Edgar Filing: MANUGISTICS GROUP INC

U.S.

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2004

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-22154

MANUGISTICS GROUP, INC.

(Exact name of Registrant as specified in its charter)

	Delaware		52-1469385
	(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

9715 Key West Avenue, Rockville, Maryland 20850

(Address of principal executive office) (Zip code)

(301) 255-5000

(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 ý No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

Yes ý No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 83.6 million shares of common stock, $.002 par value, as of December 31, 2004.

MANUGISTICS GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets (Unaudited) -
	November 30, 2004 and February 29, 2004	3

	Condensed Consolidated Statements of Operations (Unaudited) -
	Three and nine months ended November 30, 2004 and 2003	4

	Condensed Consolidated Statements of Cash Flows (Unaudited) -
	Nine months ended November 30, 2004 and 2003	5

	Notes to Condensed Consolidated Financial Statements (Unaudited) -
	November 30, 2004	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48

Item 4.	Controls and Procedures	49

PART II	OTHER INFORMATION	50

Item 1.	Legal Proceedings	50

Item 6.	Exhibits	50

	SIGNATURES	51

PART I-FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

MANUGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)

	November 30, 2004			February 29, 2004

ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	81,566		$	138,984
Marketable securities	36,477			7,316

Total cash, cash equivalents and marketable securities	118,043			146,300
Account receivable, net of allowance for doubtful accounts of $7,833 and $4,395 at November 30, 2004 and February 29, 2004, respectively	37,716			55,575
Other current assets	13,264			11,924

Total current assets	169,023			213,799

NON-CURRENT ASSETS:
Property and equipment, net of accumulated depreciation	18,565			21,632
Software development costs, net of accumulated amortization	14,140			14,224
Long-term investments	14,127			8,999
Goodwill	185,749			185,501
Acquired technology, net of accumulated amortization	16,386			27,023
Customer relationships, net of accumulated amortization	10,997			15,984
Other intangibles and non-current assets, net of accumulated amortization	9,612			10,919

TOTAL ASSETS	$	438,599		$	498,081

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	7,932			10,368
Accrued compensation	4,344			6,180
Accrued exit and disposal obligations	6,735			5,112
Deferred revenue	31,051			43,748
Other current liabilities	20,445			22,857

Total current liabilities	70,507			88,265

NON-CURRENT LIABILITIES:
Convertible debt	175,500			175,500
Accrued exit and disposal obligations	9,243			14,393
Long-term debt and capital leases	1,841			2,633
Other non-current liabilities	323			430

Total non-current liabilities	186,907			192,956

COMMITMENTS AND CONTINGENCIES (Note 4)

STOCKHOLDERS’ EQUITY:
Preferred stock	—			—
Common stock, $.002 par value per share; 300,000 shares authorized; 83,542 and 81,973 issued and outstanding at November 30, 2004 and February 29, 2004, respectively	167			164
Additional paid-in capital	779,699			775,969
Deferred compensation	(3,306		)	(1,410		)
Accumulated other comprehensive income	4,218			3,615
Accumulated deficit	(599,593		)	(561,478		)

Total stockholders’ equity	181,185			216,860

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	438,599		$	498,081

See accompanying notes to the Condensed Consolidated Financial Statements.

MANUGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

	Three Months Ended November 30,						Nine Months Ended November 30,

	2004			2003			2004			2003
REVENUE:
Software	$	6,664		$	17,079		$	28,143		$	54,790
Support	20,666			22,195			63,383			64,749
Services	16,159			18,332			50,091			58,249
Reimbursed expenses	1,556			2,291			6,273			7,457

Total revenue	45,045			59,897			147,890			185,245

OPERATING EXPENSES:
Cost of revenue:
Cost of software	3,525			3,695			10,861			12,560
Amortization of acquired technology	3,546			3,546			10,638			10,664

Total cost of software	7,071			7,241			21,499			23,224

Cost of services and support	18,391			18,450			55,621			62,902
Cost of reimbursed expenses	1,556			2,291			6,273			7,457
Non-cash stock-option compensation expense for cost of services and support	—			183			75			780

Total cost of services and support	19,947			20,924			61,969			71,139

Sales and marketing	11,387			16,326			41,852			49,209
Non-cash stock-option compensation expense for sales and marketing	—			92			26			424

Total cost of sales and marketing	11,387			16,418			41,878			49,633

Product development	8,257			8,049			25,151			28,153
Non-cash stock-option compensation expense for product development	—			27			15			110

Total cost of product development	8,257			8,076			25,166			28,263

General and administrative	5,250			5,912			17,270			18,158
Non-cash stock-option compensation expense for general and administrative	—			92			52			292

Total cost of general and administrative	5,250			6,004			17,322			18,450

Amortization of intangibles	1,662			1,004			4,986			3,012
Exit and disposal activities	2,931			67			6,636			10,549

Total operating expenses	56,505			59,734			179,456			204,270

(LOSS) INCOME FROM OPERATIONS	(11,460		)	163			(31,566		)	(19,025		)
DEBT CONVERSION EXPENSE	—			(16,406		)	—			(16,406		)
OTHER EXPENSE, NET	(1,585		)	(3,374		)	(5,655		)	(9,997		)
LOSS BEFORE INCOME TAXES	(13,045		)	(19,617		)	(37,221		)	(45,428		)
PROVISION FOR INCOME TAXES	223			230			894			849
NET LOSS	$	(13,268	)	$	(19,847	)	$	(38,115	)	$	(46,277	)

BASIC AND DILUTED LOSS PER SHARE	$	(0.16	)	$	(0.27	)	$	(0.47	)	$	(0.65	)

SHARES USED IN BASIC AND DILUTED LOSS PER SHARE COMPUTATION	81,928			72,753			81,885			71,088

See accompanying notes to the Condensed Consolidated Financial Statements.

MANUGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

	Nine Months Ended November 30,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(38,115	)	$	(46,277	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	29,433			27,961
Amortization of debt issuance costs	678			921
Exit and disposal activities	6,636			10,549
Debt conversion expense	—			16,406
Non-cash stock-option compensation expense	168			1,606
Bad debt expense	3,965			856
Other	793			291
Changes in assets and liabilities:
Accounts receivable	13,894			4,619
Other assets	(1,311		)	(5,007		)
Accounts payable	(2,436		)	1,007
Accrued compensation	(1,837		)	(1,599		)
Other liabilities	(2,763		)	(4,245		)
Accrued exit and disposal obligations	(9,778		)	(7,941		)
Deferred revenue	(12,697		)	(8,457		)
Net cash used in operating activities	(13,370		)	(9,310		)

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired	—			1,968
Restricted cash	—			12,980
(Purchases) sales of marketable securities, net	(29,360		)	308
Purchases of property and equipment	(3,352		)	(1,674		)
Proceeds from sale of fractional shares of jet	1,958			—
Capitalization and purchases of software	(7,341		)	(8,955		)
Purchases of long-term investments, net	(5,128		)	(9,807		)
Net cash used in investing activities	(43,223		)	(5,180		)

CASH FLOWS FROM FINANCING ACTIVITIES
Payments of long-term debt and capital lease obligations	(1,976		)	(2,359		)
Proceeds from exercise of stock options and employee stock plan purchases	745			4,646
Net cash (used in) provided by financing activities	(1,231		)	2,287

EFFECTS OF EXCHANGE RATES ON CASH BALANCES	406			2,029

NET CHANGE IN CASH AND CASH EQUIVALENTS	(57,418		)	(10,174		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	138,984			134,789
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	81,566		$	124,615

SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	9,011		$	13,057

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of capital leases	$	1,490		$	—
Debt conversion	$	—		$	22,500

See accompanying notes to the Condensed Consolidated Financial Statements.

MANUGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

November 30, 2004

1. The Company and Basis of Presentation

The Company

Manugistics Group, Inc. (the “Company”) is a leading global provider of demand-driven supply chain management software products and services. The Company combines its products and services to deliver solutions that address the specific demand-driven supply chain business needs of its clients. The Company’s approach to client delivery is to advise clients on how to best use its software and other technologies across their entire demand-driven supply chain. The Company’s solutions enable companies to reduce their operating costs, improve customer service and increase their top-line revenue by allowing them to plan, optimize and synchronize their entire demand-driven supply chain.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of the Company and its wholly-owned subsidiaries have been prepared in accordance with generally accepted accounting principles for interim reporting and the guidance provided in the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments which are necessary for a fair presentation of the unaudited results for the interim periods presented have been included. The results of operations for the periods presented herein are not necessarily indicative of the results of operations for the entire fiscal year, which ends on February 28, 2005.

These financial statements should be read in conjunction with the financial statements and notes thereto for the fiscal year ended February 29, 2004 included in the Annual Report on Form 10-K of the Company for that year filed with the Securities and Exchange Commission.

Certain prior year amounts have been reclassified to conform with the current year’s financial statement presentation.

2. Stock Option-Based Compensation Plans & Employee Stock Option Exchange Program

Stock Option-Based Compensation Plans. The Company accounts for its stock option-based compensation plans in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations using the intrinsic value based method of accounting. If the Company accounted for its stock option-based compensation plan using the fair value based method of accounting in accordance with the provisions of Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” as amended by Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Interpretation No. 9,” as it will be required to do beginning September 1, 2005, the Company’s net loss and loss per basic and diluted share amounts would have been as follows (amounts in thousands except per share amounts):

	Three Months Ended November 30,						Nine Months Ended November 30,
	2004			2003			2004			2003
Net loss, as reported	$	(13,268	)	$	(19,847	)	$	(38,115	)	$	(46,277	)
Add: Stock option-based compensation expense included in reported net loss, net of tax	—			394			168			1,606
Deduct: Stock option-based compensation expense determined under the fair-value method, net of tax (1)	(1,257		)	(1,665		)	(4,999		)	(1,976		)

Pro forma net loss	$	(14,525	)	$	(21,118	)	$	(42,946	)	$	(46,647	)

Basic and diluted loss per share, as reported	$	(0.16	)	$	(0.27	)	$	(0.47	)	$	(0.65	)
Basic and diluted loss per share, pro forma	$	(0.18	)	$	(0.29	)	$	(0.52	)	$	(0.66	)

(1) Includes the impact of actual stock option forfeitures related to employee terminations.

Consistent with the Company’s accounting for deferred tax assets resulting from the exercise of employee stock options in the accompanying unaudited Condensed Consolidated Financial Statements, the Company has not provided a tax benefit or expense on the pro forma expense in the above table.

During the three and nine months ended November 30, 2004, stock options granted had weighted average fair values of $1.65 and $1.76 per share, respectively, and $4.00 and $4.20 per share during the three and nine months ended November 30, 2003, respectively, as calculated using the Black-Scholes option valuation model.

The weighted average estimated fair value of the common stock purchase rights granted under the employee stock purchase plan during the three months ended November 30, 2004 was $0.51 per share. The weighted average estimated fair value of the common stock purchase rights granted under the employee stock purchase plan during the nine months ended November 30, 2003 was $0.90 per share. The employee stock purchase plan was suspended as of June 30, 2003. At the 2004 Annual Meeting of Shareholders, the shareholders of the Company approved the 2004 Employee Stock Purchase Plan of Manugistics Group, Inc., and participation commenced on September 1, 2004. On November 30, 2004, 70,278 shares of the Company’s common stock were issued under the Company’s employee stock purchase plan.

The Company determined the assumptions used in computing the fair value of stock options and stock purchase plan shares by estimating the expected useful lives, giving consideration to the vesting and purchase periods, contractual lives, actual employee forfeitures, and the relationship between the exercise price and the fair market value of the Company’s common stock, among other factors. The risk-free interest rate is the U.S. Treasury bill rate for the relevant expected life. The fair value of stock options and stock purchase plan shares was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	OPTIONS				ESPP			OPTIONS				ESPP
	Three Months Ended November 30,				Three Months Ended November 30,			Nine Months Ended November 30,				Nine Months Ended November 30,
	2004		2003		2004		2003	2004		2003		2004		2003
Risk-free interest rate	3.37	%	2.22	%	2.02	%	N/A	3.15	%	2.49	%	2.02	%	1.45	%
Expected term	5.41 years		2.86 years		3 months		N/A	4.71 years		4.44 years		3 months		6 months
Volatility	0.7812		0.9403		0.5499		N/A	0.7902		0.9430		0.5499		0.8814
Dividend Yield	0	%	0	%	0	%	N/A	0	%	0	%	0	%	0	%

Employee Stock Option Exchange Program. On February 10, 2003, the Company announced a voluntary stock option exchange program for its employees. Under the program, the Company offered to exchange options to purchase an aggregate of approximately 6.1 million shares of Manugistics common stock held by eligible employees, vested or unvested, with exercise prices equal to or greater than $7.0001 per share. All employees had the opportunity to exchange existing eligible options for a promise to grant new options at exchange ratios dependent on the exercise price of the exchanged options. Members of the Company’s Board of Directors, including the Company’s then Chairman and Chief Executive Officer, were not eligible to participate in this program.

On March 10, 2003, the Company announced that it had accepted for cancellation and exchange options to purchase approximately 4.8 million shares of its common stock in exchange for approximately 1.5 million new options of its common stock, to be granted on September 16, 2003. The Company granted approximately 1.2 million new options on September 16, 2003 as a result of the option exchange program. The number of new options granted to employees declined from the original expected amount as a result of voluntary and involuntary terminations. The replacement options have terms, except for exercise price, and conditions that are substantially the same as those of the cancelled options. The exercise price of the replacement options is $5.55 per share, which was the market value of a share of the Company’s common stock on the date of grant as determined under the Company’s option plans.

Options cancelled in the exchange program and the new options have been treated as fixed option awards for accounting purposes as the new options were granted six months and five days after the cancellation date and any options granted after August 9, 2002 (the “look-back” period) were required to be exchanged in order for employees to participate in the program. Therefore, no compensation expense will be recorded as a result of the exchange program.

Restricted Stock Program. In June 2003, the Company’s Board of Directors approved an amendment to the Company’s 1998 stock option plan to issue restricted shares of Manugistics’ common stock to its employees. This amendment was approved by shareholders at the Company’s 2003 Annual Meeting of Shareholders on July 29, 2003. On November 3, 2004, the Company issued 1.3 million shares of restricted stock to certain key employees. The restricted stock awards granted to key employees have a vesting schedule pursuant to which the stock award vests in three equal annual increments over three years from the date of grant, with the first increment vesting on November 3, 2005. The total value of the 2004 restricted stock awards granted of approximately $2.5 million was

computed using the closing stock price on the date of grant and a 22% estimated forfeiture rate and was recorded as a component of deferred compensation. The related compensation expense will be recognized and amortized over the vesting period. Additionally, 200,000 shares, which vest in full on January 1, 2006, were issued to the new Chief Executive Officer, resulting in an increase in deferred compensation in stockholders’ equity of $0.5 million.

On October 17, 2003, the Company issued 205,000 shares of restricted stock to certain key employees. The restricted stock awards granted to key employees have a vesting schedule pursuant to which the stock award vests in four equal increments over four years from the date of grant, with the first increment vesting on April 17, 2005. The total value of the 2003 restricted stock awards granted of approximately $1.3 million was computed using the closing stock price on the date of grant and was recorded as a component of deferred compensation. The related compensation expense will be recognized and amortized over the vesting period. The Company recorded $0.3 million and $0.6 million in compensation expense related to restricted shares outstanding during the three and nine months ended November 30, 2004, respectively.

3. Net Loss Per Share

Basic net loss per share is computed using the weighted average number of shares of common stock outstanding. Diluted net loss per share is computed using the weighted average number of shares of common stock and, when dilutive, potential common shares from options, restricted stock and warrants to purchase common stock using the treasury stock method and the effect of the assumed conversion of the Company’s convertible subordinated debt. The dilutive effect of options, restricted stock and warrants to acquire six thousand and 1.9 million shares for the three months ended November 30, 2004 and 2003, respectively, and to acquire 0.9 million and 0.7 million shares for the nine months ended November 30, 2004 and 2003, respectively, was excluded from the calculation of diluted net loss per share because including these shares would be anti-dilutive due to the Company’s reported net loss. The assumed conversion of the Company’s convertible debt was excluded from the computation of diluted net loss per share for the three and nine month periods ended November 30, 2004 and 2003 because it was anti-dilutive.

4. Commitments and Contingencies

Legal Actions. The Company is involved in disputes and litigation in the normal course of business. The Company does not believe that the outcome of existing disputes or litigation will have a material adverse effect on the Company’s business, operating results, financial condition or cash flows. The Company has established accruals for losses related to such matters that are probable and reasonably estimable. However, an unfavorable outcome of some or all of these matters could have a material adverse effect on the Company’s operating performance, financial condition and cash flows.

Indemnification. The Company licenses software to its customers under contracts which the Company refers to as Software License Agreements (“SLAs”). Each SLA contains the relevant terms of the contractual arrangement with the customer, and generally includes provisions for indemnifying the customer against damages, judgments, reasonable cost and expenses incurred by the customer for any claim or suit based on infringement of a trademark or copyright as a result of the customer’s use of the Company’s software. The SLA generally limits the indemnification obligations in a variety of industry-standard respects. To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions and no material claims are outstanding as of November 30, 2004. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the SLAs, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions. There can be no assurance that potential future payments will not have a material adverse effect on the Company’s operating performance, financial condition and cash flows.

The SLA generally provides that in the event of a determination that the Company’s software, or the customer’s use of the Company’s software, infringes any trademark or copyright of any third party, or if the Company reasonably believes that such is the case, the Company, at its option and expense, has the right to obtain for the customer the right to continue to use the infringing item, replace the infringing item or modify the infringing item so that it is no longer infringing.

Product Warranty. The Company generally warrants its software products. The Company provides for the estimated cost of product warranties based on specific warranty claims, provided that it is probable that a liability exists and provided the amount can be reasonably estimated. To date, the Company has not had any material costs associated with these warranties.

5. Intangible Assets and Goodwill

Acquisition-related intangible assets subject to amortization as of November 30, 2004 and February 29, 2004 were as follows (amounts in thousands):

	Gross Assets		Accumulated Amortization			Net Assets
November 30, 2004
Acquired technology	$	64,739	$	(48,353	)	$	16,386
Customer relationships	28,109		(17,112		)	10,997

Total	$	92,848	$	(65,465	)	$	27,383

	Gross Assets		Accumulated Amortization			Net Assets
February 29, 2004
Acquired technology	$	64,739	$	(37,716	)	$	27,023
Customer relationships	28,109		(12,125		)	15,984

Total	$	92,848	$	(49,841	)	$	43,007

The change in the carrying amount of goodwill for the nine months ended November 30, 2004 was as follows (amounts in thousands):


Balance as of February 29, 2004	$	185,501
Foreign currency translation adjustments, net	248

Balance as of November 30, 2004	$	185,749

During the six months ended August 31, 2004, the Company experienced adverse changes in its stock price resulting from its poor financial performance. As a result, the Company performed a test for goodwill impairment at August 31, 2004 and determined that based upon the implied fair value (which includes factors such as, but not limited to, the Company’s market capitalization, control premium and recent stock price volatility) of the Company as of August 31, 2004, there was no impairment of goodwill. There was no change in circumstances during the three months ended November 30, 2004 that caused the Company to perform an additional test for goodwill impairment at November 30, 2004.

Amortization expense for acquisition-related intangible assets was $5.2 million and $4.6 million for the three months ended November 30, 2004 and 2003, respectively, and $15.6 million and $13.7 million for the nine months ended November 30, 2004 and 2003, respectively. Estimated aggregate future amortization expense for acquisition-related intangible assets for the three month period ending February 28, 2005 and future fiscal years is as follows (amounts in thousands):

	Three Months Ending February 28,		Fiscal Year Ending February 28 or 29,
	2005		2006		2007		2008		2009		Thereafter		Total
Amortization expense	$	4,231	$	12,497	$	7,146	$	2,441	$	914	$	154	$	27,383

6. Comprehensive Loss

Other comprehensive loss relates primarily to foreign currency translation adjustments and unrealized (losses) gains on investments in marketable securities and long-term investments. The following table sets forth the comprehensive loss for the three and nine month periods ended November 30, 2004 and 2003 (amounts in thousands):

	Three Months Ended November 30,						Nine Months Ended November 30,
	2004			2003			2004			2003

Net loss	$	(13,268	)	$	(19,847	)	$	(38,115	)	$	(46,277	)
Other comprehensive loss, net of tax:
Unrealized (loss) gain on investments	(114		)	31			(308		)	23
Foreign currency translation adjustment	1,949			2,041			911			2,643
Total comprehensive loss	$	(11,433	)	$	(17,775	)	$	(37,512	)	$	(43,611	)

7. Exit and Disposal Activities

The following table sets forth a summary of total exit and disposal charges, payments made against those charges and the remaining liabilities as of November 30, 2004 (amounts in thousands):

All Plans	Balance as of February 29, 2004		Adjustments to charges in the three months ended May 31, 2004			Charges and adjustments to charges in the three months ended August 31, 2004		Charges and adjustments to charges in the three months ended November 30, 2004			Utilization of cash in the nine months ended November 30, 2004			Non-cash activity disposal losses in the nine months ended November 30, 2004			Balance as of November 30, 2004
Lease obligations and terminations (1)	$	18,636	$	(2,837	)	$	3,377	$	578		$	(6,478	)	$	—		$	13,276
Severance and related benefits	82		—			1,922		2,647			(2,985		)	—			1,666
Impairment charges (benefit) and write-downs	—		246			686		(370		)	—			(562		)	—
Other	58		74			237		76			(315		)	—			130
Subtotal	18,776		$	(2,517	)	$	6,222	$	2,931		$	(9,778	)	$	(562	)	15,072
Reclassification of deferred rent	729																906
Total	$	19,505															$	15,978

(1) Certain accrued lease obligations extend through fiscal year 2019.

Plan FY05 Q2 Exit and Disposal Plans (“FY05 Q2 Plans”). During the three months ended August 31, 2004, the Company announced and began implementing the FY05 Q2 Plans designed to further adjust its cost structure and resource allocation to increase efficiencies and reduce excess office space. Actions taken included the involuntary termination of 16 employees located in the U.S. and 3 located overseas and abandoning additional idle space in the San Carlos and Calabasas, California facilities. As a result of the involuntary terminations, the Company recorded a charge of approximately $1.9 million. Three of the terminated employees had employment contracts that defined the amount of severance and related benefits they would receive upon termination. The severance and related benefits for employees with employment contracts were accrued at August 31, 2004 in accordance with Statement of Financial Accounting Standards No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” (“SFAS 88”) as the amounts were both probable and estimable. All terminated employees were notified by August 31, 2004 and those employees without employment contracts were not required to render service to the Company for severance and related benefits beyond the earlier of their termination date or a minimum retention period of 60 days (as defined by Statement of Financial Accounting Standards No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”)).

The Company recorded a facility charge of approximately $2.2 million related to abandoning additional idle space in the San Carlos and Calabasas facilities. The costs associated with the facilities charge were recorded based on the present value of the sum of expected remaining lease commitments and include management’s best estimates of expected sublease income and costs associated with subleasing the vacated space. Other contract termination-related charges amounted to approximately $0.2 million. In accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), the Company

recorded a write-down of certain furniture, fixtures, computer equipment and leasehold improvements of approximately $0.7 million related to the abandonment of idle space in San Carlos, California.

During the three months ended November 30, 2004, the Company recorded exit and disposal charges of approximately $0.5 million related to abandoning additional office space in Munich, Germany and Stockholm, Sweden. The costs associated with the facilities charge were recorded based on the present value of the sum of expected remaining lease commitments and include management’s best estimates of expected sublease income and costs associated with subleasing the vacated space. The Company also disposed of its right to certain fractional shares of a jet, resulting in a benefit of approximately $0.4 million. Other exit and disposal charges were $0.1 million.

Additionally, during the three months ended November 30, 2004, the Company recorded severance-related exit and disposal charges of approximately $2.6 million as a result of the involuntary termination of 75 employees located in the U.S. and 21 located overseas. All terminated employees were notified by November 30, 2004. There were 24 employees who were required to render service beyond the earlier of their termination date or minimum retention period of 60 days, as defined by SFAS 146. The severance cost for these employees is recognized and accrued over the required service period in accordance with SFAS 146. All other terminated employees were not required to render service to the Company for severance and related benefits beyond the earlier of their termination date or a minimum retention period of 60 days.

The following table sets forth a summary of the FY05 Q2 Plans exit and disposal charges, payments made and the remaining liabilities as of November 30, 2004 (amounts in thousands):

FY05 Q2 Plans	Balance as of February 29, 2004		Charges in the three months ended August 31, 2004		Charges and adjustments to charges in the three months ended November 30, 2004			Utilization of cash in the nine months ended November 30, 2004			Non-Cash activity disposal losses in the nine months ended November 30, 2004			Balance as of November 30, 2004
Lease obligations and terminations(1)	$	—	$	2,180	$	519		$	(179	)	$	—		$	2,520
Severance and related benefits	—		1,922		2,635			(2,891		)	—			1,666
Impairment charges (benefit) and write downs	—		686		(370		)	—			(316		)	—
Other	—		190		76			(136		)	—			130
Subtotal	—		$	4,978	$	2,860		$	(3,206	)	$	(316	)	4,316
Reclassification of deferred rent	—													88
Total	$	—												$	4,404

(1) Includes $14 of accretion expense in adjustments to charges in the three and nine month periods ended November 30, 2004.

In accordance with SFAS 146, in periods subsequent to the initial recording of the FY05 Q2, FY04 Q4 and FY04 Q1 Plans facilities charge, the Company will recognize accretion expense due to the passage of time. Accretion expense will be recorded as an additional restructuring-related expense and increase to restructuring liabilities.

Plan FY04 Q4 Exit and Disposal Plan (“FY04 Q4 Plan”). During the three months ended February 29, 2004, the Company announced and implemented the FY04 Q4 Plan designed to further adjust its cost structure and resource allocation to increase efficiencies and reduce excess office space. Actions taken included further consolidation of the Company’s U.S. product development functions to the corporate headquarters in Rockville, Maryland by closing the product development facility at Wayne, Pennsylvania and relocating employees to the corporate headquarters in Rockville, Maryland, involuntary termination for the remaining employees at the Wayne, Pennsylvania product development facility and lease abandonments. The Company recorded a facility charge of approximately $5.6 million during the three months ended February 29, 2004 related to the Company vacating Wayne, Pennsylvania, remaining office space in Irving, Texas and Detroit, Michigan, as well as further reductions of office space in Atlanta, Georgia; Itasca, Illinois; Calabasas, California; and Bracknell, United Kingdom. The costs associated with the facilities charge were recorded based on the present value of the sum of expected remaining lease commitments and include management’s best estimates of expected sublease income and costs associated with subleasing the vacated space. The Company also recorded other charges of approximately $0.1 million related to relocation costs during the three months ended February 29, 2004 to relocate certain employees under the consolidation of its U.S. product development function from Wayne, Pennsylvania. The involuntary terminations related to the closing of the Wayne, Pennsylvania product development facility totaled seven employees which resulted in a charge for severance and related benefits of approximately $0.1 million. All terminated employees were

notified by February 29, 2004 and were not required to render service to the Company beyond the earlier of their termination date or minimum retention period of 60 days (as defined by SFAS 146).

During the nine months ended November 30, 2004, the Company recorded an adjustment of approximately $0.4 million in facility charges to the FY04 Q4 Plan related to a lease termination agreement with the landlord of its facility in metropolitan Chicago, Illinois (the “Chicago Lease Termination”). In addition, the Company recorded an adjustment to other charges of approximately $0.1 million related to additional costs to relocate certain product development employees from Wayne, Pennsylvania to the corporate headquarters in Rockville, Maryland. Further, during the nine months ended November 30, 2004, the Company recorded an adjustment of approximately $0.1 million related to a change in the sublease income estimate for the Detroit, Michigan facility and an adjustment of approximately ($0.1) million related to other estimate adjustments for the Atlanta, Georgia facility.

The following table sets forth a summary of the FY04 Q4 Plan exit and disposal charges, payments made and the remaining liabilities as of November 30, 2004 (amounts in thousands):

FY04 Q4 Plan	Balance as of February 29, 2004		Adjustments to charges in the three months ended May 31, 2004			Adjustments to charges in the three months ended August 31, 2004		Adjustments to charges in the three months ended November 30, 2004		Utilization of cash in the nine months ended November 30, 2004			Balance as of November 30, 2004
Lease obligations and terminations (1)	$	5,338	$	(418	)	$	5	$	31	$	(1,422	)	$	3,534
Severance and related benefits	24		—			—		12		(36		)	—
Other	58		58			47		—		(163		)	—
Subtotal	5,420		$	(360	)	$	52	$	43	$	(1,621	)	3,534
Reclassification of deferred rent	225												225
Total	$	5,645											$	3,759

(1) Includes $31 and $102 of accretion expense in adjustments to charges in the three and nine month periods ended November 30, 2004.

Plan FY04 Q1 Exit and Disposal Plan (“FY04 Q1 Plan”). During the three months ended May 31, 2003, the Company announced and implemented the FY04 Q1 Plan designed to further align its cost structure with expected revenue. Actions taken included a reduction in the Company’s employee workforce by approximately 8%, further consolidation of the U.S. product development functions to the corporate headquarters in Rockville, Maryland, further reduced discretionary spending and lease terminations. The reduction in workforce was achieved through a combination of attrition and involuntary terminations and totaled 94 employees, 72 of which were involuntary, across most business functions and geographic regions. Involuntary terminations by geographic region included 66 in the U.S., 3 in Mexico, 2 in Canada and 1 in Japan which resulted in a charge for severance and related benefits of approximately $1.3 million. All terminated employees were notified by May 31, 2003 and were not required to render service to the Company beyond the earlier of their termination date or minimum retention period of 60 days, as defined by SFAS 146. The Company recorded a facility charge of approximately $5.9 million during the three months ended May 31, 2003 related to the Company vacating and subleasing approximately 26% of its corporate headquarters building in Rockville, Maryland, as well as further reductions of office space in San Carlos, California; Atlanta, Georgia; Irving, Texas and Detroit, Michigan. The costs associated with the facilities charge were recorded based on the present value of the sum of expected remaining lease commitments and include management’s best estimates of expected sublease income and costs associated with subleasing the vacated space. In accordance with SFAS 144, the Company recorded a write-down related to exit and disposal activities of approximately $3.2 million during the three months ended May 31, 2003. The write-down consisted of the abandonment of certain furniture, fixtures, computer equipment and leasehold improvements related to permanently vacating office space in the previously mentioned facilities.

During the nine months ended November 30, 2004, the Company recorded an adjustment of approximately $0.5 million related to a change in sublease income estimate for the Detroit, Michigan and San Carlos, California facilities.

The following table sets forth a summary of FY04 Q1 Plan exit and disposal charges, payments made and the remaining liabilities as of November 30, 2004 (amounts in thousands):

FY04 Q1 Plan	Balance as of February 29, 2004		Adjustments to charges in the three months ended May 31, 2004		Adjustments to charges in the three months ended August 31, 2004		Adjustments to charges in the three months ended November 30, 2004		Utilization of cash in the nine months ended November 30, 2004			Balance as of November 30, 2004
Lease obligations and terminations (1)	$	3,632	$	30	$	467	$	36	$	(544	)	$	3,621
Severance and related benefits	40		—		—		—		(40		)	—
Subtotal	3,672		$	30	$	467	$	36	$	(584	)	3,621
Reclassification of deferred rent	504											504
Total	$	4,176										$	4,125

(1) Includes $34 and $105 of accretion expense in adjustments to charges in the three and nine month periods ended November 30, 2004.

Plans FY03, FY02 and FY99 Exit and Disposal Plans (the “Prior Plans”). During fiscal 2003, the Company implemented three exit and disposal plans in order to further align its cost structure with expected revenue. Actions taken included a reduction in the Company’s employee workforce by approximately 26%, consolidation of most of the U.S. product development functions to the corporate headquarters in Rockville, Maryland, further reduced discretionary spending and lease termination costs. Implementation of these plans resulted in a charge for severance and related benefits of approximately $7.9 million related to 343 involuntary terminations across most business functions and geographic regions. In addition, the plans resulted in a facility charge of approximately $8.6 million related to the closure and abandonment of leased office space; closure of the offices in Ratingen, Germany; Milan, Italy; and Denver, Colorado; reductions in office space in Bracknell, UK; San Carlos, California; and Atlanta, Georgia; and the expected loss of sublease rental income from a previously closed office in Bracknell, UK. The facility charge was offset by a credit of approximately $0.7 million related to the reduction of a previously recorded office space liability assumed as part of the Talus Solutions, Inc. (“Talus”) acquisition where the landlord subsequently agreed to reduce the remaining office space and lease obligation held by the Company. These costs include management’s best estimates of expected sublease income. The Company also recorded other charges of approximately $0.7 million related to contract termination costs during the twelve months ended February 28, 2003. The Company recorded other charges of approximately $0.2 million related to relocation costs of certain employees relocated to Rockville, Maryland as part of the consolidation of product development during the twelve months ended February 28, 2003.

In accordance with SFAS 144, the Company recorded a write-down relating to exit and disposal activities of approximately $1.3 million during fiscal 2003. The write-down consisted of the abandonment of certain furniture, fixtures, computer equipment and leasehold improvements related to the closure of certain facilities. In fiscal 2003 the Company also recorded an impairment charge of approximately $1.2 million related to the discontinued use of a portion of the Company’s sales force automation software, which was subsequently replaced with another tool. The remaining net book value at August 31, 2002 of $0.7 million was fully amortized over its remaining useful life.

During fiscal 2002, the Company adopted two exit and disposal plans in order to (i) centralize certain of its product development functions in Rockville, Maryland from other locations in North America; and (ii) reduce expenses as a result of expected reduction in revenue caused by client concerns about committing to large capital projects in the face of weakening global economic conditions. Implementation of these plans resulted in facility charges of approximately $3.7 million related to the closure and abandonment of leased office space, a charge for severance and related benefits of approximately $2.3 million related to the involuntary termination of 163 employees across most business functions and geographic regions, a charge of approximately $0.5 million related to the relocation of 10 employees and an impairment charge of approximately $0.1 million related to the closure and abandonment of certain leased facilities.

During the third and fourth quarters of fiscal 1999, the Company implemented an exit and disposal plan aimed at reducing costs and returning the Company to profitability. Actions taken included a reduction in the Company’s workforce of 412 employees across all business functions in the U.S., the abandonment of future lease commitments on office facilities that were closed and write-downs of operating assets, goodwill and capitalized software made in accordance with Statement of Financial Accounting Standards No.121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (“SFAS 121”).

In fiscal 2004, the Company recorded adjustments to facility charges of approximately $1.2 million related to changes in certain facilities sublease assumptions based on commercial real-estate conditions, adjustments to severance charges of approximately $(0.6) million and an adjustment to other charges of approximately $0.5 million related to its initiative taken on in fiscal 2003 to relocate certain employees under the consolidation of the U.S. product development functions to Rockville, Maryland.

In the nine months ended November 30, 2004, the Company recorded an exit and disposal-related adjustment of approximately $1.0 million related to a change in the sublease income estimate for the San Carlos, California facility. Additionally, the Company executed a lease amendment for its facility in Ratingen, Germany. Under the terms of the amendment, half of the existing space was eliminated from the existing lease. As a result, the Company recorded a benefit of $0.3 million.

In the nine months ended November 30, 2004, the Company recorded an exit and disposal-related adjustment of approximately ($2.8) million in facility charges related to the Chicago Lease Termination. Approximately ($2.4) million of the adjustment relates to the Prior Plans. In accordance with SFAS 144, the Company recorded a write-down of certain furniture, fixtures, computer equipment and leasehold improvements of $0.2 million related to the lease termination.

The following table sets forth a summary of the Prior Plans exit and disposal charges, payments made and the remaining liabilities as of November 30, 2004 (amounts in thousands):

Prior Plans	Balance as of February 29, 2004		Adjustments to charges in the three months ended May 31, 2004			Charges and Adjustments to charges in the three months ended August 31, 2004		Adjustments to charges in the three months ended November 30, 2004			Utilization of cash in the nine months ended November 30, 2004			Non-cash activity disposal losses in the nine months ended November 30, 2004			Balance as of November 30, 2004
Lease obligations and terminations	$	9,666	$	(2,449	)	$	725	$	(8	)	$	(4,333	)	$	—		$	3,601
Severance and related benefits	18		—			—		—			(18		)	—			—
Impairment charges and write-downs	—		246			—		—			—			(246		)	—
Other	—		16			—		—			(16		)	—			—
Subtotal	9,684		$	(2,187	)	$	725	$	(8	)	$	(4,367	)	$	(246	)	3,601
Reclassification of deferred rent	—																89
Total	$	9,684															$	3,690

8. Warrant

In March 2004, the Company entered into an amendment to an existing alliance agreement with International Business Machines Corporation (“IBM”) under which the companies will develop, market, sell and deliver demand and supply chain solutions globally. In connection with entering into the amendment to the alliance agreement, the Company issued a warrant (the “Warrant”) to IBM to acquire 250,000 shares of the Company’s common stock at a per share purchase price of $8.51, in reliance upon an exception provided under Section 4(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering. The Warrant is immediately exercisable, expires March 12, 2009, and provides for customary registration and indemnification rights and certain limited transfer rights. The fair value of the Warrant of $1.1 million will be recognized as operating expense over the three-year service period of the alliance agreement. The fair value of the Warrant was calculated using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 2.79%; dividend yield of zero; volatility of 99%; and a Warrant life of five years. The Company recorded $0.3 million in amortization expense associated with the Warrant for the nine months ended November 30, 2004.

9. Credit Facilities

The Company has a one-year unsecured revolving credit facility (the “Credit Facility”) with Silicon Valley Bank (“SVB”) for $15.0 million which will expire on March 30, 2005, unless renewed. Under the terms of the Credit Facility, the Company may request cash advances, letters of credit, or both.

The Credit Facility requires the Company to comply with financial covenants including (i) a minimum tangible net worth requirement and (ii) a minimum ratio of (a) unrestricted cash, cash equivalents, marketable securities and long-term investments deposited with SVB and its affiliates plus net accounts receivable to (b) current liabilities, plus long-term indebtedness to SVB and outstanding letters of credit, minus deferred revenue, of at least 1.75 to 1.0. On September 22, 2004, the Company and SVB amended the terms of the Credit Facility to change the minimum tangible net worth (defined as the total consolidated assets of the Company minus goodwill, capitalized software costs, other intangible assets and total liabilities plus convertible debt and up to $10.0 million in exit and disposal

accruals) requirement to $120.0 million as of November 30, 2004 and $120.0 million plus 50% of net quarterly GAAP profit for the quarter ending February 28, 2005. The Company was in compliance with all financial covenants as of November 30, 2004 and February 29, 2004. There were no cash draws outstanding under the Credit Facility as of November 30, 2004 and February 29, 2004. As of November 30, 2004 and February 29, 2004, the Company had $9.5 million and $9.9 million, respectively, in letters of credit outstanding under the Credit Facility to secure its lease obligations for certain office space.

The Credit Facility requires the Company to maintain $50.0 million in funds with SVB Asset Management and its affiliates. The Credit Facility also restricts the amount of additional debt the Company can incur and restricts the amount of cash that the Company can use for acquisitions and for the repurchase of convertible debt. Under the terms of the Credit Facility, the Company retains the right to terminate the facility at any time upon repayment of any advances and the posting of cash collateral for any outstanding letters of credit. Under the Credit Facility, SVB has the right to obtain a lien on all of the Company’s assets, other than intellectual property, upon an occurrence of default, unless the Company terminates the facility as provided above. The Credit Facility also provides that, upon an event of default, the Company is prohibited from paying a cash dividend to its shareholders.

The Company had an additional credit agreement (the “Equipment Line”) with SVB, as amended, which expired on December 31, 2004, under which the Company was permitted to borrow up to $5.0 million for the purchase of equipment. During fiscal 2003, the Company borrowed $2.9 million under the Equipment Line. Amounts borrowed under the Equipment Line in fiscal 2003 accrue interest at a rate equal to the greater of the three-year treasury note rate plus 5%, or 8.25%, and are repaid monthly over a 36-month period. The principal balance remaining as of November 30, 2004 and February 29, 2004 was approximately $1.0 million and $1.7 million, respectively. The financial covenants for the Equipment Line are the same as the financial covenants for the Credit Facility. The Company was in compliance with all financial covenants as of November 30, 2004 and February 29, 2004.

10. Stockholder Rights Agreement

On October 28, 2004, the Board of Directors declared a dividend of one right (a “Right”) for each outstanding share of the Company’s common stock to stockholders of record at the close of business on November 8, 2004. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of series A junior participating preferred stock, $.01 par value per share, at a purchase price of $19.00 in cash, subject to adjustment. Initially, the Rights are not exercisable and will be attached to all certificates representing outstanding shares of common stock, and no separate Rights certificates will be distributed. The Rights will become exercisable and separate from the common stock, and the distribution date will occur, upon the earlier of (i) 10 business days following the later of (a) the first date of a public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding shares of common stock or (b) the first date on which an executive officer of the Company has actual knowledge that an Acquiring Person has become such or (ii) 10 business days following the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 20% or more of the outstanding shares of common stock. The distribution date may be deferred in circumstances determined by the Board of Directors. In addition, certain inadvertent acquisitions will not trigger the occurrence of the distribution date. The Rights expire upon the close of business on October 27, 2014, unless earlier redeemed or exchanged.

11. New Accounting Pronouncements

FASB Statement 123 (Revision 2004), “Share-Based Payment,” was issued in December 2004 and is effective for reporting periods beginning after June 15, 2005. The new statement requires all share-based payments to employees to be recognized in the financial statements based on their fair values. The Company currently accounts for its share-based payments to employees under the intrinsic value method of accounting set forth in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issues to Employees.” Additionally, the Company complies with the stock-based employer compensation disclosure requirements of SFAS 148. The Company plans to adopt the new statement beginning September 1, 2005.

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

Forward-Looking Statements

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. The discussion and analysis contains forward-looking statements which are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from those anticipated in these forward-looking statements and other forward-looking statements made elsewhere in this Quarterly Report on Form 10-Q as a result of specified factors, including those set forth under the caption “Factors that May Affect Future Results.”

Executive Summary

Our Condensed Consolidated Financial Statements are included in Item 1 of this Quarterly Report on Form 10-Q. The following discussion is provided to allow the reader to have a better understanding of our operating results for the third quarter ended November 30, 2004, including (i) a brief discussion of our business and products, (ii) the business environment and factors that affected our financial performance, (iii) our focus on future improvements in our financial performance and (iv) Key Financial Metrics-Fiscal 2005. This executive summary should be read in conjunction with the more detailed discussion and analysis of our financial condition and results of operations included in this Item 2, section titled, “Factors that May Affect Future Results” and our Condensed Consolidated Financial Statements, which are included in Item 1 of this Quarterly Report on Form 10-Q.

Overview – Business and Products

We are a leading global provider of demand-driven supply chain management software products and services. We combine these products and services to deliver solutions that address the specific demand-driven supply chain business needs of our clients. Our approach to client delivery is to advise clients on how to best use our software and other technologies across their entire demand-driven supply chain.

Our solutions enable our clients to reduce operating costs, improve customer service and increase their top-line revenue by allowing them to plan, optimize and synchronize their entire demand-driven supply chain. These benefits create efficiencies in how goods and services are brought to market, how they are priced and sold and how they are serviced and maintained. Our software solutions provide the further benefit of simultaneously optimizing cost and revenue on an enterprise-wide basis by integrating pricing, forecasting, operational planning and execution, enhancing margins across the client’s enterprise and extended trading network. In addition, our software solutions help our clients derive more benefits from their existing IT investments with other software vendors, such as legacy and Enterprise Resource Planning applications, and help ensure the security and integrity of their global supply chains.

Our approach to client delivery is to advise our clients how to best use our solutions and other technologies across their entire demand-driven supply chain to integrate pricing, forecasting, operational planning and execution in a manner that will allow them to enhance margins across their entire enterprise and extended trading network. We deliver our solutions using commercially available products and will provide additional functionality addressed through product extensions for industry-specific capabilities. Certain of our clients and prospects are also asking for unique capabilities on top of our core capabilities to give them a competitive edge in the market place. In these instances, this could lead to an increase in software license revenue being recognized on a contract accounting basis over the course of the delivery of the solution rather than upon delivery and contract execution. We are primarily focused on the Consumer Goods, Retail, and Government, Aerospace & Defense markets. We are also focused on providing revenue management solutions for the Travel, Transportation & Hospitality and Communications and High Technology markets.

Business Environment and Factors That Affected our Three and Nine Months Ended November 30, 2004 Results

Our operating results for the past three fiscal years were affected by several broad-based factors including global macro-economic conditions and cautious capital spending by corporations, especially for information technology, such as enterprise application software. Despite improvements in macro-economic conditions in the United States during our fiscal 2005, markets for supply chain management software has lagged the overall

improvements in macro-economic indicators in capital spending. We believe changing conditions over the last three fiscal years caused changes in the behavior patterns in our markets as our clients and prospects intensified their efforts to reduce costs. Their focus shifted from longer-term strategic initiatives to short-term tactical initiatives with more rapid paybacks. In addition, we believe that some of our clients and prospects are still deferring capital spending on supply chain management software in part as a result of the challenges they have faced in complying with the requirements of the Sarbanes-Oxley Act of 2002 and other related regulatory requirements. As a result, over the past three fiscal years and during the three and nine months ended November 30, 2004, we have faced challenges in our ability to stabilize revenue and improve our operating performance. We also believe that our financial results for the three and nine months ended November 30, 2004 were affected by the magnitude of changes in our workforce, including our executive management and sales organization, difficulties in execution, a market focus that was too broad for existing market conditions and a strong competitive environment.

In addition to these trends in our operating environment, we also recognize that our performance has not met our expectations, and as previously announced, during our second quarter of fiscal 2005 we developed and began executing plans to improve our overall operating performance and other initiatives to focus on future improvements in our financial performance, which we discuss in more detail below.

Focus on Future Improvements in Our Financial Performance

In response to our recent financial performance, we continue to make focused changes within our business to reduce cost and improve our financial performance. These changes include, among others, the continued development of a more focused product and market strategy and strategic restructuring of the organization, and efforts to align our operating expense levels with a revenue run-rate that will allow us to become profitable. During the last two fiscal quarters, we hired a new Chief Executive Officer and a new Chief Technology Officer, consolidated our senior management team, eliminating several positions including that of President, and consolidated our sales team on a global basis. In December 2004, we hired a new Vice President of Mid-Markets. In two European countries where we do not presently have a critical mass of resources, we eliminated certain offices, which are now being serviced from other locations in the region and through indirect sales channels such as resellers and other alliance partners. In addition, we have integrated our services, support and training organizations to provide better coordination and improved customer service.

As part of these initiatives, in our second quarter of fiscal 2005, we approved and began to implement exit and disposal plans, with anticipated quarterly cost savings of approximately $4.0 million to $5.0 million by the end of the first quarter of fiscal 2006, compared to the first quarter of fiscal 2005. During our third quarter, we continued making focused changes to reduce our costs under our second quarter exit and disposal plans, including the abandonment of certain office space and the involuntary termination of employees. We recorded an exit and disposal charge of $2.9 million in the three months ending November 30, 2004 related to these cost-cutting initiatives. We will continue the implementation of our second quarter exit and disposal plans through the fourth quarter of fiscal 2005 and seek to implement other initiatives that will improve our performance. As a result of these plans, we expect to incur exit and disposal charges of $5.0 million to $6.5 million during the fourth quarter of fiscal 2005 that will result in future cash expenditures consisting primarily of $4.5 million to $5.5 million for lease abandonment charges and $0.5 million to $1.0 million in severance and other benefits associated with further reductions in headcount.

We recently commenced operations at our new product development center in India. We intend to move a substantial portion of our product development to our new facility over the course of the next year while keeping our core high-level product development at our headquarters in Rockville, Maryland. We believe this will allow us to leverage lower cost product development work, resulting in anticipated expense savings of approximately $2.0 million to $3.0 million per quarter by the end of the fourth quarter of fiscal 2006.

If market conditions for our products and services do not improve, we will need to make further adjustments to our cost structure to improve performance.

Key Financial Metrics – Fiscal 2005

We reported year-over-year revenue decreases in software, support, services and reimbursed expense and total revenue. “All other operating expenses” decreased $6.4 million, or 11.6%, to $48.4 million for the quarter ended November 30, 2004 compared to the same period in fiscal 2004.

	Three Months Ended November 30,					Nine Months Ended November 30,
	2004			2003		2004		2003
Revenue:
Software	$		6,664	$	17,079	$	28,143	$	54,790
Support	20,666			22,195		63,383		64,749
Services and reimbursed expenses	17,715			20,623		56,364		65,706
Total revenue	$	45,045		$	59,897	$	147,890	$	185,245

Operating expenses and employee headcount:
Exit and disposal and acquisition-related expenses (1)	$	8,139		$	5,011	$	22,428	$	25,831
All other operating expenses (2)	48,366			54,723		157,028		178,439
Total operating expenses	$	56,505		$	59,734	$	179,456	$	204,270

Total employees (period end)	733			943		733		943
Total average employees	766			957		828		1,017
Total revenue per average employee	$	59		$	63	$	179	$	182

	November 30, 2004			August 31, 2004			May 31, 2004			February 29, 2004
Financial condition, liquidity and capital structure:
Cash, cash equivalents, marketable securities and long-term investments	$	132,170		$	137,911		$	148,737		$	155,299
Convertible debt	$	175,500		$	175,500		$	175,500		$	175,500
Total stockholders’ equity	$	181,185		$	192,094		$	209,030		$	216,860
Common shares outstanding (period end)	83,542			82,304			82,072			81,973
Cash flows from operating activities (quarter ended)	$	(5,598	)	$	(6,758	)	$	(1,014	)	$	16,135

(1) Includes exit and disposal activities plus acquisition-related expenses consisting of amortization of acquired technology and intangibles and non-cash stock option-based compensation expense.

(2) Includes cost of software, cost of services and support, cost of reimbursed expenses, sales and marketing, product development and general and administrative costs.

The following is a brief discussion of the above financial metrics and analysis of the reasons for the change between fiscal quarters ended November 30, 2004 and 2003 and recent trends.

Software revenue

Our software revenue decreased $10.4 million, or 61.0%, to $6.7 million for the three months ended November 30, 2004 compared to the same period in fiscal 2004 and decreased $26.6 million, or 48.6%, to $28.1 million for the nine months ended November 30, 2004 compared to the same period in fiscal 2004. The following table highlights some of the significant trends affecting our software revenue:

Quarter Ended	Significant Software Transactions (1)	Average Selling Price (in 000s)		Software Transactions $1.0 Million or Greater

May 31, 2003	14	$	1,279	5
August 31, 2003	27	$	556	6
November 30, 2003	31	$	513	4
February 29, 2004	27	$	654	3
May 31, 2004	13	$	695	1
August 31, 2004	18	$	533	3
November 30,2004	11	$	491	1

(1) Significant software transactions are those with a value of $100,000 or greater recognized within the fiscal quarter.

Software revenue categorized by the current industries on which we focus for the three and nine months ended November 30, 2004 and 2003 is as follows (in thousands):

	Three Months Ended November 30,					Nine Months Ended November 30,
	2004			2003		2004		2003
Government, Aerospace & Defense	$		230	$	4,429	$	2,356	$	18,455
Consumer Packaged Goods (1)	2,527			1,574		5,015		8,364
Retail	615			146		9,119		2,749
Communications and High Technology	315			781		2,365		4,208
Travel, Transportation & Hospitality	274			1,686		1,254		2,297
Other	2,703			8,463		8,034		18,717
	$	6,664		$	17,079	$	28,143	$	54,790

(1) A component of Consumer Goods

The previous tables indicate the following trends affecting our software revenue in the three and nine months ended November 30, 2004 and 2003:

• The number of significant software license transactions completed decreased in the three and nine months ended November 30, 2004 compared to the same periods in fiscal 2004.

• The average selling price of our software has fluctuated during the past six quarters, ranging from $491,000 to $695,000. The quarter ended May 31, 2003 included software revenue from an installment payment under a large multi-year government contract.

• The number of software transactions of $1.0 million or greater reported for the three and nine months ended November 30, 2004 has decreased compared to the same periods in fiscal 2004 due to lower and delayed capital spending on information technology by corporations.

• Software revenue declined for all industries with the exception of an increase in the Consumer Packaged Goods and Retail industries during the three months ended November 30, 2004 compared to the same period in fiscal 2004. The concentration of software revenue from the retail industry increased significantly for the nine months ended November 30, 2004 compared to the same period in fiscal 2004, reflecting increased spending by retail clients. The concentration of software revenue from the government, aerospace and defense sector was significantly lower for the nine months ended November 30, 2004 compared to the same period in fiscal 2004 due in part to the inclusion of software revenue from a large multi-year government contract in the nine months ended November 30, 2003, and lengthening sales cycles that we believe are resulting, in part, from the Department of Defense’s shift of budget dollars from planned initiatives to other projects to cover funding shortfalls caused by the increased cost of the war in Iraq.

• The decrease in “Other” software revenue for the three months ended November 30, 2004 compared to the same period in fiscal 2004 was primarily due to decreases in the Pulp & Paper, Chemical and Life Sciences industries. The decrease in “Other” software revenue for the nine months ended November 30, 2004 compared to the same period in fiscal 2004 was primarily due to decreases in the Industrial, Energy, Chemical, Automotive, Pulp & Paper and Food and Agriculture industries.

Support revenue

Support revenue decreased $1.5 million, or 6.9%, to $20.7 million for the three months ended November 30, 2004 compared to the same period in fiscal 2004 and decreased $1.4 million, or 2.1%, to $63.4 million during the nine months ended November 30, 2004 compared to the same period in fiscal 2004. Our percentage of annual support renewals by our clients remains high; however, decreases in support revenue from non-renewals was not fully offset by increases in support revenue from new software sales during the three and nine months ended November 30, 2004. We have not lost any of our largest support customers in the past several quarters that had a material negative effect on revenue.

Services and reimbursed expenses revenue

Our services and reimbursed revenue decreased $2.9 million, or 14.1%, to $17.7 million for the three months ended November 30, 2004 compared to the same period in fiscal 2004 and decreased $9.3 million, or 14.2%, to $56.4 million for the nine months ended November 30, 2004 compared to the same period in fiscal 2004. The decrease for the three months ended November 30, 2004 compared to the same period in fiscal 2004 is due to the lag effect of a decrease in the number of software transactions completed in early fiscal 2005. The decrease for the nine months ended November 30, 2004 compared to the same period in fiscal 2004 is due to the lag effect of a decrease

in the number of software transactions completed in early fiscal 2005, lower demand for implementation services, attrition of services employees and lower than anticipated revenue from services transactions with fixed price contract terms.

Total revenue per average employee

Our total quarterly revenue per average employee decreased $4,000, or 6.3%, to $59,000 for the three months ended November 30, 2004 compared to the same period in fiscal 2004 and decreased $3,000, or 1.6%, to $179,000 during the nine months ended November 30, 2004 compared to the same period in fiscal 2004. Total quarterly revenue per average employee is calculated as total revenue for the quarter divided by average employees for the quarter. The decrease during the three and nine months ended November 30, 2004 was primarily due to the decrease in total revenue compared to the same period in fiscal 2004, partially offset by the decrease in employee headcount.

Total operating expenses

Our total operating expenses decreased $3.2 million, or 5.4%, to $56.5 million for the three months ended November 30, 2004 compared to the same period in fiscal 2004 and decreased $24.8 million, or 12.1%, to $179.5 million for the nine months ended November 30, 2004 compared to the same period in fiscal 2004. Total operating expenses contain both exit and disposal and acquisition-related expenses and “all other operating expenses” (as defined in the preceding Key Financial Metrics — Fiscal 2005 table). Exit and disposal and acquisition-related expenses increased $3.1 million, or 62.4%, to $8.1 million during the three months ended November 30, 2004 compared to the same period in fiscal 2004. Exit and disposal and acquisition-related expenses decreased $3.4 million, or 13.2%, to $22.4 million during the nine months ended November 30, 2004 compared to the same period in fiscal 2004. “All other operating expenses” decreased $6.4 million, or 11.6%, to $48.4 million for the three months ended November 30, 2004 compared to the same period in fiscal 2004 and decreased $21.4 million, or 12.0%, to $157.0 million for the nine months ended November 30, 2004 compared to the same period in fiscal 2004. The decreases in “all other operating expenses” were primarily the result of lower revenue-related expenses due to a decrease in total revenue and a 20.0% and 18.6% decrease in average employee headcount during the three and nine months ended November 30, 2004, respectively, compared to the same periods in fiscal 2004. The decrease in average employee headcount is the direct result of our exit and disposal plans during fiscal 2005 and 2004 and voluntary attrition.

Financial condition, liquidity and capital structure

During the three months ended November 30, 2004, we had a net usage of cash. Activity includes the following:

• Cash, cash equivalents, marketable securities and long-term investments decreased $5.7 million, or 4.2%, to $132.2 million as of November 30, 2004 compared to $137.9 million as of August 31, 2004. This decrease is the result of cash flows used in operations of $5.6 million, including the semi-annual interest payment of $4.4 million on our outstanding convertible debt, capital expenditures, including capitalized software development costs, of $3.0 million, cash flows used in financing activities of $0.6 million, partially offset by positive cash flows from the effect of foreign currency exchange rates of $1.6 million and the proceeds of approximately $2.0 million from the disposal of our right to certain fractional shares of a jet.

• Cash flows from operating activities improved by $1.2 million to ($5.6) million for the three months ended November 30, 2004 compared to ($6.8) million for the three months ended August 31, 2004 primarily because of a lower reported operating loss, higher accounts receivable contribution related to the timing of receipt of payments for outstanding receivables, which was partially offset by an increase in the allowance for doubtful accounts, a smaller decrease in deferred revenue due to the timing of billing renewals and the seasonal nature of our support renewals, decreased vendor payments related to the timing of receipt of vendor invoices, offset by increased payments related to our exit and disposal activities.

Use of Estimates and Critical Accounting Policies

The accompanying discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe 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 could differ from the estimates made by management with respect to these and other items that require management’s estimates.

We believe that the following accounting policies are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and relate to the more significant areas involving management’s judgments and estimates:

• revenue recognition and deferred revenue;

• allowance for doubtful accounts;

• capitalized software development costs;

• valuation of long-lived assets, including intangible assets and impairment review of goodwill;

• income taxes;

• exit and disposal related expenses; and

• stock-based compensation plans.

Our management has reviewed our critical accounting policies, our critical accounting estimates and the related disclosures with our Disclosure and Audit Committees. These policies and our procedures related to these policies are described further in our Annual Report on Form 10-K for the year ended February 29, 2004 in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Use of Estimates and Critical Accounting Policies.”

Results of Operations

The following table includes the Condensed Consolidated Statements of Operations data for the three months and nine months ended November 30, 2004 and 2003 expressed as a percentage of total revenue:

	Three Months Ended November 30,				Nine Months Ended November 30,
	2004		2003		2004		2003
REVENUE:
Software	14.8	%	28.5	%	19.0	%	29.6	%
Support	45.9	%	37.1	%	42.9	%	35.0	%
Services	35.9	%	30.6	%	33.9	%	31.4	%
Reimbursed expenses	3.4	%	3.8	%	4.2	%	4.0	%

Total revenue	100.0	%	100.0	%	100.0	%	100.0	%

OPERATING EXPENSES:
Cost of software	7.8	%	6.2	%	7.3	%	6.8	%
Amortization of acquired technology	7.9	%	5.9	%	7.2	%	5.8	%
Cost of services and support	40.8	%	30.8	%	37.6	%	34.0	%
Cost of reimbursed expenses	3.4	%	3.8	%	4.2	%	4.0	%
Sales and marketing	25.3	%	27.3	%	28.3	%	26.6	%
Product development	18.3	%	13.4	%	17.0	%	15.2	%
General and administrative	11.7	%	9.9	%	11.7	%	9.8	%
Amortization of intangibles	3.7	%	1.7	%	3.4	%	1.6	%
Exit and disposal activities	6.5	%	0.1	%	4.5	%	5.7	%
Non-cash stock option compensation expense	0.0	%	0.7	%	0.1	%	0.9	%

Total operating expenses	125.4	%	99.8	%	121.3	%	110.4	%

(Loss) income from operations	(25.4	)%	0.2	%	(21.3	)%	(10.4	)%
Debt conversion expense	—		(27.4	)%	—		(8.9	)%
Other expense, net	(3.5	)%	(5.6	)%	(3.8	)%	(5.4	)%

Loss before income taxes	(28.9	)%	(32.8	)%	(25.1	)%	(24.7	)%
Provision for income taxes	0.5	%	0.4	%	0.6	%	0.5	%

Net loss	(29.4	)%	(33.2	)%	(25.7	)%	(25.2	)%

The percentages shown above for cost of services and support, sales and marketing, product development and general and administrative expenses have been calculated excluding non-cash stock compensation expense as follows (in thousands):

	Three Months Ended November 30,				Nine Months Ended November 30,
	2004		2003		2004		2003
Cost of services and support	$	—	$	183	$	75	$	780
Sales and marketing	—		92		26		424
Product development	—		27		15		110
General and administrative	—		92		52		292
	$	—	$	394	$	168	$	1,606

See Operating Expenses: “Non-Cash Stock Compensation Expense” for further detail.

Revenue:

Software Revenue. Software revenue decreased $10.4 million, or 61.0%, to $6.7 million for the three months ended November 30, 2004 compared to the same period in fiscal 2004 and decreased $26.6 million, or 48.6%, to $28.1 million for the nine months ended November 30, 2004 compared to the same period in fiscal 2004. We believe the decreases in software revenue and software revenue as a percentage of total revenue are due to cautious capital spending for supply chain software purchases and to effects resulting from the magnitude of changes in our workforce, including our executive management and sales organization, difficulties in execution and a strong competitive environment. We experienced lengthening sales cycles and reductions in the size of customer orders compared to the same periods in fiscal 2004. These factors resulted in a decrease in the number of significant software license transactions with a value of $100,000 or greater, the number of transactions greater than $1.0 million and our average selling price in both the three months and nine months ended November 30, 2004 compared to the same periods in fiscal 2004.

We attribute much of the caution of our clients and prospects to their concerns regarding the sustainability of the current economic recovery and the current geopolitical environment in which we operate. We saw no driving force to overcome the negative market factors that are holding back companies from supply chain initiatives. Further, we believe that the effort by companies to comply with the Sarbanes-Oxley Act of 2002 continues to consume the internal resources of our clients and prospects and slow the decision making process for other software purchases.

The following table summarizes significant software transactions completed during the three and nine months ended November 30, 2004 and 2003:

	Three Months Ended November 30,				Nine Months Ended November 30,
Significant Software Transactions (1)	2004		2003		2004		2003
Number of transactions $100,000 to $999,999	10		27		37		57
Number of transactions $1.0 million and greater	1		4		5		15
Total number of transactions	11		31		42		72
Average selling price (in thousands)	$	491	$	513	$	572	$	678

(1) Significant software transactions are those with a value of $100,000 or greater recognized within the fiscal quarter.

Support Revenue. Support revenue decreased $1.5 million, or 6.9%, to $20.7 million for the three months ended November 30, 2004 compared to the same period in fiscal 2004 and decreased $1.4 million, or 2.1%, to $63.4 million during the nine months ended November 30, 2004 compared to the same period in fiscal 2004. Our percentage of annual support renewals by our clients remains high; however, decreases in support revenue from non-renewals were not fully offset by increases in support revenue from new software sales during the three and nine months ended November 30, 2004. We have not lost any of our largest support customers in the past several quarters that had a material negative effect on revenue. There can be no assurance that our historical renewal rate will continue. See “Forward-Looking Statements” and “Factors That May Affect Future Results.”

Services Revenue. Services revenue decreased $2.2 million, or 11.9%, to $16.2 million for the three months ended November 30, 2004 compared to the same period in fiscal 2004 and decreased $8.2 million, or 14.0%, to $50.1 million for the nine months ended November 30, 2004 compared to the same period in fiscal 2004. The decrease in services revenue during the three months ended November 30, 2004 resulted from the decrease in the number of completed software transactions in the first half of fiscal 2005. Services revenue tends to track software license revenue in prior periods. The decrease in services revenue during the nine months ended November 30, 2004 was due to a decrease in the number of completed software transactions in late fiscal 2004 and the first half of 2005. Additionally, there was lower demand for implementation services, attrition of services employees and lower than

anticipated revenue from services transactions recognized on a percentage-of-completion basis. See “Forward-Looking Statements” and “Factors That May Affect Future Results.”

Geographic Revenue. We market and sell our software and services internationally, primarily in Europe, Asia, Canada and South America. Revenue outside of the U.S. decreased $7.3 million, or 31.1%, to $16.1 million, or 35.8% of total revenue, during the three months ended November 30, 2004 compared to the same period in fiscal 2004 and decreased $13.5 million, or 21.1%, to $50.3 million, or 34.0% of total revenue, during the nine months ended November 30, 2004 compared to the same period in fiscal 2004. The decrease in international revenue during the three and nine months ended November 30, 2004 compared to the same periods in fiscal 2004 is due to lower software and services revenue caused by a decrease in the number of software sales and reductions in the size of customer orders, resulting from what we believe are concerns of our clients and prospects over general market conditions, the effects resulting from the magnitude of changes in our workforce, including our executive management and sales organization, difficulties in execution and a strong competitive environment.

Operating Expenses:

Cost of Software. Cost of software consists primarily of amortization of capitalized software development costs and royalty fees associated with third-party software either embedded in our software or resold by us. The following table sets forth amortization of capitalized software development costs and other costs of software for the three and nine months ended November 30, 2004 and 2003 (in thousands):

	Three Months Ended November 30,						Nine Months Ended November 30,
	2004			2003			2004			2003

Amortization of capitalized software	$	2,435		$	2,095		$	7,224		$	7,303
Percentage of software revenue	36.5		%	12.3		%	25.7		%	13.3		%
Other costs of software	$	1,090		$	1,600		$	3,637		$	5,257
Percentage of software revenue	16.4		%	9.4		%	12.9		%	9.6		%
Total cost of software	$	3,525		$	3,695		$	10,861		$	12,560
Percentage of software revenue	52.9		%	21.6		%	38.6		%	22.9		%

The decrease in the total cost of software during the three months ended November 30, 2004 as compared to the same period in fiscal 2004 was a result of decreased royalties paid to third parties as a result of decreased software revenue which was partially offset by an increase in the amortization of capitalized software due to the product release of version 7.2 of our software in February 2004 and the write-off of one of our capitalized products for which the anticipated future gross revenues were less than the estimated future costs of completing and disposing of the product. The decrease in the total cost of software during the nine months ended November 30, 2004 as compared to the same period in fiscal 2004 was a result of decreased royalties paid to third parties as a result of decreased software revenue. Amortization of capitalized software development costs does not typically vary as software revenue changes, but royalty fees do change with movements in software revenue.

Amortization of Acquired Technology. In connection with acquisitions in fiscal 2003, 2002 and 2001, we acquired developed technology that we offer as part of our solutions. Acquired technology is amortized over periods ranging from four to six years. We expect annual amortization of acquired technology to be approximately $13.2 million in fiscal 2005.

Cost of Services and Support. Cost of services and support includes primarily personnel and third-party contractor costs. Cost of services and support, excluding the cost of reimbursed expenses and non-cash stock option compensation expense, remained flat at $18.4 million, while the percentage of related revenue increased to 49.9% for the three months ended November 30, 2004 compared to 45.5% for the same period in fiscal 2004. The increase in costs as a percentage of revenue reflects an increase in the percentage of active implementations with fixed price contract terms. Cost of services and support decreased $7.3 million, or 11.6%, to $55.6 million, or 49.0% of related revenue during the nine months ended November 30, 2004 compared to 51.1% of related revenue for the same period in fiscal 2004. The decrease in cost of services and support was attributable to an overall decrease in the average number of services and support employees to 310 during the nine months ended November 30, 2004, compared to 378 during the same period in fiscal 2004. This was primarily the result of our exit and disposal initiatives implemented during the past two fiscal years.

Sales and Marketing. Sales and marketing expense consists primarily of personnel costs, sales commissions, and promotional events such as user conferences, trade shows and technical conferences, advertising and public relations programs. Sales and marketing expense decreased $4.9 million, or 30.3%, to $11.4 million during the three months ended November 30, 2004 compared to the same periods in fiscal 2004. The decrease during the three months ended November 30, 2004 was due to:

• an overall decrease in the average number of sales, marketing and business development employees to 153 during the three months ended November 30, 2004 compared to 216 during the same period in fiscal 2004 and 181 for the nine months ended November 30, 2004 compared to 223 during the same period in fiscal 2004. This was the result of our exit and disposal plans implemented during the second and third quarters of fiscal 2005 and the implementation of our exit and disposal plan in the fourth quarter of fiscal 2004 in addition to some voluntary attrition;

• a decrease in sales commissions due to lower software revenue; and

• a decrease in promotional spending, travel, advertising and public relations spending resulting from cost containment and cost reduction measures implemented in fiscal 2004 and the second and third quarters of fiscal 2005.

Product Development. Product development costs include expenses associated with the development of new software products, enhancements of existing products and quality assurance activities and are reported net of capitalized software development costs. Such costs are primarily from employees and third-party contractors. The following table sets forth product development costs for the three and nine months ended November 30, 2004 and 2003 (in thousands):

Three Months Ended
November 30,

Nine Months Ended
November 30,

2004

2003

2004

2003

Gross product development costs

10,853

10,717