##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 (mark one)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934for the quarter ended March 31, 2006o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
   MRO SOFTWARE, INC.
  MASSACHUSETTS
(State of Incorporation)
    
    04-2448516
(I.R.S. EmployerIdentification Number)
 
 
 
 
  
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
 o þ




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##### 



MRO SOFTWARE, INC.
10-Q INDEX
 PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    PageConsolidated Balance Sheets (unaudited) as of March 31, 2006 and September 30, 2005.
    
    
    3Consolidated Statements of Operations (unaudited) for the three and six months ended March 31, 2006 and 2005.
    
    
    4Consolidated Statements of Cash Flows (unaudited) for the six months ended March 31, 2006 and 2005.
    
    
    5Notes to Consolidated Financial Statements (unaudited).
    
    
    6Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    27PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    28Item 1A.
    
    Risk Factors
    
    
    28Item 2.
    
    Unregistered Sales of Equity Securities & Use of Proceeds
    
    
    28Item 3.
    
    Defaults upon Senior Executives
    
    
    28Item 4.
    
    Submission of Matter to a Vote of Security Holders
    
    
    28Item 5.
    
    Other Information
    
    
    28Item 6.
    
    Exhibits
    
    
    28SIGNATURE
    
    
    29Ex-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEO & CFO
  2




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##### Table of Contents



MRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
 (unaudited)
 March 31,
    
    
    September 30,2006
    
    
    2005(in thousands, except per share data)ASSETSCurrent assets:Cash and cash equivalents
    
    
    
    
    
    $
    131,250
    
    
    $
    120,301Marketable securities
    
    
    
    
    
    
    6,131
    
    
    
    5,130Accounts receivable, trade, less allowance
for doubtful accounts of $1,373 at March 31, 2006
and $1,445 at September 30, 2005, respectively
    
    
    
    
    
    
    45,756
    
    
    
    40,362Prepaid expenses and other current assets
    
    
    
    
    
    
    7,415
    
    
    
    4,715Deferred income taxes
    
    
    
    
    
    
    1,772
    
    
    
    1,963Total current assets
    
    
    
    
    
    
    192,324
    
    
    
    172,471Marketable securities
    
    
    
    
    
    
    5,774
    
    
    
    7,743Property and equipment, net
    
    
    
    
    
    
    7,058
    
    
    
    7,210Goodwill
    
    
    
    
    
    
    46,337
    
    
    
    46,337Intangible assets, net
    
    
    
    
    
    
    2,261
    
    
    
    3,118Deferred income taxes
    
    
    
    
    
    
    5,736
    
    
    
    6,412Other assets
    
    
    
    
    
    
    2,941
    
    
    
    3,079Total assets
    
    
    
    
    
    $
    262,431
    
    
    $
    246,370LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    
    
    
    
    $
    13,637
    
    
    $
    15,481Accrued compensation
    
    
    
    
    
    
    8,625
    
    
    
    12,805Income taxes payable
    
    
    
    
    
    
    4,473
    
    
    
    1,467Deferred revenue
    
    
    
    
    
    
    36,496
    
    
    
    31,718Deferred lease obligation
    
    
    
    
    
    
    434
    
    
    
    363Total current liabilities
    
    
    
    
    
    
    63,665
    
    
    
    61,834Deferred lease obligation
    
    
    
    
    
    
    1,964
    
    
    
    2,013Deferred revenue
    
    
    
    
    
    
    375
    
    
    
    577Other long term liabilities
    
    
    
    
    
    
    125
    
    
    
    240Total liabilities
    
    
    
    
    
    
    66,129
    
    
    
    64,664Commitments and contingencies (Note H)Stockholders equityPreferred
stock, $0.01 par value; 1,000 shares authorized,
none issued and outstanding
    
    
    
    
    
    
    
    
    
    
    Common stock, $0.01 par value; 50,000 shares authorized;
26,151 and 25,738 issued and outstanding at March 31, 2006
and September 30, 2005, respectively
    
    
    
    
    
    
    262
    
    
    
    257Additional paid-in capital
    
    
    
    
    
    
    129,127
    
    
    
    125,760Retained earnings
    
    
    
    
    
    
    66,248
    
    
    
    55,098Accumulated other comprehensive income
    
    
    
    
    
    
    665
    
    
    
    591Total stockholders equity
    
    
    
    
    
    
    196,302
    
    
    
    181,706Total liabilities and stockholders equity
    
    
    
    
    
    $
    262,431
    
    
    $
    246,370
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MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except per share data)Revenues:Software
    
    $
    17,662
    
    
    
    10,174
    
    
    $
    30,477
    
    
    $
    24,998Support and services
    
    
    39,550
    
    
    
    33,005
    
    
    
    75,867
    
    
    
    65,537Total revenues
    
    
    57,212
    
    
    
    43,179
    
    
    
    106,344
    
    
    
    90,535Cost of revenues:Software
    
    
    1,917
    
    
    
    1,199
    
    
    
    3,300
    
    
    
    2,479Support and services
    
    
    17,373
    
    
    
    16,320
    
    
    
    33,547
    
    
    
    31,935Total cost of revenues
    
    
    19,290
    
    
    
    17,519
    
    
    
    36,847
    
    
    
    34,414Gross profit
    
    
    37,922
    
    
    
    25,660
    
    
    
    69,497
    
    
    
    56,121Operating expenses:Sales and marketing
    
    
    15,731
    
    
    
    13,351
    
    
    
    29,332
    
    
    
    28,582Product development
    
    
    7,789
    
    
    
    6,958
    
    
    
    15,242
    
    
    
    13,738General and administrative
    
    
    4,983
    
    
    
    4,550
    
    
    
    9,611
    
    
    
    9,120Total operating expenses
    
    
    28,503
    
    
    
    24,859
    
    
    
    54,185
    
    
    
    51,440Income from operations
    
    
    9,419
    
    
    
    801
    
    
    
    15,312
    
    
    
    4,681Interest income, net
    
    
    1,215
    
    
    
    647
    
    
    
    2,440
    
    
    
    1,118Other income/(expense), net
    
    
    208
    
    
    
    (499
    )
    
    
    17
    
    
    
    71Income before income taxes
    
    
    10,842
    
    
    
    949
    
    
    
    17,769
    
    
    
    5,870Provision for income taxes
    
    
    3,908
    
    
    
    330
    
    
    
    6,619
    
    
    
    2,088Net income
    
    $
    6,934
    
    
    $
    619
    
    
    $
    11,150
    
    
    $
    3,782Net income per share, basic
    
    $
    0.27
    
    
    $
    0.02
    
    
    $
    0.43
    
    
    $
    0.15Net income per share, diluted
    
    $
    0.26
    
    
    $
    0.02
    
    
    $
    0.42
    
    
    $
    0.15Shares used to calculate net income per shareBasic
    
    
    25,722
    
    
    
    25,238
    
    
    
    25,658
    
    
    
    25,141Diluted
    
    
    26,603
    
    
    
    25,727
    
    
    
    26,597
    
    
    
    25,559
  4




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MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Six Months endedMarch 31,(in thousands)
    
    2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    11,150
    
    
    $
    3,782Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation
    
    
    1,457
    
    
    
    1,564Amortization of other intangibles
    
    
    857
    
    
    
    1,221Amortization of premium on marketable securities
    
    
    
    
    
    
    86Loss on sale and disposal of property and equipment
    
    
    2
    
    
    
    66Stock-based compensation
    
    
    693
    
    
    
    95Deferred income taxes
    
    
    833
    
    
    
    762Changes in operating assets and liabilities:Accounts receivable
    
    
    (5,468
    )
    
    
    3,953Prepaid expenses and other assets
    
    
    (2,544
    )
    
    
    (221
    )Accounts payable, accrued expenses and other liabilities
    
    
    (1,840
    )
    
    
    (645
    )Accrued compensation
    
    
    (4,156
    )
    
    
    (2,974
    )Income taxes payable
    
    
    3,011
    
    
    
    (2,097
    )Deferred revenue
    
    
    4,640
    
    
    
    2,975Net cash provided by operating activities
    
    
    8,635
    
    
    
    8,567Cash flows from investing activities:Acquisitions of property and equipment and other
capital expenditures
    
    
    (1,271
    )
    
    
    (2,187
    )Sale of marketable securities
    
    
    1,000
    
    
    
    43,094Purchase of marketable securities
    
    
    
    
    
    
    (36,664
    )Net cash
(used in)/provided by investing activities
    
    
    (271
    )
    
    
    4,243Cash flows from financing activities:Proceeds from exercise of employee stock options and
stock purchases
    
    
    2,482
    
    
    
    2,775Tax benefit  stock based compensation
    
    
    126
    
    
    
    Net cash provided by financing activities
    
    
    2,608
    
    
    
    2,775Effect of exchange rate changes on cash
and cash equivalents
    
    
    (23
    )
    
    
    505Net increase in cash and cash equivalents
    
    
    10,949
    
    
    
    16,090Cash and cash equivalents, beginning of period
    
    
    120,301
    
    
    
    56,982Cash and cash equivalents, end of period
    
    $
    131,250
    
    
    $
    73,072
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MRO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 A.    Basis of Presentation
    B.    Net Income Per Share
   Three months ended(in thousands, except per share data)
    
    03/31/06
    
    
    03/31/05Net income
    
    $
    6,934
    
    
    $
    619Weighted average common shares outstanding-basic
    
    
    25,722
    
    
    
    25,238Effect of dilutive securities (primarily stock options)
    
    
    881
    
    
    
    489Weighted average common shares outstanding-diluted
    
    
    26,603
    
    
    
    25,727Net income per share, basic
    
    $
    0.27
    
    
    $
    0.02Net income per share, diluted
    
    $
    0.26
    
    
    $
    0.02
 6




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Six months ended(in thousands, except per share data)
    
    03/31/06
    
    
    03/31/05Net income
    
    $
    11,150
    
    
    $
    3,782Weighted average common shares outstanding-basic
    
    
    25,658
    
    
    
    25,141Effect of dilutive securities (primarily stock options)
    
    
    939
    
    
    
    418Weighted average common shares outstanding-diluted
    
    
    26,597
    
    
    
    25,559Net income per share, basic
    
    $
    0.43
    
    
    $
    0.15Net income per share, diluted
    
    $
    0.42
    
    
    $
    0.15
  C.    Accounting Policies
 Stock Based Compensation
  Stock based plans  description
   7




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Three months ended
    
    
    Six months ended(in thousands)
    
    03/31/06
    
    
    03/31/06Cost of revenues
    
    $
    28
    
    
    $
    89Sales and marketing
    
    
    35
    
    
    
    100Product development
    
    
    27
    
    
    
    75General and administrative
    
    
    222
    
    
    
    429Total stock based compensation before taxes
    
    $
    312
    
    
    $
    693Less: Income tax benefit
    
    
    98
    
    
    
    180Net stock based compensation expense
    
    $
    214
    
    
    $
    513
   Three and six monthsended03/31/06Weighted average fair value of grants
    
    $8.73Expected life (1)
    
    6.25 YearsExpected volatility (2)
    
    59%Risk-free interest rate (3)
    
    4.6%Expected annual dividend yield (4)
    
    0.00%
 (1)
    
    Expected life is based on the elective method for plain vanilla options as provided
by SAB 107.(2)
    
    Expected volatility is based on an even weighting of the historical volatility of the
Companys stock over its expected life and the most recent two years. This
weighting reflects a more accurate expectation of future volatility.(3)
    
    Risk-free interest rate is based on U.S. Treasury rates corresponding to the grant date
and expected life.(4)
    
    Based on managements expectations with respect to payment of dividends during the
option term.
 8




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WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateNumber
    
    
    Average
    
    
    Contractual
    
    
    Intrinsicof Shares
    
    
    Exercise Price
    
    
    Term (Years)
    
    
    ValueOutstanding at September 30, 2005
    
    
    5,029,076
    
    
    $
    17.14
    
    
    
    6.1Granted
    
    
    15,000
    
    
    $
    17.24Exercised
    
    
    (62,757
    )
    
    $
    11.25Cancelled
    
    
    (15,291
    )
    
    $
    34.59Outstanding at December 31, 2005
    
    
    4,966,028
    
    
    $
    17.17
    
    
    
    5.8Granted
    
    
    348,000
    
    
    $
    14.52Exercised
    
    
    (87,229
    )
    
    $
    11.37Cancelled
    
    
    (8,000
    )
    
    $
    28.43Outstanding at March 31, 2006
    
    
    5,218,799
    
    
    $
    17.07
    
    
    
    5.9
    
    
    $
    16,746,855Exercisable at March 31, 2006
    
    
    4,849,439
    
    
    $
    17.25
    
    
    
    5.6
    
    
    $
    16,232,570Unvested at March 31, 2006
    
    
    369,360
    
    
    $
    14.62
    
    
    
    9.9Expected to vest at March 31, 2006
    
    
    330,031
    
    
    $
    14.62
    
    
    
    9.9
    
    
    $
    457,651
      WeightedAverageNumber of
    
    
    Grant DateShares
    
    
    Fair ValueNon-vested at September 30, 2005
    
    
    197,940
    
    
    $
    13.39GrantedVested
    
    
    (7,204
    )
    
    $
    12.55ForfeitedNon-vested at December 31, 2005
    
    
    190,736
    
    
    $
    13.42Granted
    
    
    197,000
    
    
    $
    14.52Vested
    
    
    (7,196
    )
    
    $
    12.55Non-vested at March 31, 2006
    
    
    380,540
    
    
    $
    14.01
  9




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Three and six monthsended03/31/05Expected life (1)
    
    4 YearsExpected volatility (2)
    
    75.0%Risk-free interest rate (3)
    
    3.38%Expected annual dividend yield (4)
    
    0.00%
 (1)
    
    Expected life is based on expected exercise patterns.(2)
    
    Expected volatility is based on historical volatility of the Companys stock.(3)
    
    Risk-free interest rate is based on U.S. Treasury rates corresponding to the grant date
and expected life.(4)
    
    Based on managements expectations with respect to payment of dividends during the option
term.
 Effect of FAS 123
 Three months ended
    
    
    Six months ended03/31/05
    
    
    03/31/05Net income as reported
    
    $
    619
    
    
    $
    3,782Add: Stock-based employee compensation
included in net income
    
    
    47
    
    
    
    95Deduct: Stock-based employee compensation
expense determined under the fair value based
method for all awards, net of related tax effects
    
    
    (981
    )
    
    
    (2,280
    )Pro forma net income
    
    $
    (315
    )
    
    $
    1,597Net income per share:Basic  as reported
    
    $
    0.02
    
    
    $
    0.15Basic  pro forma
    
    $
    (0.01
    )
    
    $
    0.06Diluted  as reported
    
    $
    0.02
    
    
    $
    0.15Diluted  pro forma
    
    $
    (0.01
    )
    
    $
    0.06
 10




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D.    Comprehensive Income:
  Three months ended(in thousands)
    
    03/31/06
    
    
    03/31/05Net income
    
    $
    6,934
    
    
    $
    619Other
comprehensive income,net of tax:Unrealized gain/(loss) on securities arising
during period
    
    
    22
    
    
    
    (83
    )Foreign currency translation adjustment
    
    
    269
    
    
    
    (510
    )Comprehensive income
    
    $
    7,225
    
    
    $
    26
 Six months ended(in thousands)
    
    03/31/06
    
    
    03/31/05Net income
    
    $
    11,150
    
    
    $
    3,782Other
comprehensive income,net of tax:Unrealized gain/(loss) on securities arising
during period
    
    
    32
    
    
    
    (91
    )Foreign currency translation adjustment
    
    
    42
    
    
    
    687Comprehensive income
    
    $
    11,224
    
    
    $
    4,378
 E.    Segment Information, Geographic Data and Major Customers:
   Three months ended(in thousands)
    
    03/31/06
    
    
    03/31/05Revenues:United States
    
    $
    34,704
    
    
    $
    24,898Other Americas
    
    
    2,962
    
    
    
    2,215Intercompany
    
    
    4,339
    
    
    
    1,755Subtotal
    
    $
    42,005
    
    
    $
    28,868Europe/Middle East and Africa
    
    
    14,363
    
    
    
    12,474Asia/Pacific
    
    
    5,183
    
    
    
    3,592Intercompany
    
    
    (4,339
    )
    
    
    (1,755
    )Total revenues
    
    $
    57,212
    
    
    $
    43,179
 11




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Six months ended(in thousands)
    
    03/31/06
    
    
    03/31/05Revenues:United States
    
    $
    61,234
    
    
    $
    51,394Other Americas
    
    
    5,472
    
    
    
    5,019Intercompany
    
    
    9,145
    
    
    
    5,233Subtotal
    
    $
    75,851
    
    
    $
    61,646Europe/Middle East and Africa
    
    
    29,473
    
    
    
    26,911Asia/Pacific
    
    
    10,165
    
    
    
    7,211Intercompany
    
    
    (9,145
    )
    
    
    (5,233
    )Total revenues
    
    $
    106,344
    
    
    $
    90,535
  F.    Goodwill and Other Intangible Assets
  03/31/06
    
    
    09/30/05(in thousands)Goodwill
    
    $
    46,337
    
    
    $
    46,337Acquired technology
    
    
    16,654
    
    
    
    16,654Accumulated amortization
    
    
    (14,456
    )
    
    
    (13,748
    )Sub-total acquired technology
    
    
    2,198
    
    
    
    2,906Other intangibles
    
    
    1,911
    
    
    
    1,911Accumulated amortization
    
    
    (1,848
    )
    
    
    (1,699
    )Sub-total other intangibles
    
    
    63
    
    
    
    212Total intangible assets, net
    
    $
    48,598
    
    
    $
    49,455
   12




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(in thousands)2006 (remaining 6 months)
    
    $
    7072007
    
    
    6592008
    
    
    6592009
    
    
    236Total
    
    $
    2,261
 G.    Recent Accounting Pronouncements
       H.    Guarantor Arrangements
  13




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14




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ITEM 2.    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
  OVERVIEW
   15




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Critical Accounting Policies and Estimates
     REVENUES
  Three
    
    
    
    
    
    
    Three
    
    
    Six
    
    
    
    
    
    
    SixMonths
    
    
    
    
    
    
    Months
    
    
    Months
    
    
    
    
    
    
    MonthsEnded
    
    
    Change
    
    
    Ended
    
    
    Ended
    
    
    Change
    
    
    Ended(in thousands)
    
    03/31/06
    
    
    %
    
    
    03/31/05
    
    
    03/31/06
    
    
    %
    
    
    03/31/05Software licenses
    
    $
    17,662
    
    
    
    74
    %
    
    $
    10,174
    
    
    $
    30,477
    
    
    
    22
    %
    
    $
    24,998Percentage of total
revenues
    
    
    31
    %
    
    
    
    
    
    
    23
    %
    
    
    29
    %
    
    
    
    
    
    
    28
    %Support revenues
    
    $
    20,320
    
    
    
    8
    %
    
    $
    18,865
    
    
    $
    40,591
    
    
    
    8
    %
    
    $
    37,454Percentage of total
revenues
    
    
    35
    %
    
    
    
    
    
    
    44
    %
    
    
    38
    %
    
    
    
    
    
    
    41
    %Service revenues
    
    $
    19,230
    
    
    
    36
    %
    
    $
    14,140
    
    
    $
    35,276
    
    
    
    26
    %
    
    $
    28,083Percentage of total
revenues
    
    
    34
    %
    
    
    
    
    
    
    33
    %
    
    
    33
    %
    
    
    
    
    
    
    31
    %Total revenues
    
    $
    57,212
    
    
    
    32
    %
    
    $
    43,179
    
    
    $
    106,344
    
    
    
    17
    %
    
    $
    90,535
  16




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##### Table of Contents



COST OF REVENUES
 Three
    
    
    
    
    
    
    Three
    
    
    Six
    
    
    
    
    
    
    SixMonths
    
    
    
    
    
    
    Months
    
    
    Months
    
    
    
    
    
    
    MonthsEnded
    
    
    Change
    
    
    Ended
    
    
    Ended
    
    
    Change
    
    
    Ended(in thousands)
    
    03/31/06
    
    
    %
    
    
    03/31/05
    
    
    03/31/06
    
    
    %
    
    
    03/31/05Cost of software licenses
revenues
    
    $
    1,917
    
    
    
    60
    %
    
    $
    1,199
    
    
    $
    3,300
    
    
    
    33
    %
    
    $
    2,479Percentage of software license
revenues
    
    
    11
    %
    
    
    
    
    
    
    12
    %
    
    
    11
    %
    
    
    
    
    
    
    10
    %Cost of support revenues
    
    $
    3,339
    
    
    
    13
    %
    
    $
    2,964
    
    
    $
    6,491
    
    
    
    11
    %
    
    $
    5,845Percentage of support revenues
    
    
    16
    %
    
    
    
    
    
    
    16
    %
    
    
    16
    %
    
    
    
    
    
    
    16
    %Cost of services revenues
    
    $
    14,034
    
    
    
    5
    %
    
    $
    13,356
    
    
    $
    27,056
    
    
    
    4
    %
    
    $
    26,090Percentage of services revenues
    
    
    73
    %
    
    
    
    
    
    
    94
    %
    
    
    77
    %
    
    
    
    
    
    
    93
    %Total cost of revenues
    
    $
    19,290
    
    
    
    10
    %
    
    $
    17,519
    
    
    $
    36,847
    
    
    
    7
    %
    
    $
    34,414Percentage of total revenues
    
    
    34
    %
    
    
    
    
    
    
    41
    %
    
    
    35
    %
    
    
    
    
    
    
    38
    %
   17




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##### Table of Contents



OPERATING EXPENSES
 Three
    
    
    
    
    
    
    Three
    
    
    Six
    
    
    
    
    
    
    SixMonths
    
    
    
    
    
    
    Months
    
    
    Months
    
    
    
    
    
    
    MonthsEnded
    
    
    Change
    
    
    Ended
    
    
    Ended
    
    
    Change
    
    
    Ended(in thousands)
    
    03/31/06
    
    
    %
    
    
    03/31/05
    
    
    03/31/06
    
    
    %
    
    
    03/31/05Sales and marketing
    
    $
    15,731
    
    
    
    18
    %
    
    $
    13,351
    
    
    $
    29,332
    
    
    
    3
    %
    
    $
    28,582Percentage of total
revenues
    
    
    27
    %
    
    
    
    
    
    
    31
    %
    
    
    28
    %
    
    
    
    
    
    
    32
    %Product development
    
    $
    7,789
    
    
    
    12
    %
    
    $
    6,958
    
    
    $
    15,242
    
    
    
    11
    %
    
    $
    13,738Percentage of total
revenues
    
    
    14
    %
    
    
    
    
    
    
    16
    %
    
    
    14
    %
    
    
    
    
    
    
    15
    %General and administrative
    
    $
    4,983
    
    
    
    10
    %
    
    $
    4,550
    
    
    $
    9,611
    
    
    
    5
    %
    
    $
    9,120Percentage of total
revenues
    
    
    9
    %
    
    
    
    
    
    
    11
    %
    
    
    9
    %
    
    
    
    
    
    
    10
    %
   18




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##### Table of Contents



NON-OPERATING EXPENSES
 Three
    
    
    
    
    
    
    Three
    
    
    Six
    
    
    
    
    
    
    SixMonths
    
    
    
    
    
    
    Months
    
    
    Months
    
    
    
    
    
    
    MonthsEnded
    
    
    Change
    
    
    Ended
    
    
    Ended
    
    
    Change
    
    
    Ended(in thousands)
    
    03/31/06
    
    
    %
    
    
    03/31/05
    
    
    03/31/06
    
    
    %
    
    
    03/31/05Interest income, net
    
    $
    1,215
    
    
    
    88
    %
    
    $
    647
    
    
    $
    2,440
    
    
    
    118
    %
    
    $
    1,118Other income/(expense), net
    
    $
    208
    
    
    
    142
    %
    
    $
    (499
    )
    
    $
    17
    
    
    
    (76
    )%
    
    $
    71
   INCOME TAXES
  LIQUIDITY AND CAPITAL RESOURCES
   19




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##### Table of Contents



RECENT ACCOUNTING PRONOUNCEMENTS
       20




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##### Table of Contents



RISK FACTORS
  We depend substantially on our Maximo EAM product.
  The markets for our products are mature and saturated and may present limited opportunity for
growth, and are crowded with larger competitors that may have significant advantages.
  
    
    The emergence and growth of the EAM, ITAM and service desk markets have attracted a
large number of strong competitors, and most of the largest software companies that sell
into complementary markets have developed competing EAM, ITAM or service desk products.
    
    In the EAM market, large ERP vendors have developed products that compete with Maximo
EAM and that are tightly integrated with the rest of their ERP product suites. In the ITAM
and service desk markets, larger companies than ours have developed competing products that
are delivered as part of a broader product offering. While our products may have technical
or functional advantages over those of our competition, these companies are all larger than
ours, they may have the ability to quickly eliminate our competitive advantages, and they
are able to market their products as part of a larger solution and take advantage of
customers desire to consolidate their information technology (IT) systems onto fewer
platforms.
   21




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##### Table of Contents



Our efforts to reach into new markets with new products may not be successful.
  
    
    We may not be able to develop and market our new products on time, with acceptable
quality or with functions and features that meet the requirements of customers in these
markets.
    
    The MXES products may not contain all of the functionality deemed necessary by
prospective buyers in these markets, and certain of our competitors in these new markets
also offer complementary and sometimes fully integrated products that we do not offer. It
may take longer than we anticipate for us to establish our presence in new markets, develop
a robust and dependable flow of sales opportunities and establish predictable closure rates
and revenue streams.
    
    It is possible that our sales, service or support personnel may not be adequately
trained and/or staffed to sell, implement or support the new products. Newly developed
products require a higher level of development, distribution and support expenditures in
the early stages of their product life cycles.
    
    In the event that our development efforts do not progress as intended, or if our new
product releases or technologies are not successful in the markets they are intended to
address, we may increase our rate of expenditure in this area over and above the level of
investment experienced in the past or previously projected, which could have a material
adverse affect on our results of operation or financial condition.
    
    We may not derive revenues from MXES in proportion to our development investment and
sales efforts, and those efforts may serve as a significant distraction from our efforts to
maintain revenues at current levels in our traditional EAM market.
    
    Our positioning of the combination of our traditional EAM products and our ITAM and
service desk products in a single offering as a logical suite of products may not be
accepted in the marketplace. As a result of this and other factors, we may not be able to
benefit from the trend among customers to consolidate their IT systems, and we may not be
successful in our attempts to cross-sell our new products into our existing accounts, or
our traditional EAM products to customers primarily interested in our new products.
  Our sales efforts depend in part on strategic relationships and reseller arrangements with other
companies.
  22




---



##### Table of Contents



If we are unable to keep pace with the rapid changes in technology and customer demand that
characterize our industry, our competitive position could be impaired.
  Our quarterly operating results are subject to fluctuations and to seasonal variation.
  We face intense competition in the markets we serve.
 .
 23




---



##### Table of Contents



Our international operations subject us to special risks.
  Our software products are dependent on third-party providers of software and services, and failure
of these parties to perform as expected, or termination of our relationships with them, could harm
our business.
  We may have exposure to additional tax liabilities.
  Changes in regulations or critical accounting policies could materially and adversely affect us.
   24




---



##### Table of Contents



We may perform more fixed price services contracts.
  We may be unable to effectively protect our intellectual property.
  Loss of the services of one or more of our key executive officers or inability to recruit needed
sales, services and technical personnel could adversely affect our business.
  25




---



##### Table of Contents



We are exposed to fluctuations in the market values of our portfolio investments and in interest
rates.
  Recently issued regulations related to equity compensation could adversely affect our ability to
attract and retain key personnel.
  We face costs and risks associated with compliance with Section 404 of the Sarbanes-Oxley Act.
  Other Risks
 26
    Table of Contents   
 ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
 ITEM 4.    CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures
  Changes in internal control over financial reporting
  27




---



##### Table of Contents



Part II. OTHER INFORMATION
 
 Item 1.
    
    Legal ProceedingsNone
 
 Item 1A.
    
    Risk Factors
  
 Item 2
    
    Unregistered Sales of Equity Securities & Use of ProceedsNone
 
 Item 3
    
    Defaults upon Senior SecuritiesNone
 
 Item 4.
    
    Submission of Matters to a Vote of Security Holders
   Robert L. DanielsFor
    
    Withheld18,686,950
    
    1,862,934John A. McMullenFor
    
    Withheld18,384,927
    
    2,164,957
  For
    
    Against
    
    Abstain
    
    Non-Vote16,766,284
    
    1,668,024
    
    60,420
    
    2,055,156
  For
    
    Against
    
    Abstain
    
    Non-Vote20,469,362
    
    74,296
    
    6,226
    
    0
 
 Item 5.
    
    Other InformationNone
 
 Item 6.
    
    Exhibits
  28




---



##### Table of Contents



MRO SOFTWARE, INC.Dated:  May 10, 2006
    By:
    /s/ Peter J. RicePeter J. RiceExecutive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer) 29




---



##### Table of Contents



EXHIBIT LIST
 Incorporated by ReferenceExhibit
    
    
    
    Filed with this
    
    
    
    
    
    ExhibitNo.
    
    Description
    
    Form 10-Q
    
    Form
    
    Filing Date
    
    No.3.1
    
    Amended and Restated Articles of Organization
    
    
    
    S-1
    
    April 21, 1994
    
    
    3.33.2
    
    Amendment to Articles of Organization
    
    
    
    10-Q
    
    February 14, 2000
    
    
    3.43.3
    
    Amendment to Articles of Organization
    
    
    
    8-K
    
    March 9, 2001
    
    
    3.43.4
    
    Certificate of Vote of Directors Establishing Series A
Junior Participating Preferred Stock
    
    
    
    8-K
    
    February 3, 1998
    
    
    4
    (b)3.5
    
    By-laws
    
    
    
    10-Q
    
    February 14, 2001
    
    
    3.53.6
    
    Amendment to By-laws
    
    
    
    10-Q
    
    May 15, 2001
    
    
    3.34.1
    
    Specimen stock certificate for common stock
    
    
    
    S-1
    
    April 21, 1994
    
    
    4.14.2
    
    Form of rights certificate
    
    
    
    8-K
    
    February 3, 1998
    
    
    4
    (c)10.1*
    
    Form of Option Amendment for executive officers
    
    
    
    8-K
    
    October 6, 2005
    
    
    10.110.2*
    
    Executive Bonus Plan Fiscal Year Ended September 30, 2006
    
    
    
    10-Q
    
    February 9, 2006
    
    
    10.210.3*
    
    Amended Stock Restriction Agreement
    
    
    
    10-Q
    
    February 9, 2006
    
    
    10.331.1
    
    Certification of the chief executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
    
    X31.2
    
    Certification of the chief financial officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
    
    X32.1
    
    Certification of the chief executive officer and the
chief financial officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    X
 *
    
    Management contract or compensatory plan.
 30