comprehensive income                                                                                  |  |                  | 245      |   |                   |   | 93       |  
|Accumulated deficit                                                                                                     |  |                  | (209,250 | ) |                   |   | (209,759 | )
|                                                                                                                        |  |                  |          |   |                   |   |          |  
|Total stockholders equity                                                                                              |  |                  | 31,760   |   |                   |   | 30,145   |  
|                                                                                                                        |  |                  |          |   |                   |   |          |  
|Total liabilities and stockholders equity                                                                              |  | $                | 55,176   |   |                   | $ | 52,899   |  
|                                                                                                                        |  |                  |          |   |                   |   |          |  



See notes to
consolidated financial statements.



4



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Concur Technologies, Inc.



Consolidated
Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                                 |  |                                |        |   |      |   |        |  
|-------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                 |  | Three Months EndedDecember 31, |       
|                                                                                 |  | 2004                           |        |   | 2003 |  
|Operating activities:                                                            |  |                                |        |   |      |   |        |  
|Net income                                                                       |  | $                              | 509    |   |      | $ | 598    |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |                                |        |   |      |   |        |  
|Amortization of intangible asset                                                 |  |                                | 285    |   |      |   | 285    |  
|Depreciation                                                                     |  |                                | 586    |   |      |   | 406    |  
|Provision for allowance for accounts receivable                                  |  |                                | (35    | ) |      |   | 204    |  
|Changes in operating assets and liabilities:                                     |  |                                |        |   |      |   |        |  
|Accounts receivable                                                              |  |                                | 306    |   |      |   | 1,292  |  
|Prepaid expenses, deposits, and other assets                                     |  |                                | (1,079 | ) |      |   | 50     |  
|Accounts payable                                                                 |  |                                | (518   | ) |      |   | 17     |  
|Accrued liabilities                                                              |  |                                | (429   | ) |      |   | (465   | )
|Deferred revenues                                                                |  |                                | 1,750  |   |      |   | (525   | )
|                                                                                 |  |                                |        |   |      |   |        |  
|Net cash provided by operating activities                                        |  |                                | 1,375  |   |      |   | 1,862  |  
|                                                                                 |  |                               
|Investing activities:                                                            |  |                                |        |   |      |   |        |  
|Purchases of property and equipment                                              |  |                                | (1,638 | ) |      |   | (803   | )
|                                                                                 |  |                                |        |   |      |   |        |  
|Net cash used in investing activities                                            |  |                                | (1,638 | ) |      |   | (803   | )
|                                                                                 |  |                               
|Financing activities:                                                            |  |                                |        |   |      |   |        |  
|Proceeds from issuance of common stock from exercise of stock options            |  |                                | 175    |   |      |   | 464    |  
|Proceeds from issuance of common stock from employee stock purchase plan         |  |                                | 779    |   |      |   |       |  
|Payments on borrowings                                                           |  |                                | (205   | ) |      |   | (342   | )
|                                                                                 |  |                                |        |   |      |   |        |  
|Net cash provided by financing activities                                        |  |                                | 749    |   |      |   | 122    |  
|                                                                                 |  |                               
|Effect of foreign currency exchange rates on cash and cash equivalents           |  |                                | 174    |   |      |   | 107    |  
|                                                                                 |  |                                |        |   |      |   |        |  
|Net increase in cash and cash equivalents                                        |  |                                | 660    |   |      |   | 1,288  |  
|                                                                                 |  |                               
|Cash and cash equivalents at beginning of period                                 |  |                                | 23,735 |   |      |   | 21,607 |  
|                                                                                 |  |                                |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                       |  | $                              | 24,395 |   |      | $ | 22,895 |  
|                                                                                 |  |                                |        |   |      |   |        |  
|Supplemental disclosure of cash flow information:                                |  |                                |        |   |      |   |        |  
|Cash paid for interest                                                           |  | $                              | 2      |   |      | $ | 23     |  
|                                                                                 |  |                                |        |   |      |   |        |  



See notes to
consolidated financial statements.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



December 31, 2004

(Unaudited)



NOTE 1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Description of the Company



Concur Technologies, Inc. is a leading provider of business services and
software solutions that automate processes involved in the management of corporate expenses. Our core purpose is to use innovation to help our customers drive down their costs associated with corporate expense management. Our solutions are designed
to automate and streamline business processes, reduce operating costs, improve internal controls, and empower businesses to apply greater insight to their spending patterns through comprehensive analytics. We provide our services and software
through flexible subscription services and license delivery models, and market and sell our solutions worldwide through a direct sales organization as well as through indirect distribution channels.



Throughout these financial statements Concur Technologies, Inc. is referred
to as Concur, we, us, and our.



Unaudited Interim Financial Information



The
financial information as of December 31, 2004, and for the three months ended December 31, 2004 and 2003 is unaudited, but includes all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a
fair presentation of our financial position at such dates and our results of operations and cash flows for the periods then ended, in conformity with accounting principles generally accepted in the United States (GAAP). The balance sheet
information at September 30, 2004 has been derived from our audited financial statements at that date but, in accordance with the rules and regulations of the United States Securities and Exchange Commission (SEC), does not include all
of the information and notes required by GAAP for complete financial statements. Operating results for the three months ended December 31, 2004 are not necessarily indicative of results that may be expected for the entire fiscal year. The financial
statements should be read in conjunction with the financial statements and notes for the fiscal year ended September 30, 2004 included in Concurs 2004 Annual Report on Form 10-K.



Segment Information



We operate in and report on one segment (Corporate Expense Management services and software) based upon the provisions of Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 131, Disclosure about Segments of an Enterprise and Related Information.



Principles of Consolidation



The consolidated financial statements include the accounts of Concur and its wholly-owned subsidiaries. All intercompany accounts and transactions were
eliminated in consolidation.



Use of Estimates



The preparation of financial statements in conformity with GAAP requires us
to make estimates and assumptions affecting the amounts reported in the consolidated financial statements and accompanying notes. Changes in these estimates and assumptions may have a material impact on our financial statements and accompanying
notes. Examples of estimates and assumptions include the determination of certain provisions, including allowances for accounts receivable, product warranties, estimating useful lives of property and equipment, valuing and estimating useful lives of
intangible assets, valuing assets and liabilities acquired through business combinations, deferring certain revenues and costs, estimating expected lives of customer relationships, and estimating tax valuation allowances.



Revenue Recognition Policy



We recognize revenues in accordance with accounting standards for software
and service companies including American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue Recognition (SOP 97-2), as amended by SOP 98-9, the consensus
reached in Emerging Issues Task Force (EITF) Issue No. 00-3, Application of AICPA Statement of Position 97-2 to Arrangements that Include the Right to Use Software Stored on Another Entitys Hardware, the consensus reached in
EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, the consensus reached in EITF Issue No. 03-5, Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software (EITF 03-5), SEC Staff Accounting Bulletin No. 104, RevenueRecognition, SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, and related
interpretations, including AICPA Technical Practice Aids.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  (Continued)



We generate our revenues from the delivery of subscription services (which
include software maintenance services), consulting services, and to a lesser degree the sale of software licenses.



We recognize revenue when:



| |  |  | evidence of an arrangement exists;
| | - |  | ----------------------------------



| |  |  | delivery has occurred;
| | - |  | ----------------------



| |  |  | the fees are fixed or determinable; and
| | - |  | ---------------------------------------



| |  |  | collection is considered probable.
| | - |  | ----------------------------------



If collection is not considered probable, we recognize revenues when the fees are collected. If the fees are not fixed or determinable, we recognize
revenues as payments become due from the customer. If non-standard acceptance periods or non-standard performance criteria are required, we recognize revenue upon the expiration of the acceptance period or satisfaction of the acceptance/performance
criteria, as applicable.



In contractual arrangements that
include the provision of multiple elements, we apply the accounting guidance most applicable to the specific arrangement to determine how contract consideration should be measured and allocated to the separate elements in the arrangement. Multiple
element arrangements require the delivery or performance of multiple products, services and/or rights to use assets. Generally, separate contracts with the same customer that are entered into at or near the same time are presumed to have been
negotiated together and, therefore, are accounted for as a single contractual arrangement in determining how contract consideration should be measured and allocated to the separate elements in the arrangement. Typically, we measure and allocate the
total arrangement fee among each of the elements based on their fair value or, if necessary, vendor-specific objective evidence of fair value (VSOE). VSOE is determined by the price charged when an element is sold separately or, in the
case of an element not yet sold separately, the price set by authorized management, if it is probable that the price, once established, will not change prior to separate market introduction.



Subscription Revenues:



Our subscription revenues are typically recognized monthly as the service is
provided to the customer and consist of:



| |  |  | monthly fees paid for subscription services;
| | - |  | --------------------------------------------



| |  |  | amortization of related set-up fees;
| | - |  | ------------------------------------



| |  |  | amortization of fees paid for software maintenance services under software license arrangements; and
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | the amortized portion of the related license and consulting fees in certain multiple element subscription arrangements where VSOE does not exist for an undelivered subscription
element.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Set-up fees paid by customers in
connection with subscription services, as well as the associated direct and incremental costs, such as labor and commissions, are deferred and recognized ratably over the longer of the contractual lives, which generally range from two to five years,
or the expected lives of the customer relationships. For those subscription service offerings that have been commercially available for only a short period of time, the contractual lives are used as the best estimate of the expected lives of the
customer relationships. We continue to evaluate and adjust the length of these amortization periods as we gain more experience with customer contract renewals and contract cancellations.



Software maintenance services include technical support and the right to receive unspecified upgrades and enhancements on a
when-and-if available basis. Fees for software maintenance services are typically billed annually in advance of performance with provisions for subsequent automatic annual renewals. We defer the related revenues and recognize them ratably over the
respective maintenance terms, which typically are one year.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  (Continued)



Subscription revenues are adjusted for estimated sales allowances, which are
based on our historical experience, including a review of our experience related to price adjustments and sales credits issued.



Consulting Revenues:



Consulting revenues consist of fees for professional services, which consist of system implementation and integration, planning, data conversion,
training, and documentation of procedures. Consulting service fees are typically billed and recognized as revenue on a time-and-materials basis. In some instances, we sell consulting services under milestone or fixed-fee contracts and, in such
cases, recognize consulting revenues on a percentage-of-completion basis. Consulting revenues are adjusted for estimated sales allowances, which are based on our historical experience, including a review of our experience related to price
adjustments and sales credits issued.



In service arrangements
including both consulting and subscription services, but not a license of our software, we recognize consulting revenues as they are performed if the consulting services qualify as a separate unit of accounting within the arrangement. The consulting
services qualify as a separate unit of accounting if they have value to the customer on a stand-alone basis, there is objective and reliable evidence of the fair value of the subscription services, and delivery or performance of the subscription
services is considered probable and substantially within our control. We have determined that, in our service arrangements of this type, the consulting services typically qualify as a separate unit of accounting and, accordingly, the consulting
revenues are recognized as the services are performed. If the consulting services do not qualify as a separate unit of accounting, the related revenues are combined with the subscription revenues, and recognized ratably over the subscription service
period.



Other Revenues:



Other revenues consist of fees earned from, and allocable to, grants of
licenses to use our software products. We recognize license revenues when evidence of a license arrangement exists, we have delivered the software, the amount of the transaction is fixed or determinable, collection is probable, and VSOE exists for
any undelivered elements of the arrangement. Elements included in our multiple-element software arrangements consist of various licensed software products and services such as software maintenance services, consulting services, and subscription
services.



In software license arrangements that include rights
to multiple elements, we allocate the total arrangement fee among each of the elements using the residual method, under which revenues are allocated to undelivered elements based on VSOE and the residual amounts of revenue are allocated to the
delivered elements. If sufficient VSOE does not exist for the allocation of revenue to the various elements of the arrangement, all revenue from the arrangement is deferred until the earlier of the point at which such sufficient VSOE does exist or
all elements of the arrangement have been delivered. If the only undelivered element is software maintenance, the entire fee is recognized ratably as subscription revenue.



In software license arrangements where we also provide consulting services, license revenues are recognized upon delivery of
the software, provided that the criteria for recognition of software license revenues described above are met, payment of the license fees is not dependent upon the performance of the consulting services, and the consulting services are not
essential to the functionality of the software. If we determine that the consulting services are essential to the functionality of the software, or payment of the license fees is dependent upon the performance of the consulting services, then both
the license and consulting fees are recognized on a percentage-of-completion basis. We typically do not consider the consulting services we provide in such arrangements to be essential to the functionality of the software and, therefore, license
revenues are typically recognized upon delivery of the software and consulting revenues are recognized as the services are performed.



In arrangements where we license our software and also host the licensed software for our customer, a software element is only considered present if our
customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty, and it is feasible for our customer to either operate the software on its own hardware or contract with another
vendor to host the software. If the arrangement meets these criteria, as well as the other criteria for recognition of license revenues described above, we recognize license revenues when the software is delivered, and the subscription hosting
revenues are recognized as the hosting service is provided. The hosting set-up fees, as well as the associated direct and incremental costs, are deferred and recognized ratably over the hosting service period. If we determine that a separate
software element as described above is not present, we combine the software license fees with the subscription hosting fees and recognize them ratably over the subscription service period, as subscription revenue.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  (Continued)



Portions of our revenues are generated from sales made through our reseller
partners. When we assume a majority of the business risks associated with performance of the contractual obligations, we record the revenues on a gross basis, and amounts paid to our reseller partners are recognized as cost of operations. Our
assumption of such business risks is evidenced when, among other things, we take responsibility for delivery of the product or service, establish pricing of the arrangement, and are the primary obligor in the arrangement. When our reseller partner
assumes the majority of the business risks associated with the performance of the contractual obligations, we record the associated revenues net of the amounts paid to our reseller partner.



Stock-Based Compensation



We issue stock options to employees and outside directors pursuant to our
stock option plans and provide employees with the right to purchase stock pursuant to our employee stock purchase plan (ESPP). We account for our stock option plans and ESPP (collectively, our stock-based compensation plans)
using the intrinsic value method of accounting as defined by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations. Under this method, no stock-based compensation
expense has been reflected in our results of operations for any of the periods presented, as all options granted under these plans had exercise prices equal to the fair market value of the underlying common stock on the date of grant, and any
purchase discounts under the ESPP were within statutory limits. See Recently Issued Accounting Standards below for a discussion of the recently released standard on accounting for stock-based compensation.



SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
123), as amended by SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure (SFAS 148), requires companies that choose to continue to follow APB 25 to provide pro forma disclosure of the impact
of accounting for stock-based compensation using the fair value method of SFAS 123. For purposes of these pro forma disclosures, the estimated fair value of the options is amortized over the related vesting periods. The estimated fair value of
purchases under the ESPP is amortized over the related purchase periods, ranging from six to twenty-four months. The following table illustrates the effect on net income and related per share amounts if we had accounted for our stock-based
compensation plans under the fair value method of accounting prescribed by SFAS 123, as amended:



|                                                      |  |                                |        |   |      |   |       |  
|----------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ----- | -
|                                                      |  | Three Months EndedDecember 31, |       
|(in thousands, except per share data)                 |  | 2004                           |        |   | 2003 |  
|Net income, as reported                               |  | $                              | 509    |   |      | $ | 598   |  
|Add: Stock-based compensation expense, as reported    |  |                                |       |   |      |   |      |  
|Deduct: Pro forma compensation expense under SFAS 123 |  |                                | (1,502 | ) |      |   | (848  | )
|                                                      |  |                                |        |   |      |   |       |  
|Pro forma net loss                                    |  | $                              | (993   | ) |      | $ | (250  | )
|                                                      |  |                                |        |   |      |   |       |  
|Net income (loss) per share:                          |  |                                |        |   |      |   |       |  
|Basic as reported                                     |  | $                              | 0.02   |   |      | $ | 0.02  |  
|                                                      |  |                               
|Diluted, as reported                                  |  | $                              | 0.01   |   |      | $ | 0.02  |  
|                                                      |  |                               
|Basic, pro forma                                      |  | $                              | (0.03  | ) |      | $ | (0.01 | )
|                                                      |  |                               
|Diluted, pro forma                                    |  | $                              | (0.03  | ) |      | $ | (0.01 | )



We estimate the fair
value of our options and ESPP purchase rights using the Black-Scholes option valuation model, which is one of several methods that can be used to estimate option values. The Black-Scholes model was developed for use in estimating the fair value of
short-term traded options that have no vesting restrictions and are fully transferable. Because our employee stock options and purchase rights have characteristics significantly different from those of traded options, and because changes in the
subjective input assumptions, such as stock price volatility, can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of the employee stock options and purchase
rights.



9



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##### Table of Contents

We estimated the following fair values of options and rights granted under our stock-based compensation
plans at the date of grant using the Black-Scholes model with the following weighted-average assumptions:



|                                         |  |                                |      |   |      |   |      |  
|---------------------------------------- |  | ------------------------------ | ---- | - | ---- | - | ---- | -
|                                         |  | Three Months EndedDecember 31, |     
|Employee and Director Stock Option Plans |  | 2004                           |      |   | 2003 |  
|Expected life in years from grant date   |  |                                | 4.5  |   |      |   | 4.5  |  
|Risk-free interest rate                  |  |                                | 3.4  | % |      |   | 2.6  | %
|Volatility                               |  |                                | 0.74 |   |      |   | 0.79 |  
|Dividend yield                           |  |                                |     |   |      |   |     |  
|                                         |  |                               
|Estimated weighted-average fair value    |  | $                              | 6.22 |   |      | $ | 6.00 |  



|                                       |  |                                |      |   |      |   |      |  
|-------------------------------------- |  | ------------------------------ | ---- | - | ---- | - | ---- | -
|                                       |  | Three Months EndedDecember 31, |     
|ESPP                                   |  | 2004                           |      |   | 2003 |  
|Expected life in years from grant date |  |                                | 1.4  |   |      |   | 1.4  |  
|Risk-free interest rate                |  |                                | 1.9  | % |      |   | 1.6  | %
|Volatility                             |  |                                | 0.74 |   |      |   | 0.85 |  
|Dividend yield                         |  |                                |     |   |      |   |     |  
|                                       |  |                               
|Estimated weighted-average fair value  |  | $                              | 4.91 |   |      | $ | 3.35 |  



Net Income Per Share



We calculate basic net income per share by dividing net
income for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income for the period by the weighted-average number of shares of common stock
outstanding during the period, plus any dilutive effect from stock-based compensation plans and warrants during the period, under the treasury stock method. The computation of basic and diluted net income per share is as follows:



|                                                             |  |                                |        |      |   |       
|------------------------------------------------------------ |  | ------------------------------ | ------ | ---- | - | ------
|                                                             |  | Three Months EndedDecember 31,
|(in thousands, except per share data)                        |  | 2004                           |        | 2003
|Net income                                                   |  | $                              | 509    |      | $ | 598   
|                                                             |  |                               
|Weighted-average shares of common stock outstanding          |  |                                | 33,126 |      |   | 32,232
|Add: Dilutive effect of stock-based compensation plans (1)   |  |                                | 3,764  |      |   | 4,424 
|                                                             |  |                                |        |      |   |       
|Dilutive weighted-average shares of common stock outstanding |  |                                | 36,890 |      |   | 36,656
|                                                             |  |                                |        |      |   |       
|Net income per share:                                        |  |                                |        |      |   |       
|                                                             |  |                               
|Basic                                                        |  | $                              | 0.02   |      | $ | 0.02  
|                                                             |  |                               
|Diluted                                                      |  | $                              | 0.01   |      | $ | 0.02  

---

|(1) | For the three months ended December 31, 2004 and 2003, 1.9 million and 0.9 million shares attributable to outstanding stock options and rights granted under our stock-based
compensation plans were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options and rights were greater than or equal to the average price of the common shares, and therefore their inclusion would
have been anti-dilutive.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | For the three months ended December 31, 2004 and 2003, 1.4 million and 2.5 million shares attributable to outstanding warrants were excluded from the calculation of diluted earnings
per share because the exercise prices of the warrants were greater than or equal to the average price of the common shares, and therefore, their inclusion would have been anti-dilutive.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Recently Issued Accounting Standards



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Accounting
for Share-Based Payments (FAS123(R)). SFAS 123(R) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements, with the cost measured based on the estimated fair value of the
equity or liability instruments issued. We are required to



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  (Continued)



apply SFAS 123(R) as of the first interim or annual reporting period that begins after June
15, 2005; therefore, we will adopt the new requirements beginning with our fourth quarter of fiscal 2005. SFAS 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase plans. SFAS 123(R) replaces SFAS 123, Share-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Adoption of the expensing
requirements will reduce our reported income; however, we are currently studying the specific impact of adoption, which includes our decision of whether to adopt the requirements on a prospective or retrospective basis.



NOTE 2. INTANGIBLE ASSET



Amortization of intangible asset represents the allocation of the acquired
customer base intangible asset from our July 2002 acquisition of Captura Software, Inc. The gross and net carrying amounts of the acquired customer base intangible asset at December 31, 2004 and September 30, 2004 were as follows:



|                                             |  |                  |        |   |                   |   |        |  
|-------------------------------------------- |  | ---------------- | ------ | - | ----------------- | - | ------ | -
|(in thousands)                               |  | December 31,2004 |        |   | September 30,2004 |  
|Acquired customer base intangible asset:     |  |                  |        |   |                   |   |        |  
|Gross carrying amount                        |  | $                | 5,700  |   |                   | $ | 5,700  |  
|Accumulated amortization                     |  |                  | (2,755 | ) |                   |   | (2,470 | )
|                                             |  |                  |        |   |                   |   |        |  
|Acquired customer base intangible asset, net |  | $                | 2,945  |   |                   | $ | 3,230  |  
|                                             |  |                  |        |   |                   |   |        |  



The related
amortization expense reflected in our results of operations totaled $285,000 for the three months ended December 31, 2004 and 2003, respectively.



Estimated amortization expense for the remaining nine months of fiscal 2005 and annually for the remaining estimated useful life is as follows:



|                                                         |  |   |      
|-------------------------------------------------------- |  | - | -----
|Estimated remaining amortization expense (in thousands): |  |  
|Fiscal 2005                                              |  | $ | 855  
|Fiscal 2006                                              |  |   | 1,140
|Fiscal 2007                                              |  |   | 950  



NOTE 3. CONTINGENCIES



Litigation



In July 2001, we and several of our current and former officers were named
as defendants in two securities class-action lawsuits filed in the United States District Court for the Southern District of New York. In April 2002, these lawsuits were consolidated. The consolidated complaint generally alleges claims against us,
several of our current and former officers, and the underwriters of our initial public offering in December 1998, based on alleged errors and omissions concerning underwriting terms in the prospectus for our initial public offering. The plaintiffs
in this lawsuit seek damages in unspecified amounts, which, if awarded, could be substantial. This lawsuit is one of more than 300 similar pending cases filed against companies that completed initial public offerings between 1997 and 2000 and the
underwriters that took them public. In October 2002, the court dismissed the individual defendants from the consolidated lawsuit, without prejudice, pursuant to a stipulated agreement between the parties. In February 2003, the presiding judge denied
a motion to dismiss all claims. In July 2003, we decided to participate in a proposed settlement being negotiated by representatives of a coalition of issuers named as defendants in similar actions and their insurers. Although we believe that the
plaintiffs claims have no merit, we have decided to participate in the proposed settlement to avoid the cost and distraction of continued litigation. We do not believe that the proposed settlement will have any material adverse effect on our
business, financial condition, or results of operations. The proposed settlement is expected to be funded by a group of insurers on behalf of the issuer defendants. The proposed settlement agreement would dispose of all remaining claims against us
and the individual defendants, without any admission of wrongdoing by us or the individual defendants. The proposed settlement is subject to final approval by the parties and the court. There is no guarantee that the parties or the court will
approve the proposed settlement. Should the parties and the court fail to approve the proposed settlement, we would continue to defend ourselves vigorously.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  (Continued)



Product Warranty and Indemnification Obligations



We provide services and software solutions to our customers under sales
contracts, which usually include a limited warranty regarding product and service performance and a limited indemnification of customers against losses, expenses, and liabilities from damages that may be awarded against them if our services or
software are found to infringe upon a patent, copyright, trademark, or other proprietary right of a third party. The contracts generally limit the scope of and remedies for such indemnification obligations in a variety of industry-standard respects,
including but not limited to certain time and geography-based scope limitations and a right for us to replace an infringing product. We also enter into similar limited indemnification terms in agreements with certain strategic business partners and
vendors. We account for potential warranty claims in accordance with the guidance in SFAS 5, and base our estimates on historical experience and current expectations. To date, we have experienced minimal warranty claims and have not had to reimburse
any customers for any losses related to the limited indemnification described above.



NOTE 4. COMPREHENSIVE INCOME



SFAS No. 130,
Reporting Comprehensive Income, establishes standards for the reporting and display of comprehensive income and its components in the financial statements. The item of comprehensive income that we currently report is foreign currency
translation adjustments as follows:



|                                         |  |                                |     |      |   |    
|---------------------------------------- |  | ------------------------------ | --- | ---- | - | ---
|(in thousands)                           |  | Three Months EndedDecember 31,
|                                         |  | 2004                           |     | 2003
|Net income                               |  | $                              | 509 |      | $ | 598
|                                         |  |                               
|Other comprehensive income:              |  |                                |     |      |   |    
|Foreign currency translation adjustments |  |                                | 152 |      |   | 101
|                                         |  |                                |     |      |   |    
|Total comprehensive income               |  | $                              | 661 |      | $ | 699
|                                         |  |                                |     |      |   |    



NOTE 5. INTERNATIONAL REVENUES



We market our services and products primarily in the
United States, Europe and Australia and we operate in a single industry segment. No single customer accounted for more than 10% of our total revenues in the three months ended December 31, 2004 or 2003, respectively. Information regarding revenues
by geographic region for the three months ended December 31, 2004 or 2003, respectively is as follows (in thousands):



|               |  |      |        |   |       |   |      |   |        |  |       |  
|-------------- |  | ---- | ------ | - | ----- | - | ---- | - | ------ |  | ----- | -
|               |  | 2004 |        | % |       |   | 2003 |   | %      | 
|Country:       |  |      |        |   |       |   |      |   |        |  |       |  
|United States  |  | $    | 13,464 |   | 82.7  | % |      | $ | 11,745 |  | 87.7  | %
|Europe         |  |      | 2,059  |   | 12.6  | % |      |   | 1,303  |  | 9.7   | %
|Other          |  |      | 757    |   | 4.7   | % |      |   | 345    |  | 2.6   | %
|               |  |      |        |   |       |   |      |   |        |  |       |  
|Total revenues |  | $    | 16,281 |   | 100.0 | % |      | $ | 13,393 |  | 100.0 | %
|               |  |      |        |   |       |   |      |   |        |  |       |  





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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Our Managements Discussion and Analysis of Financial Condition and Results of Operations provides information we believe is relevant to an
assessment and understanding of our results of operations and financial condition. This discussion should be read in conjunction with our Consolidated Financial Statements and Notes that are included with this report. Also, the discussion of
Critical Accounting Policies and Estimates in this section is an integral part of the analysis of our results of operations and financial condition.



Overview



Concur Technologies, Inc. is a leading provider of business services and software solutions that automate processes involved in the management of
corporate expenses. Our core purpose is to use innovation to help our customers drive down their costs associated with corporate expense management. Our solutions are designed to automate and streamline business processes, reduce operating costs,
improve internal controls, and empower businesses to apply greater insight to their spending patterns through comprehensive analytics.



Our flagship products are our Concur Expense services and software for automating the travel and entertainment expense management process. We also offer value-added services and software that are
integrated with our core services and software, as well as consulting, customer support and training for our customers.



We offer our solutions under flexible delivery models that range from highly-configurable to standardized. We sell our solutions primarily as subscription
services, and, to a lesser extent, through our on-premises license agreements. We market and sell our solutions worldwide through a direct sales organization and indirect distribution channels.



We generate our revenues from the delivery of subscription services,
consulting services, and the sale of software licenses. Subscription revenues grew from 45% of total revenues in fiscal 2002, to 59% in fiscal 2003 and 71% in fiscal 2004. This growth reflects our strategic shift to emphasize sales of subscription
services rather than license software. Generally, our subscription services revenues are recognized over the time period we provide our services to customers, in contrast to license revenues, which typically are recognized upon software delivery to
the customer. We believe that our strategic shift to the subscription services model provides more stable and predictable revenues and operating results compared to prior years when our license revenues were more significant than our subscription
services revenues. From the time we began selling expense management software in 1996 we offered our products under a traditional software license model. In 1999, we began offering Concur Expense as a subscription service and, since that time, we
have increasingly focused our business on providing our solutions under a subscription delivery model. We continue to sell licensed software and support license customers as part of our standard offerings.



Our strategic focus in fiscal 2005 is to grow our core subscription business
and related market share of our offerings and to reduce our cost of deploying and operating our services. We expect our subscription revenues to increase in fiscal 2005 compared to fiscal 2004, on both an absolute basis and as a percentage of total
revenues, due to anticipated demand for our subscription services and lower sales of license software. We expect our sales and marketing expenses to increase in fiscal 2005 compared to fiscal 2004, primarily reflecting our decision to increase sales
headcount to support expected demand and create additional awareness in our target market.



We operate in and report on one segment: corporate expense management services and software.



RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003



Selected Financial Data



In the following table, we show financial data derived from our unaudited statements of operations as a percentage of total revenues for the periods
indicated. The operating results for the periods shown are not necessarily indicative of the results that may be expected for any future period.



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|                                 |  |                                |   |  |       |  
|-------------------------------- |  | ------------------------------ | - |  | ----- | -
|                                 |  | Three Months EndedDecember 31, |  
|                                 |  | 2004                           |   |  | 2003  |  
|Revenues:                        |  |                                |   |  |       |  
|Subscription                     |  | 74.1                           | % |  | 68.8  | %
|Consulting                       |  | 19.6                           |   |  | 22.4  |  
|Other                            |  | 6.3                            |   |  | 8.8   |  
|                                 |  |                                |   |  |       |  
|Total revenues                   |  | 100.0                          |   |  | 100.0 |  
|                                 |  |                               
|Expenses:                        |  |                                |   |  |       |  
|Cost of operations               |  | 41.1                           |   |  | 40.5  |  
|Sales and marketing              |  | 25.6                           |   |  | 24.2  |  
|Research and development         |  | 14.4                           |   |  | 16.5  |  
|General and administrative       |  | 14.6                           |   |  | 12.8  |  
|Amortization of intangible asset |  | 1.8                            |   |  | 2.1   |  
|                                 |  |                                |   |  |       |  
|Total expenses                   |  | 97.4                           |   |  | 96.1  |  
|                                 |  |                                |   |  |       |  
|Income from operations           |  | 2.6                            |   |  | 3.9   |  
|                                 |  |                               
|Interest income                  |  | 0.5                            |   |  | 0.4   |  
|Interest expense                 |  | (0.0                           | ) |  | (0.1  | )
|Other income (loss), net         |  | (0.0                           | ) |  | 0.3   |  
|                                 |  |                                |   |  |       |  
|Net income                       |  | 3.1                            | % |  | 4.5   | %
|                                 |  |                                |   |  |       |  



Results of Operations



Revenues



|                       |  |                                 |        |      |   |        |  |       |   
|---------------------- |  | ------------------------------- | ------ | ---- | - | ------ |  | ----- | --
|                       |  | Three Months Ended December 31, |       
|(dollars in thousands) |  | 2004                            |        | 2003 |   | Change | 
|Subscription           |  | $                               | 12,061 |      | $ | 9,210  |  | 31.0  | % 
|Consulting             |  |                                 | 3,186  |      |   | 3,007  |  | 5.9   | % 
|Other                  |  |                                 | 1,034  |      |   | 1,176  |  | (12.1 | )%
|                       |  |                                 |        |      |   |        |  |       |   
|Total revenues         |  | $                               | 16,281 |      | $ | 13,393 |  | 21.6  | % 
|                       |  |                                 |        |      |   |        |  |       |   



Subscription
Revenues. Subscription revenues consist of monthly fees paid for subscription services, the amortization of set-up fees paid to us in connection with those services, the amortization of fees paid for software maintenance services under software
license arrangements, and in some multiple element subscription arrangements, where there is no vendor specific objective evidence of fair value for an undelivered subscription element, the amortized portion of the related license and consulting
fees. Subscription revenues are affected by pricing, number of new customers, customer contract durations, and our customer retention rate.



Subscription revenues increased 31.0% for the three months ended December 31, 2004, compared to the same period in fiscal 2004. Revenues from our
subscription services (total subscription revenues less revenue from the amortization of fees paid for software maintenance services under software license arrangements) contributed approximately 95% of the absolute dollar increase in subscription
revenues for the three months ended December 31, 2004, compared to the same period in fiscal 2004. Continued expansion of our customer base for outsourced subscription services was the main reason for the increase. The larger customer base reflects
a trend of increased market demand for our subscription services and strong retention of existing subscription customers. We believe this expansion relates primarily to the markets continued and growing acceptance of outsourced services,
driven in part by limited information technology capital budgets. We believe these economic trends make traditional self-hosted software license arrangements, with their substantial up-front costs, less attractive than subscription services.



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We expect subscription revenues to continue to grow during the remainder of fiscal 2005 as a result of
the growing demand for our subscription service offerings.



Consulting Revenues. Consulting revenues consist of fees for client services, which include system implementation and integration, planning, data conversion, training, and documentation of procedures. Consulting revenues are affected
by the number of and complexity of implementations. Recognized consulting revenues are also affected by circumstances in which consulting fees in multiple element arrangements require deferral or are deemed to be subscription related.



The 5.9% increase in consulting revenues for the three months ended December
31, 2004, compared to the same period in fiscal 2004, was due to increased consulting services performed for new and existing customers. This increase was offset in part by the deferral of revenues totaling approximately $0.3 million relating to
consulting services performed under contracts through certain strategic resellers, which are required to be recognized ratably over the remaining life of the contracts.



We anticipate that consulting revenues for the remainder of fiscal 2005 will fluctuate on a quarterly basis but be higher
for the fiscal year compared to fiscal 2004, based the demand for our services and the timing of upgrades and enhancements to our solutions.



Other Revenues. Other revenues consist of fees earned from sales of our software licenses.



The 12.1% decrease in other revenues for the three months ended December 31,
2004, compared to the same period in fiscal 2004, primarily reflects the markets continued shift in focus to our subscription services business away from license sales. In addition, in the three months ended December 31, 2004, we eliminated
our $0.2 million sales return reserve for potential license claims as the volume of license sales continues to decline and we believe the likelihood of such claims is minimal.



We expect the absolute dollar value of other revenues to decrease in fiscal 2005, compared to fiscal 2004, reflecting
overall market trends toward subscription services over licensed software.



International Revenues. Revenues from customers outside the United States were $2.8 million (17.3% of total revenues) and $1.6 million (12.3%) in the three months ended December 31, 2004 and 2003, respectively.
Historically, fluctuations in foreign currency exchange rates have not had a material effect on our operating results. We expect our international revenues to grow in the near term, as our products and services continue to gain acceptance in
international markets, due in part to the expansion of international functionality within our solutions.



Expenses



|                                  |  |                                 |        |      |   |        |  |      |  
|--------------------------------- |  | ------------------------------- | ------ | ---- | - | ------ |  | ---- | -
|                                  |  | Three Months Ended December 31, |       
|(dollars in thousands)            |  | 2004                            |        | 2003 |   | Change | 
|Cost of operations                |  | $                               | 6,690  |      | $ | 5,428  |  | 23.2 | %
|Sales and marketing               |  |                                 | 4,162  |      |   | 3,237  |  | 28.6 | %
|Research and development          |  |                                 | 2,349  |      |   | 2,205  |  | 6.5  | %
|General and administrative        |  |                                 | 2,375  |      |   | 1,721  |  | 38.0 | %
|Amortization of intangible assets |  |                                 | 285    |      |   | 285    |  | 0.0  | %
|                                  |  |                                 |        |      |   |        |  |      |  
|Total expenses                    |  | $                               | 15,861 |      | $ | 12,876 |  | 23.2 | %
|                                  |  |                                 |        |      |   |        |  |      |  



Cost of
Operations. Cost of operations expenses primarily consist of salaries and related expenses (including travel related expenses) and allocated overhead costs (which include depreciation, occupancy, insurance, telecommunications, and computer
equipment expenses) associated with employees and contractors who provide our subscription and consulting services. Cost of operations expenses also include co-location and related telecommunications costs, fees paid to third parties for referrals,
resale arrangements, royalties, and amortization of deferred set-up costs we incur in connection with our subscription services.



Cost of operations expenses represented 41.1% of total revenues in the three months ended December 31, 2004 compared with 40.5% for the same period in
fiscal 2004. Total salaries and related expenses and allocated overhead costs increased 26.9% for the three months ended December 31, 2004 compared to the same period in fiscal 2004 due primarily to increased headcount. Co-location and related
telecommunications costs decreased 16.5% for the three months ended December 31, 2004 compared with



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the same period in fiscal 2003. This decrease was due primarily to an improvement in the negotiated cost of such
services. Fees paid to third parties for referrals, resale arrangements, and royalties increased 13.4% for the three months ended December 31, 2004 compared with the same period in fiscal 2004. This increase was due primarily to an increase in
reseller partner fees for subscription-based sales.



Through
the end of fiscal 2005, we expect cost of operations expenses to trend down as a percentage of total revenues as the incremental cost to deploy and support each new customer is expected to decrease due to economies of scale anticipated in our
subscription service model infrastructure. We anticipate that cost of operations will increase in absolute dollars as we continue to deploy and support additional new customers.



Sales and Marketing. Sales and marketing expenses consist of salaries and related expenses (including sales
commissions and travel related expenses) and allocated overhead costs associated with our sales and marketing personnel, and, to a lesser extent, miscellaneous sales and marketing costs, such as advertising, trade shows, and other promotional
activities.



Sales and marketing expenses were 25.6% of total
revenues for the three months ended December 31, 2004 compared with 24.2% for the same period in fiscal 2004. Total sales and marketing expense increased 28.6% for the three months ended December 31, 2004 compared with the same period in fiscal
2004. This increase was mainly due to a 28.1% increase in salaries and related expenses and allocated overhead costs, driven primarily by headcount increases, as well as an increase of 36.1% in costs for advertising, trade shows and other
promotional activities.



We expect total sales and marketing
expenses in fiscal 2005 to increase significantly in absolute dollars compared to fiscal 2004 primarily as a result of our expected 50% increase in sales headcount during the first half of fiscal 2005. A key part of our strategic focus in fiscal
2005 is to expand our sales and marketing efforts to grow our subscription services business and to create additional awareness in our target market.



Research and Development. Research and development expenses consist of salaries and related expenses, and allocated overhead costs associated with
employees and contractors engaged in software engineering, program management, and quality assurance.



Research and development expenses were 14.4% of total revenues for the three months ended December 31, 2004 compared to 16.5% for the same period in
fiscal 2004. Research and development expenses recognized increased 6.5% for the three months ended December 31, 2004, compared to the same period in fiscal 2004. Excluding the increase in the amount of research and development expenses capitalized
of $0.5 million, research and development costs increased by $0.7 million for the three months ended December 31, 2004, compared to the same period in fiscal 2004. This increase was nearly all due to increased salaries and related expenses. The
amount capitalized during the period was primarily the result of our shift from developing licensed software for resale to developing software for internal use to support our subscription services offerings. Such development of internal-use software
requires the capitalization of related costs, as provided for under generally accepted accounting principles.



We anticipate that total research and development expenses in fiscal 2005 will increase moderately compared to fiscal 2004 as we continue to focus on
product innovation and enhancement.



General and
Administrative. General and administrative expenses consist of salaries and related expenses and allocated overhead costs, all associated with employees and contractors in finance, human resources, legal, information technology, facilities, and,
to a lesser extent, miscellaneous costs, such as professional fees and public company costs.



General and administrative expenses were 14.6% of total revenues for the three months ended December 31, 2004 compared to 12.8% for the same period in fiscal 2004. General and administrative expenses increased 38.0%
for the three months ended December 31, 2004, compared to the same period in fiscal 2004. Excluding the impact of a $0.3 million charge in the first quarter of fiscal 2005 for previously capitalized costs related to an acquisition that we had been
evaluating but chose not to pursue during the quarter, general and administrative expenses increased 21.4% over the same period in fiscal 2004. This increase was primarily due to a 33.8% increase in headcount and related expenses and allocated
overhead costs, driven primarily by headcount increases related to the growth of our business, and a 28.4% decrease in miscellaneous costs due in part to a reduction in the reserve for bad debt of $0.1 million as a result of improved collections
experience.



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We expect the absolute dollar amount of general and administrative expenses to increase in fiscal 2005
compared to fiscal 2004 due to increases in personnel costs related to the growth of our business, as well as increased public company compliance costs, including our continued Sarbanes-Oxley compliance efforts.



Amortization of Intangible Asset. Amortization of intangible asset
represents the allocation of the acquired customer base intangible asset from our July 2002 acquisition of Captura. This intangible asset is being ratably amortized as a non-cash charge to operations over five years, consistent with the timing and
level of the expected cash flows from the underlying acquired customer contracts.



Interest Income and Interest Expense



|                       |  |                                |    |      |   |        |  |       |   
|---------------------- |  | ------------------------------ | -- | ---- | - | ------ |  | ----- | --
|                       |  | Three Months EndedDecember 31, |   
|(dollars in thousands) |  | 2004                           |    | 2003 |   | Change | 
|Interest income        |  | $                              | 98 |      | $ | 48     |  | 104.2 | % 
|Interest expense       |  |                                | 3  |      |   | 9      |  | (66.7 | )%



Interest Income and
Interest Expense. The increase in interest income in the three months ended December 31, 2004 compared to the same period in fiscal 2004 reflects higher short term interest rates and higher levels of interest-earning cash and cash equivalent
investments. The decrease in interest expense in the three months ended December 31, 2004 compared to the same period in the fiscal 2004 was due to lower average outstanding bank borrowings and capital lease obligations.



Provision for Income Taxes. No provision for federal or state income
taxes has been recorded as we have accumulated significant net losses since inception, resulting in deferred tax assets. Since our utilization of these deferred tax assets is dependent on future profits, which are not assured, we have recorded a
valuation allowance equal to the net deferred tax assets.



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Financial Condition



Our total assets were $55.2 million at December 31, 2004 and $52.9 million at September 30, 2004, representing an increase of $2.3 million or 4.3%. This
increase consisted primarily of increases in our cash and cash equivalents and property and equipment at December 31, 2004. Our cash and cash equivalents totaled $24.4 million at December 31, 2004 and $23.7 million as of September 30, 2004,
representing an increase of $0.7 million, or 2.8%. Our cash flow activity is described in more detail in the Liquidity and Capital Resources section below. Net property and equipment increased to $6.1 million at December 31, 2004 from $5.0 million
at September 30, 2004, primarily due to additional purchases of computer equipment and software and investment in software used internally, both in connection with our subscription services offerings.



Accounts receivable balances, net of allowances of $0.4 million and $0.7
million, were $10.0 million and $10.3 million as of December 31, 2004 and September 30, 2004, respectively, representing a decrease of $0.3 million or 2.4%. The reduction in the allowance for the period of $0.3 million was the result of improved
collections experience.



Our total current liabilities were
$17.5 million and $17.7 million at December 31, 2004 and September 30, 2004, respectively, representing a decrease of $0.3 million, or 1.5%. This decrease was mainly due to the reduction of accounts payable, accrued liabilities and the current
portion of long term obligations, all totaling $1.1 million offset by an increase of $0.8 million in the current portion of deferred revenues. Including the $1.0 million increase in long term deferred revenues, total deferred revenues increased by
$1.8 million to $18.4 million at December 31, 2004 from $16.6 million at September 30, 2004. This increase resulted from the growth in our customer base for our subscription services offerings over the period.



Our common stock and additional paid in capital totaled $240.8 million at
December 31, 2004 and $239.8 million at September 30, 2004, respectively, an increase of $1.0 million, or 0.4%. The increase reflected proceeds received from the exercise of stock options under our stock based compensation plans and purchases of
stock under our employee stock purchase plan.



Liquidity and Capital
Resources



Our available sources of liquidity as of
December 31, 2004 consisted principally of cash and cash equivalents totaling $24.4 million. We have a revolving credit line and equipment purchase facility available, which is discussed in more detail below.



Our operating cash inflows consist of cash received from our subscription and
license customers. Our operating cash outflows consist of cash payments to employees and vendors directly related to subscription and license customers, payments under arrangements with third parties who provide hosting infrastructure services in
connection with our subscription services offerings, related sales and marketing and administrative costs, and research and development costs. Operating activities provided $1.4 million and $1.9 million in the three months ending December 31, 2004
and 2003, respectively.



Our investing activities used $1.6
million and $0.8 million in the three months ending December 31, 2004 and 2003, respectively. Purchases of property and equipment comprised the total amount in each period and consisted mainly of computer equipment and software purchases, as well as
amounts capitalized for the development of software used internally, in connection with our subscription services offerings, as described in more detail in Research and Development above.



Our financing activities provided $0.7 million and $0.1 million in the three
months ending December 31, 2004 and 2003, respectively. Proceeds from financing activities during these periods consisted of proceeds from employee stock option exercises and employee stock purchase plan activities, which we do not directly control.
Scheduled payments made on loans comprised the total cash outflows from financing activities.



In March 2002, we entered into a loan and security agreement (Agreement) with a bank for a $1.0 million equipment credit facility (Term I Advance). The Agreement for the Term I Advance allowed
for borrowings in the amount of actual equipment purchases made through December 2002. As of December 31, 2004, there was no outstanding indebtedness under the Term I Advance.



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In September 2002, we amended the terms of the Agreement to add Captura as a borrower, and to include an
additional term loan (Term II Advance) of $0.4 million, with the proceeds used to refinance certain indebtedness owed by Captura to another creditor. As of December 31, 2004, there was no outstanding indebtedness under the Term II
Advance.



In September 2003, we amended the terms of the
Agreement to add a revolving line of credit (Revolver) in an amount not to exceed the lesser of 80% of eligible accounts receivable or $5.0 million, with interest at the banks prime rate. Any advances under the Revolver became due
and payable on September 23, 2004. In September 2004 we amended the Agreement to extend the Revolvers availability to March 31, 2005, at which time any advances become due and payable. The other terms of the Revolver remain the same. There
were no amounts borrowed under the Revolver at December 31, 2004.



We also amended the terms of the Agreement in September 2003 to add an additional equipment facility (Term III Advance) for advances in the amount of actual equipment purchases up to $1.0 million through September 2004, with
interest at the banks prime rate, maturing September 2006. In September 2004 we amended the Agreement to extend the Term III Advances availability to March 31, 2005, with any amounts borrowed due on March 31, 2007. The other terms of the
Term III Advance remain the same. There were no amounts borrowed under the Term III Advance at December 31, 2004.



In March 2004, we entered into an arrangement to finance the premium for our current directors and officers liability insurance policy. The
loan under this financing agreement bears interest at 5.4% and matured in December 2004. As of December 31, 2004, there were no amounts outstanding under this agreement.



In January 2003, our Board of Directors authorized a stock repurchase program, under which we may repurchase up to one
million shares of our outstanding stock over a two-year period expiring in January 2005. In January 2005, our Board of Directors authorized a new stock repurchase program, under which we may repurchase up to two million shares of our outstanding
stock over a two-year period expiring in January 2007. Stock purchases under these stock repurchase programs may be made from time to time in the open market based on market conditions. Any purchases will be made at the then-current market prices,
and repurchased shares will be retired. No repurchases have been made under these programs through the date of this report.



The following table summarizes our contractual obligations as of December 31, 2004 related to long-term debt, operating leases, and purchase obligations:



|                            |                 |                        |            |  |            |       |                 |   |       |  |   |       |  |   |       
|--------------------------- | --------------- | ---------------------- | ---------- |  | ---------- | ----- | --------------- | - | ----- |  | - | ----- |  | - | ------
|(in thousands)              |                 | Payments due by period
|                            | Less than1 year |                        | 1  3years |  | 3  5years |       | Morethan 5years |   | Total
|Contractual Obligations:    |                 |                        |            |  |            |       |                 |   |       |  |   |       |  |   |       
|Operating lease obligations |                 | $                      | 1,411      |  | $          | 1,845 |                 | $ | 2,257 |  | $ | 4,298 |  | $ | 9,811 
|Purchase obligations (1)    |                 |                        | 1,936      |  |            | 2,600 |                 |   |      |  |   |      |  |   | 4,536 
|                            |                 |                        |            |  |            |       |                 |   |       |  |   |       |  |   |       
|Total                       |                 | $                      | 3,347      |  | $          | 4,445 |                 | $ | 2,257 |  | $ | 4,298 |  | $ | 14,347
|                            |                 |                        |            |  |            |       |                 |   |       |  |   |       |  |   |       

---

|(1) | Reflects future minimum commitments under arrangements with third parties who provide hosting infrastructure services in connection with the provision of our subscription services
offerings.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We do not use derivative financial
instruments.



We believe our cash and cash equivalents, amounts
available under our equipment credit facilities and revolving line of credit, as well as expected positive operating cash flows, will be sufficient to meet our anticipated cash needs for normal business operations, working capital needs and capital
expenditures for at least the next 12 months. In the longer term, or if we decide to acquire assets or businesses, we may require additional funds and may seek to raise such additional funds through private or public sales of debt or equity
securities, strategic relationships, bank debt, lease financing arrangements, or other available means. There can be no assurances that any such funds will be available or, if available, will be on acceptable terms to meet our business needs. If
additional funds are raised through the issuance of equity securities, stockholders may experience dilution, or such equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock.



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Critical Accounting Policies and Estimates



Our discussion and analysis of financial condition and results of operations is based on our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the
circumstances; such estimates and judgments are periodically re-evaluated. Actual results may differ materially from these estimates under different assumptions, judgments, or conditions.



The estimates and judgments noted above are affected by our application of accounting policies. Our critical accounting
policies are those most important to the portrayal of our financial condition and results of operations, and that require the most difficult, subjective, or complex judgments. Our critical accounting policies include revenue recognition,
internal-use software, allowances for accounts receivable, accounting for stock-based compensation, and accounting for income taxes.



Revenue Recognition



We generate our revenues from the delivery of subscription services (which include software maintenance services), consulting services, and the sale of
software licenses. We recognize revenues in accordance with accounting standards for software and service companies.



We recognize revenue when:



| |  |  | evidence of an arrangement exists;
| | - |  | ----------------------------------



| |  |  | delivery has occurred;
| | - |  | ----------------------



| |  |  | the fees are fixed or determinable; and
| | - |  | ---------------------------------------



| |  |  | collection is considered probable.
| | - |  | ----------------------------------



If collection is not considered probable, we recognize revenues when the fees are collected. If the fees are not fixed or determinable, we recognize
revenues as payments become due from the customer. Accordingly, our judgment as to the probability of collection and determinability of fees may materially affect the timing of our revenue recognition and results of operations. If non-standard
acceptance periods or non-standard performance criteria are required, we recognize revenue upon the expiration of the acceptance period or satisfaction of the acceptance/performance criteria, as applicable.



In contractual arrangements that include the provision of multiple elements,
we apply the accounting guidance most applicable to the specific arrangement to determine how contract consideration should be measured and allocated to the separate elements in the arrangement. Multiple element arrangements require the delivery or
performance of multiple products, services and/or rights to use assets. Generally, separate contracts with the same customer that are entered into at or near the same time are presumed to have been negotiated together and, therefore, are accounted
for as a single contractual arrangement in determining how contract consideration should be measured and allocated to the separate elements in the arrangement. Typically, we measure and allocate the total arrangement fee among each of the elements
based on their fair value or, if necessary, vendor-specific objective evidence of their fair value (VSOE). VSOE is determined by the price charged when an element is sold separately or, in the case of an element not yet sold separately,
the price set by authorized management, if it is probable that the price, once established, will not change prior to separate market introduction.



Subscription Revenues



Our subscription revenues are typically recognized monthly as the service is provided to the customer and consist of:



| |  |  | monthly fees paid for subscription services;
| | - |  | --------------------------------------------



| |  |  | amortization of related set-up fees;
| | - |  | ------------------------------------



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| |  |  | amortization of fees paid for software maintenance services under software license arrangements; and
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | the amortized portion of the related license and consulting fees in certain multiple element subscription arrangements where VSOE does not exist for an undelivered subscription
element.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Set-up fees paid by customers in
connection with subscription services, as well as the associated direct and incremental costs, such as labor and commissions, are deferred and recognized ratably over the longer of the contractual lives, or the expected lives of the customer
relationships, which generally range from two to five years. For those subscription service offerings that have been commercially available for only a short period of time, the contractual lives are used as the best estimate of the expected lives of
the customer relationships. We continue to evaluate and adjust the length of these amortization periods as we gain more experience with customer contract renewals and contract cancellations. It is possible that, in the future, the estimates of
expected customer lives may change and, if so, the periods over which such subscription set-up fees and costs are amortized will be adjusted. Any such change in estimated expected customer lives will affect our future results of operations.



Software maintenance services include technical support and
the right to receive unspecified upgrades and enhancements on a when-and-if available basis. Fees for software maintenance services are typically billed annually in advance of performance with provisions for subsequent automatic annual renewals. We
defer the related revenues and recognize them ratably over the respective maintenance terms, which typically are one year.



Subscription revenues are adjusted for estimated sales allowances, which are based on our historical experience, including a review of our experience
related to price adjustments and sales credits issued.



Consulting Revenues



Consulting revenues
consist of fees for professional services, which consist of system implementation and integration, planning, data conversion, training, and documentation of procedures. Consulting service fees are typically billed and recognized as revenue on a
time-and-materials basis. In some instances, we sell consulting services under milestone or fixed-fee contracts and, in such cases, recognize consulting revenues on a percentage-of-completion basis. Consulting revenues are adjusted for estimated
sales allowances, which are based on our historical experience, including a review of our experience related to price adjustments and sales credits issued.



In service arrangements including both consulting and subscription services, but not a license of our software, we recognize consulting revenues as they
are performed if the consulting services qualify as a separate unit of accounting within the arrangement. The consulting services qualify as a separate unit of accounting if they have value to the customer on a stand-alone basis, there is objective
and reliable evidence of the fair value of the subscription services, and delivery or performance of the subscription services is considered probable and substantially within our control. We have determined that, in our service arrangements of this
type, the consulting services typically qualify as a separate unit of accounting and, accordingly, the consulting revenues are recognized as the services are performed. If the consulting services do not qualify as a separate unit of accounting, the
related revenues are combined with the subscription revenues, and recognized ratably over the subscription service period. Our judgment as to whether the consulting services qualify as a separate unit of accounting may materially affect the timing
of our revenue recognition and our results of operations.



Other Revenues



Other revenues consist of fees
earned from, and allocable to, grants of licenses to use our software products. We recognize license revenues when evidence of a license arrangement exists, we have delivered the software, the amount of the transaction is fixed or determinable,
collection is probable, and VSOE exists for any undelivered elements of the arrangement. Elements included in our multiple-element software arrangements consist of various licensed software products and services such as software maintenance
services, consulting services, and subscription services.



In
software license arrangements that include rights to multiple elements, we allocate the total arrangement fee among each of the elements using the residual method, under which revenues are allocated to undelivered elements based on VSOE and the
residual amounts of revenue are allocated to the delivered elements. If sufficient VSOE does not exist for the allocation of revenue to the various elements of the arrangement, all revenue from the arrangement is deferred until the earlier of the
point at which such sufficient VSOE does exist or all elements of the arrangement have been delivered. If the only undelivered element is software



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maintenance, the entire fee is recognized ratably as subscription revenue. We are required to exercise judgment in
deciding how to interpret the evidence of fair value to determine the allocation of arrangement consideration with respect to a given element, and in determining whether an established price is likely to change prior to separate market introduction.
These judgments may materially affect the timing of our revenue recognition and results of operations.



In software license arrangements where we also provide consulting services, license revenues are recognized upon delivery of the software, provided that
the criteria for recognition of software license revenues described above are met, payment of the license fees is not dependent upon the performance of the consulting services, and the consulting services are not essential to the functionality of
the software. If we determine that the consulting services are essential to the functionality of the software, or payment of the license fees is dependent upon the performance of the consulting services, then both the license and consulting fees are
recognized on a percentage-of-completion basis. We typically do not consider the consulting services we provide in such arrangements to be essential to the functionality of the software and, therefore, license revenues are typically recognized upon
delivery of the software and consulting revenues are recognized as the services are performed. Accordingly, our judgment as to whether consulting services should be considered essential to the functionality of the licensed software may materially
affect the timing of our revenue recognition and results of operations.



In arrangements where we license our software and also host the licensed software for our customer, a software element is only considered present if our customer has the contractual right to take possession of the software at any time
during the hosting period without significant penalty, and it is feasible for our customer to either operate the software on its own hardware or contract with another vendor to host the software. If the arrangement meets these criteria, as well as
the other criteria for recognition of license revenues described above, we recognize license revenues when the software is delivered, and the subscription hosting revenues are recognized as the hosting service is provided. The hosting set-up fees,
as well as the associated direct and incremental costs, are deferred and recognized ratably over the hosting service period. If we determine that a separate software element as described above is not present, we combine the software license fees
with the subscription hosting fees and recognize them ratably over the subscription service period, as subscription revenue. Our judgment as to whether we meet the criteria above could have a material affect on the timing and mix of our revenue
recognition and on our results of operations.



Portions of our
revenues are generated from sales made through our reseller partners. When we assume a majority of the business risks associated with performance of the contractual obligations, we record the revenues on a gross basis, and amounts paid to our
reseller partners are recognized as cost of operations. Our assumption of such business risks is evidenced when, among other things, we take responsibility for delivery of the product or service, establish pricing of the arrangement, and are the
primary obligor in the arrangement. When our reseller partner assumes the majority of the business risks associated with the performance of the contractual obligations, we record the associated revenues net of the amounts paid to our reseller
partner. Our judgment as to whether we have assumed the majority of the business risks associated with performance of the contractual obligations materially affects how we report revenues and cost of operations.



Internal-Use Software



We capitalize certain costs of software developed or obtained for internal use in accordance with AICPA SOP 98-1,
Accounting for the Costs of Corporate Software Developed or Obtained for Internal Use (SOP 98-1). We capitalize software development costs when application development begins, it is probable that the project will be completed, and
the software will be used as intended. Costs associated with preliminary project stage activities, training, maintenance and all other post implementation stage activities are expensed as incurred. Our policy provides for the capitalization of
certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects, as well as external direct costs of materials and services associated with developing or obtaining internal use
software. Capitalizable personnel costs are limited to the time directly spent on such projects. Capitalized costs are ratably amortized, using the straight-line method, over the estimated useful lives of the related applications which typically
range from three to five years. Our judgment as to which costs to capitalize, when to begin capitalizing, and what period to amortize the costs over may materially affect our results of operations.



Accounts Receivable Allowances



We record provisions for estimated sales allowances against subscription and
consulting revenues in the period in which the related revenues are recorded. We record our sales allowances based on historical experience, including a review of our experience related to price adjustments and sales credits issued.



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We make judgments as to our ability to collect outstanding receivables, and we provide an allowance for
doubtful accounts, included in general and administrative expenses. In estimating allowances for doubtful accounts, we consider specific receivables when collection is doubtful, as well as an analysis of our historical bad debt experience and the
current economic environment. If the data used to estimate the allowance provided for doubtful accounts does not adequately reflect our future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and
future results of operations could be materially affected.



Stock-Based
Compensation



We have elected to continue to account for
our stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations, as opposed to the fair value method allowed by
SFAS No. 123, Accounting for Stock-Based Compensation, as amended. Accordingly, no stock-based compensation cost has been reflected in our statement of operations for any of the periods presented, as all options granted under these plans had
exercise prices equal to the fair market value of the underlying common stock on the date of grant, and any purchase discounts under our employee stock purchase plan were within statutory limits.



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payments (SFAS 123(R)), which requires that the compensation cost relating to share-based payment transactions be recognized in financial statements, with the cost measured based on the estimated fair value of the equity or liability
instruments issued. We are required to apply SFAS 123(R) as of the first interim or annual reporting period that begins after June 15, 2005; therefore, we will adopt the new requirements beginning with our fourth quarter of fiscal 2005. As a result,
we expect to record non-cash, stock-based compensation expense, which will have a material effect on our results of operations. For example, in the three months ended December 31, 2004, had we accounted for stock-based compensation using a fair
value method of accounting as defined by the currently effective guidance under SFAS 123, our net income would have been reduced by $1.5 million (see Note 1 to our financial statements included herein).



Income Taxes



We are required to estimate our income taxes in each of the jurisdictions in which we operate. This involves estimating our
current tax liabilities, including the impact, if any, of additional taxes resulting from tax examinations as well as making judgments regarding our ability to realize our deferred tax assets. Such judgments can involve complex issues and may
require an extended period to resolve.



We have experienced
significant operating losses to date, as well as assumed significant net operating loss carryforwards from acquisitions, both of which have resulted in significant net deferred tax assets. We have recorded a valuation allowance equal to these
deferred tax assets and will continue to do so until the point at which we believe future profitability is more than reasonably assured. In the event we determine it is more likely than not we will be able to realize our deferred tax assets in
excess of our net recorded amount, an adjustment to our valuation allowance would be recorded and may result in a reduction to goodwill, and/or the recording of a significant tax benefit, which would increase net income in the period such a
determination was made. Depending on the amount of deferred tax assets that may be realized, and depending on whether we incur taxable profits in the periods following the recognition of any tax benefit, we may record tax expense in these subsequent
periods. Any recorded tax expense would result in minimal actual tax payments until the point at which we fully utilized our accumulated net operating loss carryforwards, which are subject to the limitations and timing as described below.



As a result of prior equity financings and the equity issued
in conjunction with certain acquisitions, we have incurred ownership changes, as defined by applicable tax laws. As a result, our use of the acquired net operating loss carryforwards may be limited. Further, to the extent that any single year loss
is not utilized to the full amount of the limitation, such unused loss is carried over to subsequent years until the earlier of its utilization or the expiration of the relevant carryforward period. Our net operating loss carryforwards may extend to
a period of greater than 10 years, subject to limitations and timing as prescribed by applicable tax laws and generally accepted accounting principles.



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Factors That May Affect Our Financial Condition And Results Of Operations



We operate in a dynamic and rapidly changing business environment that
involves substantial risk and uncertainty. The following discussion addresses the risks and uncertainties that could cause, or contribute to causing, actual results to differ materially from expectations. In evaluating our business, readers should
pay particular attention to the descriptions of risks and uncertainties described below and in other sections of this report and our other filings with the SEC.



Since Sales Of Our Concur Expense Solutions, Account For More Than 95% Of Our Total Revenues, If Demand For These Solutions Was to Decline Materially, Our
Results Of Operations Would Be Substantially Harmed.



We generated greater than 95% of our total revenues in the three months ended December 31, 2004, and for all of fiscal 2004, from our Concur Expense services and software, and we expect such services and software to continue to contribute a
similar percentage of our total revenues for the foreseeable future. Our future financial performance and revenue growth is dependent upon continued market acceptance of our Concur Expense solutions, and our revenues would decline significantly if,
for example, our competitors, some of which have substantially greater resources than us, develop expense management products that achieve greater market acceptance, or we do not keep up with technological advancements in software platforms,
delivery models or product features. There can be no assurance that our services and software solutions will continue to maintain widespread market penetration or that we will continue to derive significant revenues from sales of such solutions in
the future.



We Depend On A Subscription Service Business Model Which Has
A Limited History And Continues To Evolve.



Our
subscription revenues are based on a business model that has a limited history and continues to evolve, and, is therefore subject to a number of risks, including: an increasing reliance on a relatively novel revenue model for our industry; a
reduction of license revenues as we focus on building our subscription business; lower gross margins and higher fixed costs associated with our subscription business, as compared to our license business; unpredictable sales cycles; and the
possibility of subscription cancellations. We began offering our software as a service on an outsourced basis over the Internet in 1999. Our subscription services delivery models have continued to evolve and, today, we anticipate that our future
financial performance and revenue growth will depend, in large part, upon the growth of our subscription services. Our subscription revenues represented 74% of total revenues in the three months ended December 31, 2004, and we depend substantially
on outsourced subscription services delivery models for our anticipated revenues and cash flows. We anticipate that subscription revenues will continue to represent a significant percentage of our total revenues and that our future financial
performance and revenue growth will depend, in large part, upon the growth in customer demand for our outsourced subscription services delivery models. As such, we have invested significantly in infrastructure, operations, and strategic
relationships to support these models, which represent a significant departure from the delivery strategies that we and other enterprise software vendors have traditionally employed. Our new and evolving business model makes our business operations
and prospects difficult to evaluate.



Our increased strategic
focus on growing our subscription business has contributed to a substantial reduction in our software license revenues in recent years. The limited history of our subscription business model makes it difficult to predict whether demand for
subscription services will continue. If it does not, we may not be able to generate sufficient license revenues to offset any decrease in sales of subscription services.



If our subscription services business does not grow sufficiently, our cost of revenues may exceed such revenues, which could
harm our operating results. Our costs of providing subscription services are relatively fixed in the short-term, so we may not be able to adjust our expenses quickly enough to offset any potential slowdown in subscription sales. In addition, the
cycle for implementing our subscription services can be unpredictable because our services must be integrated with a customers existing systems. Any delays in implementation may prevent us from recognizing subscription revenue for periods of
time, even when we have already incurred costs relating to the implementation of our subscription services. Furthermore, we may experience unanticipated increases in costs associated with providing our subscription services and software maintenance
services to customers over the term of our customer contracts as a result of inflation, inaccurate internal cost projections or other factors, which may harm our operating results. Additionally, some of our subscription services contracts contain
cancellation provisions, and, as a result, we may recognize substantially less revenue than the aggregate value of those contracts over their terms. If a customer cancels or otherwise seeks to terminate a subscription or maintenance agreement prior
to the end of its term, or if we are unable to renew such an agreement at the end of its term, our operating results in future periods could be substantially harmed.



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We Depend On Consulting Revenues, Which May Fluctuate Or Decline.



Our consulting revenues represented 20% of total revenues in the three
months ended December 31, 2004. We anticipate that consulting revenues will continue to represent a significant component of our total revenues. The level of consulting revenues depends largely upon demand for our consulting services, which consist
of system implementation and integration, planning, data conversion, training, and documentation of procedures. Our consulting revenues could fluctuate or decline to the extent sales or upgrades of our subscription services and/or software licenses
fluctuate or decline or if third-party organizations such as systems integrators compete with us for the installation or servicing of our offerings. Our ability to increase consulting revenues will depend in large part on our ability to increase the
scale of our consulting organization, including our ability to recruit and train a sufficient number of qualified consulting personnel.



Software License Revenues Are Volatile, Which Makes Our Operating Results Difficult To Predict.



Our software license revenues represented 6% of total revenues in the three
months ended December 31, 2004. While software license revenues are diminishing as a percent of total revenues, they continue to contribute to our overall operating results. However, the timing and amounts of license revenues can be difficult to
predict, which can lead to variability in operating results. For example, our licensed software is typically shipped when orders are received, so license backlog at the beginning of any quarter typically represents only a small portion of the
quarters expected license revenues. This makes license revenues in any quarter difficult to forecast because they are determined by orders booked and shipped in that quarter. Moreover, we have historically recognized a substantial percentage
of license revenues in the last month of the quarter, frequently in the last week or even the last days of the quarter, and we expect this trend to continue for as long as our licensed software represents a meaningful part of our overall business.
Because our expenses are relatively fixed in the near term, any shortfall from anticipated revenues or any delay in the recognition of revenues could result in significant variations in operating results from quarter to quarter. Furthermore we find
it difficult to forecast quarterly license revenues because our sales cycle, from initial evaluation to delivery of software, is lengthy and varies substantially from customer to customer. The continuing weakness of capital spending for enterprise
software contributes to the length and unpredictability of our sales cycle for licensed products, making related revenues more difficult to predict and subjecting our operating results to greater volatility on a quarter over quarter basis.



We Face Significant Competition From Companies That Have Greater
Resources Than We Do And If We Fail To Compete Effectively, Our Business Will Suffer.



The market for our solutions is intensely competitive and rapidly changing. The direct competition we face depends on the market segment focus and delivery model capabilities of our competitors. We also face indirect
competition from potential customers internal development efforts and, at times, have to overcome their reluctance to move away from existing paper-based systems. Our principal direct competition comes from independent vendors of Corporate
Expense Management software and services, as well as financial institutions and ERP vendors that sell products similar to ours along with their suites of other products and services. Many of our competitors have longer operating histories, greater
financial, technical, marketing, and other resources, greater name recognition, and a larger total number of customers for their products and services than we do. Some of our competitors, particularly major financial institutions and ERP vendors,
have well-established relationships with our current and potential customers as well as with systems integrators and other vendors and service providers. These competitors may also be able to respond more quickly to new or emerging technologies and
changes in customer requirements, or to devote greater resources to the development, promotion, and sale of their products, than us. In addition, we anticipate the entrance of new competitors in the future. Increased competition may result in price
reductions, reduced gross margins, and change in market share and could have a material adverse effect on our business, financial condition, and results of operations.



We Are Dependent Upon Strategic Relationships With Third Parties And If We Cannot Continue To Sustain And Develop These Relationships,
Our Revenues Will Decline.



We depend on strategic
reseller and referral relationships to offer products and services to a larger customer base than we can reach through direct sales, telesales, and internal marketing efforts. If we were unable to maintain our existing strategic relationships or
enter into additional strategic relationships, we would have to devote substantially more resources to the distribution, sales, and marketing of our products and services. Our success depends in part on the ultimate success of our strategic reseller
and referral partners and their ability to market our products and services successfully. Our existing strategic referral partners are not obligated to refer any potential customers to us. In addition, some of these third parties have entered, and
may continue to enter, into strategic relationships with our competitors. Further, many of our strategic partners have multiple strategic relationships, and they may not regard us as significant for their businesses. Our strategic partners may
terminate their respective



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relationships with us, pursue other partnerships or relationships, or attempt to develop or acquire products or services
that compete with our products or services. Our strategic partners also may interfere with our ability to enter into other desirable strategic relationships.



If Our Customers Have Concerns Over The Scalability Or Security Of Our Products, They May Not Continue To Buy Our Products And Our Revenues Will Decline.



If customers determine that our subscription services
offerings are not sufficiently scalable, do not provide adequate security for the dissemination of information over the Internet or corporate extranets, or are otherwise inadequate for Internet or extranet use or if, for any other reason, customers
fail to accept our subscription services for use, our business will be harmed. As part of our subscription services, we receive credit card, travel booking, employee, purchasing, supplier, and other financial and accounting data, through the
Internet or extranets, and there can be no assurance that this information will not be subject to computer break-ins, theft, and other improper activity that could jeopardize the security of information for which we are responsible. Any such lapse
in security could expose us to litigation, loss of customers, or other harm to our business.



In addition, any person who is able to circumvent our security measures could misappropriate proprietary or confidential customer information or cause interruptions in our operations. We may be required to incur
significant costs to protect against security breaches or to alleviate problems caused by breaches. Any general concern regarding security in the marketplace could deter customers or prospects from using the Internet to conduct transactions that
involve transmitting confidential information. Our failure to prevent security breaches, or well-publicized security breaches affecting the Internet in general, could significantly harm our business, operating results, and financial condition.



Privacy Concerns Are Increasing, Which Could Result In Regulatory
Changes That May Harm Our Business.



Personal privacy
has become a significant issue in the United States and many other countries in which we operate. The United States and various other countries have recommended restrictions on, or taken actions to restrict, the use of personal information by those
collecting such information. Any new or existing privacy laws, if applicable to our business, could impose additional costs and could limit our use and disclosure of such information. If such privacy laws were deemed to apply to us, we may be
required to change our activities and revise or eliminate our services, which could significantly harm our business.



Interruption Of Our Operations Could Significantly Harm Our Business.



Significant portions of our operations depend on our ability to protect our computer equipment and the information stored in
our computer equipment, offices, and hosting facilities against damage from earthquake, floods, fires, power loss, telecommunications failures, unauthorized intrusion, and other events. We back up software and related data files regularly and store
the back-up files at various off-site locations. However, there can be no assurance that our disaster preparedness will eliminate the risk of extended interruption of our operations.



We have engaged third-party hosting facility providers to provide the hosting facilities and related infrastructure for our
subscription services. These hosting facilities are located in several locations in the United States, United Kingdom, and Australia. We do not control the operation of these hosting facilities. Despite precautions taken at these facilities, the
occurrence of a natural disaster, a decision by one of our hosting providers to close a facility without adequate notice to us, or other unanticipated problems at these facilities could result in lengthy interruptions in our services. We also retain
third-party telecommunications providers to provide Internet and direct telecommunications connections for our services. Any of these third-party providers may fail to perform their obligations adequately. Any damage to, or failure of, our systems
could result in interruptions in our service and/or litigation. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates.
Our business will be harmed if our customers and potential customers believe our service is unreliable.



Our Reported Financial Results May Be Adversely Affected By Changes In Accounting Principles Generally Accepted In The United States.



GAAP is subject to interpretation by the FASB, the American Institute of Certified Public Accountants, the SEC, and various
bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed
before the announcement of a change. In particular, revenue recognition rules for software and service companies are complex and require significant interpretation by us. Changes in circumstances, interpretations, or accounting principles or
guidance may require us to modify our revenue recognition policies. Such modifications could impact the timing of revenue recognition and our operating



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results. See Managements Discussion And Analysis Of Financial Condition And Results Of Operations regarding our
critical revenue recognition policies. Further, we currently are not required to record stock-based compensation charges if the employees stock option exercise price is equal to or exceeds the fair market value of our common stock on the grant
date. However, in December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS 123(R)), Share-Based Payments, which requires that the compensation cost relating to share-based payment transactions be recognized in financial
statements, with the cost measured based on the estimated fair value of the equity or liability instruments issued. We are required to apply SFAS 123(R) as of the first interim or annual reporting period that begins after June 15, 2005; therefore,
we will adopt the new requirements beginning with our fourth quarter of fiscal 2005, or July 1, 2005. As a result, we expect to record non-cash based, stock compensation expense, which will have a material effect on our results of operations. For
example, in the three months ended December 31, 2004, had we accounted for stock-base compensation using a fair value method of accounting as defined by the currently effective guidance under SFAS 123, our net income would have been reduced by $1.5
million (see Note 1 to our financial statements included herein).



Compliance With New Regulations Governing Public Company Corporate Governance And Reporting Is Uncertain And Expensive.



Many new laws, regulations, and standards, notably those adopted in connection with the Sarbanes-Oxley Act of 2002 by the SEC, the New York Stock
Exchange, and the NASDAQ Stock Market, impose new obligations on public companies, such as ours, which have increased the scope, complexity, and cost of corporate governance, reporting, and disclosure practices and have created uncertainty for
companies such as ours. These new laws, regulations, and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided
by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our continuing preparation for and
implementation of these reforms and enhanced new disclosures has resulted in, and will likely continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to
compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external
auditors audit of that assessment, which will be required for our fiscal year ending September 30, 2005, has required, and will likely continue to require, the commitment of significant financial and managerial resources. Any unanticipated
difficulties in preparing for and implementing these reforms could result in material delays in complying with these new laws, regulations, and standards or significantly increase our costs. Our ability to fully comply with these new laws and
regulations is also uncertain. Our failure to timely prepare for and implement the reforms required by these new laws, regulations, and standards could significantly harm our business, operating results, and financial condition. Further, these laws,
regulations, and standards may make it more difficult for us to attract and retain qualified members to serve on our board of directors and board committees, particularly our audit committee, and to attract and retain qualified executive officers,
which could harm our business. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.



The Growth Of The International Component Of Our Business Subjects Us To Additional
Risks Associated With Foreign Operations.



Our
international operations, which are subject to risks associated with operating abroad, are becoming an increasingly important component of our business. Revenues from customers outside the United States represented approximately $2.8 million and
$1.6 million, in the three months ended December 31, 2004 and 2003, respectively. These international operations are subject to a number of difficulties and special costs, including:



| |  |  | costs of customizing products for foreign countries;
| | - |  | ----------------------------------------------------



| |  |  | laws and business practices favoring local competitors;
| | - |  | -------------------------------------------------------



| |  |  | uncertain regulation of electronic commerce;
| | - |  | --------------------------------------------



| |  |  | compliance with multiple, conflicting, and changing governmental laws and regulations;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | longer sales cycles;
| | - |  | --------------------



| |  |  | greater difficulty in collecting accounts receivable;
| | - |  | -----------------------------------------------------



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| |  |  | import and export restrictions and tariffs;
| | - |  | -------------------------------------------



| |  |  | potentially weaker protection for our intellectual property than in the United States, and practical difficulties in enforcing such rights abroad;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties staffing and managing foreign operations;
| | - |  | ------------------------------------------------------



| |  |  | multiple conflicting tax laws and regulations; and
| | - |  | --------------------------------------------------



| |  |  | political and economic instability.
| | - |  | -----------------------------------



Our international operations also face foreign currency-related risks. To date, most of our revenues have been denominated in United States dollars, but
we believe that an increasing portion of our revenues will be denominated in foreign currencies. We currently do not engage in foreign exchange hedging activities and, therefore our international revenues and expenses are currently subject to the
risks of foreign currency fluctuations. In addition, our ability to expand into international markets will depend on our ability to develop and support services and products that incorporate the tax laws, accounting practices, and currencies of
applicable countries.



Our international operations also
increase our exposure to international laws and regulations. If we cannot comply with foreign laws and regulations, which are often complex and subject to variation and unexpected changes, we could incur unexpected costs and potential litigation.
For example, the governments of foreign countries might attempt to regulate our services and products or levy sales or other taxes relating to our activities. In addition, foreign countries may impose tariffs, duties, price controls or other
restrictions on foreign currencies or trade barriers, any of which could make it more difficult for us to conduct our business in international markets.



We intend to continue to expand our international sales and marketing activities and enter into relationships with additional international distribution
partners. We are in the early stages of developing our indirect distribution channels in markets outside the United States. We may not be able to attract and retain distribution partners that will be able to market our products effectively.



Our Quarterly Revenues And Operating Results May Fluctuate In Future
Periods And We May Fail To Meet Expectations Of Investors And Public Market Analysts, Which Could Cause The Price Of Our Common Stock To Decline.



Our quarterly revenues and operating results may fluctuate significantly from quarter to quarter. We believe that period-to-period comparisons of our
operating results may not be meaningful and should not be relied on as an indication of our future performance. If quarterly revenues or operating results fall below the expectations of investors or public market analysts, the price of our common
stock could decline substantially. Factors that might cause quarterly fluctuations in our operating results include:



| |  |  | the evolving demand for our services and software;
| | - |  | --------------------------------------------------



| |  |  | spending decisions by our customers and prospective customers;
| | - |  | --------------------------------------------------------------



| |  |  | our ability to manage expenses;
| | - |  | -------------------------------



| |  |  | the timing of new product releases;
| | - |  | -----------------------------------



| |  |  | changes in our pricing policies or those of our competitors;
| | - |  | ------------------------------------------------------------



| |  |  | the timing of execution of large contracts;
| | - |  | -------------------------------------------



| |  |  | changes in mix of our services and software offerings;
| | - |  | ------------------------------------------------------



| |  |  | the mix of sales channels through which our services and software are sold;
| | - |  | ---------------------------------------------------------------------------



| |  |  | costs of developing new products and enhancements;
| | - |  | --------------------------------------------------



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| |  |  | our ability to adequately provide services and software; and
| | - |  | ------------------------------------------------------------



| |  |  | global economic and political conditions.
| | - |  | -----------------------------------------



In addition, due to the continuing weakness of capital spending for enterprise software and business services, we believe that many existing and potential
customers may reassess or reduce their planned technology and Internet-related investments and defer or reprioritize purchasing decisions. Any such reduction in business spending for technology could have a material adverse effect on our revenues
and operating results. As a result, there is increased uncertainty with respect to our expected revenues.



Our Lengthy Sales Cycle Could Adversely Affect Our Financial Results.



Because of the high costs involved over a significant period of time, customers for enterprise software and business services typically commit significant
resources to an evaluation of available solutions and require us to expend substantial time, effort, and money educating them about the value of our services and software. Our sales cycle, which is the time between initial contact with a potential
customer and the ultimate sale, is often lengthy and unpredictable. As a result, we have limited ability to forecast the timing and size of specific sales. In addition, customers may delay their purchases from a given quarter to another as they
elect to wait for new product enhancements or due to other factors. Any delay in completing, or failure to complete, sales in a particular quarter or fiscal year could harm our business and could cause our operating results to vary significantly.



We May Not Successfully Develop Or Introduce New Products Or
Enhancements To Existing Products, And, As A Result, We May Lose Existing Customers Or Fail To Attract New Customers And Our Revenues Would Suffer.



Our future financial performance and revenue growth will depend, in part, upon the successful development, introduction, and customer acceptance of new
and enhanced versions of our products and services, and our business could be harmed if we fail to deliver enhancements to our current and future products and services that customers desire. From time to time, we experience delays in the planned
release dates of enhancements to our products and services, and we have discovered errors in new releases after their introduction. New product versions or upgrades may not be released according to schedule, or may contain errors when released.
Either situation could result in adverse publicity, loss of sales, delay in market acceptance of our products and services, or customer claims, including warranty claims, against us, any of which could harm our business. If we do not deliver new
product versions, upgrades, or other enhancements to existing products and services on a timely and cost-effective basis, our business will be harmed. We are also continually seeking to develop new offerings. However, we remain subject to all of the
risks inherent in product development, including unanticipated technical or other development problems, which could result in material delays in product introduction and acceptance or significantly increased costs. There can be no assurance that we
will be able to successfully develop new services or products, or to introduce in a timely manner and gain acceptance of such new products or services in the marketplace.



Our Products And Services Might Not Keep Pace With Technological Change.



We must continually modify and enhance our services and products to keep
pace with changes in hardware and software platforms, database technology, electronic commerce technical standards, and other items. As a result, uncertainties related to the timing and nature of new product announcements or introductions, or
modifications by vendors of operating systems, back-office applications, and browsers and other Internet-related applications, could harm our business.



We Rely On Third-Party Software And Services That May Be Difficult To Replace.



We license or purchase software and services provided by third parties in order to offer some of our services and software
offerings. Such third-party software and services may not continue to be available on commercially reasonable terms, if at all. The loss or inability to maintain our rights to use any of these software or services could result in delays in the sale
of our services or software offerings until equivalent technology is either developed by us, or, if available, is identified, licensed, and integrated, which could harm our business.



Our Stock Price Has Experienced High Volatility In The Past, May Continue To Be Volatile, And May Decline.



The trading price of our common stock has fluctuated widely in the past and
may do so in the future, as a result of a number of factors, many of which are outside our control, such as:



| |  |  | variations in our actual and anticipated operating results;
| | - |  | -----------------------------------------------------------



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| |  |  | changes in our earnings estimates by analysts;
| | - |  | ----------------------------------------------



| |  |  | failure to achieve earnings expectations;
| | - |  | -----------------------------------------



| |  |  | the volatility inherent in stock prices within the emerging sector within which we conduct business; and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | the volume of trading in our common stock, including sales of substantial amounts of common stock issued upon the exercise of outstanding options and warrants.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, the stock market, particularly the
NASDAQ Stock Market, has experienced extreme price and volume fluctuations that have affected the market prices of many technology and computer software companies, particularly Internet-related companies. Such fluctuations have often been unrelated
or disproportionate to the operating performance of these companies. These broad market fluctuations could adversely affect the market price of our common stock.



Further, securities class action litigation has often been brought against companies that experience periods of volatility
in the market prices of their securities. Securities class action litigation could result in substantial costs and a diversion of our managements attention and resources. In July 2001, we and several of our current and former officers were
named as defendants in two securities class-action lawsuits based on alleged errors and omissions concerning underwriting terms in the prospectus for our initial public offering. In April 2002, these lawsuits were consolidated. This consolidated
lawsuit is one of more than 300 similar pending cases filed against companies that completed initial public offerings between 1997 and 2000 and the underwriters that took them public. In July 2003, we decided to participate in a proposed settlement
being negotiated by representatives of a coalition of issuers named as defendants in similar actions and their insurers. Although we believe that the plaintiffs claims have no merit, we have decided to participate in the proposed settlement to
avoid the cost and distraction of continued litigation. The proposed settlement agreement would dispose of all remaining claims against us and the individual defendants, without any admission of wrongdoing by us or the individual defendants. The
proposed settlement is subject to final approval by the parties and the court. There is no guarantee that the parties or the court will approve the proposed settlement. Should the parties and the court fail to approve the proposed settlement, we
would continue to defend ourselves vigorously. Any liability we incur in connection with this lawsuit could materially harm our business and financial position and, even if we defend ourselves successfully, there is a risk that managements
distraction in dealing with this lawsuit could harm our results.



In
Order To Meet Our Business Objectives We Need To Attract And Retain Qualified Personnel. We Depend Significantly On Direct Sales, Which Are Subject To Personnel Risks And May Cause Us To Miss Some Opportunities.



Our success depends in large part on our ability to attract, motivate, and
retain highly qualified personnel. Competition for such personnel is intense and there can be no assurance that we will be successful in attracting, motivating, and retaining key personnel. Many of our competitors have greater financial and other
resources than us for attracting experienced personnel. We also compete for personnel with other software vendors and consulting and professional services companies. Further, recent changes in applicable stock exchange listing standards relating to
obtaining stockholder approval of equity compensation plans could make it more difficult or expensive for us to grant options to employees in the future. We rely on our direct sales force to sell our services and software in the marketplace. We
anticipate increasing our direct sales force by approximately 50% in fiscal 2005, compared to the level at September 30, 2004. There is significant competition for direct sales personnel with the advanced sales skills and technical knowledge we
need. If we were unable to hire or retain competent sales personnel our business would suffer. In addition, by relying primarily on a direct sales model, we may miss sales opportunities that might be available through other sales channels, such as
domestic and international resellers and strategic referral arrangements. Any inability to hire and retain salespeople or any other qualified personnel, or any loss of the services of key personnel, would harm our business.



We May Require Additional Financing To Fund Our Operations Or Growth.



In the future, we may be required to seek additional
financing to fund our operations or growth. Factors such as the commercial success of our existing services and products, the timing and success of any new services and products, the progress of our research and development efforts, our results of
operations and cash flows, the use of cash in our stock repurchase program, the status of competitive services and products, and the timing and success of potential strategic alliances or potential opportunities to acquire or sell businesses or
assets may require us to seek additional funding sooner than we expect. There is no assurance that such funding will be available on terms that are acceptable to us, or at all. If we raise additional funds through the issuance of equity securities
or debt convertible into equity securities, the percentage of stock ownership by our existing stockholders would be reduced. In addition, such securities could have rights, preferences, and privileges senior to those of our current stockholders. If



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adequate funds were not available on acceptable terms, our ability to achieve or sustain positive cash flows, maintain
current operations, fund any potential growth, take advantage of unanticipated opportunities, develop or enhance services or products, or otherwise respond to competitive pressures would be significantly limited.



Our Ability To Protect Our Intellectual Property Is Limited And Our Products May Be
Subject To Infringement Claims By Third Parties.



Our
success depends, in part, upon our proprietary technology, processes, trade secrets, and other proprietary information, and our ability to protect this information from unauthorized disclosure and use. We rely on a combination of copyright, trade
secret, and trademark laws, confidentiality procedures, contractual provisions, and other similar measures to protect our proprietary information. We do not own any issued patents or have any patent applications pending. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary, and third parties may attempt to develop similar technology independently. We provide
our licensed customers with access to object code versions of our software, and to other proprietary information underlying our software. Policing unauthorized use of our products is difficult, particularly because the global nature of the Internet
makes it difficult to control the ultimate destination or security of software or other data transmitted. While we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States, and we expect that it will become more difficult to monitor use of our products as we increase
our international presence. There can be no assurance that our means of protecting our proprietary rights will be adequate, or that our competitors will not independently develop similar technology. In addition, there can be no assurance that third
parties will not claim infringement by us with respect to current or future products or other intellectual property rights. Any such claims could have a material adverse effect on our business, results of operations and financial condition. In
addition, over the past several years, we have made numerous changes in our product names. Although we own registered trademarks in the United States and have filed trademark applications in the United States and in certain other countries, we do
not have assurance that our strategy with respect to our trademark portfolio will be adequate to secure or protect all necessary intellectual property.



If We Acquire Companies, Products, Or Technologies, We May Face Risks Associated With Those Acquisitions.



In the future, we may acquire companies or make investments in other
companies, products, or technologies. We may not realize the anticipated benefits of our prior or future acquisitions or investments to the extent that we anticipate, or at all. We may have to incur debt or issue equity securities to pay for future
acquisitions or investments, the issuance of which could be dilutive to our existing stockholders. If any acquisition or investment is not perceived as improving our earnings per share, our stock price may decline. In addition, we may incur non-cash
amortization charges from acquisitions, which could harm our operating results. Any completed acquisitions would also require significant integration efforts, diverting our attention from our business operations and strategy.



Anti-Takeover Effects Of Our Rights Agreement, Charter Documents, And Delaware Law
Could Discourage Or Prevent A Change In Control Of Concur.



We have a shareholder rights agreement in place, under which our stockholders have special rights, in the form of additional voting and beneficial ownership, in the event that a person or group not approved by the board of directors were to
acquire, or to announce the intention to acquire 15% or more of our outstanding shares. This plan is designed to have the effect of discouraging, delaying or rendering more difficult an acquisition of us that has not been approved by our Board of
Directors.



In addition, there are provisions in our
certificate of incorporation and bylaws, as well as provisions in the Delaware General Corporation Law, that may discourage, delay or prevent a change of control. For example:



| |  |  | our Board of Directors may, without stockholder approval, issue shares of preferred stock with special voting or economic rights;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | our stockholders do not have cumulative voting rights, and, therefore, each of our directors can only be elected by holders of a majority of our outstanding common stock;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a special meeting of stockholders may only be called by a majority of our Board of Directors, the Chairman of our Board of Directors, or our Chief Executive Officer;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | our stockholders may not take action by written consent;
| | - |  | --------------------------------------------------------



| |  |  | our Board of Directors is divided into three classes, only one of which is elected each year; and
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | we require advance notice for nominations for election to the Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



We are exposed to market risks in the ordinary course of our business. These risks include primarily interest rate and foreign exchange risks.



Interest Rate Risk.We have borrowing arrangements with variable
rates of interest. There are no amounts outstanding at December 31, 2004 under such arrangements. We also maintain cash in highly liquid investment vehicles including money market accounts, which bear interest at variable overnight or short term
rates. Variable interest rate investment and debt exposes us to differences in future cash flows resulting from changes in market interest rates. Variable interest rate risk can be quantified by estimating the change in cash flows resulting from a
hypothetical 10% increase in interest rates. We believe such a change would not have a material impact on our cash flows related to these investment and debt arrangements.



Foreign Currency Risk.We have foreign currency risks related to our revenue and operating expenses denominated in
currencies other than the U.S. dollar. We do not believe movements in the foreign currencies in which we transact will significantly affect future net earnings. Foreign currency risk can be quantified by estimating the change in cash flows resulting
from a hypothetical 10% adverse change in foreign exchange rates. We believe such a change would not have a material impact on our cash flows of financial instruments that are sensitive to foreign currency exchange risk.



Derivatives. We do not use derivative financial instruments.



ITEM 4. CONTROLS AND PROCEDURES



Evaluation Of
Disclosure Controls And Procedures.



Regulations under the
Securities Exchange Act of 1934 require public companies, including our company, to maintain disclosure controls and procedures, which are defined to mean a companys controls and other procedures that are designed to ensure that
information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported, within the time periods specified in the SECs rules and forms. Our Chief
Executive Officer and our Chief Financial Officer, based on their evaluation of our disclosure controls and procedures as of the end of the period covered by this report, concluded that our disclosure controls and procedures were effective for this
purpose.



Changes In Internal Control Over Financial Reporting.



Regulations under the Securities Exchange Act of 1934
require public companies, including our company, to evaluate any change in internal control over financial reporting, which is defined as a process to provide reasonable assurance regarding the reliability of financial reporting and
preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. In connection with their evaluation of our disclosure controls and procedures as of the end of the period
covered by this report, our Chief Executive Officer and Chief Financial Officer did not identify any change in our internal control over financial reporting during the three month period ended December 31, 2004 that materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.



Limitation On Effectiveness Of Controls.



It
should be noted that any system of controls, including disclosure controls and procedures and internal controls over financial reporting, however well designed and operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system are met. The design of any control system is based, in part, upon the benefits of the control system relative



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to its costs. Control systems can be circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these and other
inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.





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PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



In
July 2001, we and several of our current and former officers were named as defendants in two securities class-action lawsuits filed in the United States District Court for the Southern District of New York. In April 2002, these lawsuits were
consolidated. The consolidated complaint generally alleges claims against us, several of our current and former officers, and the underwriters of our initial public offering in December 1998, based on alleged errors and omissions concerning
underwriting terms in the prospectus for our initial public offering. The plaintiffs in this lawsuit seek damages in unspecified amounts, which, if awarded, could be substantial. This lawsuit is one of more than 300 similar pending cases filed
against companies that completed initial public offerings between 1997 and 2000 and the underwriters that took them public. In October 2002, the court dismissed the individual defendants from the consolidated lawsuit, without prejudice, pursuant to
a stipulated agreement between the parties. In February 2003, the presiding judge denied a motion to dismiss all claims. In July 2003, we decided to participate in a proposed settlement being negotiated by representatives of a coalition of issuers
named as defendants in similar actions and their insurers. Although we believe that the plaintiffs claims have no merit, we have decided to participate in the proposed settlement to avoid the cost and distraction of continued litigation. We do
not believe that the proposed settlement will have any material adverse effect on our business, financial condition, or results of operations. The proposed settlement is expected to be funded by a group of insurers on behalf of the issuer
defendants. The proposed settlement agreement would dispose of all remaining claims against us and the individual defendants, without any admission of wrongdoing by us or the individual defendants. The proposed settlement is subject to final
approval by the parties and the court. There is no guarantee that the parties or the court will approve the proposed settlement. Should the parties and the court fail to approve the proposed settlement, we would continue to defend ourselves
vigorously.



ITEM 6. EXHIBITS



(a) The
following exhibits are filed as a part of this report:



|              |  |                                                                                                                          |  |                           |  |          |  |                     |  |               |  |                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- |  | -------- |  | ------------------- |  | ------------- |  | ----------------
|              |  |                                                                                                                          |  | Incorporated by Reference
|ExhibitNumber |  | Exhibit Description                                                                                                      |  | Form                      |  | File No. |  | Date ofFirst Filing |  | ExhibitNumber |  | ProvidedHerewith
|31.01         |  | Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a).                             |  |                          |  |         |  |                    |  |              |  | X               
|              |  |                                                                                                                          |  |                           |  |         
|31.02         |  | Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a).                             |  |                          |  |         |  |                    |  |              |  | X               
|              |  |                                                                                                                          |  |                           |  |         
|32.01         |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).* |  |                          |  |         |  |                    |  |              |  | X               
|              |  |                                                                                                                          |  |                           |  |         
|32.02         |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).* |  |                          |  |         |  |                    |  |              |  | X               

---

|* | This certification is not deemed filed for purposes of Section 18 of the Securities Exchange Act, or otherwise subject to the liability of that section. Such
certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that Concur specifically incorporates it by reference.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURE



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized to sign on behalf of the registrant and as the principal financial officer
thereof.



Dated: February 9, 2005



CONCUR TECHNOLOGIES, INC.By

/s/ John F. AdairJohn F. AdairChief Financial Officer










35



---

##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                                          |  |                           |  |          |  |                     |  |               |  |                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- |  | -------- |  | ------------------- |  | ------------- |  | ----------------
|              |  |                                                                                                                          |  | Incorporated by Reference
|ExhibitNumber |  | Exhibit Description                                                                                                      |  | Form                      |  | File No. |  | Date ofFirst Filing |  | ExhibitNumber |  | ProvidedHerewith
|31.01         |  | Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a).                             |  |                          |  |         |  |                    |  |              |  | X               
|              |  |                                                                                                                          |  |                           |  |         
|31.02         |  | Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a).                             |  |                          |  |         |  |                    |  |              |  | X               
|              |  |                                                                                                                          |  |                           |  |         
|32.01         |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).* |  |                          |  |         |  |                    |  |              |  | X               
|              |  |                                                                                                                          |  |                           |  |         
|32.02         |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).* |  |                          |  |         |  |                    |  |              |  | X               

---

|* | This certification is not deemed filed for purposes of Section 18 of the Securities Exchange Act, or otherwise subject to the liability of that section. Such
certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that Concur specifically incorporates it by reference.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





36