**FORM 10-Q**

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC  20549**

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**
| **For Quarter Ended: October 31, 2006** |   | **Commission  File Number: 000-23829** |
|-----------------------------------------|--------|----------------------------------------|

 

**DOCUCORP INTERNATIONAL, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                    | ** ** | **75-2690838**         |
|---------------------------------|------------|------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer       |
| incorporation or organization)  |       | identification number) |

 

| **5400 LBJ Freeway, Suite 300, Dallas, Texas** | ** ** | **75240**  |
|------------------------------------------------|------------|------------|
| (Address of principal executive offices)       |       | (Zip Code) |

 

**(214) 891-6500**

(Registrant’s telephonenumber including area code)

**Not applicable**

(Former name, formeraddress and former fiscal year, if changed since last report)

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

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

| Large accelerated filer  o |   | Accelerated filer  x |   | Non-accelerated filer  o |
|--------------------------------------|--------|--------------------------------|--------|------------------------------------|

 

Indicate by check mark whether the registrantis a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes  o    No  x

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: Common Stock, $.01 par value, 11,685,464 shares outstanding as ofDecember 1, 2006.

 

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**Docucorp International, Inc.**

**Table of Contents**

**Quarterly Report on Form 10-Q**

**October 31, 2006**
|            | PART I –  FINANCIAL INFORMATION                                                                                          |   |
|------------|-------------------------------------------------------------------------------------------------------------------------------|--------|
|       |                                                                                                                          |   |
| Item 1.    | Financial Statements (Unaudited)                                                                                              |   |
|       |                                                                                                                          |   |
|       | Consolidated Balance  Sheets as of October 31, 2006 and July 31, 2006                                                         |   |
|       |                                                                                                                          |   |
|       | Interim  Consolidated Statements of Operations and Comprehensive Income for the three  months ended October 31, 2006 and 2005 |   |
|       |                                                                                                                          |   |
|       | Interim  Consolidated Statements of Cash Flows for the three months ended October 31,  2006 and 2005                          |   |
|       |                                                                                                                          |   |
|       | Notes to  Interim Consolidated Financial Statements                                                                           |   |
|       |                                                                                                                          |   |
| Item 2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                   |   |
|       |                                                                                                                          |   |
| Item 3.    | Quantitative  and Qualitative Disclosures About Market Risk                                                                   |   |
|       |                                                                                                                          |   |
| Item 4.    | Controls and  Procedures                                                                                                      |   |
|       |                                                                                                                          |   |
|       | PART II – OTHER  INFORMATION                                                                                             |   |
|       |                                                                                                                          |   |
| Item 1.    | Legal Proceedings                                                                                                             |   |
|       |                                                                                                                          |   |
| Item 6.    | Exhibits                                                                                                                      |   |
|       |                                                                                                                          |   |
| Signatures |                                                                                                                          |

 

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**Docucorp International, Inc.**

**ConsolidatedBalance Sheets**

**(In thousands, except share andper share amounts)**

**(Unaudited)**
| ** **                                                                                         | ** ** | **October 31,  2006** | ** ** | **July 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| **Assets**                                                                                         | ** ** | ** **                 | ** ** | ** **              |       |
| Current assets:                                                                                    | ** ** | ** **                 | ** ** | ** **              |       |
| Cash and cash  equivalents                                                                         | ** ** | **$**                      | **8,920**  | ** **              | $          | 9,829 |   |
| Accounts  receivable, net of allowance of $398 and $479, respectively                              | ** ** | **16,486**                 | ** ** | 16,918                  |       |
| Current portion  of deferred taxes                                                                 | ** ** | **363**                    | ** ** | 363                     |       |
| Income tax  receivable                                                                             | ** ** | **248**                    | ** ** | 248                     |       |
| Other current  assets                                                                              | ** ** | **2,732**                  | ** ** | 2,905                   |       |
| Total current  assets                                                                              | ** ** | **28,749**                 | ** ** | 30,263                  |       |
|                                                                                               | ** ** | ** **                 | ** ** |                    |       |
| Property and  equipment, net of accumulated depreciation of $25,121 and $24,156,  respectively     | ** ** | **9,527**                  | ** ** | 9,674                   |       |
| Software  development costs, net of accumulated amortization of $31,480 and $30,274,  respectively | ** ** | **14,487**                 | ** ** | 14,301                  |       |
| Goodwill                                                                                           | ** ** | **9,842**                  | ** ** | 9,842                   |       |
| Identifiable  intangibles, net of accumulated amortization of $331 and $290, respectively          | ** ** | **689**                    | ** ** | 730                     |       |
| Other assets                                                                                       | ** ** | **487**                    | ** ** | 499                     |       |
| Total assets                                                                                       | ** ** | **$**                      | **63,781** | ** **              | $          | 65,309 |   |
| ** **                                                                                         | ** ** | ** **                 | ** ** |                    |       |
| **Liabilities and stockholders’  equity**                                                     | ** ** | ** **                 | ** ** |                    |       |
| Current  liabilities:                                                                              | ** ** | ** **                 | ** ** |                    |       |
| Accounts payable                                                                                   | ** ** | **$**                      | **2,630**  | ** **              | $          | 3,322 |   |
| Accrued liabilities:                                                                               | ** ** | ** **                 | ** ** |                    |       |
| Accrued  compensation                                                                              | ** ** | **3,495**                  | ** ** | 3,453                   |       |
| Other                                                                                              | ** ** | **1,403**                  | ** ** | 1,625                   |       |
| Income taxes  payable                                                                              | ** ** | **443**                    | ** ** | 531                     |       |
| Current portion  of lease obligations                                                              | ** ** | **1,730**                  | ** ** | 1,845                   |       |
| Current portion  of long-term debt                                                                 | ** ** | **2,438**                  | ** ** | 3,324                   |       |
| Deferred revenue                                                                                   | ** ** | **10,725**                 | ** ** | 11,709                  |       |
| Total current  liabilities                                                                         | ** ** | **22,864**                 | ** ** | 25,809                  |       |
|                                                                                               | ** ** | ** **                 | ** ** |                    |       |
| Deferred taxes                                                                                     | ** ** | **4,772**                  | ** ** | 4,772                   |       |
| Long-term lease  obligations                                                                       | ** ** | **1,242**                  | ** ** | 1,588                   |       |
| Long-term debt                                                                                     | ** ** | **120**                    | ** ** | 137                     |       |
| Other long-term  liabilities                                                                       | ** ** | **1,513**                  | ** ** | 1,501                   |       |
|                                                                                               | ** ** | ** **                 | ** ** | ** **              |       |
| Commitments and  contingencies                                                                     | ** ** | ** **                 | ** ** | ** **              |       |
|                                                                                               | ** ** | ** **                 | ** ** | ** **              |       |
| Stockholders’  equity:                                                                        | ** ** | ** **                 | ** ** | ** **              |       |
| Preferred stock,  $0.01 par value, 1,000,000 shares authorized; none issued                        | ** ** | **0**                      | ** ** | 0                       |       |
| Common stock,  $0.01 par value, 50,000,000 shares authorized; 16,593,849 shares issued             | ** ** | **166**                    | ** ** | 166                     |       |
| Additional  paid-in capital                                                                        | ** ** | **45,499**                 | ** ** | 45,915                  |       |
| Treasury stock  at cost, 4,921,584 and 5,185,109 shares, respectively                              | ** ** | **(27,517**                | **)**      | (28,991                 | )          |
| Retained  earnings                                                                                 | ** ** | **15,684**                 | ** ** | 14,948                  |       |
| Foreign currency  translation adjustment                                                           | ** ** | **(562**                   | **)**      | (536                    | )          |
| Total  stockholders’ equity                                                                   | ** ** | **33,270**                 | ** ** | 31,502                  |       |
| Total liabilities and  stockholders’ equity                                                   | ** ** | **$**                      | **63,781** | ** **              | $          | 65,309 |   |

 

*Seeaccompanying notes to interim consolidated financial statements.*

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**Docucorp International, Inc.**

# **InterimConsolidated Statements of Operations and Comprehensive Income**

**(In thousands, except per shareamounts)**

**(Unaudited)**
| ** **                                          | ** ** | **Three months ended  October 31,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| **Revenues**                                        | ** ** | ** **                                         |       |   |   |
| ASP hosting                                         | ** ** | **$**                                              | **8,218**  |   | $ | 8,048 |   |
| Professional services                               | ** ** | **5,987**                                          |       | 5,372 |   |
| License                                             | ** ** | **1,876**                                          |       | 2,035 |   |
| Maintenance                                         | ** ** | **5,621**                                          |       | 5,363 |   |
| Total revenues                                      | ** ** | **21,702**                                         |       | 20,818 |   |
|                                                | ** ** | ** **                                         |       |   |   |
| **Cost of  revenues**                               | ** ** | ** **                                         |       |   |   |
| ASP hosting                                         | ** ** | **7,367**                                          |       | 7,360 |   |
| Professional services                               | ** ** | **4,531**                                          |       | 4,134 |   |
| License                                             | ** ** | **1,440**                                          |       | 1,174 |   |
| Maintenance                                         | ** ** | **279**                                            |       | 359 |   |
| Total cost of revenues                              | ** ** | **13,617**                                         |       | 13,027 |   |
|                                                | ** ** | ** **                                         |       |   |   |
| Gross profit                                        | ** ** | **8,085**                                          |       | 7,791 |   |
|                                                | ** ** | ** **                                         |       |   |   |
| **Operating  expenses**                             | ** ** | ** **                                         |       |   |   |
| Product development                                 | ** ** | **2,283**                                          |       | 2,193 |   |
| Sales and marketing                                 | ** ** | **2,618**                                          |       | 2,569 |   |
| General and administrative                          | ** ** | **2,032**                                          |       | 2,155 |   |
| Total operating expenses                            | ** ** | **6,933**                                          |       | 6,917 |   |
|                                                | ** ** | ** **                                         |       |   |   |
| Operating income                                    | ** ** | **1,152**                                          |       | 874 |   |
|                                                | ** ** | ** **                                         |       |   |   |
| Interest expense                                    | ** ** | **(70**                                            | **)**      | (113 | ) |
| Other income,  net                                  | ** ** | **142**                                            |       | 106 |   |
|                                                | ** ** | ** **                                         |       |   |   |
| Income before  income taxes                         | ** ** | **1,224**                                          |       | 867 |   |
| Provision for  income taxes                         | ** ** | **459**                                            |       | 321 |   |
|                                                | ** ** | ** **                                         |       |   |   |
| Net income                                          | ** ** | **$**                                              | **765**    |   | $ | 546 |   |
|                                                | ** ** | ** **                                         |       |   |   |
| Other  comprehensive income:                        | ** ** | ** **                                         |       |   |   |
| Foreign currency translation adjustment, net of tax | ** ** | **(26**                                            | **)**      | (0 | ) |
| Comprehensive  income                               | ** ** | **$**                                              | **739**    |   | $ | 546 |   |
|                                                | ** ** | ** **                                         |       |   |   |
| Basic net income  per share                         | ** ** | **$**                                              | **0.07**   |   | $ | 0.05 |   |
|                                                | ** ** | ** **                                         |       |   |   |
| Weighted average  basic shares outstanding          | ** ** | **11,071**                                         |       | 10,900 |   |
|                                                | ** ** | ** **                                         |       |   |   |
| Diluted net  income per share                       | ** ** | **$**                                              | **0.07**   |   | $ | 0.05 |   |
|                                                | ** ** | ** **                                         |       |   |   |
| Weighted average  diluted shares outstanding        | ** ** | **11,634**                                         |       | 11,505 |   |

 

*Seeaccompanying notes to interim consolidated financial statements.*

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**Docucorp International, Inc.**

# **InterimConsolidated Statements of Cash Flows**

**(In thousands)**

**(Unaudited)**
| ** **                                                                         | ** ** | **Three months ended  October 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| **Cash  flows from operating activities**                                          | ** ** | ** **                                         | ** ** | ** ** |   |
| Net income                                                                         | ** ** | **$**                                              | **765**    | ** ** | $ | 546 | ** ** |
| Adjustments to reconcile net income to net cash  provided by operating activities: | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Stock-based compensation expense                                                   | ** ** | **239**                                            | ** ** | 169 | ** ** |
| Depreciation and amortization                                                      | ** ** | **992**                                            | ** ** | 1,067 | ** ** |
| Amortization of capitalized software                                               | ** ** | **1,206**                                          | ** ** | 1,073 | ** ** |
| Gain on foreign currency                                                           | ** ** | **(56**                                            | **)**      | (23 | ) |
| Provision for doubtful accounts                                                    | ** ** | **(12**                                            | **)**      | 9 | ** ** |
| Deferred income taxes                                                              | ** ** | **0**                                              | ** ** | 73 | ** ** |
| Tax benefit related to stock option exercises                                      | ** ** | **(244**                                           | **)**      | (73 | ) |
| Changes in assets and liabilities:                                                 | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Accounts receivable                                                                | ** ** | **489**                                            | ** ** | 1,057 | ** ** |
| Other assets                                                                       | ** ** | **192**                                            | ** ** | 172 | ** ** |
| Accounts payable                                                                   | ** ** | **(699**                                           | **)**      | 399 | ** ** |
| Accrued liabilities                                                                | ** ** | **(193**                                           | **)**      | 32 | ** ** |
| Income taxes payable                                                               | ** ** | **156**                                            | ** ** | (209 | ) |
| Deferred revenue                                                                   | ** ** | **(1,002**                                         | **)**      | (900 | ) |
| Other liabilities                                                                  | ** ** | **11**                                             | ** ** | 30 | ** ** |
| Net cash provided by operating activities                                          | ** ** | **1,844**                                          | ** ** | 3,422 | ** ** |
|                                                                               | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| **Cash  flows from investing activities**                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Purchase of property and equipment                                                 | ** ** | **(799**                                           | **)**      | (363 | ) |
| Capitalized software development costs                                             | ** ** | **(1,392**                                         | **)**      | (1,272 | ) |
| Net cash used in investing activities                                              | ** ** | **(2,191**                                         | **)**      | (1,635 | ) |
|                                                                               | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| **Cash  flows from financing activities**                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Principal payments under lease obligations                                         | ** ** | **(461**                                           | **)**      | (385 | ) |
| Principal payments under debt obligations                                          | ** ** | **(903**                                           | **)**      | (903 | ) |
| Tax benefit related to stock option exercises                                      | ** ** | **244**                                            | ** ** | 73 |   |
| Proceeds from exercise of stock options                                            | ** ** | **544**                                            | ** ** | 292 |   |
| Net cash used in financing activities                                              | ** ** | **(576**                                           | **)**      | (923 | ) |
|                                                                               | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Effect of  exchange rates on cash flows                                            | ** ** | **14**                                             | ** ** | 18 |   |
|                                                                               | ** ** | ** **                                         | ** ** |   |   |
| Net increase  (decrease) in cash and cash equivalents                              | ** ** | **(909**                                           | **)**      | 882 |   |
| Cash and cash  equivalents at beginning of period                                  | ** ** | **9,829**                                          | ** ** | 8,381 |   |
| Cash and cash  equivalents at end of period                                        | ** ** | **$**                                              | **8,920**  | ** ** | $ | 9,263 |   |

 

*See accompanying notes to interimconsolidated financial statements.*

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**Docucorp International, Inc.**

# **Notes toInterim Consolidated Financial Statements**

**(Unaudited)**

**Note 1 -Basis of presentation and summary of significant accounting policies**

DocucorpInternational, Inc. (“Docucorp”), a Delaware corporation, was organized on January13, 1997 in connection with the acquisition of FormMaker Software, Inc. byImage Sciences, Inc. We develop, market and support Customer CommunicationManagement (“CCM”) solutions via a portfolio of proprietary informationsoftware, application service provider (“ASP”) hosting and professionalservices that enable companies to create, publish, manage and archive complex,high-volume, individualized information. We support the entire information life cycle – from acquisition of thefirst raw data point to final delivery of personalized information to thecustomer.  The majority of our businessis currently derived from companies in the insurance industry. We operateprimarily in the United States, Canada and Europe.

The accompanyingunaudited interim consolidated financial statements of Docucorp and its whollyowned subsidiaries (“Docucorp”) as of October 31, 2006 and July 31, 2006, andfor the three months ended October 31, 2006 and 2005, have been prepared inaccordance with generally accepted accounting principles for interim financialinformation.  Accordingly, they do notinclude all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  The financial information presented should beread in conjunction with our annual consolidated financial statements for theyear ended July 31, 2006. The foregoing unaudited interim consolidatedfinancial statements reflect all adjustments (all of which are of a normalrecurring nature), which are, in the opinion of management, necessary for afair presentation of the results of the interim periods, and include theaccounts of Docucorp and our wholly owned subsidiaries. All intercompanyaccounts and transactions have been eliminated in consolidation. Operatingresults for the three months ended October 31, 2006 are not necessarilyindicative of the results to be expected for the year.

Revenue recognition

We derive our revenues from the sale of softwarelicenses, annual software maintenance and support agreements, professionalservices and ASP hosting services. We recognize revenue in accordance withStatement of Position 97-2, “Software Revenue Recognition” and Staff AccountingBulletin No. 104, “Revenue Recognition” (“SAB 104”). Revenue is recognized whena contract exists, the fee is fixed or determinable, delivery has occurred andcollection of the receivable is deemed probable.

We use the residual method to recognize revenue fromthe sale of software licenses that are bundled with maintenance and support.Under the residual method, the fair value of the undelivered element(s) isdeferred and the remaining value of the contract is recognized as revenue. Fairvalue of an element is based on vendor-specific objective evidence (“VSOE”).VSOE is based on the price charged when the same element is sold separately. Wedo not generally sell software licenses without selling maintenance and supportfor the licensed software. As a result, we have established VSOE only for theundelivered element(s) included in a multi-element arrangement. VSOE formaintenance and support is based upon prices customers pay to renew maintenanceand support agreements. After expiration of the initial maintenance term,maintenance and support agreements are renewable on an annual basis and includerights to unspecified upgrades, updates and enhancements on a when and ifavailable basis, as well as telephone support and bug fixes. Revenue generatedfrom maintenance and support is recognized ratably over the maintenance term ofthe agreement. We record deferred revenue for maintenance amounts invoicedprior to the performance of the related services.

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Our standard software license agreements do notprovide for rights of software return and/or conditions of acceptance. However,in the rare case that acceptance criteria are provided, revenue is deferred andnot recognized until all acceptance provisions are satisfied.  Revenue from software licenses which includea cancellation clause is recognized upon expiration of the cancellation period. License revenue related to productsstill in the testing phase is deferred until formal acceptance of the productby the customer.

Professional services revenue includes implementation,integration, training and consulting services relating to new software licensesales and consulting with existing customers to provide additional services.For new software license sales that are sold with installation services, theresidual method is applied, whereby the fair value of the services element isdeferred along with the fair value of the maintenance and support, with theresidual value of the contract recognized as license revenue. The servicesoffered are not essential to the functionality of the software.  Professional services revenue is generallybilled on a time and material basis and is recognized as the services areperformed.

Professional services revenue derived from theinstallation and integration of software packages under a fixed price contractis recognized on a percentage-of-completion basis measured by the relationshipof hours worked to total estimated contract hours.  We follow this method because reasonablydependable estimates of the revenue and contract hours applicable to variouselements of a contract can be made. Since the financial reporting of thesecontracts depends upon estimates which are assessed continually during the termof these contracts, recognized revenue and profit are subject to revisions asthe contract progresses to completion. Revisions in profit estimates arereflected in the period in which the facts that give rise to the revisionsbecome known. Accordingly, favorable changes in estimates result in additionalrevenue recognition and net income, and unfavorable changes in estimates resultin a reduction of recognized revenue and net income. When estimates indicatethat a loss will be incurred on a contract upon completion, a provision for theexpected loss is recorded in the period in which the loss becomes evident.

Revenue from our ASP hosting operations is recognizedin accordance with SAB 104, generally on a per transaction basis. ASP hostingagreements are generally one to five years in duration and provide for monthlybilling based on transaction volume or contract minimums. Revenue related tothe customer’s initial set up and implementation is deferred and subsequentlyrecognized over the expected term of the ASP hosting agreement.

Cash equivalents

We consider allhighly liquid investments purchased with an original maturity of three monthsor less to be cash equivalents. Cash equivalents are stated at cost, whichapproximates fair market value.

Accounts receivable

Accountsreceivable is composed of billed and unbilled accounts receivable. Unbilledaccounts receivable includes amounts recognized as revenue, primarily softwarelicense, for which the payments are not yet due and therefore, have not yetbeen billed.

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Allowance fordoubtful accounts

We maintain anallowance for doubtful accounts for estimated losses resulting from theinability of our customers to make required payments. We take intoconsideration the current financial condition of our customers, the specificdetails of the customer accounts, the age of the outstanding balance and thecurrent economic environment when assessing the adequacy of the allowance.  If the financial condition of our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances might be required.

Property and equipment, depreciation and amortization

Property andequipment are carried at cost, less accumulated depreciation and amortization.Software developed for internal use is accounted for in accordance with AICPAStatement of Position No. 98-1, “Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use.” Depreciation and amortization are computed over the estimated servicelives using the straight-line method. Estimated service lives are as follows:
| Leasehold improvements          |   | Lesser of useful  life or life of lease |
|---------------------------------|--------|-----------------------------------------|
| Computer  equipment             |   | 4-5 years                               |
| Furniture and  fixtures         |   | 5 years                                 |
| Equipment under  capital leases |   | Lesser of useful  life or life of lease |

 

Costs related torepairs and maintenance are expensed as incurred. Major renewals andbetterments are capitalized and depreciated over the assets’ remainingestimated service lives. Upon retirement or sale of an asset, the cost andaccumulated depreciation are removed from the accounts with any resulting gainor loss included in income.

Software development costs

Softwaredevelopment costs are accounted for in accordance with Statement of FinancialAccounting Standards No. 86, “Accounting for the Costs of Computer Software tobe Sold, Leased or Otherwise Marketed” (“SFAS 86”). SFAS 86 requires thecapitalization of certain software development costs, which include salariesand personnel related costs incurred in the development activities, oncetechnological feasibility of the software has been established. Research anddevelopment costs incurred prior to the establishment of the technological feasibilityof a product are expensed as incurred and are included in product developmentexpense. The cost of capitalized software is amortized on a straight-line basisto cost of license revenue over its estimated useful life, generally three tosix years, or the ratio of current revenues to current and anticipated revenuesfrom the software, whichever provides the greater amortization.

Business combinations and goodwill and intangibleassets

Uponacquisition of a business, we allocate the purchase price to tangible assetsand liabilities acquired and identifiable intangible assets. Any residualpurchase price is recorded as goodwill. The allocation of the purchase pricerequires management to make significant estimates in determining the fairvalues of assets acquired and liabilities assumed, especially with respect tointangible assets.  These estimates arebased on historical experience and information obtained from valuationspecialists and the management

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from theacquired company. These estimates can include, but are not limited to,appraisals by valuation specialists, the cash flows that an asset is expectedto generate in the future and the appropriate weighted average cost of capital.Estimates used in determining the fair value of assets acquired and liabilitiesassumed are inherently uncertain and unpredictable. Unanticipated events andcircumstances may occur which may affect the accuracy or validity of suchestimates.

Inaccordance with Financial Accounting Standards Board Statement of Financial AccountingStandards No. 142, “Goodwill and Other Intangible Assets,” we assess theimpairment of goodwill within our reporting units annually, during the thirdquarter, or more often if events or changes in circumstances indicate that thecarrying value may not be recoverable. We assess the impairment of identifiableintangible assets whenever events or changes in circumstances indicate thattheir carrying amount may not be recoverable.

Impairment of long-lived assets

We have evaluatedour long-lived assets for impairment, and will continue to do so as events orchanges in circumstances indicate that the carrying value of such assets maynot be fully recoverable.  If facts orcircumstances support the possibility of impairment, we prepare a projection offuture operating cash flows, undiscounted and without interest.  If based on this projection we do not expectto recover our carrying cost, an impairment loss equal to the differencebetween the fair value of the asset and its carrying value will be recognizedin operating income.

Deferredrevenue

Deferred revenuerelates primarily to maintenance and support agreements that have been invoicedto customers prior to the performance of the related services. Maintenance andsupport services are generally billed annually in advance for services to beperformed over a 12 month period. Maintenance and support provided under aninitial software license contract is recorded as deferred revenue based on theVSOE of that maintenance, and is recognized over the term of the associatedagreement.

Guarantees

In the ordinarycourse of business, we include standard indemnification provisions in ourcustomer and distributor agreements. Pursuant to these agreements, we typicallyindemnify, hold harmless and reimburse the indemnified party for those lossessuffered or incurred by the indemnified party arising from any trade secret,trademark, copyright, patent or other intellectual property infringement claimby any third party with respect to our software and services. The term of theseindemnification agreements is generally perpetual. The maximum potential amountof future payments that we could be required to make under theseindemnification agreements is unlimited; however, we have never incurred coststo defend lawsuits or settle claims related to these indemnificationagreements. We believe the estimated fair value of our obligation under theseagreements is minimal. Accordingly, we have no liabilities recorded for theseagreements as of October 31, 2006.

We currentlyprovide software product warranties to our customers. The product warrantiesgenerally provide that the licensed software will operate substantially inaccordance with the applicable user documentation for a period typically 90days from delivery. At October 31, 2006, we did not have material productwarranty liabilities.

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We have agreementsin place with our directors and officers whereby we indemnify them for certainevents or occurrences while the officer or director is, or was, serving at ourrequest in such capacity.  The maximumpotential amount of future payments we could be required to make under theseindemnification agreements is unlimited; however, we have a director andofficer insurance policy that may enable us to recover a portion of any futureamounts paid.

Translation of foreign currencies

We translate thefinancial statements of our European subsidiary into U.S. dollars in accordancewith Statement of Financial Accounting Standards No. 52, “Foreign CurrencyTranslation.” Assets and liabilities of our European subsidiary, whosefunctional currency is other than the U.S. dollar, are translated at period-endrates of exchange, and revenues and expenses are translated at average exchangerates prevailing during the period. Gains and losses on foreign currencytransactions and the translation of our intercompany loan to a consolidatedforeign subsidiary are recognized in other income as incurred. All othertranslation adjustments are reflected in stockholders’ equity as part of othercomprehensive income.

Treasury stock

We account forTreasury Stock using the cost method. Gains on sales of Treasury Stock are credited to Additional Paid-inCapital (“APIC”), and losses are charged to APIC to the extent that previousnet gains from sales are included therein, otherwise to Retained Earnings.Shares of our Common Stock are issued from our treasury shares as stock optionsare exercised and restricted shares are granted. Since inception of our stockrepurchase program in fiscal 1999, we have repurchased approximately 9,763,000shares of stock at an average purchase price of $5.39.

Income taxes

Income taxes areaccounted for under the asset and liability method. Deferred tax assets andliabilities are recognized for the estimated future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Deferred taxassets and liabilities are measured using enacted tax rates for the year inwhich those temporary differences are expected to be recovered or settled.  Valuation allowances are established whennecessary to reduce deferred tax assets to the amounts more likely than not tobe realized.

Net incomeper share

Our basic and diluted netincome per share is computed in accordance with Statement of FinancialAccounting Standards No. 128, “Earnings Per Share.”  Basic net income per share is computed usingthe weighted average number of common shares outstanding. Diluted net incomeper share is computed using the weighted average number of common sharesoutstanding and the assumed exercise of stock options and unvested restrictedstock awards, using the treasury stock method. The treasury stock methodrecognizes the use of proceeds that could be obtained upon exercise of optionsand the unrecognized compensation on unvested restricted stock in computingdiluted net income per share. It assumes that any proceeds would be used topurchase common stock at the average market price during the period. Optionsand unvested restricted stock will have a dilutive effect under the treasurystock method only when the average market price of common stock during theperiod exceeds the exercise price of the

 

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options or the averageprice computed from the unamortized compensation associated with unvestedrestricted stock. Following is a reconciliation of the shares used in computingbasic and diluted net income per share for the periods indicated (inthousands):

 
|                                                                 | ** ** | **Three months ended  October 31,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| Shares used in  computing basic net income per share            | ** ** | **11,071**                                         |       | 10,900 |   |
|                                                            | ** ** | ** **                                         |       |   |   |
| Dilutive effect  of stock options and unvested restricted stock | ** ** | **563**                                            |       | 605 |   |
|                                                            | ** ** | ** **                                         |       |   |   |
| Shares used in  computing diluted net income per share          | ** ** | **11,634**                                         |       | 11,505 |   |

 

At October 31, 2006 and 2005, optionsto purchase 96,000 shares and 348,000 shares of Common Stock at averageexercise prices of $10.80 and $8.23 per share, respectively, were anti-dilutiveand not included in the computation of diluted net income per share, becausethe options’ exercise prices were greater than the average market price of theCommon Stock for the period.

At October 31, 2006 and 2005, 153,000shares and 120,800 shares of unvested restricted stock, at average exerciseprices of $7.99 and $7.12 per share, respectively, were anti-dilutive and notincluded in the computation of diluted net income per share, because restrictedstocks’ calculated exercise prices were greater than the average market priceof the Common Stock for the period.

Stock-basedcompensation

In December 2004,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 123 (revised), “Share-Based Payment” (“SFAS 123R”).SFAS 123R requires employee stock-based compensation awards to be accounted forunder the fair value method and eliminates the ability to account for theseinstruments under the intrinsic value method prescribed by AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB25”). We adopted SFAS 123R on a modified prospective basis beginning August 1,2005 for stock-based compensation awards granted after that date and forunvested awards outstanding at that date. In addition, we followed thetransition method for calculating the excess tax benefits available to absorbany future tax deficiencies that will be recognized subsequent to the adoptionof SFAS 123R (the “APIC Pool”). Tax deficiencies arise when actual tax benefitsrealized upon the exercise of stock options are less than the recorded taxbenefit. We determined our APIC pool utilizing the alternative transitionmethod.

Stock-basedcompensation expense of $239,000 and $169,000 for the three months endedOctober 31, 2006 and 2005, respectively, relates to restricted stock and arecent option grant. Tax benefits from stock option exercises of $244,000 and$73,000 for the three months ended October 31, 2006 and 2005, respectively werereflected as an outflow from operating activities and an inflow from financingactivities in the Consolidated Statement of Cash Flows.

In August 2006,the Compensation Committee of the Board of Directors granted 100,000 shares ofrestricted stock to certain executive officers. Based on the market value ofour Common Stock, these restricted stock grants were valued at approximately$750,000.  The restricted stock vestsratably over five years. Compensation expense related to the restricted stockgrant is being recognized ratably over the vesting period.

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In September 2006,the Compensation committee of the Board of Directors approved the grant of75,000 options, which have a fair value of $4.83 per option. The fair value ofour stock-based awards was estimated using the Black-Scholes option pricingmodel with the following weighted average assumptions used for the grant:risk-free interest rate of 4.64%; no expected dividend yield; expected life of6.50 years, and volatility of 59.3%. The Black-Scholes model was not developedfor use in valuing employee stock options, but was developed for use inestimating the fair value of traded options that have no vesting restrictionsand are fully transferable. In addition, it requires the use of subjectiveassumptions including expectations of future dividends and stock pricevolatility.  Such assumptions are onlyused for making the required fair value estimate and should not be consideredas indicators of future dividend policy or stock price appreciation. Becausechanges in the subjective assumptions can materially affect the fair valueestimate, and because employee stock options have characteristics significantlydifferent from those of traded options, the use of the Black-Scholesoption-pricing model may not provide a reliable estimate of the fair value ofemployee stock options.

Management estimates

The preparation ofour financial statements, in accordance with accounting principles generallyaccepted in the United States of America (“GAAP”), requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, and disclosure of contingent assets and liabilities and thereported amounts of revenues and expenses at the date of the financialstatements.  On an ongoing basis,management evaluates its estimates and judgments. Actual results could differfrom those estimates. Certain accounting policies require higher degrees ofjudgment than others in their application. The following accounting policiesrequire significant estimates: revenue recognition, accounts receivable andallowance for doubtful accounts, fair value of acquired intangible assets andgoodwill, impairment of long-lived assets, software development costs andincome taxes.

Advertising costs

We expenseadvertising costs as incurred.

Royalty costs

We incur royaltycosts associated with the licensing of certain software products.  These fees vary based upon the terms of theroyalty agreement.

Recently issued accounting guidance

In July 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASBStatement No. 109” (“FIN 48”), which prescribes accounting for and disclosureof uncertainty in tax positions. FIN 48 defines the criteria that must be metfor the benefits of a tax position to be recognized. The provisions of FIN 48are effective for fiscal years beginning after December 15, 2006, which is ourfiscal 2008. We may need to record an obligation under FIN 48 associated withthe transfer pricing issues impacting our 2002 and 2000 tax years, however, noamount has been determined. We are evaluating other potential impacts of thisinterpretation on our future results of operations and financial condition.

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On September 13,2006, the Securities and Exchange Commission issued Staff Accounting BulletinNo. 108, “Considering the Effects of Prior Year Misstatements When QuantifyingMisstatements in Current Year Financial Statements” (“SAB 108”), which providesconsistency between how registrants quantify financial statement misstatements.SAB 108 allows companies to either (1) retroactively adjust prior financialstatements as if an adjustment had always been recorded or (2) record thecumulative effect of initially applying an adjustment to the carrying values ofassets and liabilities as of August 1, 2006 with a offsetting adjustmentrecorded to the opening balance of retained earnings. We will apply theinterpretive guidance contained in SAB 108 during the fourth quarter of ourfiscal 2007. Upon the initial application of SAB 108, we expect to record anincrease for deferred rent in other long-term liabilities of $2.2 million andin increase in property and equipment of $2.2 million. We are still evaluatingother potential impacts of SAB 108 on our future results of operations andfinancial condition. The accompanying financial statements do not reflect any adjustmentfor SAB 108.

From time to time,new accounting pronouncements are issued by the Financial Accounting StandardsBoard or other standard setting bodies which we adopt as of the specifiedeffective date. Unless otherwise discussed, we believe the impact of recentlyissued standards which are not yet effective will not have a material impact onour consolidated financial statements upon adoption.

**Note 2 – Business segments**

As setforth in the criteria of Statement of Financial Accounting Standards No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” we are organized intotwo reportable segments: Software and ASP hosting. The Software segmentconsists of initial software license sales, professional services consultingrelating to our software products and continued customer support andmaintenance of the software products. The ASP hosting segment providesprocessing, print, mail, archival and Internet delivery of documents forcustomers who outsource these activities. The table below presents informationabout reported segments for the three months ended October 31, 2006 and 2005(in thousands):
|                                                          | ** ** | **Three months ended  October 31,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| Revenues:                                                | ** ** | ** **                                         | ** ** | ** ** |   |
| Software                                                 | ** ** | **$**                                              | **13,484** | ** ** | $ | 12,770 |   |
| ASP hosting                                              | ** ** | **8,218**                                          | ** ** | 8,048 |   |
| Total revenues                                           | ** ** | **$**                                              | **21,702** | ** ** | $ | 20,818 |   |
|                                                     | ** ** | ** **                                         | ** ** |   |   |
| Software gross  profit, net of product development costs | ** ** | **$**                                              | **4,951**  | ** ** | $ | 4,910 |   |
| ASP hosting  gross profit                                | ** ** | **851**                                            | ** ** | 688 |   |
| Sales and  marketing                                     | ** ** | **(2,618**                                         | **)**      | (2,569 | ) |
| General and  administrative                              | ** ** | **(2,032**                                         | **)**      | (2,155 | ) |
| Consolidated  operating income                           | ** ** | **$**                                              | **1,152**  | ** ** | $ | 874 | ** ** |

 

**Note 3 – Commitments andcontingencies**

The Internal Revenue Service (“IRS”) has completedtheir examination of our tax years ended July 31, 2002 and 2000 and issued anotice of proposed adjustment for transfer pricing issues impacting

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intercompanyinterest and royalty income. Although these proposed adjustments would increaseour U.S. taxable income for these tax years, we vigorously disagree with theproposed adjustments and are aggressively contesting these matters throughapplicable IRS and judicial processes, as appropriate. We have filed a writtenprotest to these proposed adjustments thereby requesting an appeals conferencewith the IRS Office of Appeals. As of October 31, 2006, we concluded that the potentialloss was not probable. With respect to the tax years under audit, the potentialexposure ranges between $0 and $443,000, excluding interest and penalties.

Assurance cannot be given that these tax matters willbe resolved in our favor in view of the inherent uncertainties involved insettlement initiatives and tax proceedings. Further, an unfavorable settlementmay result in additional exposure for other open tax years. An unfavorableresolution of these tax matters may also have a material adverse impact on ourconsolidated financial position and results of operations.

**Note 4 – Lease abandonment**

At July 31, 2006, wehad $1.3 million of obligations associated with abandoned leased facilities.During the three months ended October 31, 2006, we made payments ofapproximately $163,000 for these obligations. At October 31, 2006, ourremaining obligations associated with abandoned leased facilities were approximately$1.1 million, net of an anticipated recovery from estimated sublease activity.

**Note 5 – Subsequent event**

In an effort to reduce product development costs andimprove synergies within our product development organization, subsequent tothe end of the quarter, we decided to relocate certain product developmentstaff in Maryland to our office in Atlanta and to close our Maryland officefacility, as the facility lease expires in December 2006. We expect to incurseverance and relocation costs in the range of $600,000 to $1.1 million duringthe current fiscal year. Finalization of these transition plans are expected tobe concluded by January 31, 2007.

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# **Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

**Forward-lookingStatements**

*Certaininformation contained herein may include “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. All statements,other than statements of historical facts included herein, are forward-lookingstatements. Readers are cautioned that any such forward-looking statements arenot guarantees of future performance and involve certain risks anduncertainties, which include, but are not limited to, those discussed in thesection entitled “Item 1A. Risk Factors” in our Form 10-K for the year endedJuly 31, 2006. Should one or more of these risks or uncertainties, among othersas set forth herein, materialize, actual results may vary materially from thoseestimated, anticipated or projected. Although we believe that the expectationsreflected by such forward-looking statements are reasonable based oninformation currently available to us, no assurance can be given that suchexpectations will prove to have been correct. Cautionary statements identifyingimportant factors that could cause actual results to differ materially from ourexpectations are set forth herein. All forward-looking statements includedherein and all subsequent oral forward-looking statements attributable to us orpersons acting on our behalf are expressly qualified in their entirety by thesecautionary statements.*

**Overview**

Docucorp develops,markets and supports CCM solutions via a portfolio of proprietary informationsoftware, ASP hosting and professional services that enable companies to create,publish, manage and archive complex, high-volume, individualizedinformation.  We support the entireinformation lifecycle – from acquisition of the first raw data point to finaldelivery of personalized information to the customer.

Our software productssupport leading hardware platforms, operating systems, printers and imagingsystems. These products are designed to personalize, produce and managedocuments such as insurance policies, utility statements, telephone bills, bankand mutual fund statements, invoices, health care provider directories,correspondence, bills of lading and other customer-oriented documents. Our ASPofferings include customer statement and bill generation, electronic billpresentment and payment, insurance policy production, provider directorygeneration, disaster recovery and electronic document archival.

Operating in fourkey vertical markets, insurance, utilities, financial services and health care,we currently have an installed base of more than 1,300 customers worldwide.More than half of the 200 largest United States insurance companies use oursoftware products and services, including nine of the top 10 life and healthinsurance companies, nine of the top 10 property and casualty insurancecompanies and more than 600 MGAs.  Manyof the largest North American health care, utility companies and majorinternational financial services institutions use our products and services.

We derive our revenues from ASP hosting fees, professional servicesfees, software license fees and recurring maintenance fees related to oursoftware products. ASP hosting revenue consists of transactional fees earnedfrom customers who outsource production of customer statements, insurancepolicies, utility statements, health care provider directories, disasterrecovery and electronic document archival. Professional services revenueincludes fees for implementation, integration, training and consultingservices. Software license revenue is generally derived from the sale ofperpetual licenses of software products. Maintenance revenue consists primarilyof annual software maintenance and support agreements.

Our operating results are strongly tied to software license revenue.Software license sales generally have a high margin and ultimately drive additionalprofessional services and maintenance revenues. A large portion of our softwarelicense revenue is generated from a small number of relatively large agreements

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executed in the latter partof a quarter. The timing of such large agreements is often unpredictable andimpacted by events beyond our control, therefore making it difficult toforecast software license revenue accurately. Due to the nature of our softwarelicense sales, revenues and profits may vary from quarter to quarter.

Net income for the first quarter of fiscal 2007 increased 40% to$765,000, or $.07 per diluted share, from $546,000, or $.05 per diluted share,for first quarter of the prior year. Increases in revenues from ASP hosting,professional services and maintenance, combined with a reduction in G&Aexpenses, resulted in improved profitability during the first quarter of thecurrent fiscal year.  Partiallyoffsetting these profit improvements were the effects of lower license revenueand increased software amortization and third party license royalties. Our financial position remains strong with$8.9 million of cash on hand and available borrowings under our revolvingcredit facility of $20.0 million at October 31, 2006.

Going forward,business and market uncertainties may affect results. For a discussion of keyfactors that could impact results, please refer to the section entitled “RiskFactors” in our Form 10-K for the year ended July 31, 2006.

**Critical AccountingPolicies and Estimates**

The accompanying “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” isbased upon our consolidated financial statements, which have been prepared inaccordance with GAAP. The preparation of these financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements, and thereported amounts of revenues and expenses during the reported period.  We base our estimates and assumptions onhistorical experiences and various other factors that are believed to bereasonable under the circumstances. These estimates and assumptions areevaluated on an ongoing basis. Actual results may differ from previouslyestimated amounts due to different assumptions or conditions. The followingcritical accounting policies, which involve significant judgments andestimates, are used in the preparation of our consolidated financialstatements:

Revenuerecognition

We derive ourrevenues from the sale of software licenses, annual software maintenance andsupport agreements, professional services and ASP hosting services. Werecognize revenue in accordance with Statement of Position 97-2, “SoftwareRevenue Recognition” and Staff Accounting Bulletin No. 104, “RevenueRecognition” (“SAB 104”). Revenue is recognized when a contract exists, the feeis fixed or determinable, delivery has occurred and collection of thereceivable is deemed probable.

We use theresidual method to recognize revenue from the sale of software licenses thatare bundled with maintenance and support. Under the residual method, the fairvalue of the undelivered element(s) is deferred and the remaining value of thecontract is recognized as revenue. Fair value of an element is based onvendor-specific objective evidence (“VSOE”). VSOE is based on the price chargedwhen the same element is sold separately. We do not generally sell softwarelicenses without selling maintenance and support for the licensed software. Asa result, we have established VSOE only for the undelivered element(s) includedin a multi-element arrangement. VSOE for maintenance and support is based uponprices customers pay to renew maintenance and support agreements. Afterexpiration of the initial maintenance term, maintenance and support agreementsare renewable on an annual basis and include rights to unspecified upgrades,updates and enhancements on a when and if available basis, as well as telephonesupport and bug fixes. Revenue generated from maintenance and support isrecognized ratably over the maintenance term of the agreement. We recorddeferred revenue for maintenance amounts invoiced prior to the performance ofthe related services.

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Our standard software license agreements do notprovide for rights of software return and/or conditions of acceptance. However,in the rare case that acceptance criteria are provided, revenue is deferred andnot recognized until all acceptance provisions are satisfied.  Revenue from software licenses which includea cancellation clause is recognized upon expiration of the cancellationperiod.  License revenue related toproducts still in the testing phase is deferred until formal acceptance of theproduct by the customer.

Professionalservices revenue includes implementation, integration, training and consultingservices relating to new software license sales and consulting with existingcustomers to provide additional services. For new software license sales thatare sold with installation services, the residual method is applied, wherebythe fair value of the services element is deferred along with the fair value ofthe maintenance and support, with the residual value of the contract recognizedas license revenue. The services offered are not essential to the functionalityof the software.  Professional servicesrevenue is generally billed on a time and material basis and is recognized asthe services are performed.

Professional services revenue derived from theinstallation and integration of software packages under a fixed price contractis recognized on a percentage-of-completion basis measured by the relationshipof hours worked to total estimated contract hours.  We follow this method because reasonablydependable estimates of the revenue and contract hours applicable to variouselements of a contract can be made. Since the financial reporting of thesecontracts depends upon estimates which are assessed continually during the termof these contracts, recognized revenue and profit are subject to revisions asthe contract progresses to completion. Revisions in profit estimates arereflected in the period in which the facts that give rise to the revisionsbecome known. Accordingly, favorable changes in estimates result in additionalrevenue recognition and net income, and unfavorable changes in estimates resultin a reduction of recognized revenue and net income. When estimates indicatethat a loss will be incurred on a contract upon completion, a provision for theexpected loss is recorded in the period in which the loss becomes evident.

Revenue from ourASP hosting operations is recognized in accordance with SAB 104, generally on aper transaction basis. ASP hosting agreements are generally one to five yearsin duration and provide for monthly billing based on transaction volume orcontract minimums. Revenue related to the customer’s initial set up andimplementation is deferred and subsequently recognized over the expected termof the ASP hosting agreement.

Allowance for doubtfulaccounts

We maintain an allowancefor doubtful accounts for estimated losses resulting from the inability of ourcustomers to make required payments. We take into consideration the currentfinancial condition of our customers, the specific details of the customeraccounts, the age of the outstanding balance and the current economicenvironment when assessing the adequacy of the allowance.  If the financial condition of our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances might be required.

Softwaredevelopment costs

Software developmentcosts are accounted for in accordance with Statement of Financial AccountingStandards No. 86, “Accounting for the Costs of Computer Software to be Sold,Leased or Otherwise Marketed” (“SFAS 86”). SFAS 86 requires the capitalization of certain software developmentcosts once technological feasibility is established. The capitalized costs arethen amortized on a straight-line basis over the estimated product life, or onthe ratio of current revenues to total projected product revenues, whicheverprovides the greater amortization. Management periodically assesses therealizability of software development costs when events and circumstancesindicate a potential decline in value.

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Business combinations

Upon acquisition of a business, we allocate thepurchase price to tangible assets and liabilities acquired and identifiableintangible assets. Any residual purchase price is recorded as goodwill. Theallocation of the purchase price requires management to make significantestimates in determining the fair values of assets acquired and liabilitiesassumed, especially with respect to intangible assets.  These estimates are based on historical experienceand information obtained from valuation specialists and the management from theacquired company. These estimates can include, but are not limited to,appraisals by valuation specialists, the cash flows that an asset is expectedto generate in the future and the appropriate weighted average cost of capital.Estimates used in determining the fair value of assets acquired and liabilitiesassumed are inherently uncertain and unpredictable. Unanticipated events andcircumstances may occur which may affect the accuracy or validity of such estimates.

Valuation of long-lived and intangible assets andgoodwill

We recognize an impairment charge associated with ourlong-lived assets, including property and equipment, goodwill and otherintangible assets whenever we determine that recovery of such long-lived assetsis not probable.  Such determination ismade in accordance with the applicable GAAP requirement associated with thelong-lived asset, and is based upon, among other things, estimates of theamount of future net cash flows to be generated by the long-lived asset andestimates of the current fair value of the asset.  Adverse changes in future net cash flows orfair value could result in the inability to recover the carrying value of thelong-lived asset, thereby requiring an impairment charge to be recognized andcould have a material adverse impact on our results of operations. We performan impairment analysis in accordance with Statement of Financial AccountingStandard No. 142, “Goodwill and Other Intangible Assets,” annually, during thethird quarter, and whenever events and circumstances indicate that animpairment might be present. Our impairment analysis for our existing goodwillutilizes various assumptions and factors to estimate future cash flows todetermine the fair value of the business. No impairment has been recognized todate; however, if our estimates of cash flow or other factors adversely change,an impairment charge might be recorded in the future.

Deferred taxes and valuation allowance

We recognize deferred tax assets and liabilities basedon the differences between the financial statement carrying amounts and the taxbases of the assets and liabilities. In assessing the realizability of deferredtax assets, management considers whether it is more likely than not that someportion or all of the deferred tax assets will not be realized.  It ispossible that in the future we may change our estimate of the amount of thedeferred income tax assets that will more likely than not be realized, whichwill result in an adjustment to the valuation allowance that would eitherincrease or decrease, as applicable, reported net income in the period suchchange in estimate was made.

Translation of foreign currency

We translate the financial statements of our Europeansubsidiary into U.S. dollars in accordance with Statement of FinancialAccounting Standards No. 52, “Foreign Currency Translation.” Assets andliabilities of our European subsidiary, whose functional currency is other thanthe U.S. dollar, are translated at period-end rates of exchange, and revenuesand expenses are translated at average exchange rates prevailing during theperiod. Gains and losses on foreign currency transactions and the translationof our intercompany loan to a consolidated foreign subsidiary are recognized inother income as incurred.

We account for unrealized gains or losses on ourforeign currency translation adjustments in accordance with Statement ofFinancial Accounting Standards No. 130, “Reporting Comprehensive Income,” whichrequires adjustments to be accumulated in stockholders’ equity as part of othercomprehensive income. Currently, we do not engage in foreign currency hedgingactivities.

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##### ***Historical OperatingResults for the three months ended October 31, 2006 and 2005***

The following table sets forth selected unauditedinterim consolidated statements of operations data expressed in dollars and asa percentage of total revenues for the periods indicated (dollars inthousands):
|                       | ** ** | **Three months ended  October 31,** | ** ** |
|-----------------------|------------|----------------------------------------------------|------------|
| ** **            | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| Revenues              | ** ** | ** **                                         |       |   |   |
| ASP hosting           | ** ** | **$**                                              | **8,218**  |   | $ | 8,048 |   |
| Professional services | ** ** | **5,987**                                          |       | 5,372 |   |
| License               | ** ** | **1,876**                                          |       | 2,035 |   |
| Maintenance           | ** ** | **5,621**                                          |       | 5,363 |   |
| Total revenues        | ** ** | **$**                                              | **21,702** |   | $ | 20,818 |   |

 

Percent relationship to total revenues:
|                             | ** ** | **Three months ended  October 31,** | ** ** |
|-----------------------------|------------|----------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| Revenues                    |       |                                               |       |   |   |
| ASP hosting                 | ** ** | **38**                                             | **%**      | 38 | % |
| Professional services       | ** ** | **28**                                             | ** ** | 26 |   |
| License                     | ** ** | **8**                                              | ** ** | 10 |   |
| Maintenance                 | ** ** | **26**                                             | ** ** | 26 |   |
| Total revenues              | ** ** | **100**                                            | ** ** | 100 |   |
|                        | ** ** | ** **                                         | ** ** |   |   |
| Cost of revenues            | ** ** | ** **                                         | ** ** |   |   |
| ASP hosting                 | ** ** | **34**                                             | ** ** | 35 |   |
| Professional services       | ** ** | **21**                                             | ** ** | 20 |   |
| License                     | ** ** | **7**                                              | ** ** | 6 |   |
| Maintenance                 | ** ** | **1**                                              | ** ** | 2 |   |
| Total cost of revenues      | ** ** | **63**                                             | ** ** | 63 |   |
|                        | ** ** | ** **                                         | ** ** |   |   |
| Gross Profit                | ** ** | **37**                                             | ** ** | 37 |   |
|                        | ** ** | ** **                                         | ** ** |   |   |
| Operating  expenses         | ** ** | ** **                                         | ** ** |   |   |
| Product development         | ** ** | **11**                                             | ** ** | 11 |   |
| Sales and marketing         | ** ** | **12**                                             | ** ** | 12 |   |
| General and administrative  | ** ** | **9**                                              | ** ** | 10 |   |
| Total operating expenses    | ** ** | **32**                                             | ** ** | 33 |   |
|                        | ** ** | ** **                                         | ** ** |   |   |
| Operating income            | ** ** | **5**                                              | ** ** | 4 |   |
| Interest expense            | ** ** | **0**                                              | ** ** | (1 | ) |
| Other income,  net          | ** ** | **1**                                              | ** ** | 1 |   |
|                        | ** ** | ** **                                         | ** ** |   |   |
| Income before  income taxes | ** ** | **6**                                              | ** ** | 4 |   |
| Provision for  income taxes | ** ** | **2**                                              | ** ** | 1 |   |
|                        | ** ** | ** **                                         | ** ** |   |   |
| Net income                  | ** ** | **4**                                              | **%**      | 3 | % |

 

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### ***Comparative analysis ofquarterly results for the three months ended October 31, 2006 and 2005***

#### Revenues

The following table summarizes revenues (in thousands) and the percentchange over the same period of the prior year: 

|                        | ** ** | **Three months ended October 31,** | ** ** |
|------------------------|------------|--------------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                               | ** ** | **2005** | ** ** | **% change** | ** ** |
| ASP hosting            | ** ** | **$**                                                  | **8,218**  |   | $ | 8,048 |   | 2 | % |
| Professional  services | ** ** | **5,987**                                              |       | 5,372 |   | 11 |   |
| License                | ** ** | **1,876**                                              |       | 2,035 |   | (8 | ) |
| Maintenance            | ** ** | **5,621**                                              |       | 5,363 |   | 5 |   |
| Total revenues         | ** ** | **$**                                                  | **21,702** |   | $ | 20,818 |   | 4 | % |

 

Total revenues increased 4%, or $884,000, for thethree months ended October 31, 2006, due to increases in ASP hosting revenue,professional services revenue and maintenance revenue, partially offset by adecrease in license revenue. For the three months ended October 31, 2006, ASPhosting revenue increased $170,000, or 2%. ASP hosting revenue for the currentquarter includes a settlement fee of $270,000 that is attributable to acustomer’s decision to cancel their contract prior to beginning any production,as a result of a change in their business direction. Professional servicesrevenue increased 11%, or $615,000, for the three months ended October 31,2006. Approximately 68% of the increase in professional services revenue wasthe result of a 65% increase in work performed in our EMEA operations. Theremaining increase in professional services revenue was primarily due toimproved billing rates in North America. Maintenance revenue increased 5%, or$258,000, for the three months ended October 31, 2006, primarily due tomaintenance agreements associated with new license sales during the precedingtwelve month period. License revenue declined 8%, or $159,000, for the threemonths ended October 31, 2006, primarily due to a decline in EMEA licensesales.

## Cost of revenues

The following table summarizes cost of revenues (in thousands) and thepercent change over the same period of the prior year: 

|                         | ** ** | **Three months ended October 31,** | ** ** |
|-------------------------|------------|--------------------------------------------------------|------------|
| ** **              | ** ** | **2006**                                               | ** ** | **2005** | ** ** | **% change** | ** ** |
| ASP hosting             | ** ** | **$**                                                  | **7,367**  |   | $ | 7,360 |   | 0 | % |
| Professional  services  | ** ** | **4,531**                                              |       | 4,134 |   | 10 |   |
| License                 | ** ** | **1,440**                                              |       | 1,174 |   | 23 |   |
| Maintenance             | ** ** | **279**                                                |       | 359 |   | (22 | ) |
| Total cost of  revenues | ** ** | **$**                                                  | **13,617** |   | $ | 13,027 |   | 5 | % |

 

*Cost of ASP hosting revenue.*Cost of ASP hosting revenue is composedprimarily of salary and personnel related costs, facility and equipment costsand postage and supplies expense related to our ASP hosting centers.  For the three months ended October 31, 2006,cost of ASP hosting revenue of $7.4 million was consistent with the same periodof the prior year. For the three months ended October 31, 2006 and 2005, costof ASP hosting revenue represented 90% and 91% of ASP hosting revenue,respectively. The decrease in cost as a percentage of ASP hosting revenue isprimarily due to the recognition of $270,000 in ASP hosting revenue associatedwith a customer settlement fee. If the cost as a percentage of ASP hosting revenuewas adjusted to exclude the revenue from the customer settlement fee, the costas a

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percentage of ASP hosting revenue would have been 93%.Compared to the prior year, this increase in cost as a percentage of ASPhosting revenue is largely attributable to a change in the mix of our ASPhosting revenue. We expect the variable components of cost of ASP hostingrevenue will continue to increase as ASP hosting revenue increases.

*Cost of professional servicesrevenue.*Cost ofprofessional services revenue consists of costs incurred in providingimplementation, integration, training and consulting services. For the threemonths ended October 31, 2006, cost of professional services increased 10%, or$397,000, primarily due to an increase in salary and personnel related costs of$167,000 and a $134,000 increase in travel and living expenses. These increasesare largely attributable to additional headcount and travel necessary toaccommodate the increase in revenue. For the three months ended October 31,2006 and 2005, cost of professional services revenue represented 76% and 77% ofprofessional services revenue, respectively. We expect the cost of professionalservices revenue to increase as professional services activities and revenueincrease both domestically and internationally.

*Cost of license revenue. *Cost of license revenue includes amortization ofcapitalized software development costs and royalties paid to thirdparties.  For the three months endedOctober 31, 2006, cost of license revenue increased 23%, or $266,000.Approximately half of this increase is attributable to increased amortizationexpense related to new products recently introduced to the marketplace and theremainder of the increase is attributable to the increases in royalty costsprimarily related to sales of the Forms Integrity Manager product. For thethree months ended October 31, 2006 and 2005, cost of license revenuerepresented 77% and 58% of license revenue, respectively. The increase in costsas a percent of license revenue is due to lower software license sales duringthe first quarter of fiscal 2007 and the increase in software amortization androyalty costs. We anticipate cost of license revenue to increase asamortization of capitalized development costs increases as new products becomegenerally available and if sales of products requiring third party royaltiescontinue to increase.

*Cost of maintenance revenue.*Cost of maintenance revenue consists ofcosts incurred in providing customer telephone and online support. Cost ofmaintenance revenue decreased 22%, or $80,000, for the three months endedOctober 31, 2006, primarily due to a reduction in maintenance staffing that wasenabled by a lower demand for support of our mature legacy products. For thethree months ended October 31, 2006 and 2005, cost of maintenance revenuerepresented approximately 5% and 7% of maintenance revenue, respectively. Thecost of maintenance revenue is expected to increase as salaries and personnelrelated costs increase due to annual merit raises and extending customersupport hours to accommodate certain international customers. However, theincrease in cost of maintenance revenue is expected to be at a slower rate thanthe expected increase in maintenance revenue.

Operatingexpenses

The following table summarizes operating expenses (in thousands) andthe percent change over the same period of the prior year: 
|                             | ** ** | **Three months ended October 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                               | ** ** | **2005** | ** ** | **% change** | ** ** |
| Product  development        | ** ** | **$**                                                  | **2,283**  |   | $ | 2,193 |   | 4 | % |
| Sales and  marketing        | ** ** | **2,618**                                              |       | 2,569 |   | 2 |   |
| General and  administrative | ** ** | **2,032**                                              |       | 2,155 |   | (6 | ) |
| Total operating  expenses   | ** ** | **$**                                                  | **6,933**  |   | $ | 6,917 |   | 0 | % |

 

*Product development.*Product developmentexpense consists primarily of costs associated with developing new productsprior to establishing technological feasibility, enhancing existing products,testing software products and developing product documentation. For the threemonths ended October 31, 2006, product development expense increased 4%, or$90,000, primarily due to approximately

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$250,000of severance expense related to staff reductions, partially offset by anincrease in capitalization of software development costs. The staff reductionswere made in response to a decrease in requirements for continuing developmentand hotline call support for legacy products. In a further effort to reduceproduct development costs and improve synergies within our product developmentorganization, subsequent to the end of the quarter, we decided to relocatecertain product development staff in Maryland to our office in Atlanta and toclose our Maryland office facility, as the facility lease expires in December2006. We expect to incur severance and relocation costs in the range of$600,000 to $1.1 million during the current fiscal year. Finalization of thesetransition plans are expected to be concluded by January 31, 2007.

*Sales and marketing*.Sales and marketing expense consists primarily of salaries and personnelrelated costs, incentive compensation and costs associated with marketingprograms. Sales and marketing expense were relatively flat increasing 2%, or$49,000, for the three months ended October 31, 2006.

*General and administrative*. General andadministrative expense consists primarily of salary and personnel related costsfor accounting, human resources, legal and information technology, as well asoutside legal, accounting and other services. General and administrativeexpense decreased 6%, or $123,000, for the three months ended October 31, 2006,primarily due to a decrease in accounting fees associated with lower audit,Sarbanes-Oxley compliance and annual report costs.

*Lease abandonment.*At July 31, 2006, we had $1.3 million of obligations associatedwith abandoned leased facilities. During the three months ended October 31,2006, we made payments of approximately $163,000 for these obligations. AtOctober 31, 2006, our remaining obligations associated with abandoned leasedfacilities were approximately $1.1 million, net of an anticipated recovery fromestimated sublease activity.

Interestexpense

For thethree months ended October 31, 2006, interest expense decreased $43,000,primarily due to principal payments made to reduce our outstanding bank debt.

Otherincome, net

Otherincome, net increased $36,000 for the first quarter ended October 31, 2006,primarily due to an increase in interest income generated by higher interestrates.

Provisionfor income taxes

Theeffective tax rate for the three months ended October 31, 2006 and 2005 was37.5% and 37.0%, respectively. For the first quarter, the rate differs from thefederal statutory rate due primarily to the state tax accrual rate and certainrecurring permanent differences. We expect our effective rate for fiscal 2007to be consistent with fiscal 2006.

TheInternal Revenue Service (“IRS”) has completed their examination of our taxyears ended July 31, 2002 and 2000 and issued a notice of proposed adjustmentfor transfer pricing issues impacting intercompany interest and royalty income.Although these proposed adjustments would increase our U.S. taxable income forthese tax years, we vigorously disagree with the proposed adjustments and areaggressively contesting these matters through applicable IRS and judicialprocesses, as appropriate. We have filed a written protest to these proposedadjustments thereby requesting an appeals conference with the IRS Office ofAppeals. As of October 31, 2006, we concluded that the potential loss was notprobable. With respect to the tax years under audit, the potential exposure rangesbetween $0 and $443,000, excluding interest and penalties.

Assurancecannot be given that these tax matters will be resolved in our favor in view ofthe inherent uncertainties involved in settlement initiatives and taxproceedings. Further, an unfavorable settlement

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mayresult in additional exposure for other open tax years. An unfavorableresolution of these tax matters may also have a material adverse impact on ourconsolidated financial position and results of operations.

**Liquidity and Capital Resources**

At October 31, 2006, our principal sources ofliquidity consisted of cash and cash equivalents of $8.9 million and ourrevolving credit facility, which had available borrowings of $20 million. Cashand cash equivalents for the three months ended October 31, 2006, decreased$909,000 from $9.8 million at July 31, 2006.

Cash provided by operating activities was $1.8 millionand $3.4 million for the three months ended October 31, 2006 and 2005,respectively. Significant changes in assets and liabilities for the threemonths ended October 31, 2006 that impacted cash flow from operations includeda decrease in accounts payable and accrued liabilities of $699,000 and$193,000, respectively primarily due to payments made during the quarter.

During the three monthsended October 31, 2006 and 2005, cash used in investing activities was $2.2million and $1.6 million, respectively. Cash used for the purchase of propertyand equipment was $799,000 and $363,000 for the three months ended October 31,2006 and 2005, respectively. Cash used in the investment of capitalizedsoftware development costs was $1.4 million and $1.3 million for the threemonths ended October 31, 2006 and 2005, respectively.

Cash used in financing activities was $576,000 and$923,000 for the three months ended October 31, 2006 and 2005, respectively.Cash used in financing activities during the three months ended October 31,2006, primarily related to principal payments made under our debt and leaseobligations of $903,000 and $461,000, respectively, partially offset byproceeds of $544,000 received from the exercise of stock options.

In December 2002, we entered into various capitallease arrangements for the rental of computer equipment at our ASP hostingfacilities in the aggregate amount of $3.2 million.  The lease agreements require monthly paymentsof principal and interest of approximately $65,000 and expire in December 2007.

With the acquisition of Newbridge in September 2004,we assumed several capital lease obligations in the aggregate amount of $2.3million.  These leases require monthlypayments of principal and interest of approximately $51,000 and expire atvarying dates over the next two years.

On June 3, 2003, we repurchased 3.1 million shares ofour Common Stock along with warrants to purchase approximately 161,000 ofadditional shares of Common Stock from Safeguard Scientifics, Inc. (“Safeguard”)and a former officer of Safeguard for $5.95 per share. In connection with therepurchase, we entered into a $14.2 million bank term note, of which $2.4million was outstanding at October 31, 2006. The bank term note bears interest at a fixed annual rate of 3.32% and isrepayable in equal monthly installments over four years.

As of October 31, 2006, we held approximately 4.9million shares of treasury stock at an average per share cost of $5.59. InMarch 2006, we amended the stock repurchase program to authorize the repurchaseof up to 1.0 million additional shares of Common Stock. At October 31, 2006,4,000 shares have been repurchased under the amended program. Since inceptionof our stock repurchase program in fiscal 1999, we have repurchasedapproximately 9.8 million shares of stock at an average purchase price of$5.39. Our Board of Directors believes the repurchase program is an appropriatemeans of increasing shareholder value.

At October 31, 2006, we have a $20 million revolvingcredit facility from Comerica Bank, which expires on November 1, 2009. Thecredit facility bears interest at the bank’s prime rate less 100 basis pointsor LIBOR rate of interest plus 150 basis points, and is collateralized bysubstantially all of our assets. As of

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October 31, 2006, there were no borrowings under thiscredit facility. Under our bank term note and credit facility, we are requiredto maintain certain financial and non-financial covenants. Based on thefinancial covenants, availability of funds under our revolving bank creditfacility was $20.0 million at October 31, 2006.

Our liquidity needs are expected to arise primarilyfrom the repayment of debt, payments of obligations under leases, funding thecontinued development activities, including severance and relocation costs,potential purchases of our Common Stock, enhancements and support of oursoftware offerings and sales and marketing costs associated with expansion innew vertical and international markets. A portion of our cash or borrowingsunder our revolving credit facility could be used to acquire complementarybusinesses or obtain the right to use complementary technologies.

Our liquidity could be negatively impacted by adecrease in demand for our products, which are subject to rapid technologychanges, reduction in capital expenditures by our customers and intensecompetition, among other factors. Operating leases are our only off balance sheetarrangements.

We currently anticipatethat existing cash and cash equivalents, together with cash generated fromoperations and available borrowings under our credit facility, will besufficient to satisfy our operating cash needs for the next 12 months.

**Recently issuedaccounting guidance**

In July 2006, the Financial Accounting Standards Board(“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), whichprescribes accounting for and disclosure of uncertainty in tax positions. FIN48 defines the criteria that must be met for the benefits of a tax position tobe recognized. The provisions of FIN 48 are effective for fiscal yearsbeginning after December 15, 2006, which is our fiscal 2008. We may need torecord an obligation under FIN 48 associated with the transfer pricing issuesimpacting our 2002 and 2000 tax years, however, no amount has been determined.We are evaluating other potential impacts of this interpretation on our futureresults of operations and financial condition.

On September 13, 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, “Considering the Effectsof Prior Year Misstatements When Quantifying Misstatements in Current YearFinancial Statements” (“SAB 108”), which provides consistency between howregistrants quantify financial statement misstatements. SAB 108 allowscompanies to either (1) retroactively adjust prior financial statements as ifan adjustment had always been recorded or (2) record the cumulative effect ofinitially applying an adjustment to the carrying values of assets andliabilities as of August 1, 2006 with a offsetting adjustment recorded to theopening balance of retained earnings. We will apply the interpretive guidancecontained in SAB 108 during the fourth quarter of our fiscal 2007. Upon theinitial application of SAB 108, we expect to record an increase for deferredrent in other long term liabilities of $2.2 million and in increase in propertyand equipment of $2.2 million. We are still evaluating other potential impactsof SAB 108 on our future results of operations and financial condition. Theaccompanying financial statements do not reflect any adjustment for SAB 108.

From time to time, new accounting pronouncements areissued by the Financial Accounting Standards Board or other standard settingbodies which we adopt as of the specified effective date. Unless otherwisediscussed, we believe the impact of recently issued standards which are not yeteffective will not have a material impact on our consolidated financialstatements upon adoption.

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**Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk**

We have no derivativefinancial instruments. We invest our cash and cash equivalents in investmentgrade, highly liquid investments, consisting of money market instruments andcommercial paper. We have fixed rate debt instruments of $2.6 million as ofOctober 31, 2006.

We are exposed tomarket risk arising from changes in foreign currency exchange rates as a resultof selling our products and services outside the U.S. (principallyEurope).  A portion of our salesgenerated from our non-U.S. operations are denominated in currencies other thanthe U.S. dollar, principally British pounds. Consequently, the translated U.S. dollar value of our non-U.S. sales,operating results and cash flows are subject to currency exchange ratefluctuations, which may favorably or unfavorably impact reported earnings andmay affect comparability of period-to-period operating results.

For the threemonths ended October 31, 2006 and 2005, 7% and 6%, respectively, of ourrevenues were denominated in British pounds. For the three months ended October31, 2006 and 2005, 10% and 7% of our costs of revenue and operating expenseswere denominated in British pounds. Historically, transactional gains andlosses from the effect of fluctuations in currency exchange rates have not hada material impact on our operations; however, there can be no guarantees thatit will not have a material impact in the future.  The exposure to fluctuations in currencyexchange rates will increase as we expand our operations outside the U.S.

## **Item 4. Controls and Procedures**

**Evaluationof disclosure controls and procedures**

Our management, withparticipation of our Principal Executive Officer and Principal FinancialOfficer, evaluated the effectiveness of our disclosure controls and procedures(as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of1934) as of the end of the period covered by this report.  Based on this evaluation, the PrincipalExecutive Officer and Principal Financial Officer concluded that, as of the endof the period covered by this report, our disclosure controls and procedureswere effective as defined in Rule 13a-15(e) and 15d-15(e).

**Internalcontrol over financial reporting**

Therewere no changes in our internal control over financial reporting during theperiod ended October 31, 2006, that materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

## **PART II - OTHER INFORMATION**

**Item 1. Legal Proceedings**

We areoccasionally involved in legal proceedings and other claims arising out of ouroperations in the normal course of business. No such claims are expected,individually or in the aggregate, to have a material adverse effect on ourconsolidated financial statements.

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**Item 6. Exhibits**
| 31.1   | – | Certification  pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                             |
| 31.2   | – | Certification  pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                |
|   |   |                                                                                                                             |
| 32.1   | – | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes – Oxley Act of 2002. |
|   |   |                                                                                                                             |
| 32.2   | – | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002.  |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
| Docucorp International, Inc.           |   |   |   |   |
|----------------------------------------|--------|--------|--------|--------|
| (Registrant)                           |   |   |   |   |
|                                   |   |   |   |   |
|                                   |   |   |   |   |
| /s/ MICHAEL D.  ANDERECK               |   |   |   | Date   |   December 5, 2006 |
| Michael D.  Andereck                   |   |   |   |   |
| President and Chief  Executive Officer |   |   |   |   |

 

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