##### Table of Contents



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, 2003 |  | Commission File Number: 00-1033864

DOCUCORP INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


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

| |                                                         |  |  |            | 
| | ------------------------------------------------------- |  |  | ---------- | 
| | 5910 North Central Expressway, Suite 800, Dallas, Texas |  |  | 75206      | 
| |                                                         |  |  |            | 
| | (Address of principal executive offices)                |  |  | (Zip Code) | 

(214) 891-6500

(Registrants telephone number including area code)


Not applicable

(Former name, former address 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 Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No []

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

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date: Common Stock, $.01 par
value, 9,920,683 shares outstanding as of December 5, 2003.





---

TABLE OF CONTENTS



|                                                 |                                                                                               |                                                                        |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- |  |  |  |  |  | 
|                                                 |                                                                                               | Consolidated Balance Sheets                                           
|                                                 |                                                                                               | Interim Consolidated Statements of Operations and Comprehensive Income
|                                                 |                                                                                               | Interim Consolidated Statements of Cash Flows                         
|                                                 |                                                                                               | 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 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                      
|EX-31.1 Certification Pursuant to Rule 13a-14(a)
|EX-31.2 Certification Pursuant to Rule 13a-14(a)
|EX-32.1 Certification Pursuant to Section 906   
|EX-32.2 Certification Pursuant to Section 906   



---



##### Table of Contents



Docucorp International, Inc.
Table of Contents
Quarterly Report on Form 10-Q
October 31, 2003

|                                                                                              |                                                                                                                             |                                |    |      |  | 
|--------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | -- | ---- |  | 
|                                                                                              |                                                                                                                             |                                |    | Page
|                                                                                              |                                                                                                                             |                                |    |     
|                                                                                              |                                                                                                                             | PART I  FINANCIAL INFORMATION |    |      |  | 
|Item 1. Financial Statements (Unaudited)                                                      |                                                                                                                             |                                |    |     
|                                                                                              | Consolidated Balance Sheets as of October 31, 2003 and July 31, 2003                                                        |                                |    | 2    | 
|                                                                                              | Interim Consolidated Statements of Operations and Comprehensive
Income for the three months ended October 31, 2003 and 2002 |                                |    | 3    | 
|                                                                                              | Interim Consolidated Statements of Cash Flows for the three months
ended October 31, 2003 and 2002                          |                                |    | 4    | 
|                                                                                              | Notes to Interim Consolidated Financial Statements                                                                          |                                |    | 5    | 
|Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                                             |                                | 12 |     
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                                             |                                | 19 |     
|Item 4. Controls and Procedures                                                               |                                                                                                                             |                                | 20 |     
|                                                                                              |                                                                                                                             | PART II  OTHER INFORMATION    |    |      |  | 
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                             |                                | 21 |     
|Signatures                                                                                    |                                                                                                                             |                                | 22 |     





---



##### Table of Contents






Docucorp International, Inc.
Consolidated Balance Sheets
(In thousands except share and per share amounts)
(Unaudited)

|                                     |                                                                                    |                                                                                       |                                            |        |             |        |          |        |         |        | 
|------------------------------------ | ---------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ----------- | ------ | -------- | ------ | ------- | ------ | 
|                                     |                                                                                    |                                                                                       |                                            |        | October 31, |        | July 31,
|                                     |                                                                                    |                                                                                       |                                            |        | 2003        |        | 2003    
|                                     |                                                                                    |                                                                                       |                                            |        |             |        |         
|Assets                               |                                                                                    |                                                                                       |                                            |        |             |        |          |       
|                                     | Current assets:                                                                    |                                                                                       |                                            |        |             |        |          |        |        
|                                     |                                                                                    | Cash and cash equivalents                                                             |                                            | $      | 6,102       |        |          | $      | 7,269   |       
|                                     |                                                                                    | Accounts receivable, net of allowance
of $457 and $562, respectively                  |                                            |        | 17,450      |        |          |        | 16,023  |       
|                                     |                                                                                    | Current portion of deferred taxes                                                     |                                            |        | 83          |        |          |        | 83      |       
|                                     |                                                                                    | Income tax receivable                                                                 |                                            |        | 1,074       |        |          |        | 1,074   |       
|                                     |                                                                                    | Other current assets                                                                  |                                            |        | 2,452       |        |          |        | 2,956   |       
|                                     |                                                                                    |                                                                                       |                                            |        |             |        |          |        |         |       
|                                     |                                                                                    |                                                                                       | Total current assets                       |        |             | 27,161 |          |        |         | 27,405 | 
|                                     | Fixed assets, net of accumulated depreciation
of $14,066 and $13,359, respectively |                                                                                       |                                            | 9,588  |             |        |          | 10,031 |        
|                                     | Software, net of accumulated amortization
of $19,703 and $19,286, respectively     |                                                                                       |                                            | 10,307 |             |        |          | 9,567  |        
|                                     | Goodwill, net of accumulated amortization of $4,940                                |                                                                                       |                                            | 5,846  |             |        |          | 5,846  |        
|                                     | Other assets                                                                       |                                                                                       |                                            | 597    |             |        |          | 591    |        
|                                     |                                                                                    |                                                                                       |                                            |        |             |        |          |       
|                                     |                                                                                    |                                                                                       | Total assets                               |        | $           | 53,499 |          |        | $       | 53,440 | 
|                                     |                                                                                    |                                                                                       |                                            |        |             |        |          |       
|Liabilities and stockholders equity |                                                                                    |                                                                                       |                                            |        |             |        |          |       
|                                     | Current liabilities:                                                               |                                                                                       |                                            |        |             |        |          |        |        
|                                     |                                                                                    | Accounts payable                                                                      |                                            | $      | 1,588       |        |          | $      | 1,644   |       
|                                     |                                                                                    | Accrued liabilities                                                                   |                                            |        | 4,150       |        |          |        | 5,038   |       
|                                     |                                                                                    | Income taxes payable                                                                  |                                            |        | 1,283       |        |          |        | 423     |       
|                                     |                                                                                    | Current portion of capital lease obligations                                          |                                            |        | 592         |        |          |        | 582     |       
|                                     |                                                                                    | Current portion of long-term debt                                                     |                                            |        | 3,550       |        |          |        | 3,550   |       
|                                     |                                                                                    | Deferred revenue                                                                      |                                            |        | 11,788      |        |          |        | 12,482  |       
|                                     |                                                                                    |                                                                                       |                                            |        |             |        |          |        |         |       
|                                     |                                                                                    |                                                                                       | Total current liabilities                  |        |             | 22,951 |          |        |         | 23,719 | 
|                                     | Deferred taxes                                                                     |                                                                                       |                                            | 2,003  |             |        |          | 2,003  |        
|                                     | Long-term capital lease obligations                                                |                                                                                       |                                            | 2,189  |             |        |          | 2,342  |        
|                                     | Long-term debt                                                                     |                                                                                       |                                            | 9,467  |             |        |          | 10,354 |        
|                                     | Other long-term liabilities                                                        |                                                                                       |                                            | 1,423  |             |        |          | 1,290  |        
|                                     | 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                                                            |                                            |        | 45,531      |        |          |        | 45,466  |       
|                                     |                                                                                    | Treasury stock at cost, 6,721,666 and 6,811,374 shares, respectively                  |                                            |        | (37,367     | )      |          |        | (37,865 | )     
|                                     |                                                                                    | Retained earnings                                                                     |                                            |        | 7,503       |        |          |        | 6,266   |       
|                                     |                                                                                    | Foreign currency translation adjustment                                               |                                            |        | (367        | )      |          |        | (301    | )     
|                                     |                                                                                    |                                                                                       |                                            |        |             |        |          |        |         |       
|                                     |                                                                                    |                                                                                       | Total stockholders equity                 |        |             | 15,466 |          |        |         | 13,732 | 
|                                     |                                                                                    |                                                                                       |                                            |        |             |        |          |        |         |       
|                                     |                                                                                    |                                                                                       | Total liabilities and stockholders equity |        | $           | 53,499 |          |        | $       | 53,440 | 
|                                     |                                                                                    |                                                                                       |                                            |        |             |        |          |        |         |       

See accompanying notes to interim consolidated financial statements.

2



---



##### Table of Contents






Docucorp International, Inc.
Interim Consolidated Statements of Operations and Comprehensive Income
(In thousands except per share amounts)
(Unaudited)

|                                            |                                                     |                            |                          |     |                    |        |        |    |       |        | 
|------------------------------------------- | --------------------------------------------------- | -------------------------- | ------------------------ | --- | ------------------ | ------ | ------ | -- | ----- | ------ | 
|                                            |                                                     |                            |                          |     | Three months ended
|                                            |                                                     |                            |                          |     | October 31,       
|                                            |                                                     |                            |                          |     |                   
|                                            |                                                     |                            |                          |     | 2003               |        | 2002  
|                                            |                                                     |                            |                          |     |                    |        |       
|Revenues                                    |                                                     |                            |                          |     |                    |        |        |   
|                                            |                                                     | ASP hosting                |                          | $   | 5,757              |        |        | $  | 5,208 |       
|                                            |                                                     | Professional services      |                          |     | 5,143              |        |        |    | 5,793 |       
|                                            |                                                     | License                    |                          |     | 2,667              |        |        |    | 2,100 |       
|                                            |                                                     | Maintenance                |                          |     | 5,338              |        |        |    | 5,036 |       
|                                            |                                                     |                            |                          |     |                    |        |        |   
|                                            |                                                     |                            | Total revenues           |     |                    | 18,905 |        |    |       | 18,137 | 
|Cost of revenues                            |                                                     |                            |                          |     |                    |        |        |   
|                                            |                                                     | ASP hosting                |                          |     | 4,680              |        |        |    | 4,460 |       
|                                            |                                                     | Professional services      |                          |     | 4,100              |        |        |    | 4,377 |       
|                                            |                                                     | License                    |                          |     | 726                |        |        |    | 761   |       
|                                            |                                                     | Maintenance                |                          |     | 314                |        |        |    | 434   |       
|                                            |                                                     |                            |                          |     |                    |        |        |   
|                                            |                                                     |                            | Total cost of revenues   |     |                    | 9,820  |        |    |       | 10,032 | 
|                                            |                                                     |                            |                          |     |                    |        |        |   
|Gross profit                                |                                                     |                            | 9,085                    |     |                    |        | 8,105  |   
|                                            |                                                     |                            |                          |     |                    |        |        |   
|Operating expenses                          |                                                     |                            |                          |     |                    |        |        |   
|                                            |                                                     | Product development        |                          |     | 2,061              |        |        |    | 1,830 |       
|                                            |                                                     | Sales and marketing        |                          |     | 2,835              |        |        |    | 2,678 |       
|                                            |                                                     | General and administrative |                          |     | 1,686              |        |        |    | 1,658 |       
|                                            |                                                     |                            |                          |     |                    |        |        |   
|                                            |                                                     |                            | Total operating expenses |     |                    | 6,582  |        |    |       | 6,166  | 
|                                            |                                                     |                            |                          |     |                    |        |        |   
|Operating income                            |                                                     |                            | 2,503                    |     |                    |        | 1,939  |   
|Other income (expense), net                 |                                                     |                            | (26                      | )   |                    |        | 4      |   
|                                            |                                                     |                            |                          |     |                    |        |        |   
|Income before income taxes                  |                                                     |                            | 2,477                    |     |                    |        | 1,943  |   
|Provision for income taxes                  |                                                     |                            | 1,028                    |     |                    |        | 750    |   
|                                            |                                                     |                            |                          |     |                    |        |        |   
|Net income                                  |                                                     | $                          | 1,449                    |     |                    | $      | 1,193  |   
|                                            |                                                     |                            |                          |     |                    |        |        |   
|Other comprehensive income (loss):          |                                                     |                            |                          |     |                    |        |        |   
|                                            | Foreign currency translation adjustment, net of tax |                            |                          | (66 | )                  |        |        | (9 | )    
|                                            |                                                     |                            |                          |     |                    |        |        |   
|Comprehensive income                        |                                                     | $                          | 1,383                    |     |                    | $      | 1,184  |   
|                                            |                                                     |                            |                          |     |                    |        |        |   
|Basic net income per share                  |                                                     | $                          | 0.15                     |     |                    | $      | 0.09   |   
|                                            |                                                     |                            |                          |     |                    |        |        |   
|Weighted average basic shares outstanding   |                                                     |                            | 9,826                    |     |                    |        | 13,535 |   
|                                            |                                                     |                            |                          |     |                    |        |        |   
|Diluted net income per share                |                                                     | $                          | 0.13                     |     |                    | $      | 0.08   |   
|                                            |                                                     |                            |                          |     |                    |        |        |   
|Weighted average diluted shares outstanding |                                                     |                            | 10,905                   |     |                    |        | 15,296 |   
|                                            |                                                     |                            |                          |     |                    |        |        |   

See accompanying notes to interim consolidated financial statements.

3



---



##### Table of Contents






Docucorp International, Inc.
Interim Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

|                                                 |                                                                                   |                                               |                                             |                                           |     |                    |        |        |     |      |        |  
|------------------------------------------------ | --------------------------------------------------------------------------------- | --------------------------------------------- | ------------------------------------------- | ----------------------------------------- | --- | ------------------ | ------ | ------ | --- | ---- | ------ | -
|                                                 |                                                                                   |                                               |                                             |                                           |     | Three months ended
|                                                 |                                                                                   |                                               |                                             |                                           |     | October 31,       
|                                                 |                                                                                   |                                               |                                             |                                           |     |                   
|                                                 |                                                                                   |                                               |                                             |                                           |     | 2003               |        | 2002  
|                                                 |                                                                                   |                                               |                                             |                                           |     |                    |        |       
|Cash flows from operating activities             |                                                                                   |                                               |                                             |                                           |     |                    |        |       
|                                                 | Net income                                                                        |                                               | $                                           | 1,449                                     |     |                    | $      | 1,193  |    
|                                                 | Adjustments to reconcile net income to
net cash provided by operating activities: |                                               |                                             |                                           |     |                    |        |        |    
|                                                 |                                                                                   | Depreciation                                  |                                             |                                           | 880 |                    |        |        | 700 |     
|                                                 |                                                                                   | Amortization of capitalized software          |                                             |                                           | 627 |                    |        |        | 765 |     
|                                                 |                                                                                   | Provision for doubtful accounts               |                                             |                                           | 67  |                    |        |        | 66  |     
|                                                 |                                                                                   | Other                                         |                                             |                                           | 3   |                    |        |        | 0   |     
|                                                 |                                                                                   | Tax benefit related to stock option exercises |                                             |                                           | 111 |                    |        |        | 763 |     
|                                                 |                                                                                   | Changes in assets and liabilities:            |                                             |                                           |     |                    |        |        |     |     
|                                                 |                                                                                   |                                               | (Increase) decrease in accounts receivable  |                                           |     | (1,447             | )      |        |     | 123  |       
|                                                 |                                                                                   |                                               | Decrease in other assets                    |                                           |     | 514                |        |        |     | 39   |       
|                                                 |                                                                                   |                                               | Decrease in accounts payable                |                                           |     | (60                | )      |        |     | (146 | )     
|                                                 |                                                                                   |                                               | Decrease in accrued liabilities             |                                           |     | (910               | )      |        |     | (987 | )     
|                                                 |                                                                                   |                                               | Increase (decrease) in income taxes payable |                                           |     | 860                |        |        |     | (623 | )     
|                                                 |                                                                                   |                                               | Decrease in deferred revenue                |                                           |     | (723               | )      |        |     | (598 | )     
|                                                 |                                                                                   |                                               | Increase (decrease) in other liabilities    |                                           |     | 131                |        |        |     | (71  | )     
|                                                 |                                                                                   |                                               |                                             |                                           |     |                    |        |        |    
|                                                 |                                                                                   |                                               |                                             | Total adjustments                         |     |                    | 53     |        |     |      | 31     |  
|                                                 |                                                                                   |                                               |                                             |                                           |     |                    |        |       
|                                                 |                                                                                   |                                               |                                             | Net cash provided by operating activities |     |                    | 1,502  |        |     |      | 1,224  |  
|                                                 |                                                                                   |                                               |                                             |                                           |     |                    |        |       
|Cash flows from investing activities             |                                                                                   |                                               |                                             |                                           |     |                    |        |       
|                                                 | Purchase of short-term investments                                                |                                               |                                             | 0                                         |     |                    |        | (4,012 | )  
|                                                 | Sale of short-term investments                                                    |                                               |                                             | 0                                         |     |                    |        | 3,980  |    
|                                                 | Purchase of fixed assets                                                          |                                               |                                             | (420                                      | )   |                    |        | (542   | )  
|                                                 | Capitalized software development costs                                            |                                               |                                             | (1,367                                    | )   |                    |        | (985   | )  
|                                                 |                                                                                   |                                               |                                             |                                           |     |                    |        |        |    
|                                                 |                                                                                   |                                               |                                             | Net cash used in investing activities     |     |                    | (1,787 | )      |     |      | (1,559 | )
|                                                 |                                                                                   |                                               |                                             |                                           |     |                    |        |       
|Cash flows from financing activities             |                                                                                   |                                               |                                             |                                           |     |                    |        |       
|                                                 | Principal payments under capital lease obligations                                |                                               |                                             | (143                                      | )   |                    |        | 0      |    
|                                                 | Principal payments under term note                                                |                                               |                                             | (887                                      | )   |                    |        | 0      |    
|                                                 | Proceeds from exercise of stock options                                           |                                               |                                             | 235                                       |     |                    |        | 1,141  |    
|                                                 | Purchase of treasury stock                                                        |                                               |                                             | 0                                         |     |                    |        | (2,729 | )  
|                                                 |                                                                                   |                                               |                                             |                                           |     |                    |        |       
|                                                 |                                                                                   |                                               |                                             | Net cash used in financing activities     |     |                    | (795   | )      |     |      | (1,588 | )
|                                                 |                                                                                   |                                               |                                             |                                           |     |                    |        |       
|Effect of exchange rates on cash flows           |                                                                                   |                                               | (87                                         | )                                         |     |                    | 4      |       
|                                                 |                                                                                   |                                               |                                             |                                           |     |                    |        |       
|Net decrease in cash and cash equivalents        |                                                                                   |                                               | (1,167                                      | )                                         |     |                    | (1,919 | )     
|Cash and cash equivalents at beginning of period |                                                                                   |                                               | 7,269                                       |                                           |     |                    | 9,733  |       
|                                                 |                                                                                   |                                               |                                             |                                           |     |                    |        |       
|Cash and cash equivalents at end of period       |                                                                                   | $                                             | 6,102                                       |                                           |     | $                  | 7,814  |       
|                                                 |                                                                                   |                                               |                                             |                                           |     |                    |        |       

See accompanying notes to interim consolidated financial statements.

4



---



##### Table of Contents






Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements
(Unaudited)

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

The accompanying unaudited interim consolidated financial statements of
Docucorp International, Inc. and its wholly owned subsidiaries (Docucorp or
the Company) for the three month periods ended October 31, 2003 and 2002 have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The financial information presented should
be read in conjunction with our annual consolidated financial statements for
the year ended July 31, 2003. The foregoing unaudited interim consolidated
financial statements reflect all adjustments (all of which are of a normal
recurring nature), which are, in the opinion of management, necessary for a
fair presentation of the results of the interim periods, and include the
accounts of Docucorp and our wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Operating results for the three months ended October 31, 2003 are not
necessarily indicative of the results to be expected for the year. Certain
prior year amounts have been reclassified to conform to the current year
presentation.

Revenue recognition

We recognize revenue in accordance with Statement of Position 97-2, Software
Revenue Recognition and Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements (SAB 101). Revenues are derived from the
sale of software licenses, annual software maintenance and support agreements,
professional services and ASP hosting services. Revenue is recognized when a
contract exists, the fee is fixed or determinable, software delivery has
occurred and collection of the receivable is deemed probable.

We use the residual method to recognize revenue from the sale of software
licenses that are bundled with maintenance and support. Under the residual
method, the fair value of the undelivered element(s) is deferred and the
remaining portion of the arrangement fee is recognized as revenue. Fair value
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. We do not
generally sell software licenses without selling maintenance and support for
the licensed software. Therefore, we have established VSOE only for the
undelivered element(s) included in a multi-element arrangement. Specifically,
VSOE for maintenance and support is based upon the price a customer pays to
renew its maintenance and support agreement. After expiration of the initial
maintenance term, maintenance and support agreements are renewable on an annual
basis and include rights to upgrades, when and if available, telephone support,
updates, enhancements and bug fixes. Revenue generated from maintenance and
support is recognized ratably over the maintenance term of the agreement. We
record deferred revenue for maintenance amounts invoiced prior to the
performance of the related services.

Our standard license agreements do not provide for rights of software return
and/or conditions of acceptance. However, in the rare case that acceptance
criteria are provided, revenue is deferred and not recognized until all
acceptance provisions are satisfied. Revenue from software licenses, which
include a cancellation clause, is recognized upon expiration of the
cancellation period. Revenue related to products still in the testing phase is
deferred until formal acceptance of the product by the customer.

5



---



##### Table of Contents



Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)

Professional services revenue includes implementation, integration, training
and consulting services related to our software products. The services offered
are not essential to the functionality of the software. Professional services
revenue is generally recognized as the services are performed.

Revenue derived from the installation and integration of software packages
under a fixed price contract is recognized on a percentage-of-completion basis
measured by the relationship of hours worked to total estimated contract hours.
We follow this method because reasonably dependable estimates of the revenue
and contract hours applicable to various elements of a contract can be made.
Since the financial reporting of these contracts depends upon estimates, which
are assessed continually during the term of these contracts, recognized revenue
and profit are subject to revisions as the contract progresses to completion.
Revisions in profit estimates are reflected in the period in which the facts
that give rise to the revisions become known. Accordingly, favorable changes in
estimates result in additional revenue recognition and net income, and
unfavorable changes in estimates result in a reduction of recognized revenue
and net income. When estimates indicate that a loss will be incurred on a
contract upon completion, a provision for the expected loss is recorded in the
period in which the loss becomes evident.

Revenue from our ASP hosting operations is recognized in accordance with SAB
101, generally on a per transaction basis. ASP hosting agreements are generally
one-to-five years in duration and provide for monthly billing based on
transaction volume or contract minimums, if applicable. Revenue related to the
customers initial set up and implementation is deferred and subsequently
recognized over the expected term of the ASP hosting agreement.

Cash equivalents

We consider all highly liquid investments purchased with an original maturity
of three months or less to be cash equivalents. Cash equivalents are stated at
cost, which approximates fair market value.

Accounts receivable

Included in accounts receivable are unbilled amounts, which have been
recognized as revenue under the percentage-of-completion method or upon
execution of the software license contract and shipment of the software, but
prior to contractual payment terms.

Allowance for doubtful accounts

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

Fixed assets, depreciation and amortization

Property and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed over the estimated
service lives using the straight-line method. Estimated service lives are as
follows:

6



---



##### Table of Contents



Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)

|                               |  |                                       
|------------------------------ |  | --------------------------------------
|Leasehold improvements         |  | Lesser of useful life or life of lease
|Computer equipment             |  | 4-5 years                             
|Furniture and fixtures         |  | 5 years                               
|Equipment under capital leases |  | 5 years                               

Repairs and maintenance are expensed as incurred. Major renewals and
betterments are capitalized and depreciated over the assets remaining
estimated service lives. Upon retirement or sale of an asset, the cost and
accumulated depreciation are removed from the accounts with any resulting gain
or loss included in income.

Software

Software development costs are accounted for in accordance with either
Statement of Financial Accounting Standards No. 86, Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed, or with AICPA
Statement of Position No. 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. For software to be sold, after the
technological feasibility of the software has been established, material
software development costs, which include salaries and personnel-related costs
incurred in the development activities are capitalized. Research and
development costs incurred prior to the establishment of the technological
feasibility of a product are expensed as incurred. The cost of capitalized
software is amortized on a straight-line basis over its estimated useful life,
generally four to six years, or the ratio of current revenues to current and
anticipated revenues from the software, whichever provides the greater
amortization.

Goodwill

In accordance with Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective
August 1, 2001, we no longer amortize goodwill, but rather test it annually for
impairment. Goodwill is also reviewed for impairment at other times during
each year when events or changes in circumstances indicate that an impairment
might be present.

Impairment of long-lived assets

We have evaluated our long-lived assets for impairment, and will continue to do
so as events or changes in circumstances indicate that the carrying value of
such assets may not be fully recoverable. If facts or circumstances support
the possibility of impairment, we prepare a projection of future operating cash
flows, undiscounted and without interest. If based on this projection we do
not expect to recover our carrying cost, an impairment loss equal to the
difference between the fair value of the asset and its carrying value will be
recognized in operating income.

Deferred revenue

Deferred revenue relates primarily to maintenance and support agreements that
have been invoiced to customers prior to the performance of the related
services. Maintenance and support services are generally billed annually in
advance for services to be performed over a 12-month period. Maintenance

7



---



##### Table of Contents



Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)

provided under an initial software license contract is recorded as deferred
revenue based on the VSOE of that maintenance and is recognized over the term
of the maintenance agreement.

Guarantees

We enter into standard indemnification agreements in our ordinary course of
business. Pursuant to these agreements, we typically indemnify, hold harmless
and agree to reimburse the indemnified party for those losses suffered or
incurred by the indemnified party arising from any trade secrets, trademark,
copyright, patent or other intellectual property infringement claim by any
third party with respect to our software and services. The term of these
indemnification agreements is generally perpetual any time after execution of
the agreement. The maximum potential amount of future payments that we could
be required to make under these indemnification agreements is unlimited. Since
we have never incurred costs to defend lawsuits or settle claims related to
these indemnification agreements, we believe the estimated fair value of our
obligation under these agreements is minimal. Accordingly, we have no
liabilities recorded for these agreements as of October 31, 2003.

We currently provide software product warranties to our customers. The product
warranties generally provide that the licensed software shall operate
substantially in accordance with the applicable user documentation for a period
typically 90 days from delivery. At October 31, 2003 we had no material
product warranty liability, as we have historically not experienced material
warranty claims. From time to time, in order to manage our customer
relationships, we incur costs outside of our product warranty program. These
costs are expensed as incurred.

We have agreements in place with our directors and officers whereby we
indemnify them for certain events or occurrences while the officer or director
is, or was, serving at our request in such capacity. The maximum potential
amount of future payments we could be required to make under these
indemnification agreements is unlimited; however, we have a director and
officer insurance policy that may enable us to recover a portion of any future
amounts paid.

Translation of foreign currencies

We translate the financial statements of our European subsidiary into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52,
Foreign Currency Translation. Assets and liabilities of our European
subsidiary, whose functional currency is other than the U.S. dollar, are
translated at year-end rates of exchange, and revenues and expenses are
translated at average exchange rates prevailing during the year. Foreign
currency transaction gains and losses are recognized in income as incurred.

We account for unrealized gains or losses on our foreign currency translation
adjustments in accordance with Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, which requires the adjustments be
accumulated in stockholders equity as part of other comprehensive income.

Treasury stock

We account for Treasury Stock using the cost method. Gains on sales of
Treasury Stock are credited to Additional Paid-in Capital (APIC), losses are
charged to APIC to the extent that previous net gains from sales are included
therein, otherwise to Retained Earnings. As of July 31, 2003, the cumulative
net

8



---



##### Table of Contents



Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)

difference between the average Treasury Stock purchase price per share and
the option exercise price of approximately $2.9 million has been reclassified
from APIC to Retained Earnings.

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
for the year in which those temporary differences are expected to be recovered
or settled. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts more likely than not to be realized.

Stock-based compensation

We provide equity incentives to our employees and directors by means of
incentive stock options and non-qualified stock options. We issue options from
the 1997 Equity Compensation Plan (the Plan). We account for stock-based
compensation under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and
related Interpretations. For the periods presented, stock-based compensation
cost is not reflected in net income, as all options granted under the Plan had
an exercise price equal to the market value of the underlying Common Stock on
the date of grant. The Company has implemented the disclosure-only provisions
of SFAS 123, Accounting for Stock-Based Compensation and SFAS 148,
Accounting for Stock-Based Compensation Transition and Disclosure. The
following table illustrates the pro forma effect on net income and net income
per share as if we had applied the fair value recognition provisions of SFAS
123 (in thousands except per share amounts):

|                       |                                              |         |       |                    |      |      |       |     |      | 
|---------------------- | -------------------------------------------- | ------- | ----- | ------------------ | ---- | ---- | ----- | --- | ---- | 
|                       |                                              |         |       | Three months ended
|                       |                                              |         |       | October 31,       
|                       |                                              |         |       |                   
|                       |                                              |         |       | 2003               |      | 2002
|                       |                                              |         |       |                    |      |     
|Net income as reported |                                              | $       | 1,449 |                    |      | $    | 1,193 |    
|                       | Stock-based compensation expense,
net of tax |         |       | 264                |      |      |       | 192 |     
|                       |                                              |         |       |                    |      |      |       |    
|Pro forma net income   |                                              | $       | 1,185 |                    |      | $    | 1,001 |    
|                       |                                              |         |       |                    |      |      |       |    
|Net income per share:  |                                              |         |       |                    |      |      |       |    
|                       | As reported                                  |         |       |                    |      |      |       |     |     
|                       |                                              | Basic   |       | $                  | 0.15 |      |       | $   | 0.09 | 
|                       |                                              |         |       |                    |      |      |       |    
|                       |                                              | Diluted |       | $                  | 0.13 |      |       | $   | 0.08 | 
|                       |                                              |         |       |                    |      |      |       |    
|                       | Pro forma                                    |         |       |                    |      |      |       |     |     
|                       |                                              | Basic   |       | $                  | 0.12 |      |       | $   | 0.07 | 
|                       |                                              |         |       |                    |      |      |       |    
|                       |                                              | Diluted |       | $                  | 0.11 |      |       | $   | 0.07 | 
|                       |                                              |         |       |                    |      |      |       |    

9



---



##### Table of Contents



Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)

Net income per share

Our basic and diluted net income per share are computed in accordance with
Statement of Financial Accounting Standards No. 128, Earnings Per Share.
Basic net income per share is computed using the weighted average number of
common shares outstanding. Diluted net income per share is computed using the
weighted average number of common shares outstanding and the assumed exercise
of stock options and warrants (using the treasury stock method). The following
is a reconciliation of the shares used in computing basic and diluted net
income per share for the periods indicated (in thousands):

|                                                      |  |                    |        |      |  |  |        | 
|----------------------------------------------------- |  | ------------------ | ------ | ---- |  |  | ------ | 
|                                                      |  | Three months ended
|                                                      |  | October 31,       
|                                                      |  |                   
|                                                      |  | 2003               |        | 2002
|                                                      |  |                    |        |     
|Shares used in computing basic net income per share   |  |                    | 9,826  |      |  |  | 13,535 | 
|Dilutive effect of stock options and warrants         |  |                    | 1,079  |      |  |  | 1,761  | 
|                                                      |  |                    |        |      |  |  |        | 
|Shares used in computing diluted net income per share |  |                    | 10,905 |      |  |  | 15,296 | 
|                                                      |  |                    |        |      |  |  |        | 

Options to purchase 390,000 and 50,000 shares of Common Stock at average
exercise prices of $8.13 and $13.50 per share at October 31, 2003 and 2002,
respectively, were anti-dilutive and not included in the computation of diluted
net income per share, because the options exercise price was greater than the
average market price of the Common Stock for the period.

Management estimates

The preparation of our financial statements, in accordance with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, and disclosure of contingent assets and liabilities
and the reported amounts of revenues and expenses at the date of the financial
statements. Actual results could differ from those estimates.

Advertising costs

We expense advertising costs as incurred.

Note 2  Business segments

As set forth in the criteria of Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information, we
are organized into two reportable segments: Software and ASP. The Software
segment consists of initial software license sales, professional services
consulting derived from implementation and integration of our software products
and continued customer support and maintenance of the software products. The
ASP segment provides processing, print, mail, archival and Internet delivery of
documents for customers who outsource these activities. The table below
presents information about reported segments for the three months ended October
31, 2003 and 2002 (in thousands):

10



---



##### Table of Contents



Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)

|                           |          |                        |        |                    |        |      |        |        |        | 
|-------------------------- | -------- | ---------------------- | ------ | ------------------ | ------ | ---- | ------ | ------ | ------ | 
|                           |          |                        |        | Three months ended
|                           |          |                        |        | October 31,       
|                           |          |                        |        |                   
|                           |          |                        |        | 2003               |        | 2002
|                           |          |                        |        |                    |        |     
|Revenues:                  |          |                        |        |                    |        |      |        |       
|                           | Software |                        | $      | 13,148             |        |      | $      | 12,929 |       
|                           | ASP      |                        |        | 5,757              |        |      |        | 5,208  |       
|                           |          |                        |        |                    |        |      |        |       
|                           |          | Total revenues         |        | $                  | 18,905 |      |        | $      | 18,137 | 
|                           |          |                        |        |                    |        |      |        |       
|Operating income:          |          |                        |        |                    |        |      |        |       
|                           | Software |                        | $      | 5,947              |        |      | $      | 5,527  |       
|                           | ASP      |                        |        | 1,077              |        |      |        | 748    |       
|Sales and marketing        |          |                        | (2,835 | )                  |        |      | (2,678 | )     
|General and administrative |          |                        | (1,686 | )                  |        |      | (1,658 | )     
|                           |          |                        |        |                    |        |      |        |       
|                           |          | Total operating income |        | $                  | 2,503  |      |        | $      | 1,939  | 
|                           |          |                        |        |                    |        |      |        |       

11



---



##### Table of Contents






Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

Certain information contained herein may include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements, other than statements of historical facts included in this Form
10-Q, are forward-looking statements. Such statements are subject to certain
risks and uncertainties, which include, but are not limited to, the economy,
dependence upon the insurance and utilities industries, technological advances,
attraction and retention of technical employees, fluctuations in operating
results and the other risk factors and cautionary statements listed from time
to time in the Companys periodic reports filed with the Securities and
Exchange Commission. All forward-looking statements included in this Form 10-Q
and all subsequent oral forward-looking statements attributable to the Company
or persons acting on its behalf are expressly qualified in their entirety by
these cautionary statements.

Overview

Docucorp International, Inc. (Docucorp or the Company) develops, markets
and supports a portfolio of proprietary information software, application
service provider (ASP) hosting and professional services that enable
companies to create, publish, manage and archive complex, high-volume,
individualized information. We support the entire lifecycle  from acquisition
of the first raw data point to final delivery of personalized information to
the customer.

Our software products support leading hardware platforms, operating systems,
printers and imaging systems. These products are designed to personalize,
produce and manage documents such as insurance policies, utility statements,
telephone bills, bank and mutual fund statements, invoices, correspondence,
bills of lading and other customer-oriented documents. Our ASP offerings
include customer statement and bill generation, electronic bill presentment and
payment, insurance policy production, disaster recovery and electronic document
archival. We currently have an installed base of more than 1,200 customers.
More than half of the 200 largest United States insurance companies use our
software products and services, including nine of the top 10 life and health
insurance companies, nine of the top 10 property and casualty insurance
companies and more than 500 managing general agents (MGAs). Many of the
largest North American utilities companies, major international financial
services institutions and clients in higher education use our products and
services.

As set forth in the criteria of Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information
(SFAS 131), we are organized into two reportable segments: Software and ASP.
The Software segment consists of initial software license sales, professional
services consulting derived from implementation and integration of our software
products and continued customer support and maintenance of the software
products. The ASP segment provides processing, print, mail, archival and
Internet delivery of documents for customers who outsource these activities.

We derive our revenues from ASP hosting fees, professional services fees,
license fees and recurring maintenance fees related to our software products.
ASP hosting revenue consist of fees earned from customers who outsource the
production of customer statements and insurance policies. Professional services
revenue include fees for implementation, integration, training and consulting
services. License revenue is generally derived from perpetual licenses of
software products. Maintenance revenue consists primarily of recurring license
fees and annual software maintenance and support agreements.

Critical Accounting Policies and Estimates

The accompanying Managements Discussion and Analysis of Financial Condition
and Results of Operations is based upon our consolidated financial statements,
which have been prepared in

12



---



##### Table of Contents



accordance with accounting principles generally
accepted in the United States of America (GAAP). The preparation
of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reported period. We base our estimates and assumptions on
historical experiences and various other factors that are believed to be
reasonable under the circumstances. These estimates and assumptions are
evaluated on an ongoing basis. Actual results may differ from previously
estimated amounts under different assumptions or conditions. We believe the
following critical accounting policies, which involve significant judgments and
estimates, are used in the preparation of our consolidated financial
statements:

Revenue recognition

We recognize revenue in accordance with Statement of Position 97-2, Software
Revenue Recognition, and Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements (SAB 101). Revenues are derived from
the sale of software licenses, annual software maintenance and support
agreements, professional services and ASP hosting services. Revenue is
recognized when a contract exists, the fee is fixed or determinable, delivery
has occurred and collection of the receivable is deemed probable.

We use the residual method to recognize revenue from the sale of software
licenses that are bundled with maintenance and support. Under the residual
method, the fair value of the undelivered element(s) is deferred and the
remaining portion of the arrangement fee is recognized as revenue. Fair value
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. We do not
generally sell software licenses without selling maintenance and support for
the licensed software. Therefore, we have established VSOE only for the
undelivered element(s) included in a multi-element arrangement. Specifically,
VSOE for maintenance and support is based upon the price a customer pays to
renew its maintenance and support agreement. After expiration of the initial
maintenance term, maintenance and support agreements are renewable on an annual
basis and include rights to upgrades, when and if available, telephone support,
updates, enhancements and bug fixes. Revenue generated from maintenance and
support is recognized ratably over the maintenance term of the agreement. We
record deferred revenue for maintenance amounts invoiced prior to the
performance of the related services.

Our standard license agreements do not provide for rights of software return
and/or conditions of acceptance. However, in the rare case that acceptance
criteria are provided, revenue is deferred and not recognized until all
acceptance provisions are satisfied. Revenue from software licenses, which
include a cancellation clause, is recognized upon expiration of the
cancellation period. Revenue related to products still in the testing phase is
deferred until formal acceptance of the product by the customer.

Professional services revenue includes implementation, integration, training
and consulting services related to our software products. The services offered
are not essential to the functionality of the software sold. Professional
services revenue is generally recognized as the services are performed.

Revenue derived from the installation and integration of software packages
under a fixed price contract is recognized on a percentage-of-completion basis
measured by the relationship of hours worked to total estimated contract hours.
We follow this method because reasonably dependable estimates of the revenue
and contract hours applicable to various elements of a contract can be made.
Since the financial reporting of these contracts depends upon estimates, which
are assessed continually during the term of these contracts, recognized revenue
and profit are subject to revisions as the contract progresses to completion.
Revisions in profit estimates are reflected in the period in which the facts
that give rise to the revisions become known. Accordingly, favorable changes in
estimates result in additional revenue recognition and net income, and
unfavorable changes in estimates result in a reduction of recognized

13



---



##### Table of Contents



revenue
and net income. When estimates indicate that a loss will be incurred on a
contract upon completion, a provision for the expected loss is recorded in the
period in which the loss becomes evident.

Revenue from our ASP hosting operations is recognized in accordance with SAB
101, generally on a per transaction basis. ASP hosting agreements are generally
one-to-five years in duration and provide for monthly billing based on
transaction volume or contract minimums, if applicable. Revenue related to the
customers initial set up and implementation is deferred and subsequently
recognized over the expected term of the ASP hosting agreement.

Allowance for doubtful accounts

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

Software development costs

Software development costs are accounted for in accordance with either
Statement of Financial Accounting Standards No. 86, Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed, or with
Statement of Position No. 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. The guidance above requires the
capitalization of certain software development costs once technological
feasibility is established. The capitalized costs are then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
revenues to total projected product revenues, whichever is greater. Management
periodically assesses the realizability of software development costs when
events and circumstances indicate a potential decline in value.

Valuation of long-lived and intangible assets and goodwill

We recognize an impairment charge associated with our long-lived assets,
including property and equipment, goodwill and other intangible assets whenever
we determine that recovery of such long-lived asset is not probable. Such
determination is made in accordance with the applicable GAAP requirement
associated with the long-lived asset, and is based upon, among other things,
estimates of the amount of future net cash flows to be generated by the
long-lived asset and estimates of the current fair value of the asset. Adverse
changes in future net cash flows or fair value could result in the inability to
recover the carrying value of the long-lived asset, thereby requiring an
impairment charge to be recognized. We perform an impairment analysis in
accordance with Statement of Financial Accounting Standard No. 142, Goodwill
and Other Intangible Assets, annually and whenever events and circumstances
indicate that an impairment might be present.

Deferred taxes and valuation allowance

We recognize deferred tax assets and liabilities based on the differences
between the financial statement carrying amounts and the tax bases of assets
and liabilities. We record a valuation allowance to reduce our deferred income
tax assets to the amount that is believed to be realized under the
more-likely-than-not recognition criteria. While we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for a valuation allowance, it is possible that in the future
we may change our estimate of the amount of the deferred income tax assets that
would more-likely-than-not be realized in the future, resulting in an
adjustment to the deferred income tax assets valuation allowance that would
either increase or decrease, as applicable, reported net income in the period
such change in estimate was made.

14



---



##### Table of Contents



Translation of foreign currency

We translate the financial statements of our European subsidiary into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52,
Foreign Currency Translation. Assets and liabilities of our European
subsidiary, whose functional currency is other than the U.S. dollar, are
translated at period-end rates of exchange, and revenues and expenses are
translated at average exchange rates prevailing during the period. Foreign
currency transaction gains and losses are recognized in income as incurred.

We account for unrealized gains or losses on our foreign currency translation
adjustments in accordance with Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, which requires adjustments to be
accumulated in stockholders equity as part of other comprehensive income.
Currently, we do not engage in foreign currency hedging activities.

Historical Operating Results of the Company

The following table sets forth selected unaudited interim consolidated
statements of operations data. The information present below is expressed as a
percentage of total revenues for the periods indicated:

|                            |                            |                          |    |                    |     |      |    |    |     | 
|--------------------------- | -------------------------- | ------------------------ | -- | ------------------ | --- | ---- | -- | -- | --- | 
|                            |                            |                          |    | Three months ended
|                            |                            |                          |    | October 31,       
|                            |                            |                          |    |                   
|                            |                            |                          |    | 2003               |     | 2002
|                            |                            |                          |    |                    |     |     
|Revenues                    |                            |                          |    |                    |     |      |    |   
|                            | ASP hosting                |                          |    | 31                 | %   |      |    | 29 | %  
|                            | Professional services      |                          |    | 27                 |     |      |    | 32 |    
|                            | License                    |                          |    | 14                 |     |      |    | 11 |    
|                            | Maintenance                |                          |    | 28                 |     |      |    | 28 |    
|                            |                            |                          |    |                    |     |      |    |    |    
|                            |                            | Total revenues           |    |                    | 100 |      |    |    | 100 | 
|                            |                            |                          |    |                    |     |      |    |   
|Cost of revenues            |                            |                          |    |                    |     |      |    |   
|                            | ASP hosting                |                          |    | 25                 |     |      |    | 25 |    
|                            | Professional services      |                          |    | 21                 |     |      |    | 24 |    
|                            | License                    |                          |    | 4                  |     |      |    | 4  |    
|                            | Maintenance                |                          |    | 2                  |     |      |    | 2  |    
|                            |                            |                          |    |                    |     |      |    |   
|                            |                            | Total cost of revenues   |    |                    | 52  |      |    |    | 55  | 
|                            |                            |                          |    |                    |     |      |    |   
|Gross Profit                |                            |                          | 48 |                    |     |      | 45 |   
|                            |                            |                          |    |                    |     |      |    |   
|Operating expenses          |                            |                          |    |                    |     |      |    |   
|                            | Product development        |                          |    | 11                 |     |      |    | 10 |    
|                            | Sales and marketing        |                          |    | 15                 |     |      |    | 15 |    
|                            | General and administrative |                          |    | 9                  |     |      |    | 9  |    
|                            |                            |                          |    |                    |     |      |    |    |    
|                            |                            | Total operating expenses |    |                    | 35  |      |    |    | 34  | 
|                            |                            |                          |    |                    |     |      |    |   
|Operating income            |                            |                          | 13 |                    |     |      | 11 |   
|Other income (expense), net |                            |                          | 0  |                    |     |      | 0  |   
|                            |                            |                          |    |                    |     |      |    |   
|Income before income taxes  |                            |                          | 13 |                    |     |      | 11 |   
|Provision for income taxes  |                            |                          | 5  |                    |     |      | 4  |   
|                            |                            |                          |    |                    |     |      |    |   
|Net income                  |                            |                          | 8  | %                  |     |      | 7  | % 
|                            |                            |                          |    |                    |     |      |    |   

15



---



##### Table of Contents



Comparative analysis of quarterly results for the three months ended October
31, 2003 and 2002

Revenues

Total revenues increased 4% due to an increase in ASP hosting revenue, license
revenue and maintenance revenue, partially offset by a decrease in professional
services revenue. ASP hosting revenue increased approximately $549,000, or
11%, due to the addition of new customers that went into production subsequent
to the three months ended October 31, 2002. License revenue increased
approximately $568,000, or 27%, primarily due to an increase in software
license contracts executed by our European subsidiary of approximately $306,000
and overall better execution by our U. S. sales force. Maintenance revenue
increased approximately $302,000, or 6%, due to maintenance agreements
associated with new license sales and customers expanding their processing
rights for existing products. Professional services revenue decreased
approximately $650,000, or 11%, primarily as a result of lower software license
sales experienced in the preceding year.

Backlog for our products and services was approximately $47.5 million as of
October 31, 2003, of which approximately $19.1 million is scheduled to be
satisfied within one year. Backlog is primarily composed of recurring software
license revenue and maintenance revenue for ongoing maintenance and support,
software implementation and consulting services and ASP hosting services.
Software agreements for recurring license fees generally have non-cancelable
terms of up to five years. Maintenance contracts may generally be terminated
upon 30 to 60 days notice; however, we have not historically experienced
material cancellations of such contracts. Software implementation and
consulting services backlog is principally performed under time and material
agreements, of which some have cancellation provisions. The estimated future
revenues with respect to software implementation and consulting services are
based on managements estimate of revenues over the remaining life of the
respective contracts. ASP hosting agreements generally have one-to-five year
terms and provide that fees are charged on a per transaction basis. Estimated
future revenues with respect to ASP hosting services are based on contractual
monthly minimums multiplied by the remaining term of the respective contract.

Cost of Revenues

Cost of ASP hosting revenue.Cost of ASP hosting revenue is composed primarily
of salary and personnel related costs, facility and equipment costs and postage
and supplies expense related to our two ASP hosting centers. Cost of ASP
hosting revenue increased approximately $220,000, or 5%, for the three months
ended October 31, 2003 due primarily to an increase of approximately $161,000,
or 15%, in salary and personnel related costs and an increase of approximately
$86,000, or 13%, in supplies expense. These increases are driven by the
overall growth in the business. For the three months ended October 31, 2003 and
2002, cost of ASP hosting revenue represented approximately 81% and 86% of ASP
hosting revenue, respectively. The decrease in cost as a percentage of ASP
revenue is primarily due to the mix of revenues, increased utilization of
capacity and lower levels of consumable expenses. Cost of ASP hosting revenue
is expected to increase as ASP revenue increases.

Cost of professional services revenue.Cost of professional services revenue
consists of costs incurred in providing implementation, integration, training
and consulting services. Cost of professional services revenue decreased
approximately $277,000, or 6%, due primarily to capitalization of development
work on a new pre-packaged insurance offering. For the three months ended
October 31, 2003 and 2002, cost of professional services revenue represented
approximately 80% and 76% of professional services revenues, respectively. The
increase in costs as a percentage of professional services revenues is
primarily due to lower utilization of implementation and consulting personnel
and select employees dedicated to non-billable development work. We expect cost
of professional services revenue to increase as professional services revenue
increases.

16



---



##### Table of Contents



Cost of license revenue.Cost of license revenue represents amortization of
capitalized software development costs and royalties paid to third parties.
For the three months ended October 31, 2003, cost of license revenue decreased
approximately $35,000, or 5%, primarily due to a decrease in amortization as
merger-related capitalized software was fully amortized as of July 31, 2003.
We anticipate continued development efforts, including Internet applications,
integration of our existing product offerings, further development of packaged
applications for use in industries such as financial services and development
of new software products.

Cost of maintenance revenue.Cost of maintenance revenue consists of costs
incurred in providing customer telephone and online support. For the three
months ended October 31, 2003, cost of maintenance revenue decreased
approximately $120,000, or 28%, due primarily to a decrease in salaries and
personnel related costs of approximately $94,000. The decrease in salaries and
personnel related costs is due to a reduction in staffing as a result of
continued departmental automation and a lower demand for support of our mature
legacy products. For the three months ended October 31, 2003 and 2002, cost of
maintenance revenue represented approximately 6% and 9% of maintenance revenue,
respectively. The cost of maintenance revenue is expected to increase, but at a
slower rate than the anticipated growth in software license and maintenance
revenues as we have reduced support of our legacy software products and
enhanced our ability to provide online support.

Operating expenses

Product development.Product development expense consists primarily of costs
associated with developing new products prior to establishing technological
feasibility, enhancing existing products, testing software products and
developing product documentation. For the three months ended October 31, 2003,
product development expense increased approximately $231,000, or 13%. The
increase is primarily due to an increase of approximately $61,000 in incentive
compensation, an increase of approximately $63,000 in contract labor and a
decrease of approximately $66,000 in capitalized development costs.

Sales and marketing. Sales and marketing expense consists primarily of salaries
and personnel related costs, incentive compensation and costs associated with
marketing programs. For the three months ended October 31, 2003, sales and
marketing expense increased approximately $157,000, or 6%. This increase is
primarily due to increased incentive compensation of approximately $113,000, or
20%, as a result of increased software license revenue.

General and administrative. General and administrative expense consists of
costs for accounting, human resources, legal, information technology and
outside legal, accounting and other services. General and administrative
expense increased approximately $28,000, or 2%, for the three months ended
October 31, 2003.

Other income (expense), net

Other income (expense), net decreased approximately $30,000 primarily due to
the addition of interest expense aggregating approximately $173,000 on our term
note and capital lease obligations for the three months ended October 31, 2003,
partially offset by a foreign currency exchange rate gain of approximately
$133,000 for the three months ended October 31, 2003.

Provision for income taxes

The effective tax rate for three months ended October 31, 2003 and 2002 was
approximately 42% and 39%, respectively. The effective rates differ from the
federal statutory rate due primarily to losses generated by our European
subsidiary, for which we do not currently recognize a tax benefit.

17



---



##### Table of Contents



Net income

Net income increased approximately $256,000, or 22%, for the three months ended
October 31, 2003. This increase is primarily due to an increase in the volume
of software license contracts in the three months ended October 31, 2003 and
improved operating margin.

Liquidity and Capital Resources

At October 31, 2003, our principal sources of liquidity consisted of cash and
cash equivalents of approximately $6.1 million and our revolving credit
facility, which has available borrowings of $5.8 million. Cash and cash
equivalents for the three months ended October 31, 2003 decreased approximately
$1.2 million from approximately $7.3 million at July 31, 2003.

Cash provided by operating activities was approximately $1.5 million and $1.2
million for the three months ended October 31, 2003 and 2002, respectively. In
addition to greater net income for the three months ended October 31, 2003,
notable changes in the balance sheet that impacted cash flows from operations
include the following:



| |  |  | Accounts receivable increased approximately $1.4 million due
primarily to the timing of collections.                                      
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Income tax payable increased approximately $860,000 due primarily
to higher net income.                                                   
|
| |  |  | Deferred revenue decreased approximately $694,000 due to the timing
of invoicing for annual maintenance agreements.                       
|
| |  |  | Accrued liabilities decreased approximately $888,000 due primarily
to a decrease in accrued compensation related to the timing of payroll.

Cash used in investing activities was approximately $1.8 million and $1.6
million for the three months ended October 31, 2003 and 2002, respectively.
Cash used in investing activities during the three months ended October 31,
2003 related to the purchase of approximately $420,000 of fixed assets and
approximately $1.4 million in costs associated with the development of
capitalized software. The approximate $1.6 million of cash used in investing
activities during the three months ended October 31, 2002 related to the
purchase of fixed assets of approximately $542,000 and approximately $985,000
of capitalized software development costs.

Cash used in financing activities was approximately $795,000 and $1.6 million
for the three months ended October 31, 2003 and 2002, respectively. Cash used
in financing activities during the three months ended October 31, 2003
primarily related to principal payments under our term note of approximately
$887,000. The approximate $1.6 million cash used in financing activities during
the three months ended October 31, 2002 related to the purchase of treasury
stock of approximately $2.7 million, partially offset by proceeds from the
exercise of stock options of approximately $1.1 million.

As of October 31, 2003, we held approximately 6,722,000 shares of treasury
stock at an average per share cost of $5.56. Since inception of our stock
repurchase program in fiscal 1999, we have repurchased approximately 9,366,000
shares of stock at an average purchase price of $5.37. Our Board of Directors
believes the repurchase program is an appropriate means of increasing
shareholder value.

Working capital was approximately $4.2 million at October 31, 2003, compared
with approximately $3.7 million at July 31, 2003. The increase in working
capital of approximately $524,000 is due to a decrease in current liabilities
of approximately $768,000, partially offset by a decrease in current assets of
approximately $244,000. The decrease in current liabilities is primarily due
to the timing of payments

18



---



##### Table of Contents



related to payroll. The decrease in current assets is
primarily due to the decrease in cash and other current assets, partially
offset by the increase in accounts receivable. The decrease in cash and
increase in accounts receivable is primarily due to the timing of collections.
The decrease in other current assets is primarily due to a decrease in prepaid
postage.

In June 2003, we entered into a $14.2 million term note with Comerica
Bank-Texas. The term note bears interest at a fixed annual rate of 3.32% and
is repayable in equal monthly installments over four years.

In December 2002, we entered into various capital lease arrangements for the
rental of computer equipment at our ASP hosting facilities. The lease
agreements require monthly payments of principal and interest of approximately
$65,000.

At October 31, 2003, we had a $5.8 million revolving credit facility from
Comerica Bank-Texas, which expires on August 31, 2005. The credit facility
bears interest at the banks prime rate less 100 basis points or LIBOR rate of
interest plus 150 basis points, and is collateralized by substantially all of
our assets. Under the credit facility, we are required to maintain certain
financial and non-financial covenants. As of October 31, 2003 there were no
borrowings under this credit facility.

Our liquidity needs are expected to arise primarily from the repayment of debt,
obligations under capital leases, funding the continued development,
enhancement and support of our software offerings and sales and marketing costs
associated with expansion in new vertical and international markets. Although
we have no current commitments or agreements with respect to any acquisition of
other businesses or technologies, a portion of our cash or borrowings under our
revolving credit facility could be used to acquire complementary businesses or
obtain the right to use complementary technologies.

Our liquidity could be negatively impacted by a decrease in demand for our
products, which are subject to rapid technology changes, reduction in capital
expenditures by our customers and intense competition, among other factors.
Operating leases and purchase obligations related to services agreements are
our only off balance sheet arrangements.

We currently anticipate that existing cash and cash equivalents, together with
cash generated from operations and available borrowings under our credit
facility, will be sufficient to satisfy our operating cash needs for the
foreseeable future.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have no derivative financial instruments. We invest our cash and cash
equivalents in investment grade, highly liquid investments, consisting of money
market instruments and commercial paper. We have a fixed rate debt instrument
of approximately $13 million as of October 31, 2003.

We are exposed to market risk arising from changes in foreign currency exchange
rates as a result of selling our products and services outside the U.S.
(principally Europe). A portion of our sales generated from our non-U.S.
operations are denominated in currencies other than the U.S. dollar,
principally British pounds. Consequently, the translated U.S. dollar value of
Docucorps non-U.S. sales and operating results are subject to currency
exchange rate fluctuations which may favorably or unfavorably impact reported
earnings and may affect comparability of period-to-period operating results.

For the three months ended October 31, 2003 and 2002, approximately 5% and 6%,
respectively, of our revenues were denominated in British pounds. For the
three months ended October 31, 2003 and 2002, approximately 6% and 4%,
respectively, of our operating expenses were denominated in British pounds.

19



---



##### Table of Contents



Historically, the effect of fluctuations in currency exchange rates has not had
a material impact on our operations; however, there can be no guarantees that
it will not have a material impact in the future. The exposure to fluctuations
in currency exchange rates will increase as we expand our operations outside
the U.S.




Item 4. Controls and Procedures

Our management, with participation of our President and Chief Executive Officer
and Senior Vice President, Finance and Administration (Principal Financial
Officer) evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rule 12a-15(e) of the Securities Exchange Act of 1934) as of the
end of the period covered by this report. Based upon that evaluation, the
President and Chief Executive Officer and Principal Financial Officer concluded
that our disclosure controls and procedures, as of October 31, 2003, were
designed and are functioning effectively to provide reasonable assurance that
the information required to be disclosed by Docucorp in reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms. There were no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent that occurred during the period
covered by this report.

See Item 9A of our Report on Form 10-K for the year ended July 31, 2003, which
report was filed during the three months ended October 31, 2003, for
information regarding the implementation of procedures and controls related to
the timely review and analysis of significant commitments entered into on
behalf of Docucorp.

20



---



##### Table of Contents






PART II - OTHER INFORMATION




Item 6. Exhibits and Reports on Form 8-K



| | (a) |  | 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.

| |     |  |                     
| | --- |  | --------------------
| | (b) |  | Reports on Form 8-K.



| |  |  | On September 4, 2003, the Company filed a Current Report on Form
8-K announcing its results of operations for the quarter and year
ended July 31, 2003.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

21



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|                             |  | 
|---------------------------- |  | 
|Docucorp International, Inc. |  | 
|                             |  | 
|(Registrant)                 |  | 

|                                      |      |                  
|------------------------------------- | ---- | -----------------
|/s/ Michael D. Andereck               | Date | December 15, 2003
|                                      |      |                  
|Michael D. Andereck                   |      |                  
|President and Chief Executive Officer |      |                  

22