##### 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 1934
 for the quarter ended June 30, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-23852
 MRO SOFTWARE, INC.
  MASSACHUSETTS
    
    04-2448516(State of Incorporation)
    
    (I.R.S. Employer Identification Number)
 100 CROSBY DRIVE, BEDFORD, MASSACHUSETTS
(Address of principal executive offices)
    
    01730
(Zip code)
 
 þ o
  o þ o
 o þ




---



##### 



MRO SOFTWARE, INC.
10-Q INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets (unaudited) as of June 30, 2006 and September 30, 2005.
    
    
    3Consolidated Statements of Operations (unaudited) for the three and nine months ended June 30, 2006 and 2005.
    
    
    4Consolidated Statements of Cash Flows (unaudited)for the nine months ended June 30, 2006 and 2005.
    
    
    5Notes to Consolidated Financial Statements (unaudited).
    
    
    6Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.Quantitative and Qualitative Disclosures about Market Risk
    
    
    29Item 4.Controls and Procedures
    
    
    29PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities & Use of Proceeds
    
    
    30Item 3. Defaults upon Senior Executives
    
    
    30Item 4. Submission of Matter to a Vote of Security Holders
    
    
    30Item 5. Other Information
    
    
    30Item 6. Exhibits
    
    
    30SIGNATURE
    
    
    31EX-31.1 SECTION 302 CERTIFICATION OF THE C.E.O.EX-31.2 SECTION 302 CERTIFICATION OF THE C.F.O.EX-32.1 SECTION 906 CERTIFICATION OF THE C.E.O. & C.F.0.
  2




---



##### Table of Contents



MRO SOFTWARE, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (unaudited)
 June 30,
    
    
    September 30,2006
    
    
    2005(in thousands, except per share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    120,802
    
    
    $
    120,301Marketable securities
    
    
    33,283
    
    
    
    5,130Accounts receivable, trade, less allowance
for doubtful accounts of $1,254 at June 30, 2006
and $1,445 at September 30, 2005, respectively
    
    
    48,274
    
    
    
    40,362Prepaid expenses and other current assets
    
    
    7,302
    
    
    
    4,715Deferred income taxes
    
    
    1,743
    
    
    
    1,963Total current assets
    
    
    211,404
    
    
    
    172,471Marketable securities
    
    
    6,902
    
    
    
    7,743Property and equipment, net
    
    
    6,868
    
    
    
    7,210Goodwill
    
    
    46,337
    
    
    
    46,337Intangible assets, net
    
    
    1,844
    
    
    
    3,118Deferred income taxes
    
    
    5,380
    
    
    
    6,412Other assets
    
    
    3,025
    
    
    
    3,079Total assets
    
    $
    281,760
    
    
    $
    246,370LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    13,070
    
    
    $
    15,481Accrued compensation
    
    
    11,441
    
    
    
    12,805Income taxes payable
    
    
    5,165
    
    
    
    1,467Deferred revenue
    
    
    37,165
    
    
    
    31,718Deferred lease obligation
    
    
    437
    
    
    
    363Total current liabilities
    
    
    67,278
    
    
    
    61,834Deferred lease obligation
    
    
    1,900
    
    
    
    2,013Deferred revenue
    
    
    301
    
    
    
    577Other long term liabilities
    
    
    74
    
    
    
    240Total liabilities
    
    
    69,553
    
    
    
    64,664Commitments and contingencies (Note I)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;
26,623 and 25,738 issued and outstanding at June 30, 2006
and September 30, 2005, respectively
    
    
    266
    
    
    
    257Treasury stock, 12 and 0, at June 30, 2006 and September 30, 2005,
respectively, at cost
    
    
    (237
    )
    
    
    Additional paid-in capital
    
    
    136,593
    
    
    
    125,760Retained earnings
    
    
    73,720
    
    
    
    55,098Accumulated other comprehensive income
    
    
    1,865
    
    
    
    591Total stockholders equity
    
    
    212,207
    
    
    
    181,706Total liabilities and stockholders equity
    
    $
    281,760
    
    
    $
    246,370
  3




---



##### Table of Contents



MRO SOFTWARE, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except per share data)Revenues:Software
    
    $
    21,513
    
    
    
    19,233
    
    
    $
    51,990
    
    
    $
    44,231Support
and
services
    
    
    38,835
    
    
    
    33,997
    
    
    
    114,702
    
    
    
    99,534Total revenues
    
    
    60,348
    
    
    
    53,230
    
    
    
    166,692
    
    
    
    143,765Cost of
revenues:Software
    
    
    1,352
    
    
    
    2,608
    
    
    
    4,652
    
    
    
    5,087Support
and
services
    
    
    17,983
    
    
    
    16,441
    
    
    
    51,530
    
    
    
    48,376Total cost of
revenues
    
    
    19,335
    
    
    
    19,049
    
    
    
    56,182
    
    
    
    53,463Gross profit
    
    
    41,013
    
    
    
    34,181
    
    
    
    110,510
    
    
    
    90,302Operating
expenses:Sales
and
marketing
    
    
    16,637
    
    
    
    15,861
    
    
    
    45,969
    
    
    
    44,443Product
development
    
    
    8,089
    
    
    
    8,183
    
    
    
    23,331
    
    
    
    21,921General
and
administrative
    
    
    5,556
    
    
    
    4,486
    
    
    
    15,167
    
    
    
    13,606Total
operating
expenses
    
    
    30,282
    
    
    
    28,530
    
    
    
    84,467
    
    
    
    79,970Income from
operations
    
    
    10,731
    
    
    
    5,651
    
    
    
    26,043
    
    
    
    10,332Interest
income,
net
    
    
    1,468
    
    
    
    693
    
    
    
    3,861
    
    
    
    1,811Other
(expense
)/income
, net
    
    
    (48
    )
    
    
    7
    
    
    
    16
    
    
    
    78Income
before
income
taxes
    
    
    12,151
    
    
    
    6,351
    
    
    
    29,920
    
    
    
    12,221Provision
for income
taxes
    
    
    4,679
    
    
    
    2,289
    
    
    
    11,298
    
    
    
    4,377Net income
    
    $
    7,472
    
    
    $
    4,062
    
    
    $
    18,622
    
    
    $
    7,844Net income
per share,
basic
    
    $
    0.29
    
    
    $
    0.16
    
    
    $
    0.72
    
    
    $
    0.31Net income
per share,
diluted
    
    $
    0.27
    
    
    $
    0.16
    
    
    $
    0.69
    
    
    $
    0.31Shares used
to
calculate
net income
per shareBasic
    
    
    26,061
    
    
    
    25,327
    
    
    
    25,797
    
    
    
    25,206Diluted
    
    
    27,393
    
    
    
    25,936
    
    
    
    26,880
    
    
    
    25,687
  4




---



##### Table of Contents



MRO SOFTWARE, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Nine Months endedJune 30,(in thousands)
    
    2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    18,622
    
    
    $
    7,844Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation
    
    
    2,224
    
    
    
    2,303Amortization of other intangibles
    
    
    1,274
    
    
    
    1,829Amortization of premium on marketable securities
    
    
    54
    
    
    
    (57
    )Loss on sale and disposal of property and equipment
    
    
    1
    
    
    
    62Stock-based compensation
    
    
    1,403
    
    
    
    236Deferred income taxes
    
    
    1,284
    
    
    
    1,659Changes in operating assets and liabilities:Accounts receivable
    
    
    (7,196
    )
    
    
    (2,385
    )Prepaid expenses and other assets
    
    
    (2,304
    )
    
    
    (42
    )Accounts payable, accrued expenses and other liabilities
    
    
    (2,905
    )
    
    
    680Accrued compensation
    
    
    (1,492
    )
    
    
    (247
    )Income taxes payable
    
    
    3,705
    
    
    
    (1,408
    )Deferred revenue
    
    
    4,603
    
    
    
    2,922Net cash provided by operating activities
    
    
    19,273
    
    
    
    13,396Cash flows from investing activities:Acquisitions of property and equipment and other
capital expenditures
    
    
    (1,883
    )
    
    
    (2,669
    )Sale of marketable securities
    
    
    3,105
    
    
    
    193,858Purchase of marketable securities
    
    
    (30,415
    )
    
    
    (183,178
    )Net cash (used in)/provided by investing activities
    
    
    (29,193
    )
    
    
    8,011Cash flows from financing activities:Proceeds from exercise of employee stock options and
stock purchases
    
    
    8,321
    
    
    
    4,322Purchase of treasury stock
    
    
    (237
    )
    
    
    Excess tax benefit on stock awards
    
    
    1,106
    
    
    
    Net cash provided by financing activities
    
    
    9,190
    
    
    
    4,322Effect of exchange rate changes on cash
and cash equivalents
    
    
    1,231
    
    
    
    (448
    )Net increase in cash and cash equivalents
    
    
    501
    
    
    
    25,281Cash and cash equivalents, beginning of period
    
    
    120,301
    
    
    
    56,982Cash and cash equivalents, end of period
    
    $
    120,802
    
    
    $
    82,263
  5




---



##### Table of Contents



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)
    
    06/30/06
    
    
    06/30/05Net income
    
    $
    7,472
    
    
    $
    4,062Weighted average common shares outstanding-basic
    
    
    26,061
    
    
    
    25,327Effect of dilutive securities (primarily stock options)
    
    
    1,332
    
    
    
    609Weighted average common shares outstanding-diluted
    
    
    27,393
    
    
    
    25,936Net income per share, basic
    
    $
    0.29
    
    
    $
    0.16Net income per share, diluted
    
    $
    0.27
    
    
    $
    0.16
 6




---



##### Table of Contents



Nine months ended(in thousands, except per share data)
    
    06/30/06
    
    
    06/30/05Net income
    
    $
    18,622
    
    
    $
    7,844Weighted average common shares outstanding-basic
    
    
    25,797
    
    
    
    25,206Effect of dilutive securities (primarily stock options)
    
    
    1,083
    
    
    
    481Weighted average common shares outstanding-diluted
    
    
    26,880
    
    
    
    25,687Net income per share, basic
    
    $
    0.72
    
    
    $
    0.31Net income per share, diluted
    
    $
    0.69
    
    
    $
    0.31
  C. Stock Based Compensation
  Stock based plans  description
   7




---



##### Table of Contents



Three months
    
    
    Nine monthsended
    
    
    ended(in thousands)
    
    06/30/06
    
    
    06/30/06Cost of revenues
    
    $
    133
    
    
    $
    222Sales and marketing
    
    
    146
    
    
    
    246Product development
    
    
    103
    
    
    
    178General and administrative
    
    
    328
    
    
    
    757Total stock based compensation before taxes
    
    $
    710
    
    
    $
    1,403Less: Income tax benefit
    
    
    146
    
    
    
    326Net stock based compensation expense
    
    $
    564
    
    
    $
    1,077
   Three months ended
    
    
    Nine months ended06/30/06
    
    
    06/30/06Weighted average fair value of grants
    
    $
    12.33
    
    
    $
    8.84Expected life (1)
    

    
    6.20 Years
    
    
    
    6.11 YearsExpected volatility (2)
    
    
    61.0
    %
    
    
    59.0
    %Risk-free interest rate (3)
    
    
    5.0
    %
    
    
    4.62
    %Expected annual dividend yield (4)
    
    
    0.00
    %
    
    
    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




---



##### Table of Contents



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
    
    
    $
    16,746,855Granted
    
    
    15,000
    
    
    $
    19.98Exercised
    
    
    (427,070
    )
    
    $
    11.63Cancelled
    
    
    (5,600
    )
    
    $
    23.60Outstanding at June 30, 2006
    
    
    4,801,129
    
    
    $
    17.55
    
    
    
    5.6
    
    
    $
    29,419,089Exercisable at June 30, 2006
    
    
    4,417,723
    
    
    $
    17.79
    
    
    
    5.3
    
    
    $
    27,410,480Unvested at June 30, 2006
    
    
    383,406
    
    
    $
    14.83
    
    
    
    9.7Expected to vest at June 30, 2006
    
    
    347,993
    
    
    $
    14.83
    
    
    
    9.7
    
    
    $
    1,820,055
      9




---



##### Table of Contents



WeightedAverageNumber of
    
    
    Grant DateShares
    
    
    Fair ValueNon-vested at September 30, 2005
    
    
    197,940
    
    
    $
    13.39GrantedVested
    
    
    (7,204
    )
    
    $
    12.55Non-vested at December 31, 2005
    
    
    190,736
    
    
    $
    13.42Granted
    
    
    197,000
    
    
    $
    14.52Vested
    
    
    (7,196
    )
    
    $
    12.55Non-vested at March 31, 2006
    
    
    380,540
    
    
    $
    14.01GrantedVested
    
    
    (41,970
    )
    
    $
    13.45Non-vested at June 30, 2006
    
    
    338,570
    
    
    $
    14.08
     Three months ended
    
    
    Nine months ended06/30/05
    
    
    06/30/05Expected life (1)
    
    

    3 Years
    
    
    

    3.4 YearsExpected volatility (2)
    
    
    75.0
    %
    
    
    75.0
    %Risk-free interest rate (3)
    
    
    3.74
    %
    
    
    3.59
    %Expected annual dividend yield (4)
    
    
    0.00
    %
    
    
    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. 10




---



##### Table of Contents



Effect of FAS 123
 Three months ended
    
    
    Nine months ended(in thousands, except per share amounts)
    
    06/30/05
    
    
    06/30/05Net income as reported
    
    $
    4,062
    
    
    $
    7,844Add: Stock-based employee compensation
included in net income
    
    
    142
    
    
    
    236Deduct: Stock-based employee compensation
expense determined under the fair value based
method for all awards, net of related tax effects
    
    
    (1,252
    )
    
    
    (3,532
    )Pro forma net income
    
    $
    2,952
    
    
    $
    4,548Net income per share:Basic  as reported
    
    $
    0.16
    
    
    $
    0.31Basic  pro forma
    
    $
    0.12
    
    
    $
    0.18Diluted  as reported
    
    $
    0.16
    
    
    $
    0.31Diluted  pro forma
    
    $
    0.11
    
    
    $
    0.18
 D. Goodwill and Other Intangible Assets
  (in thousands)
    
06/30/06
    
    
    09/30/05Goodwill
    
    $
    46,337
    
    
    $
    46,337Acquired technology
    
    
    16,654
    
    
    
    16,654Accumulated amortization
    
    
    (14,810
    )
    
    
    (13,748
    )Sub-total acquired technology
    
    
    1,844
    
    
    
    2,906Other intangibles
    
    
    1,911
    
    
    
    1,911Accumulated amortization
    
    
    (1,911
    )
    
    
    (1,699
    )Sub-total other intangibles
    
    
    
    
    
    
    212Total intangible assets, net
    
    $
    48,181
    
    
    $
    49,455
   11




---



##### Table of Contents



(in thousands)2006 (remaining 3 months)
    
    $
    2902007
    
    
    6592008
    
    
    6592009
    
    
    236Total
    
    $
    1,844
 E Stockholders Equity
  F. Comprehensive Income:
  Three months ended(in thousands)
    
    06/30/06
    
    
    06/30/05Net income
    
    $
    7,472
    
    
    $
    4,062Other comprehensive income,
net of tax:Unrealized gain on securities arising during period
    
    
    12
    
    
    
    69Foreign currency translation adjustment
    
    
    1,188
    
    
    
    (949
    )Comprehensive income
    
    $
    8,672
    
    
    $
    3,182
 Nine months ended(in thousands)
    
    06/30/06
    
    
    06/30/05Net income
    
    $
    18,622
    
    
    $
    7,844Other comprehensive income,
net of tax:Unrealized gain/(loss) on securities arising
during period
    
    
    45
    
    
    
    (22
    )Foreign currency translation adjustment
    
    
    1,229
    
    
    
    (262
    )Comprehensive income
    
    $
    19,896
    
    
    $
    7,560
 G. Segment Information, Geographic Data and Major Customers:
   12




---



##### Table of Contents



Three months ended(in thousands)
    
    6/30/2006
    
    
    6/30/2005Revenues:United States
    
    $
    40,212
    
    
    $
    31,089Other Americas
    
    
    2,961
    
    
    
    2,419Intercompany
    
    
    1,211
    
    
    
    3,641Subtotal
    
    $
    44,384
    
    
    $
    37,149Europe/Middle East and Africa
    
    
    12,826
    
    
    
    15,357Asia/Pacific
    
    
    4,349
    
    
    
    4,365Intercompany
    
    
    (1,211
    )
    
    
    (3,641
    )Total revenues
    
    $
    60,348
    
    
    $
    53,230
 Nine months ended(in thousands)
    
    6/30/2006
    
    
    6/30/2005Revenues:United States
    
    $
    101,446
    
    
    $
    82,482Other Americas
    
    
    8,433
    
    
    
    7,438Intercompany
    
    
    10,357
    
    
    
    8,874Subtotal
    
    $
    120,236
    
    
    $
    98,794Europe/Middle East and Africa
    
    
    42,299
    
    
    
    42,268Asia/Pacific
    
    
    14,514
    
    
    
    11,577Intercompany
    
    
    (10,357
    )
    
    
    (8,874
    )Total revenues
    
    $
    166,692
    
    
    $
    143,765
  H. Recent Accounting Pronouncements
   13




---



##### Table of Contents



I. Guarantor Arrangements
   14




---



##### Table of Contents



J. Subsequent Event
    15




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
  OVERVIEW
    16




---



##### Table of Contents



Critical Accounting Policies and Estimates
     17




---



##### Table of Contents



REVENUES
  Three
    
    
    
    
    
    
    Three
    
    
    Nine
    
    
    
    
    
    
    NineMonths
    
    
    
    
    
    
    Months
    
    
    Months
    
    
    
    
    
    
    MonthsEnded
    
    
    Change
    
    
    Ended
    
    
    Ended
    
    
    Change
    
    
    Ended(in thousands)
    
    06/30/06
    
    
    %
    
    
    06/30/05
    
    
    06/30/06
    
    
    %
    
    
    06/30/05Software licenses
    
    $
    21,513
    
    
    
    12
    %
    
    $
    19,233
    
    
    $
    51,990
    
    
    
    18
    %
    
    $
    44,231Percentage of total revenues
    
    
    36
    %
    
    
    
    
    
    
    36
    %
    
    
    31
    %
    
    
    
    
    
    
    31
    %Support revenues
    
    $
    21,321
    
    
    
    14
    %
    
    $
    18,732
    
    
    $
    61,912
    
    
    
    10
    %
    
    $
    56,186Percentage of total revenues
    
    
    35
    %
    
    
    
    
    
    
    35
    %
    
    
    37
    %
    
    
    
    
    
    
    39
    %Service revenues
    
    $
    17,514
    
    
    
    15
    %
    
    $
    15,265
    
    
    $
    52,790
    
    
    
    22
    %
    
    $
    43,348Percentage of total revenues
    
    
    29
    %
    
    
    
    
    
    
    29
    %
    
    
    32
    %
    
    
    
    
    
    
    30
    %Total revenues
    
    $
    60,348
    
    
    
    13
    %
    
    $
    53,230
    
    
    $
    166,692
    
    
    
    16
    %
    
    $
    143,765
    18




---



##### Table of Contents



COST OF REVENUES
 Three
    
    
    
    
    
    
    Three
    
    
    Nine
    
    
    
    
    
    
    NineMonths
    
    
    
    
    
    
    Months
    
    
    Months
    
    
    
    
    
    
    MonthsEnded
    
    
    Change
    
    
    Ended
    
    
    Ended
    
    
    Change
    
    
    Ended(in thousands)
    
    06/30/06
    
    
    %
    
    
    06/30/05
    
    
    06/30/06
    
    
    %
    
    
    06/30/05Cost of software licenses revenues
    
    $
    1,352
    
    
    
    (48
    )%
    
    $
    2,608
    
    
    $
    4,652
    
    
    
    (9
    )%
    
    $
    5,087Percentage of software license
revenues
    
    
    6
    %
    
    
    
    
    
    
    14
    %
    
    
    9
    %
    
    
    
    
    
    
    12
    %Cost of support revenues
    
    $
    3,348
    
    
    
    9
    %
    
    $
    3,084
    
    
    $
    9,839
    
    
    
    10
    %
    
    $
    8,929Percentage of support revenues
    
    
    16
    %
    
    
    
    
    
    
    16
    %
    
    
    16
    %
    
    
    
    
    
    
    16
    %Cost of services revenues
    
    $
    14,635
    
    
    
    10
    %
    
    $
    13,357
    
    
    $
    41,691
    
    
    
    6
    %
    
    $
    39,447Percentage of services revenues
    
    
    84
    %
    
    
    
    
    
    
    88
    %
    
    
    79
    %
    
    
    
    
    
    
    91
    %Total cost of revenues
    
    $
    19,335
    
    
    
    2
    %
    
    $
    19,049
    
    
    $
    56,182
    
    
    
    5
    %
    
    $
    53,463Percentage of total revenues
    
    
    32
    %
    
    
    
    
    
    
    36
    %
    
    
    34
    %
    
    
    
    
    
    
    37
    %
    19




---



##### Table of Contents



OPERATING EXPENSES
 Three
    
    
    
    
    
    
    Three
    
    
    Nine
    
    
    
    
    
    
    NineMonths
    
    
    
    
    
    
    Months
    
    
    Months
    
    
    
    
    
    
    MonthsEnded
    
    
    Change
    
    
    Ended
    
    
    Ended
    
    
    Change
    
    
    Ended(in thousands)
    
    06/30/06
    
    
    %
    
    
    06/30/05
    
    
    06/30/06
    
    
    %
    
    
    06/30/05Sales and marketing
    
    $
    16,637
    
    
    
    5
    %
    
    $
    15,861
    
    
    $
    45,969
    
    
    
    3
    %
    
    $
    44,443Percentage of total revenues
    
    
    28
    %
    
    
    
    
    
    
    30
    %
    
    
    28
    %
    
    
    
    
    
    
    31
    %Product development
    
    $
    8,089
    
    
    
    (1
    )%
    
    $
    8,183
    
    
    $
    23,331
    
    
    
    6
    %
    
    $
    21,921Percentage of total revenues
    
    
    13
    %
    
    
    
    
    
    
    15
    %
    
    
    14
    %
    
    
    
    
    
    
    15
    %General and administrative
    
    $
    5,556
    
    
    
    24
    %
    
    $
    4,486
    
    
    $
    15,167
    
    
    
    11
    %
    
    $
    13,606Percentage of total revenues
    
    
    9
    %
    
    
    
    
    
    
    8
    %
    
    
    9
    %
    
    
    
    
    
    
    9
    %
    20




---



##### Table of Contents



NON-OPERATING EXPENSES
 Three
    
    
    
    
    
    
    Three
    
    
    Nine
    
    
    
    
    
    
    NineMonths
    
    
    
    
    
    
    Months
    
    
    Months
    
    
    
    
    
    
    MonthsEnded
    
    
    Change
    
    
    Ended
    
    
    Ended
    
    
    Change
    
    
    Ended(in thousands)
    
    06/30/06
    
    
    %
    
    
    06/30/05
    
    
    06/30/06
    
    
    %
    
    
    06/30/05Interest income, net
    
    $
    1,468
    
    
    
    112
    %
    
    $
    693
    
    
    $
    3,861
    
    
    
    113
    %
    
    $
    1,811Other (expense)/ income, net
    
    $
    (48
    )
    
    
    (786
    )%
    
    $
    7
    
    
    $
    16
    
    
    
    (79
    )%
    
    $
    78
   INCOME TAXES
  LIQUIDITY AND CAPITAL RESOURCES
      21




---



##### Table of Contents



RECENT ACCOUNTING PRONOUNCEMENTS
      22




---



##### 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.
   23




---



##### 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.
  24




---



##### 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.
 .
 25




---



##### 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.
   26




---



##### 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.
  27




---



##### 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
  28




---



##### 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
  29




---



##### Table of Contents



Part II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 None
 
 Item 1A. Risk Factors
  
 Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 None
 
 Item 3. Defaults upon Senior Securities
 None
 
 Item 4. Submission of Matters to a Vote of Security Holders
 None
 
 Item 5. Other Information
 None
 
 Item 6. Exhibits
  30




---



##### Table of Contents



MRO SOFTWARE, INC.Dated:  August 9, 2006
    By:
    /s/ Peter J. RicePeter J. RiceExecutive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and Accounting Officer) 31




---



##### Table of Contents



EXHIBIT LIST
 Filed with this
    
    
    
    Incorporated by ReferenceExhibit No.

    Description
    
    Form 10-Q
    
    Form
    
    Filing Date
    
    Exhibit No.2.3
    
    The Agreement and Plan of Merger
among the Company, Kennesaw Acquisition Corporation and International
Business Machines Corporation dated August 3, 2006
    
    
    
    8-K
    
    August 4, 2006
    
    
    2.33.1
    
    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
    
    
    10.310.4*
    
    Amendment No. 1 to the Rights
Agreement dated January 27, 1998 between the Company and BankBoston N.A.
    
    
    
    8-K
    
    August 4, 2006
    
    
    10.431.1
    
    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. 32