UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

(Mark One)

Commission File Number: 0-22993

INDUS INTERNATIONAL, INC.

(770) 952-8444
(Registrant’s telephone number, including area code)

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

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

As of August 4, 2004, the Registrant had outstanding 57,243,992 shares of Common Stock, $.001 par value.

TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INDUS INTERNATIONAL, INC.

See accompanying notes.

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INDUS INTERNATIONAL, INC.

See accompanying notes.

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INDUS INTERNATIONAL, INC.

See accompanying notes.

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INDUS INTERNATIONAL, INC.

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial information has been prepared by management in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s (“SEC”) rules and regulations. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s financial position at June 30, 2004 and results of operations and cash flows for all periods presented have been made. The condensed, consolidated balance sheet at March 31, 2004 has been derived from the audited consolidated financial statements at that date. Certain prior period amounts have been reclassified to conform to current period classifications.

These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended March 31, 2004 that are included in the Company’s 2004 Annual Report on Form 10-K as filed with the SEC. The consolidated results of operations for the three months ended June 30, 2004 are not necessarily indicative of the results to be expected for any subsequent quarter or period, or for the entire fiscal year ending March 31, 2005.

2. Restructuring Expenses

The Company recorded restructuring costs of $10.5 million and $12,000 for the three months ended June 30, 2004 and 2003, respectively.

In the three months ended June 30, 2004, the Company recorded restructuring charges of $10.5 million for adjustments to the existing accounting accruals from prior restructurings and for new restructuring charges related to office and business consolidations and employee severance. An adjustment to the Company’s expected sublease income for two remaining unoccupied floors in San Francisco from the restructuring initiative in 2000, as revised in 2002 and 2003, comprised $1.4 million of this expense. Due to the continuing surplus of office space capacity in the San Francisco market and the relatively short time period remaining on the lease compared with potential tenant requirements, the Company determined that there would be no future sublease income and recorded restructuring charges to fully accrue for the remaining lease obligation for these two floors. Further consolidation of office space in San Francisco and Atlanta resulted in $7.8 million in new restructuring charges for the quarter. This consolidation includes vacating three floors in Atlanta and one additional floor in San Francisco. The remaining $1.3 million in restructuring expense is associated with the elimination of approximately 70 positions, including the transfer of certain functions to the company-owned office buildings in Columbia, South Carolina and the outsourcing of some development functions to India. These restructuring charges have been recorded in accordance with SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” and SFAS No. 112, “Employer’s Accounting for Postemployment Benefits.”

Between January 1, 2000 and March 31, 2004, the Company recorded restructuring charges totaling $22.7 million. Restructuring costs of $2.1 million and $10.2 million were recorded for fiscal years 2000 and 2001 in connection with the relocation of the Company’s headquarters and certain administrative functions to Atlanta, Georgia, severance payments related to the elimination of 56 global positions, and charges representing the estimated excess lease costs associated with subleasing redundant San Francisco office space. In fiscal year 2002, the Company recorded restructuring costs of approximately $8.2 million, of which $3.4 million related to the suspension of the United Kingdom Ministry of Defense (“MoD”) project and the Company’s subsequent demobilization and reduction in workforce and required support office facilities and $4.8 million related to changes in the Company’s estimates of excess lease costs associated with subleasing redundant office space in San Francisco, Dallas and Pittsburgh. In the three-month period ended March 31, 2003, the Company recorded restructuring expenses of $2.2 million related to further space consolidation in the Company’s San Francisco office.

The restructuring accruals remaining as of June 30, 2004 are included in the Condensed Consolidated Financial Statements in “Accrued liabilities” for amounts due within one year and “Other liabilities” for amounts due after one year. The following is a summary of activity in the restructuring accruals for the three months ended June 30, 2004 (in thousands):

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Company headquarters relocation:

MoD project suspension:

Office and business consolidation:

3. Loss per Share

Basic loss per share is computed using net loss and the weighted average number of common shares outstanding during each period. Diluted earnings (loss) per share is computed using net income and the weighted average number of outstanding common shares and dilutive common stock equivalents during each period, reflecting the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

The Company has excluded all outstanding stock options, warrants and convertible notes to purchase common stock from the calculation of diluted net loss per share because all securities are antidilutive for the periods presented. As of June 30, 2004 and 2003, stock options, warrants and convertible notes to purchase an aggregate of 11.1 million and 20.6 million shares, respectively, were outstanding. The 8% Convertible Notes issued to fund the acquisition of Indus Utility Systems, Inc. (“IUS”) were converted into 9,751,859 shares of common stock in July 2003.

The weighted average numbers of shares outstanding used in the calculations of basic and fully-diluted loss per share for the three months ended June 30, 2004 are 57,063,257 shares. The weighted average numbers of shares outstanding used in the calculations of basic and fully-diluted loss per share for the three months ended June 30, 2003 are 42,078,601 shares.

4. Comprehensive Income (Loss)

Comprehensive income (loss) includes net loss, foreign currency translation adjustments and unrealized gains and losses on securities investments that are excluded from net income (loss) and reflected in stockholders’ equity.

The following table sets forth the calculation of comprehensive income (loss) for the three months ended June 30, 2004 and 2003, respectively (in thousands):

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5. Stock-Based Compensation

As permitted under SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”, the Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and accordingly recognizes no compensation expense for the stock option grants as long as the exercise price is equal to or more than the fair value of the shares at the date of grant.

For purposes of pro forma disclosures, as required by SFAS No. 123, which also requires that the pro forma information be determined as if the Company had accounted for its employee stock option grants under the fair value method required by SFAS No. 123, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma net loss including pro forma compensation expense, net of tax for the three months ended June 30, 2004 and 2003, respectively, is as follows (in thousands, except per share amounts):

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6. Recent Accounting Pronouncements

In January 2003, the FASB issued and subsequently revised in December 2003, FIN No. 46, “Consolidation of Variable Interest Entities”, which clarifies the consolidation accounting guidance of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties. Such entities are known as variable interest entities (“VIE”). Controlling financial interests of a VIE are identified by the exposure of a party to the VIE to a majority of either the expected losses or residual rewards of the VIE, or both. Such parties are primary beneficiaries of the VIE, and FIN No. 46 requires that the primary beneficiary of a VIE consolidate the VIE. FIN No. 46 also requires new disclosures for significant relationships with VIEs, whether or not consolidation accounting is either used or anticipated. Application of FIN No. 46 is required in the financial statements of public entities that have interests in VIEs or potential VIEs commonly referred to as special-purpose entities for periods after December 15, 2003. Application by public entities for all other types of entities is required in financial statements for periods ending after March 15, 2004. The Company adopted FIN No. 46 on March 31, 2004, and there was no impact on the Company’s financial position and results of operations as a result of such adoption. The Company had no VIEs during the three months ended June 30, 2004.

7. Income Taxes

The provisions for income taxes for the three months ended June 30, 2004 and 2003 are attributable to the withholding of income taxes on revenues generated from foreign countries. At June 30, 2004, the Company had a net operating loss of approximately $58.3 million, inclusive of losses for the three months ended June 30, 2004, to carry forward which, subject to certain limitations, may be used to offset future income through 2025.

8. Restricted Cash

The Company had restricted cash of approximately $6.8 million at June 30, 2004 and $5.6 million at March 31, 2004 supporting letters of credit and performance bonds totaling $6.2 million and $5.0 million, respectively. At both dates there was $0.6 million in an interest bearing cash account collateralizing the Company’s note payable.

9. Segment Information and Geographic Data

The Company operates in one reportable segment, service delivery management (“SDM”) and sells software and services offerings to enable the three principal components of SDM: enterprise asset management, customer relationship management and workforce management. Neither the acquisition of Indus Utility Systems nor the acquisition of Wishbone Systems resulted in a new business segment for the Company. The Company manages its business by geographic areas.

Geographic revenue information for the three months ended June 30, 2004 and 2003 is based on the selling location. Long-lived asset information is based on the physical location of the assets at the end of each period. Following is a table of geographic information (in thousands):

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10. Litigation

In February, 2003, Integral Energy Australia brought a claim against IUS in the Supreme Court of New South Wales, Australia, relating to the implementation of IUS software. On March 5, 2003, the Company acquired IUS from Systems and Computer Technology Corporation (“SCT”). IUS was subsequently merged into the Company, and the Company is now the defendant in this lawsuit. The amount of damages asserted against the Company is not determinable. Pursuant to the terms of the Purchase Agreement among the Company and SCT and its affiliates, SCT and those affiliates of SCT that were a party to the Purchase Agreement agreed to defend the Company against the claims in this suit and to indemnify the Company from all losses relating thereto.

In 2002, the Company received an inquiry from the federal government requesting documents and employee interviews related to certain Department of Energy facilities with which the Company does business. The Company was made aware that this inquiry was the result of a qui tam complaint against the Company in the United States District Court of Virginia (Case No. CA01-1260-A) relating to its billing practices at these facilities. The Company has settled this matter with the federal government and the relator. Under the terms of this settlement the Company paid the federal government $500,000 and relator’s counsel $45,000 in July 2004. The settlement was provided for by the Company at March 31, 2004. The court has dismissed this action with prejudice. There was no factual finding or adjudication of wrongdoing by the Company as part of the settlement.

From time to time, the Company is involved in other legal proceedings incidental to the conduct of its business. The outcome of these claims cannot be predicted with certainty. The Company intends to defend itself vigorously in these actions. However, any settlement or judgment may have a material adverse effect on the Company’s results of operations in the period in which such settlement or judgment is paid or payment becomes probable. The Company does not believe that, individually or in aggregate, the legal matters to which it is currently a party are likely to have a material adverse effect on its results of operations or financial condition.

11. Guarantees and Indemnifications

The Company accounts for guarantees and indemnifications in accordance with Financial Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others.”

License and hosting agreements with customers generally contain infringement indemnity provisions. Under these agreements, the Company agrees to indemnify, defend and hold harmless the customer in connection with patent, copyright, trademark or trade secret infringement claims made by third parties with respect to the customer’s authorized use of our products and services. The indemnity provisions generally provide for the Company to control defense and settlement and cover costs and damages finally awarded against the customer. The indemnity provisions also generally provide that if the Company products infringe, or in the Company’s opinion it is likely that they will be found to infringe, on the rights of a third-party Indus will, at its option and expense, procure the right to use the infringing product, modify the product so it is no longer infringing, or return the product for a partial refund that reflects the reasonable value of prior use. The Company has not previously incurred costs to settle claims or pay awards under these indemnification obligations. The Company accounts for these indemnity obligations

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in accordance with SFAS No. 5, “Accounting for Contingencies,” and records a liability for these obligations when a loss is probable and reasonably estimable. The Company has not recorded any liabilities for these arrangements as of June 30, 2004.

Services agreements with customers may also contain indemnity provisions for death, personal injury or property damage caused by the Company’s personnel or contractors in the course of performing services to customers. These agreements, generally agree to indemnify, defend and hold harmless the customer in connection with death, personal injury and property damage claims made by third parties with respect to actions of the Company’s personnel or contractors. The indemnity provisions generally provide for the Company’s control of defense and settlement and cover costs and damages finally awarded against the customer. The indemnity obligations contained in services agreements generally have no specified expiration date and no specified monetary limitation on the amount of award covered. The Company has not previously incurred costs to settle claims or pay awards under these indemnification obligations and estimates the fair value of these potential obligations to be nominal. Accordingly, no liabilities have been recorded for these agreements as of June 30, 2004.

The Company generally warrants that its software products will perform in all material respects in accordance with its standard published specifications in effect at the time of delivery of the licensed products to the customer for six months to a year, depending upon the software license. Additionally, contracts generally warrant that services will be performed consistent with generally accepted industry standards or, in some instances, specific service levels through completion of the agreed upon services. If necessary, provision will be made for the estimated cost of product and service warranties based on specific warranty claims and claim history. There has been no significant recurring expense under these product or service warranties.

12. Goodwill and Acquisition-Related Intangible Assets

Goodwill, which represents the excess of purchase price over fair value of net assets acquired, increased by $443,000 during the three months ended June 30, 2004 as a result of a purchase price adjustment for the acquisition of Wishbone Systems and costs to relocate certain Wishbone Systems employees to the Company’s Atlanta offices. These two events were anticipated at the time of the acquisition of Wishbone Systems. Goodwill is not amortized, but is subject to impairment testing criteria. For purposes of its impairment testing, the Company considers itself to be a single reporting unit and assesses goodwill impairment on an enterprise-wide level. The Company evaluates the carrying value of goodwill annually as of December 31 and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the asset below its carrying amount. The Company has recorded goodwill of $0.4 million associated with the acquisition of IUS and $7.0 million associated with the acquisition of Wishbone Systems. No impairment losses have been recorded through June 30, 2004.

Acquisition-related intangible assets are stated at cost less accumulated amortization, and include values for developed technology, customer base, contracts and trade names. Acquired technology is being amortized over the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining estimated economic life of the product including the period being reported on. Other intangible assets are being amortized on a straight-line basis over a period of two to fifteen years. Total amortization expense for intangible assets was $520,000 and $454,000 for the three months ended June 30, 2004 and 2003, respectively, and is included in general and administrative expense in the accompanying Condensed Consolidated Statements of Operations.

Acquisition-related intangible assets consist of the following (in thousands):

The weighted-average amortization period for all acquired intangible assets is approximately eleven years. Trademarks and technology have a weighted-average amortization period of five years and contracts and customer base have a weighted-average amortization period of thirteen years. The Company expects amortization expense from acquired intangible assets as of June 30, 2004 for the next five years to be as follows (in thousands):

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13. Software Development Costs

The Company accounts for software development costs in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”, whereby costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs are capitalized. Through December 31, 2002, software development costs incurred subsequent to the establishment of technological feasibility were not significant, and all software development costs were charged to research and development expense in the accompanying consolidated statements of operations during that time.

The Company capitalized certain development costs related to the internationalization of its products to Asian markets of $7.7 million through March 31, 2004. During the three months ended June 30, 2004, the product was generally released for sale and the related capitalized software development costs became subject to amortization. In accordance with the provisions of SFAS No. 86, amortization is determined as the greater of the amount computed using (a) the ratio that current gross revenues for the product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining economic life of the product including the period being reported on. Amortization expense of $1.7 million was recorded in the three months ended June 30, 2004 and is included in “Cost of revenue: Software license fees” in the accompanying Condensed Consolidated Statements of Operations.

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

Forward Looking Statements

In addition to historical information, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
(“MD&A”) may contain 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. These forward-looking statements are not based on historical facts, but rather reflect management’s current expectations concerning future results and events. These forward-looking statements generally can be identified by the use of phrases and expressions such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “will” or other similar words or phrases. These statements, which speak only as of the date given, are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our expectations or projections. These risks include, but are not limited to, projected growth in the emerging service delivery management market, market acceptance of our service delivery management strategy, current market conditions for our products and services, the capital spending environment generally, our ability to achieve growth in our enterprise asset management, customer relationship management and workforce management offerings, market acceptance and the success of our new products and enhancements and upgrades to our existing products, the success of our product development strategy, our competitive position, the ability to establish and retain partnership arrangements, our ability to develop our indirect sales channels, the successful integration of the acquisition of Wishbone Systems, Inc. (“Wishbone Systems”) including the challenges inherent in diverting our management’s attention, changes in our executive management team, uncertainty relating to and the management of personnel changes, the ability to realize the anticipated benefits of our recent restructurings, timely development and introduction of new products, releases and product enhancements, heightened security and war or terrorist acts in countries of the world that affect our business, and other risks identified in the section of this Report entitled “Factors Affecting Future Performance,” beginning on page 20. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements.

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Overview

Indus International, Inc. (the “Company” or “Indus”) develops, licenses, implements, supports, and hosts service delivery management (“SDM”) solutions, which help clients in a broad array of industries optimize the management of their customers, assets, workforce, spare parts inventory, tools and documentation in order to maximize performance and customer satisfaction while reducing operating expenses. Historically, our solutions have been focused on asset management, and more recently on customer management. Through our acquisitions of best-in-class customer relationship management software in March 2003 and field service management technology in January 2004, we believe that we are the first company to offer comprehensive suites of world-class customer, asset, and field service management solutions, which we market and sell as our SDM solutions.

These solutions are comprised of three distinct suites: Customer Management Suite, Asset Management Suite, and Field Service Management Suite. Customer Management Suite provides the functionality for energy and utility customers to optimize customer-facing activities, encompassing call center, customer information tracking, billing, and accounts receivable functions. Asset Management Suite supports organizations’ operations and maintenance workforce, inventory management and procurement professionals, safety and compliance engineers, and other decision-making personnel affected by asset care decisions throughout the enterprise. Field Service Management Suite provides resource optimization enabling customers to dispatch resources with all the required tools, information, and parts at the promised time, optimizing schedules based on customer or asset demands, travel times, service level agreements, technician skills requirements, and internal costs. Other complementary solutions include mobile computing, enterprise asset integration tools, sophisticated search capabilities, data warehousing products, and integration to leading ERP products for financial and human resources functions.

Our SDM solutions also include consulting, professional services, Indus Knowledge Delivery, Global Client Services, and hosting services offered as part of the Indus Service Select program. Service Select offerings include comprehensive implementation programs, strategic consulting, e-Learning and training solutions, three-tiered maintenance and support plans, and hosting and outsourcing services.

Critical Accounting Policies

Management’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, accounts receivable and allowance for doubtful accounts, valuation of goodwill and intangibles and restructuring. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company has identified the following policies as critical to the Company’s business operations and the understanding of the Company’s results of operations. Senior management has discussed the development and selection of these policies and the disclosures below with the Audit Committee of the Board of Directors. For a detailed discussion of the application of these and other accounting policies, see the Notes to Consolidated Financial Statements contained within the Company’s 2004 Annual Report on Form 10-K, as filed with the SEC.

Revenue Recognition:

Revenue recognition rules for software companies are very complex, often subject to interpretation, and continue to evolve. Very specific and detailed guidelines in measuring revenue are followed; however, certain judgments affect the application of the Company’s revenue policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause operating results to vary significantly from quarter-to-quarter.

The Company’s revenue arises from two sources: (a) the sale of licenses to use our software products, and (b) the delivery of customer support, outsourcing and hosting, implementation, and consulting and training services related to our software products. Customer support, outsourcing and hosting services are typically sold under agreements lasting one or more years, the revenue from which is recognized, in most cases, ratably over the periods covered by the agreements.

For software license arrangements that do not require modification of the software, revenue is recognized in accordance with accounting standards for software companies, including Statement of Position, or SOP, 97-2, “Software Revenue Recognition,”

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as amended or interpreted by SOP 98-4 and SOP 98-9, Technical Practice Aids, and SEC Staff Accounting Bulletins. License fee revenue is recognized when a non-cancelable license agreement becomes effective as evidenced by a signed contract, product delivery, a fixed or determinable license fee and probability of collection. If the license fee is not fixed or determinable, revenue is recognized as payments become due from the customer.

In arrangements that include rights to multiple software products and/or services, the total arrangement fee is allocated among each of the deliverables using the residual method, under which revenue is allocated to undelivered elements based on vendor-specific objective evidence (“VSOE”) of fair value of such undelivered elements and the residual amounts of revenue are allocated to delivered elements. Elements included in multiple element arrangements may consist of software products, maintenance (which includes customer support services and unspecified upgrades), hosting and consulting services. VSOE is based on the price generally charged when an element is sold separately or, in the case of an element not yet sold separately, the price established by authorized management, if it is probable that the price, once established, will not change when the element is sold separately. If VSOE does not exist for an undelivered element, the total arrangement fee will be taken to revenue over the life of the contract.

Revenue from consulting and implementation services is, in general, time and material based and recognized as the work is performed. Delays in project implementation will result in delays in revenue recognition. Some professional consulting services involve fixed-price and/or fixed-time arrangements and are recognized using contract accounting, which requires the accurate estimation of the cost, scope and duration of each engagement. Revenue and the related costs for these projects are recognized on the percentage-of-completion method, with progress-to-completion measured by using specific milestones, usually labor cost inputs, with revisions to estimates reflected in the period in which changes become known. Project losses are provided for in their entirety in the period they become known, without regard to the percentage-of-completion. If the Company does not accurately estimate the resources required or the scope of work to be performed, or does not manage its projects properly within the planned periods of time or satisfy its obligations under the contracts, then future consulting margins on these projects may be negatively affected or losses on existing contracts may need to be recognized.

Revenue from maintenance and support services is recognized ratably over the term of the support contract, typically one year. Revenue from outsourcing and hosting services is recognized based upon contractually agreed upon rates per user or service, over a contractually defined time period.

Accounts Receivable and Allowance for Doubtful Accounts:

Billed and unbilled accounts receivable are credit based. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability or failure of its customers to make required payments. This allowance is formula-based, supplemented by an evaluation of specific accounts where there may be collectibility risk. If the methodology the Company uses to calculate this allowance does not properly reflect future collections, revenue could be overstated or understated. On an ongoing basis, the Company evaluates the collectibility of accounts receivable based upon historical collections and an assessment of the collectibility of specific accounts. The Company evaluates the collectibility of specific accounts using a combination of factors, including the age of the outstanding balance(s), evaluation of the account’s financial condition, recent payment history, and discussions with the Company’s account executive for the specific customer. Based upon this evaluation of collectibility, any increase or decrease required in the allowance for doubtful accounts is reflected in the period in which the evaluation indicates that a change is necessary. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The allowance for doubtful accounts was $656,000 as of June 30, 2004 and $912,000 as of March 31, 2004. The decrease is attributable to improved collections of aged accounts receivable during the three months ended June 30, 2004.

The Company generates a significant portion of revenues and corresponding accounts receivable from sales to the utility industry. As of June 30, 2004, approximately $11.4 million, or 62.3%, of the Company’s gross billed accounts receivable were attributable to software license fees and services sales to utility customers. In determining the Company’s allowance for doubtful accounts, the Company has considered the financial condition of the utility industry as a whole, as well as the financial condition of individual utility customers. While the utility industry customers served by the Company are generally in the regulated or retail sector, their unregulated affiliated activities might affect the ability to collect amounts due. The credit status of customers is monitored and, where deemed necessary, a provision is made for potential uncollectibility.

Revenue from sales denominated in currencies other than the U.S. Dollar resulted in approximately $4.0 million of the Company’s June 30, 2004 gross billed accounts receivable being denominated in foreign currencies, of which approximately $1.8 million were denominated in British Pounds. Historically, the foreign currency gains and losses on these receivables have not been significant, and the Company has determined that foreign currency derivative products are not required to hedge the

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Company’s exposure. If the value of the U.S. Dollar significantly increased versus one or more foreign currencies, the U.S. Dollar equivalents received from the Company’s customers could be significantly less than the June 30, 2004 reported amount. See additional discussion in “Quantitative and Qualitative Disclosures About Market Risks.”

Valuation of Intangible Assets and Goodwill:

The acquisitions of Indus Utility Systems, Inc. (“IUS”) (formerly SCT Utility Systems, Inc.) in March 2003 and Wishbone Systems in January 2004 resulted in the recording of goodwill, which represents the excess of the purchase price over the fair value of assets acquired, as well as other definite-lived intangible assets.

Under present accounting rules (SFAS No. 142), goodwill is no longer subject to amortization; instead it is subject to impairment testing criteria at least annually. Other acquired definite-lived intangible assets are being amortized over their estimated useful lives. For purposes of its goodwill impairment testing, the Company considers itself to be a single reporting unit and assesses goodwill impairment on an enterprise-wide level. The impairment test is therefore performed on a consolidated basis and compares the Company’s market capitalization (reporting unit fair value) to its outstanding equity (reporting unit carrying value). In accordance with the recommended provisions of SFAS No. 142, the Company utilizes its closing stock price as reported on the Nasdaq National Market on the date of the impairment test in order to compute market capitalization. The Company has designated December 31 as the annual date for impairment testing.

The Company performed its annual impairment test as of December 31, 2003 and concluded that no impairment of goodwill existed since the fair value of the Company’s reporting unit exceeded its carrying value. No events have occurred, nor circumstances changed, subsequent to December 31, 2003 that would reduce the fair value of the Company’s reporting unit below its carrying value. The Company will continue to test for impairment on an annual basis or on an interim basis if circumstances change that would indicate the possibility of impairment. The impairment review may require an analysis of future projections and assumptions about the Company’s operating performance. If such a review indicates that the assets are impaired, an expense would be recorded for the amount of the impairment, and the corresponding impaired assets would be reduced in carrying value. Differences in the identification of reporting units and the use of valuation techniques can result in materially different evaluations of impairment.

Restructuring:

In the three months ended June 30, 2004, the Company recorded restructuring charges of $10.5 million for adjustments to the existing accounting accruals from prior restructurings and for new restructuring charges related to office and business consolidations and employee severance. An adjustment to the Company’s expected sublease income for two remaining unoccupied floors in San Francisco from the restructuring initiative in 2000, as revised in 2002 and 2003, comprised $1.4 million of this expense. Due to the continuing surplus of office space capacity in the San Francisco market and the relatively short time period remaining on the lease compared with potential tenant requirements, the Company determined that there would be no future sublease income and recorded restructuring charges to fully accrue for the remaining lease obligation for these two floors. Further consolidation of office space in San Francisco and Atlanta resulted in $7.8 million in new restructuring charges for the quarter. This consolidation includes vacating three floors in Atlanta and one additional floor in San Francisco. The remaining $1.3 million in restructuring expense is associated with the elimination of approximately 70 positions, including the transfer of certain functions to the company-owned office buildings in Columbia, South Carolina and the outsourcing of some development functions to India. These restructuring charges have been recorded in accordance with SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” and SFAS No. 112, “Employer’s Accounting for Postemployment Benefits.”

Should rental conditions in the Company’s Atlanta location deteriorate to the point where the remaining redundant office space is not leased, the Company could incur additional charges totaling approximately $6.6 million over the remaining period of fiscal years 2005 through 2012. Should rental conditions improve, it is possible that higher than anticipated sublease income will be generated. Any required increase or decrease in this accrual will be reflected in the period in which the evaluation indicates that a change is necessary.

Between January 1, 2000 and March 31, 2004, the Company recorded restructuring charges totaling $22.7 million. Restructuring costs of $2.1 million and $10.2 million were recorded for fiscal years 2000 and 2001 in connection with the relocation of the Company’s headquarters and certain administrative functions to Atlanta, Georgia, severance payments related to the elimination of 56 global positions, and charges representing the estimated excess lease costs associated with subleasing redundant San Francisco office space. In fiscal year 2002, the Company recorded restructuring costs of approximately $8.2 million, of which $3.4 million related to the suspension of the United Kingdom Ministry of Defense (“MoD”) project and the

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Company’s subsequent demobilization and reduction in workforce and required support office facilities and $4.8 million related to changes in the Company’s estimates of excess lease costs associated with subleasing redundant office space in San Francisco, Dallas and Pittsburgh. In the three-month period ended March 31, 2003, the Company recorded restructuring expenses of $2.2 million related to further space consolidation in the Company’s San Francisco office.

The restructuring accruals remaining as of June 30, 2004 are included in the Condensed Consolidated Financial Statements in “Accrued liabilities” for amounts due within one year and “Other liabilities” for amounts due after one year.

Consolidated Results of Operations

Revenue

The Company’s revenue arises from two sources: (a) the sale of licenses to use our software products, and (b) the delivery of customer support, outsourcing and hosting, implementation, and consulting and training services related to our software products. Customer support, outsourcing and hosting services are typically sold under agreements lasting one or more years, the revenue from which is recognized, in most cases, ratably over the periods covered by the agreements.

Software license fees: Software license fees increased 7.0% to $9.4 million in the three months ended June 30, 2004. Greater than $5.0 million of software license fee revenue for the first quarter of fiscal 2005 is attributable to the initial license fee from Tokyo Electric Power Company (“TEPCO”), which was recognized as revenue after acceptance by TEPCO and upon delivery of the double-byte character-enabled version of our PassPort product in April, 2004. This TEPCO license fee had been classified as deferred revenue beginning with the quarter ended March 31, 2003. For comparison purposes, over $5.0 million of software license fees for the three months ended June 30, 2003, previously classified as deferred revenue, is attributable to a single customer.

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Cost of Revenue

Cost of revenue consists of (i) amortization of the costs associated with internally developed software, (ii) amounts paid to third parties for inclusion of their products in the Company’s software, (iii) personnel, data maintenance and related costs for customer support, hosting and outsourcing services, and (iv) personnel and related costs for implementation, consulting and training services. Gross profits on license fees are substantially higher than gross profits on services revenues due to the relatively high personnel costs associated with the various services.

Cost of software license fees: The increase in cost of software license fees in the three months ended June 30, 2004 is due to amortization of $1.7 million in capitalized software development costs to create a double-byte character-enabled Japanese version of our PassPort product. The product was made generally available for sale in April 2004. There was no such amortization in the three months ended June 30, 2003.

Cost of services revenue — customer support, outsourcing and hosting: The decrease in cost of customer support, outsourcing and hosting services is attributable to staffing reductions associated with the Company’s consolidation of its North American customer support center in Columbia, South Carolina.

Cost of services revenue — consulting, training and other: Cost of consulting, training and other services decreased in the three months ended June 30, 2004, as compared to the same period of the prior year, due to the elimination of personnel as part of the Company’s strategic resource allocation plans that include more efficient use of existing personnel and more use of third party systems integrators. Gross margin on consulting, training and other services increased from 15.2% for the three months ended June 30, 2003 to 26.1% as a result of these personnel reductions and the associated efficiencies.

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Operating Expenses

Research and development: Research and development expenses include personnel and related costs, third party consultant fees and computer processing costs, all directly attributable to the development of new software application products and enhancements to existing products. The reduction in research and development expenses for the three months ended June 30, 2004 from the same period of the prior year is attributable to the combined effects of two principal actions: (1) the elimination of personnel dedicated to less strategic product lines; and (2) better utilization of offshore research and development resources in India. The expense savings from these actions were partially offset by the absence of capitalized software development costs in the three months ended June 30, 2004. There were $1.3 million of software development costs capitalized in the three months ended June 30, 2003.

Sales and marketing: Sales and marketing expenses include personnel costs, sales commissions, and the costs of advertising, public relations, and participation in industry conferences and trade shows. The slight reduction in sales and marketing expenses for the three months ended June 30, 2004 from the same period in the prior year is attributable to the Company’s continued efforts to more prudently and appropriately allocate resources.

General and administrative: General and administrative expenses include personnel and other costs of the Company’s finance, human resources and administrative operations. The $1.9 million reduction in general and administrative expenses for the three months ended June 30, 2004 from the same period of the prior year is attributable to two factors: (1) the elimination of approximately $1.5 million in personnel and related costs and redundant administrative services and professional fees following the acquisition of Indus Utility Systems, and (2) realization of approximately $350,000 in acquisition synergies and other benefits.

Restructuring expenses: The Company recorded a $10.5 million restructuring charge in the three months ended June 30, 2004. The restructuring charge includes three principal components, all incurred in conjunction with the Company’s continued efforts to more closely align its resources with its strategic plans: (1) $3.6 million associated with the abandonment of redundant office space and revisions to the Company’s estimates of the costs of previously abandoned office space in San Francisco, California (which includes full accrual for all vacant space not under sublease arrangements as of June 30, 2004); (2) $5.6 million associated with the elimination of excess office space in the Company’s headquarters in Atlanta, Georgia resulting from significant staffing reductions and the consolidation of certain business functions; and (3) $1.3 million of severance costs associated with the elimination of approximately 70 positions worldwide, necessitated by more extensive use of offshore development resources in India and consolidation of certain other business functions. The Company could incur future increases or decreases to its existing accruals in the event that the underlying assumptions used to develop the Company’s estimates of excess lease costs, such as the timing and the amount of any sublease income change.

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Interest Expense, Other Income (Expense) and Provision for Income Taxes

Interest expense, net: Interest expense, net arises from debt financing associated with the acquisition of IUS in March 2003. Interest expense for the three months ended June 30, 2003 included amounts associated with the Company’s issuance of $14.5 million of 8% convertible notes to fund the acquisition and execution of a $10.0 million 6% promissory note as part of the acquisition. The 8% convertible notes were converted to shares of the Company’s common stock on July 29, 2003. The $10.0 million 6% promissory note was paid in September 2003 with the proceeds from an $11.5 million 6.5% note secured by certain real property in Columbia, South Carolina. Interest expense, net has declined with the amount of debt outstanding, partially offset by interest income from invested cash.

Other income (expense), net: Other income (expense), net is attributable to foreign exchange gains or losses. Foreign exchange gains were $176,000 in the three months ended June 30, 2004 compared with a $229,000 loss for the same period of 2003. This variance reflects changes in relative values of currencies in which the Company’s non-U.S. subsidiaries do business and revaluation of certain balances between the parent company and its non-U.S. subsidiaries.

Provision for income taxes: Income taxes include federal, state and foreign income taxes. The provisions for income taxes for the three months ended June 30, 2004 and 2003 are attributable to the withholding of income taxes on revenues generated in foreign countries. As of June 30, 2004, the Company had significant net operating losses to carry forward to offset taxable income that may arise, subject to certain limitations.

Liquidity and Capital Resources

As of June 30, 2004, the Company’s principal sources of liquidity consisted of approximately $23.6 million in cash and cash equivalents and $6.8 million in short and long-term restricted cash.

The Company maintained six standby letters of credit at June 30, 2004 totaling approximately $6.1 million. These letters of credit require the Company to maintain corresponding compensating balances equal to the amounts of the letters of credit. The compensating balances are classified as restricted cash at June 30, 2004 and March 31, 2004. A total of $4.6 million in restricted cash should be released in increments of $2.3 million each in both January 2006 and May 2008, relative to the expiration of letters of credit supporting a performance bond and the Company’s leased facilities in San Francisco, respectively. Of the remaining amount, $0.7 million should be released ratably through June 2005 and $0.4 million should be released in the second quarter of fiscal 2005. A $0.6 million certificate of deposit, used as collateral for the Company’s $11.5 million note payable, will be released in April 2008.

During the three months ended June 30, 2004:

	•		Cash of $5.0 million was used in operating activities. The decline in cash is attributable to two factors: (1) cash payments of $1.4 million associated with the Company’s prior and current charges to restructure its operations; and (2) software license fees from TEPCO (>$5.0 million), the cash from which was received in prior periods. Continued solid management of accounts receivable provided cash of $2.4 million.
	•		Cash of $2.3 million was used in investing activities, including $1.2 million in restricted cash to support additional standby letters of credit, $0.7 million in capital expenditures and $0.4 million in adjustments to the purchase price for the acquisition of Wishbone Systems.

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Changes in operating expenses or variations in the timing of recognition of specific revenues resulting from any of these factors can cause significant variations in operating results from quarter-to-quarter and may in some future quarter result in losses or have a material adverse effect on our business or results of operations.

If we are unable to achieve consistent profitability and become cash flow positive in the near future, our business and long-term prospects may be harmed.

We generated a net loss of $9.9 million in the three months ended June 30, 2004 and used cash of $5.0 million in operating activities during the same period. For the fiscal year ended March 31, 2004, we generated a net loss of $12.0 million and used cash of approximately $3.8 million in operating activities during the same period. If we are unable to achieve and maintain consistent profitability or produce positive cash flow from operations in the near future it will negatively affect our capacity to implement our business strategy and may require us to take actions in the short-term that will impair the long-term prospects of our business. If we are unable to achieve and maintain consistent profitability or produce positive cash flow from operations in the near future it may also result in liquidity problems and impair our ability to finance our continuing business operations on terms that are acceptable to us. Further, we may need to enter into financing transactions that are dilutive to our stockholders’ equity ownership in our company.

If the market for service delivery management solutions does not grow as anticipated or if our service delivery management solutions are not accepted in the market, we may not be able to grow our business.

From time to time, we expand into new markets. For example, in January 2004, we announced our service delivery management solutions for utilities. The market for service delivery management solutions is an emerging market. If customers’ demand in this emerging market does not grow as anticipated or if our service delivery management solution is not accepted in the market place, then we may not be able to grow our business.

If the market does not accept our new products and enhancements or upgrades to our existing products that we launch from time to time, our operating results and financial condition would be materially adversely affected.

From time to time, we acquire new products, launch new products, and release enhancements or upgrades to existing products. For example, in March 2004, we released PassPort 10.0, one of our asset management solutions. In January 2004, we acquired a suite of field service management modules from Wishbone Systems, which forms a part of our service delivery management offering. In addition, in December 2003, we introduced InSite EE, the consolidation of our EMPAC and Indus InSite enterprise asset management products into a single software solution. There can be no assurance that any of our new or enhanced products, including PassPort 10.0, the field service management suite and InSite EE, will be sold successfully or that they can achieve market acceptance. Our future success with these products and other next generation product offerings will depend on our ability to accurately determine the functionality and features required by our customers, as well as the ability to enhance our products and deliver them in a timely manner. We cannot predict the present and future size of the potential market for our next generation of products, and we may incur substantial costs to enhance and modify our products and services in order to meet the demands of this potential market.

Demand for enterprise asset management solutions and customer relationship management software may grow slowly or decrease in upcoming quarters, which may impair our business and could materially adversely affect our results of operations and financial condition.

Overall demand for enterprise asset management software and customer relationship management software in general may grow slowly or decrease in upcoming quarters and years because of unfavorable general economic conditions, decreased spending by companies in need of our solutions or otherwise. This may reflect the capital spending environment generally, a saturation of the market for enterprise asset management software and customer relationship management software generally, as well as deregulation and retrenchments affecting the way companies purchase our software. To the extent that there is a slowdown in the overall market for our solutions, our business, results of operations and financial condition are likely to be materially adversely affected.

If we experience delays in product development or the introduction of new products or new versions of existing products, our business and sales will be negatively affected.

We have, in the past, experienced delays in product development that have negatively affected our relationships with existing customers and have resulted in lost sales of our products and services to existing and prospective customers and our failure to recover our product development costs. There can be no assurance that we will not experience further delays in connection

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with our current product development or future development activities. If we are unable to develop and introduce new products, or enhancements to existing products, in a timely manner in response to changing market conditions or customer requirements, our business, operating results and financial condition will be materially and adversely affected. Because we have limited resources, we must effectively manage and properly allocate and prioritize our product development efforts and our porting efforts relating to newer products and operating systems. There can be no assurance that these efforts will be successful or, even if successful, that any resulting products or operating systems will achieve customer acceptance.

Delays in implementation of our software or the performance of our professional services may negatively affect our business.

Following license sales to new customers, the implementation of our products and their extended solutions generally involves a lengthy process, including customer training and consultation. In addition, we are often engaged by our existing customers for other lengthy professional services projects. A successful implementation or other professional services project requires a close working relationship between us, the customer and, if applicable, third-party consultants and systems integrators who assist in the process. These factors may increase the costs associated with completion of any given sale, increase the risks of collection of amounts due during implementation or other professional services projects, and increase risks of cancellation or delay of such projects. Delays in the completion of a product implementation or with any other professional services project may require that the revenues associated with such implementation or project be recognized over a longer period than originally anticipated, or may result in disputes with customers regarding performance by us and payment by the customers. Such delays in the implementation have caused, and may in the future cause, material fluctuations in our operating results. Similarly, customers may typically cancel implementation projects at any time without penalty, and such cancellation could have a material adverse effect on our business or results of operations. Because our expenses are relatively fixed, a small variation in the timing of recognition of specific revenues can cause significant variations in operating results from quarter-to-quarter and may in some further quarter result in losses or have a material adverse effect on our business or results of operations.

We have experienced significant change in our executive management team during the last several months and the current executive management team has only begun to work together.

We have experienced significant change in our executive management team in recent months. In October 2003, Gregory Dukat was promoted from Executive Vice President of Worldwide Operations to President and Chief Operating Officer, and in February 2004, he was promoted to President and Chief Executive Officer. In February 2004, John Gregg was promoted to Executive Vice President of Field Operations. In June 2004, we appointed Thomas Williams as our new Chief Financial Officer. The current executive management team has only recently begun to work together, and they may be unable to integrate and work effectively as a team. There are no assurances that we will be able to motivate and retain the current executive management team or that they will be able to work together effectively. If we lose any member of our executive management team or they are unable to work together effectively, our business, operations and financial results could be adversely affected.

Our success depends upon our ability to attract and retain key personnel.

Our future success depends, in significant part, upon the continued service of our key technical, sales and senior management personnel, as well as our ability to attract and retain new personnel. Competition for qualified sales, technical and other personnel is intense, and there can be no assurance that we will be able to attract, assimilate or retain additional highly qualified employees in the future. Our ability to attract, assimilate and retain key personnel may be adversely impacted by the fact that we have reduced our work force by 9% in the three months ended June 30, 2004 and that, in order to reduce our operating expenses, we have generally not increased wages or salaries over the last several years. If we are unable to offer competitive salaries and bonuses, our key technical, sales and senior management personnel may be unwilling to continue service for us, and it may be difficult for us to attract new personnel. If we were unable to hire and retain personnel, particularly in senior management positions, our business, operating results and financial condition would be materially adversely affected. Further additions of new personnel and departures of existing personnel, particularly in key positions, can be disruptive and have a material adverse effect on our business, operating results and financial condition.

Our failure to realize the expected benefits of our recent restructurings, including anticipated cost savings, could result in unfavorable financial results.

Over the last several years we have undertaken several internal restructuring initiatives. For example, in March 2002, our Board of Directors approved a restructuring plan that, among other things, resulted in a reduction in force and the closing of our Dallas office. During the second half of 2002, due to unfavorable financial performance and management reviews of worldwide operations, we reconfigured our business model and implemented several reductions in workforce and other cost

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reductions to restructure and resize the business. In the three months ended June 30, 2004, the Company restructured certain business activities relating to the consolidation of office space in Atlanta and San Francisco, wherein certain functions were transferred from these locations to company-owned office buildings in Columbia, South Carolina. These types of internal restructurings have operational risks, including reduced productivity and lack of focus as we terminate some employees and assign new tasks and provide training to other employees. In addition, there can be no assurance that we will achieve the anticipated cost savings from these restructurings and any failure to achieve the anticipated cost savings could cause our financial results to fall short of expectations and adversely affect our financial position.

We have taken charges for restructuring of $10.2 million in 2001, $8.2 million in 2002, $2.2 million in the transition period ended March 31, 2003, $44,000 in the fiscal year ended March 31, 2004 and $10.5 million in the three months ended June 30, 2004. There can be no assurance that additional charges for restructuring expenses will not be required in future periods. Significant future restructuring charges could cause financial results to be unfavorable.

Our business may suffer from risks associated with growth and acquisitions, including the acquisition of Wishbone Systems.

All acquisitions, including the Wishbone Systems acquisition, involve specific risks. Some of these risks include:

	•		the assumption of unanticipated liabilities and contingencies;
	•		diversion of our management’s attention;
	•		inability to achieve market acceptance of acquired products; and
	•		possible reduction of our reported asset values and earnings because of:

	•		goodwill impairment;
	•		increased interest costs;
	•		issuances of additional securities or debt; and
	•		difficulties in integrating acquired businesses and assets.

As we grow and attempt to integrate any business and assets that we may acquire, including those in the Wishbone Systems acquisition, we can give no assurance that we will be able to:

	•		properly maintain and take advantage of the business or value of any acquired business and assets;
	•		identify suitable acquisition candidates;
	•		complete any additional acquisitions; or
	•		integrate any acquired businesses or assets into our operations.

The strain on our management may negatively affect our business and our ability to execute our business strategy.

Changes to our business and customer base have placed a strain on management and operations. Previous expansion had resulted in substantial growth in the number of our employees, the scope of our operating and financial systems and the geographic area of our operations, resulting in increased responsibility for management personnel. Our restructuring activities in recent years and our acquisitions of IUS and Wishbone Systems have recently placed additional demands on management. In connection with our restructuring activities and our acquisitions of IUS and Wishbone Systems, we will be required to effectively manage our operations, improve our financial and management controls, reporting systems and procedures on a timely basis and to train and manage our employee work force. There can be no assurance that we will be able to effectively manage our operations and failure to do so would have a material adverse effect on our business, operating results and financial condition.

The market for our products is highly competitive, and we may be unable to maintain or increase our market share.

Our success depends, in part, on our ability to develop more advanced products more quickly and less expensively than our existing and potential competitors and to educate potential customers on the benefits of licensing our products. Some of our competitors have substantially greater financial, technical, sales, marketing and other resources, as well as greater name recognition and a larger customer base than us, which may allow them to introduce products with more features, greater functionality and lower prices than our products. These competitors could also bundle existing or new products with other, more established products in order to effectively compete with us.

Increased competition is likely to result in price reductions, reduced gross margins and loss of sales volume, any of which could materially and adversely affect our business, operating results, and financial condition. Any material reduction in the price of

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our products would negatively affect our gross revenues and could have a material adverse effect on our business, operating results, and financial condition. There can be no assurance that we will be able to compete successfully against current and future competitors, and if we fail to do so we may be unable to maintain or increase or market share.

If we don’t respond to rapid technological change and evolving industry standards, we will be unable to compete effectively.

The industries in which we participate are characterized by rapid technological change, evolving industry standards in computer hardware and software technology, changes in customer requirements and frequent new product introductions and enhancements. The introduction of products embodying new technologies, the emergence of new standards or changes in customer requirements could render our existing products obsolete and unmarketable. As a result, our success will depend in part upon our ability to enhance our existing asset management solutions, customer relationship management software products and field service management solutions, expand our products offerings through development or acquisition, and introduce new products that keep pace with technological developments, satisfy increasingly sophisticated customer requirements and achieve customer acceptance. Customer requirements include, but are not limited to, product operability and support across distributed and changing hardware platforms, operating systems, relational databases and networks. There can be no assurance that any future enhancements to existing products or new products developed or acquired by us will achieve customer acceptance or will adequately address the changing needs of the marketplace. There can also be no assurance that we will be successful in developing, acquiring and marketing new products or enhancements to our existing products that incorporate new technology on a timely basis.

Our growth is dependent upon the successful development of our direct and indirect sales channels.

We believe that our future growth also will depend on developing and maintaining successful strategic relationships or partnerships with systems integrators and other technology companies. One of our strategies is to continue to increase the proportion of customers served through these indirect channels. Our inability to partner with other technology companies and qualified systems integrators could adversely affect our results of operations. Because lower unit prices are typically charged on sales made through indirect channels, increased indirect sales could reduce our average selling prices and result in lower gross margins. As indirect sales increase, our direct contact with our customer base will decrease, and we may have more difficulty accurately forecasting sales, evaluating customer satisfaction and recognizing emerging customer requirements. In addition, sales of our products through indirect channels may reduce our professional service revenues, as the third-party systems integrators reselling our products provide these services. Further, when third-party integrators install our products and train customers to us our products, it could result in more instances of incorrect product installation, failure to properly train the customer, or general failure of an integrator to satisfy the customer, which could have a negative effect on our relationship with the integrator and the customer. Such problems could damage our reputation and the reputation of our products and services. In addition, we may face additional competition from these systems integrators and third-party software providers who develop, acquire or market products competitive with our products.

Our strategy of marketing our products directly to customers and indirectly through systems integrators and other technology companies may result in distribution channel conflicts. Our direct sales efforts may compete with those of our indirect channels and, to the extent different systems integrators target the same customers, systems integrators may also come into conflict with each other. Any channel conflicts that develop may have a material adverse effect on our relationships with systems integrators or hurt our ability to attract new systems integrators to market our products.

If we fail to comply with laws or government regulations, we may be subject to penalties and fines.

We are not directly subject to regulation by any governmental agency, other than regulations applicable to businesses generally, and there are currently few laws or regulations addressing the products and services we provide. We do, however, license our products and provide services, from time to time, to the government, government agencies, and government contractors and to other customers that are in industries regulated by the government. As a result, our operations, as they relate to our relationships with governmental entities and customers in regulated industries, are governed by certain laws and regulations. These laws and regulations are subject to change without notice to us. In some instances, compliance with these laws and regulations may be difficult or costly, which may negatively affect our business and results of operation. In addition, if we fail to comply with these laws and regulations, we may be subject to significant penalties and fines that could materially negatively affect our business, results of operations and financial position.

If we are unable to expand our international operations, our operating results and financial condition could be materially and adversely affected.

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International revenue (from sales outside the United States) accounted for approximately 41% and 34% of total revenue for the years ended December 31, 2001 and 2002, respectively, 35% of total revenue for the three-month transition period ended March 31, 2003, 21% of total revenue for the fiscal year ended March 31, 2004, and 19% of total revenue for the three months ended June 30, 2004. We maintain an operational presence and have established support offices in the United Kingdom, Canada, Australia, France and Japan. We expect international sales to continue to be a material component of our business. However, there can be no assurance that we will be able to maintain or increase international market demand for our products. In addition, international expansion may require us to establish additional foreign operations and hire additional personnel. This may require significant management attention and financial resources and could adversely affect our operating margins. To the extent we are unable to expand foreign operations in a timely manner, our growth, if any, in international sales will be limited, and our business, operating results and financial condition could be materially and adversely affected.

Exchange rate fluctuations between the U.S. Dollar and other currencies in which we do business may result in currency translation losses.

At June 30, 2004, a significant portion of our cash was held in Pound Sterling or other foreign currencies (Australian Dollars, Canadian Dollars, Euros, and Japanese Yen). In the future, we may need to exchange some of the cash held in Pound Sterling, or other foreign currencies, to U.S. Dollars. We do not engage in hedging transactions, and an unfavorable foreign exchange rate at the time of conversion to U.S. Dollars would adversely affect the net fair value of the foreign denominated cash upon conversion.

The success of our international operations is subject to many uncertainties.

Our international business also involves a number of additional risks, including:

	•		lack of acceptance of localized products;
	•		cultural differences in the conduct of business;
	•		longer accounts receivable payment cycles;
	•		greater difficulty in accounts receivable collection;
	•		seasonality due to the annual slow-down in European business activity during the third calendar quarter;
	•		unexpected changes in regulatory requirements and royalty and withholding taxes that restrict the repatriation of earnings;
	•		tariffs and other trade barriers;
	•		the burden of complying with a wide variety of foreign laws; and
	•		negative effects relating to hostilities, war or terrorist acts.

To the extent profit is generated or losses are incurred in foreign countries, our effective income tax rate may be materially and adversely affected. In some markets, localization of our products will be essential to achieve market penetration. We may incur substantial costs and experience delays in localizing our products, and there can be no assurance that any localized product will ever generate significant revenues. There can be no assurance that any of the factors described herein will not have a material adverse effect on our future international sales and operations and, consequently, our business, operating results and financial condition.

We have only limited protection of our proprietary rights and technology.

Our success is heavily dependent upon our proprietary technology. We rely on a combination of the protections provided under applicable copyright, trademark and trade secret laws, confidentiality procedures and license arrangements to establish and protect our proprietary rights. As part of our confidentiality procedures, we generally enter into non-disclosure agreements with our employees, distributors and corporate partners, and license agreements with respect to our software, documentation and other proprietary information. Despite these precautions, it may be possible for unauthorized third parties to copy certain portions of our products or to reverse engineer or obtain and use information that we regard as proprietary, to use our products or technology without authorization, or to develop similar technology independently. Moreover, the laws of some countries do not protect our proprietary rights to the same extent as do the laws of the United States. Furthermore, we have no patents and existing copyright laws afford only limited protection. We license source code for certain of our products and providing such source code may increase the likelihood of misappropriation or other misuses of our intellectual property. Accordingly, there can be no assurance that we will be able to protect our proprietary software against unauthorized third-party copying or use, which could adversely affect our competitive position.

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We may not be successful in avoiding claims that we infringe other’s proprietary rights.

We are not aware that any of our products, including the products we acquired in the IUS and Wishbone Systems acquisitions, infringe the proprietary rights of third parties. There can be no assurance, however, that a third-party will not assert that our technology violates its patents or other proprietary rights in the future. As the number of software products in the industry increases and the functionality of these products further overlap, we believe that software developers may become increasingly subject to infringement claims. Any such claims, with or without merit, can be time consuming and expensive to defend or could require us to enter into royalty and license agreements. Such royalty or license agreements, if required, may not be available on terms acceptable to us or at all, which could have a material adverse effect upon our business, operating results and financial condition.

As a result of our lengthy sales cycle and the large size of our typical orders from new customers, any delays we experience will affect our operating results.

The purchase of our software products by a customer generally involves a significant commitment of capital over a long period of time, with the risk of delays frequently associated with large capital expenditures procedures within an organization, such as budgetary constraints and internal approval review. During the sales process, we may devote significant time and resources to a prospective customer, including costs associated with multiple site visits, product demonstrations and feasibility studies, and experience significant delays over which we will have no control. Any such delays in the execution of orders have caused, and may in the future cause, material fluctuations in our operating results.

Customer claims, whether successful or not, could be expensive and could harm our business.

The sale and support of our products may entail the risk of product liability claims. Our license agreements typically contain provisions designed to limit exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in such license agreements may not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions. A successful product liability claim brought against us relating to our product or third-party software embedded in our products could have a material adverse effect upon our business, operating results and financial condition.

Additional shares have recently become eligible for sale, and significant sales of such shares could result in a decrease in the price of our common stock.

The market price of our common stock could drop as a result of sales of large numbers of shares in the market, or the perception that such sales could occur. On February 9, 2004 we completed a private placement for 5.0 million shares of the Company’s common stock and agreed to register these shares for resale without restriction with the Securities and Exchange Commission. We filed a registration statement to register these shares for resale, which has been declared effective by the Commission, and these shares are freely transferable without restriction. Since there is minimal trading volume in our common stock, stockholders wishing to sell even small numbers of shares could have a negative impact on the price of our common stock. If the holders of significant amounts of our common stock, including those stockholders who acquired shares of our common stock in connection with our recent private placement, desire to sell their shares, our stock price would be materially, negatively affected.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Interest rate sensitivity:

The Company’s cash flow can be exposed to market risks related to fluctuations in the value of its investments in certain available-for-sale securities. The Company’s cash management and investment policies restrict investments to highly liquid, low risk debt instruments. The Company currently does not use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point adverse move (decrease in) interest rates along the entire interest rate yield curve would adversely affect the net fair value of all interest sensitive financial instruments by approximately $0.2 million at June 30, 2004.

Foreign exchange rate sensitivity:

The Company provides services to customers primarily in the United States, Europe, Asia Pacific and elsewhere throughout the world. As a result, the Company’s financial results could be affected by factors such as changes in foreign currency exchange

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rates or weak economic conditions in foreign markets. Sales are primarily made in U.S. Dollars; however, as the Company continues to expand its operations, more contracts may be denominated in Australian and Canadian Dollars, Pound Sterling, Euros and Japanese Yen. A strengthening of the U.S. Dollar could make the Company’s products less competitive in foreign markets. A hypothetical 5% unfavorable foreign currency exchange move versus the U.S. Dollar, across all foreign currencies, would adversely affect the net fair value of foreign denominated cash, cash equivalent and investment financial instruments by approximately $0.3 million at June 30, 2004.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon the foregoing, the Chief Executive Officer along with the Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective, in all material respects, in the timely alerting of them to material information relating to our company and its consolidated subsidiaries required to be included in our Exchange Act reports.

There has not been any change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In February, 2003, Integral Energy Australia brought a claim against IUS in the Supreme Court of New South Wales, Australia, relating to the implementation of IUS software. On March 5, 2003, the Company acquired IUS from Systems and Computer Technology Corporation (“SCT”). IUS was subsequently merged into the Company, and the Company is now the defendant in this lawsuit. The amount of damages asserted against the Company is not determinable. Pursuant to the terms of the Purchase Agreement among the Company and SCT and its affiliates, SCT and those affiliates of SCT that were a party to the Purchase Agreement agreed to defend the Company against the claims in this suit and to indemnify the Company from all losses relating thereto.

In 2002, the Company received an inquiry from the federal government requesting documents and employee interviews related to certain Department of Energy facilities with which the Company does business. The Company was made aware that this inquiry was the result of a qui tam complaint against the Company in the United States District Court of Virginia (Case No. CA01-1260-A) relating to its billing practices at these facilities. The Company has settled this matter with the federal government and the relator. Under the terms of this settlement the Company paid the federal government $500,000 and relator’s counsel $45,000 in July 2004. The settlement was provided for by the Company since March 31, 2004. The court has dismissed this action with prejudice. There was no factual finding or adjudication of wrongdoing by the Company as part of the settlement.

From time to time, the Company is involved in other legal proceedings incidental to the conduct of its business. The outcome of these claims cannot be predicted with certainty. The Company intends to defend itself vigorously in these actions. However, any settlement or judgment may have a material adverse effect on the Company’s results of operations in the period in which such settlement or judgment is paid or payment becomes probable. The Company does not believe that, individually or in aggregate, the legal matters to which it is currently a party are likely to have a material adverse effect on its results of operations or financial condition.

ITEM 2. CHANGES IN 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 AND REPORTS ON FORM 8-K

The Company filed the following Reports on Form 8-K during the quarter ended June 30, 2004.

	a.		Current Report on Form 8-K filed April 19, 2004 relating to financial results for the fourth fiscal quarter ended March 31, 2004.
	b.		Current Report on Form 8-K filed May 6, 2004 announcing financial results for the quarter and fiscal year ended March 31, 2004.
	c.		Current Report on Form 8-K filed May 12, 2004 announcing the appointment of Thomas W. Williams, Jr. as Chief Financial Officer.

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d.

Current Report on Form 8-K filed June 16, 2004 announcing the appointment of Frederick J. Schwab to the Company’s Board of Directors.

The following exhibits are filed herewith or are incorporated by reference.

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SIGNATURE

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

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