UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the year ended December 31, 20032004

or

For the transition period from                    to                    ..

Commission File Number ( 0-22292 )

Captiva Software Corporation

(Exact name of registrant as specified in its charter)

10145 Pacific Heights Boulevard

San Diego, CA 92121

(858) 320-1000

(Address, including zip code, and telephone number, including area code, of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value

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            

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [    ]

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

The aggregate market value of the voting stock held by non-affiliates of the registrant, as of June 30, 2003,2004, was approximately $38,274,365$93.7 million (based on the closing price for shares of the registrant’s Common Stock as reported by the Nasdaq National Market on that date). Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the registrant’s Common Stock, $0.01 par value, as of February 29, 200428, 2005 was 10,938,083.12,382,694.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the registrant’s 2004 Annual Meeting of Stockholders are incorporated herein by reference into Part III of this Report. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrant’s year ended December 31, 2003.

Certain exhibits filed with the registrant’s (i) Current Report on Form 8-K filed on March 20, 2002, (ii) Registration Statement on Form S-1, as amended (Registration No. 33-66142), (iii) Current Report on Form 8-K filed on September 24, 1997, (iv) Registration Statement on Form 8-A filed on September 10, 1997 (Registration No. 000-22292), (v) Annual Report on Form 10-K filed on March 29, 2002, (vi) Annual Report on Form 10-K filed on April 2, 2001, (vii) Registration Statement on Form S-4 (Registration No. 333-87106) and (viii) Annual Report on Form 10-K filed on March 31, 2003, are incorporated by reference into Part IV of this Report.

CAPTIVA SOFTWARE CORPORATION

FORM 10-K

For the Year Ended December 31, 20032004

INDEX

PART I

Forward Looking Statements

ThisStatements contained in this Annual Report on Form 10-K containsthat are not statements of historical fact should be considered forward-looking statements. These statements relate to future events orwithin the meaning of the Private Securities Litigation Reform Act of 1995 (the Act). In addition, certain statements in our future filings with the Securities and Exchange Commission (SEC), in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, income or loss, earnings or loss per share, capital structure and other statements concerning future financial performance. In some cases, you canperformance; (ii) statements of our plans and objectives by our management or Board of Directors, including those relating to products or services; (iii) statements of assumptions underlying such statements; (iv) statements regarding business relationships with vendors, customers or collaborators; and (v) statements regarding products, their characteristics, performance, sales potential or effect in the hands of customers and the development of new products. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “should,��� “potential,” “goals,” “strategy,” and similar expressions generally identify forward-looking statements, by termsbut are not the exclusive means of identifying such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of these terms or other words of similar meaning. Thesestatements. Forward-looking statements are only predictions based on information currently available to us. Actual events or results may differ materially. Important factorsinvolve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in the section entitled “Risk Factors” in Item 1Factors,” below. The performance of this reportour business and inour securities may be adversely affected by these factors and by other risks identified from timefactors common to time in our filings withother businesses and investments, or to the Securities and Exchange Commission, press releases and other communications.

Although we believe thatgeneral economy. Forward-looking statements speak only as of the estimates and expectations reflected in our forward-lookingdate on which the statements are reasonable,made, and we cannot guarantee future results, levels of activity, performance or achievements. We assumeundertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events or circumstances. Readers should carefully review the forward-looking statements containeddisclosures and the risk factors described in this report.and other documents we file from time to time with the SEC, including our reports on Forms 10-Q and 8-K.

Overview

We areCaptiva Software Corporation (together with its consolidated subsidiaries, theCompany, which may also be referred to in this report aswe,us,our, andCaptiva) is a leading provider of input management solutions designed to manage business criticalbusiness-critical information from paper, faxed and electronic forms, documents and transactions into the enterprise. Our solutions automate the processing of billions of forms, documents and transactions annually, converting their content into information that is usable in database, document, content and other information management systems. We believe that our products and services enable organizations to reduce operating costs, obtain higher information accuracy rates and speed processing times.

Our productssolutions offer organizations a cost-effective, accurate and automated alternative to both manual data entry and electronic data interchange (EDI)( EDI). These traditional approaches are typically labor intensive, time consuming and costly methods of managing the input of information into the enterprise. Organizations can utilize our productssolutions to capture information digitally, extract the meaningful content or data, and apply business rules that ensure the data’s accuracy. Our solutions serve thousands of users in insurance, financial services, business processbanking, government, business-process outsourcing (BPO), government, manufacturing,technology and other markets. Enterprises that have purchased our products and services include GEICO, American Express, Blue Cross Blue Shield of Oklahoma, Electronic Data Systems, FileNet, Fujitsu, GEICO, National City Corporation,Citicorp, the U.S. Patent and Texas Workforce Commission.Trademark Office, the FBI Records Management Division, the Internal Revenue Service, EDS, IBM and Home Depot.

We are a Delaware corporation, formed by the merger of ActionPoint, Inc., a Delaware corporation (ActionPoint), with Captiva Software Corporation, a California corporation (Old Captiva), in the third quarter of 2002 (the Merger), pursuant to which ActionPoint acquired all of the capital stock of Old Captiva. In connection with the Merger, Old Captiva became a wholly-owned subsidiary of ActionPoint and ActionPoint changed its name to Captiva Software Corporation.

In February 2004, we acquired ADP Context Inc. (Context), a business unit of ADP Claims Solutions Group, Inc. and a part of the worldwide Automatic Data Processing, Inc. family of companies, for approximately $5.2 million in cash.companies. Context’s products provide automated solutions to complex medical claims coding, editing and reimbursement challenges in the healthcare industry and allow us to better serve our claims processing customers and expand our reach in the healthcare insurance market.

Captiva Software Corporation resulted from the merger of ActionPoint, Inc., a Delaware corporation (ActionPoint), with Captiva Software Corporation, a California corporation (Old Captiva), in the third quarter of 2002 (the Merger). In this transaction, Captiva Software Corporation became a wholly owned subsidiary of ActionPoint, and ActionPoint changed its name to Captiva Software Corporation and remained a Delaware Corporation.

OurMore information about us can be found on our principal executive offices are located at 10145 Pacific Heights Boulevard, San Diego, California 92121, our telephone number is (858) 320-1000 and our Internet website address isweb site, www.captivasoftware.com. We were incorporated in California in January 1986 and were reincorporated in Delaware in September 1993. Our filings with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K, quarterly

reportsour Quarterly Reports on Form 10-Q current reportsand our Current Reports on Form 8-K, and anyas well as amendments to those reports, are available free of charge through the investor relations section of our Internet websiteweb site as soon as reasonably practicable after being filedwe electronically file them with or furnished to the SEC. Information on our web site and other information that can be accessed through our web site are not part of this report.

You may read and copy materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy statements and other information we file. The address of the SEC website is http://www.sec.gov.

Industry Background

The Input Management Problem

Enormous quantities of printed and electronic information flow into businesses, government agencies and other organizations on a daily basis. Most of this information comes from customers, suppliers, employees and other third parties conducting transactions or corresponding with the organization through the use of paper and electronic forms and documents such as letters, resumes, new account enrollments, credit applications, tax returns, invoices, legal briefs and regulatory filings.

Pertinent information from these forms and documents must be captured, classified, extracted, validated, perfected, formatted and exported to an organization’s information management systems as cost effectively, accurately and quickly as possible. Processing delays, incorrect or invalid data and inefficient methods can adversely impact an organization’s revenues, operating expenses and interactions with customers, suppliers and employees. According to Strategy Partners, a consultancy firm specializing in enterprise content management (ECM), the input management software market is expected to exceed $1.2 billion$974 million in 2004.2005.

Current Approaches are Inadequate

Traditional methods for capturing data from paper forms and documents rely principally uponon manual data entry. According to Harvey Spencer Associates, a consultancy firm specializing in ECM, organizations in the United States spend $15 billion a year manually keying data from forms alone. Organizations generally perform this work internally or outsource it to BPO firms. Butfirms, but both approaches have inherent problems. Organizations performing this work internally usually distribute it on a departmental basis, where highly paid knowledge workers manually key data directly into information management systems with minimal data validation and low productivity rates. The accuracy of the information and processing times usually suffer, and costs incurred from both erroneous data and poorly utilized human resources are high.

Gartner Group (Gartner), an independent information technology research firm, estimates that the amount of time wasted on these document management tasks is significant and increasing. In 1997, Gartner estimated that knowledge workers spent about eight hours per week or 20% of their time on document management tasks. In 2003, Gartner increased this estimate to between 12 and 16 hours per week or 30% and 40% of their time. Additional data gathered by Gartner indicated that:

BPO firms that specialize in performing this type of work typically achieve higher productivity rates at a lower cost. However, unpredictable data accuracy and turnaround times as well as an overall loss of control impede adoption, particularly for confidential or time sensitive forms and documents and for government agencies sensitive to the increased outsourcing of jobs to offshore firms.

Alternative approaches to manually capturing data include electronic data interchange (EDI),the use of EDI, electronic forms and documents and, more recently, Internet applications. Each of these approaches also has inherent problems and limitations. EDI is difficult to implement and has been adopted in only a few vertical markets, such as medical claims processing. We believe approximately 60%a substantial percentage of all medical claims continue to be submitted on paper forms. The growth in the use of electronic forms and documents and Internet-based transactions is limited by

user concerns about the security of transactions, the absence of a standard data exchange format and the limited acceptance of legally binding, digital signatures.

These alternative input management methods frequently have minimal data validation capabilities, are incapable of capturing data from paper forms and documents, and require substantial custom application development and maintenance. Gartner Group estimates that for every dollar spent on Internet applications organizations should expect to spend from $5 to $20 on services, principally for the integration of Internet applications with existing information management systems.

As the volume of forms and documents continues to grow, many organizations processing paper and electronic forms and documents are seeking a more comprehensive solution to address their input management problems. We believe there is a significant opportunity to help organizations automate their input management processes, reduce operating costs, obtain higher information accuracy rates and speed processing times.

Our Solutions

Our products and services, which we refer to togethercollectively as our “solutions”,“solutions,” allow our customers to realize the following benefits:

An Input Management Process Thatthat is Cost Effective,Cost-Effective, Accurate and Timely

By automating previously manual processes, our solutions enable our customers to capture information from multiple sources in a more cost effective,cost-effective, accurate and timely manner than otherwise possible. OurWe believe our customers achieve lower operating costs, higher information accuracy rates and faster processing times. These benefits can increase our customers’ revenues, reduce their expenses, accelerate their business processes and help improve their relationships with customers, suppliers and employees. We believe our solutions typically provide a 12 to 18 month return on investment (ROI) through reduced manual data entry costs alone, and also improve the quality and timeliness of information, which further increases the ROI.

Rapid Implementation Timeframes

Our products utilize graphically oriented, easy to use development modules that enable rapid application development, testing and deployment. We also offer professional services to assist customers with these tasks or to perform them entirely on their behalf. Our solutions allow our customers to reduce implementation costs and shorten implementation timeframes.

A Highly Flexible, Open and Scalable System

Our products provide a modular platform using an open architecture that is scalable from a single personal computer to large, multi-user networks processing from several hundred to hundreds of thousands of forms and documents per day. This allows our customers to configure systems and supplement our solutions with third-party software and hardware in order to meet unique requirements and easily expand systems easily should the need arise.

Ease in Extracting and Exporting Information

Our solutions are able to extract and improve the accuracy of information from paper, faxed and scanned forms and documents, electronic forms and electronic data in an EDI or an eXtensible Markup Language (XML) format. Our solutions also provide the ability to export information in multiple formats including XML, to almost any information management system, including those from Documentum, FileNet, IBM, OpenText and SAP.system. These capabilities allow our customers to deploy and benefit from a single, fully integrated input management platform as opposed, for example, to separate systems for document capture, forms processing and electronic data streams.

The Application of Uniform Business Rules to All Sources of Information

Our solutions are able to consistently apply a configurable set of business rules to all forms and documents entering the organization throughout the input management process, regardless of their origin or format. This allows organizations to make a one-time investmentinvest in developing, testing and deploying a single set of these rules, and it allows the forms and documents to be automatically verified and properly routed.

Growth Strategy

Our objective is to extend our position as a leading provider of input management solutions. Key elements of this strategy include:

LeverageLeveraging Our Existing Customer Base

We believe significant opportunities exist to expand the use of our solutions in our existing customer base. Our customers generally start by deploying our solutions on a departmentalline of business basis or for limited form or document types. Satisfaction with these initial deployments can lead to a broader or enterprise-wide adoption of our solutions.

Leverage and ExpandBroadening Our Sales Channels and Expanding Our Markets

In 20032004, we derived 36%39% of our revenues from resellers, systemsystems integrators and distributors. We believe there are significant opportunities to increase sales of our solutions through resellers, system integrators and distributors.these channels. We also believe there are significant opportunities to both add new cooperative marketing partners and leverage our existing cooperative marketing partners, who typically develop and market complementary products but do not actually resell our products.

We have historically focused our sales and marketing efforts on large organizations, which typically require the ability to process large volumes of forms and documents through scalable input management solutions. Our solutions are, however, flexible enough to serve the full spectrum of market needs, and we intend to expand intocontinue expanding in lower volume segments by repackaging and repricing our solutions for these segments.Insegments. For example, in 2003, we released InputAccelInputAccel Expressto specifically address the lower volume market, and we announced ahave since entered into distribution agreementagreements for this product with Headway Technology Group, aseveral leading imaging products distributorECM product distributors in Western Europe. In 2004 we announced a distribution agreement for this product with Scientific Digital Business Group, a leading imaging products distributorEurope and Southeast Asia in Southeast Asia.2003 and in Latin America in 2004.

ExpandExpanding Our International Presence

We derived 21%20%, 25%21% and 30%25% of our revenues from outside the United States in 2004, 2003 2002 and 2001,2002, respectively. We believe there are significant opportunities to increase sales of our solutions in international markets. We believe the size and presence of our subsidiaries in the United Kingdom, Germany and Australia will improve our competitiveness in those countries. InAdditionally, in 2003 we initiated efforts to add resellers and system integrators in most Spanish and Portuguese speaking countries. Incountries and in 2004 we initiated similar efforts in the Pacific Rim.Rim region. We expect to expand our presence in additional international markets and to continue to address local language requirements by localizing our products.

BroadenBroadening Our Product Offerings

We intend to continue to develop and introduce new solutions that utilizeutilizing our proven technologies and allow us to enter new markets. For example, in 2001Moreover, because we released ClaimPack, in 2003 we introduced InputAccel Express and in 2004 we introduced Digital Mailroom. Allbelieve that many end-user customers prefer to procure complete sets of these products build upon our pre-existing technology and have allowed us to enter new markets.

According to IDC, an independent information technology research firm, end-users are willing to pay a single vendor source 10% to 15% more for a complete solution that includes software, hardware and integration services from a single source, instead of purchasing these components

services than they would if they obtained these components separately from multiple vendors. Wevendors, we believe that we can extendimprove our market position and increase ourthe average selling price of our products by offeringbroadening our product offerings to include a variety of software, services and hardware, includingsuch as digital scanners and other third-party products, as part of the solutions we provide.

PursuePursuing Strategic Acquisitions

We believe that strategic acquisitions of complementary technologies may allow us to expand our producttechnology offerings, augment our distribution channels, expand our market opportunities or broaden our customer base. We have acquired technology in theachieved these objectives through past to achieve these objectivesacquisitions, and may in the future evaluate and pursue similar opportunities.

Our Products and Services

Our products and services enable enterprises to manage business critical information from paper, faxed and electronic forms, documents and transactions. Our solutions automate the processing of billions of forms, documents and transactions annually by converting their contents into information that is usable in database, document, content, and other information management systems.

Software

Our customers are usually required to capture large amounts of information within short timeframes in order to meet inflexible deadlines on a regular basis. We have optimized our software products to provide this level of system performance and availability. Our software products are generally licensed on either a per server, per user or per concurrent user basis, with the server-based processes typically being configured to support only a specified form or document throughput rate. In 2004, 2003 2002 and 2001,2002, software revenues were approximatelyrepresented 50%, 47%, and 57% and 68% of our total revenues, respectively.

FormWare

FormWare is comprised of a set of modules that work in conjunction with one another to capture data from paper, faxed and scanned forms and documents, Internet forms and electronic data in an EDI or XML format. It is a forms processing platform that is optimized to extract data from structured forms containing fieldedfields of data, such as medical claims, new account enrollments, credit applications, tax returns, orders and similar forms. ItFormWare includes modules for:

ClaimPack

Built on FormWare, ClaimPack is an automated medical claims processing solution for the healthcare industry that is able to capture critical information from paper-based claim forms (including HCFA and UB92 forms). It speeds deployment times by providing a standard packaged application while maintaining the ability to customizeconfigure applications through the use of FormWare’s integrated development environment and VBA.

InputAccelInputAccel

InputAccelis comprised of a set of modules that work in conjunction with one another to capture content from paper, faxed and scanned forms and documents and electronic data sources. It is a document capture platform optimized to extract content from unstructured documents, such as correspondence, resumes, regulatory filings, litigation materials, drug test reports and similar documents. It includes modules for:

FormWare and InputAccel are fully integrated with one another and can be licensed separately or together.

InputAccelInputAccel Express

Based on InputAccel, InputAccel Express is a repackaged and repriced version of InputAccel designed for the mid-market segment of the input management market. Completely upgradeable to InputAccel, InputAccel Express is more of a packaged solution for departmental or lower volume users who need to quickly and easily transform paper forms and documents into more usable electronic content.

InputAccelInputAccel for Invoices

Built on InputAccel, InputAccel for Invoices is a productsolution for automating accounts payable departments that is designed to capture critical information from invoices. Like ClaimPack, it speeds deployment times by providing a standard packaged application, but can be customizedconfigured through the use of InputAccel’s development environment and VBVisual Basic Scripting. InputAccel for Invoices was released in the first quarter of 2004.

Digital Mailroom

Also built on InputAccel, the Digital Mailroom is a solution for the automated classification and routing of digitized images of inbound mail and electronic communications. It provides a single point of entry and centralized processing that is able to automatically recognize and route forms and documents to the appropriate department or person for processing, while providing full auditing and tracking capabilities. Digital Mailroom was released in the first quarter of 2004.

Pixel Products

Pixel software products include:

Context Products

We acquired the Context products onproduct line in connection with our February 1, 2004 through the acquisition of ADP Context, Inc., a business unit of ADP Claims Solutions Group, Inc. and a part of the worldwide Automatic Data Processing, Inc. family of companies.Context. Context products are sold to providers and payers in the health insurance market and include:

Architecture

Our software products areconsist of sophisticated 32 bit32-bit applications for use on standalone personal computers and client-server platforms using Microsoft Windows software at the desktop and Microsoft Server software on file servers. Many of our software products include modules that function as servers, which means that their resources can be shared by multiple users and that additional modules can be added as required to address more complex processing or greater throughput requirements. All of our software products use Microsoft SQL Server or a highly optimized proprietary file system to maintain higher throughput rates.system.

Most of our software products use complex queuing algorithms to ensure subsecond response times and minimize the number of system calls required to complete various tasks. All of our software products are available in English; some of our products are available in localized German, Spanish, Portuguese and Japanese versions.Japanese. We expect to provide additional localizednon-English versions of our product in order to increase our international presence and revenues.

AdvantEDGE Services

We offer a variety of services throughThrough our AdvantEDGE services program. Weprogram, our professional and technical services staff offers a broad range of services, which we believe that this allows us to better address the implementation and support needs of our customers, resellers and system integrators, and achieve a greater level of customer satisfaction. This program includes a broad rangeDuring each of services provided by our professional2004, 2003 and technical services staff, which consisted of 69 employees as of December 31, 2003. In 2003, 2002, and 2001, services revenues were approximatelyaccounted for 40%, 40% and 32% of our total revenues, respectively.revenues.

Our professional services staff provides project management, functional and detailed specification preparation, application development, form redesign, system configuration, testing, installation and application specific training services to our customers. While our resellers and system integrators can and do provide these services to their customers, they frequently ask us to provide these services to their customers on a subcontract basis. We generally charge our clients for professional services on either a fixed fee basis for projects utilizing mutually agreed upon functional and detailed specifications and on aor time and materials basis for other projects.

Our technical services staff provides maintenance for the resolution of technical inquiries by telephone, emaile-mail and over the Internet, andInternet. Our staff also offers a set of regularly scheduled training classes held at our offices and customer sites. We offer several levels of maintenance, with the most comprehensive coveringof which provides coverage to

our customers 24 hours a day, seven days a week. We generally charge for maintenance as a percentage of the related software license fee, that varies, depending upon the related level of service and other factors, and classroom training on a per attendee basis.

Hardware and Other Products

As part of our solutions, we offer digital scanners and other third-party products. InDuring 2004, 2003 and 2002, these products accounted for approximately10%, 13% and 3% of our total revenues with substantiallyrespectively. Substantially all of these amounts being attributable to the saleour hardware and third-party product revenues are generated by our sales of sophisticated, production levelproduction-level digital scanners manufactured by Kodak and IBML. We had a backlog of digital scanner revenues of approximately $4.3 million and $2.2 million at December 31, 2003 and 2002, respectively.Based on our current relationships with these vendors as well as their strength in this industry, we believe that we will be able to continue sourcing products from these vendors in the future.

Our Customers

As of December 31, 2003 we hadWe have licensed our software to over 2,0005,000 customers. Our solutions are designed to address input management needs in a broad range of industries, including insurance, financial services, banking, technology, government, BPO and other markets. The following is a partial list of clients that have licensed our customerssolutions and areis representative of our overall customer base:

Banking		Other
Bank of America		Amgen
Bank of New York Bank One Chase Manhattan Citicorp Deutsche Postbank HSBC National City Corporation US Bank Wachovia Bank		Amgen Cleary Gottlieb Express Scripts Home Depot Intracorp JD Power and Associates Johnson & Johnson Jostens Kable News MerckPfizer PfizerTyson Foods
Technology
Bell & Howell Canon Cardiff Software Kofax (a Dicom Group company) FileNet Fujitsu HP Hummingbird IBM Kodak Readsoft Ricoh Siemens Business ServicesVerity

In 2003, noNo single customer accounted for 10% or more than 10% of our total revenues.revenues in 2002, 2003 or 2004.

Sales Marketing and Business DevelopmentMarketing

We reach our customers through our direct sales force, our cooperative marketing partners and a network of resellers, system integrators and distributors, collectively “channels”.“channels.” Our cooperative marketing partners, with whom we jointly sell products directly to end-user customers, typically develop and market complementary products, and we jointly sell directly to end-user customers.products. We have established relationships with resellers, system integrators and distributors that deliver our solutions to multiple markets. We believe our ability to work with and through these diverse and sometimes competing channels represents a significant competitive advantage. These channels currently offer our solutions in the United States, Western Europe, the Pacific Rim and Spanish and Portuguese speaking countries. During 2004, 2003 and 2002, 39%, 36% and 29%, respectively, of our total revenues were derived from sales to resellers, system integrators and distributors. No single reseller, system integrator or distributor contributed to 10% or more of our total revenues during any of these periods.

Our resellers, system integrators and distributors include American Management Systems, Cranel Imaging, Crowe Chizek, Documentum (an EMC company), DST Technologies, EDS, Headway Technology Group (an Acal company), IBM, Deutschland, IKON, Image Systems Solutions, ImageScan, Ingram Micro, Integrated Document Technologies, Nissho Electronics Corporation, Open Text and Unisys. Our cooperative marketing partners include Eastman Kodak, FileNet, Fujitsu, Hyland Software, IBM, IBML, Information Management Resources, (IMR), InterwovenOracle and SAP.

Our marketing strategy uses a variety of programs to build awareness of input management problems, our solutions and our brand name. We use a broad mix of programs to accomplish these goals, including market research, product and strategy updates with industry analysts, public relations activities, direct mail and

relationship marketing programs, seminars, trade shows, speaking engagements and Internet-based marketing. To support our sellingsales efforts, our marketing staff also produces collateral materials such as brochures, data sheets, white papers and provides presentations and demonstrations.

As of December 31, 2003, our sales, marketing and business development staff consisted of 97 employees. In 2003 approximately 36% of our total revenues came from resellers, system integrators and distributors, but none of these parties accounted for more than 10% of our total revenues.

We intend to aggressively expand our sales and marketing activities, increase the number of our resellers, system integrators, distributors and cooperative marketing partners and devote significant resources to accomplishing these objectives.

Research and Development

We believe our future success depends in large part on our ability to enhance our current products, develop new products, maintain technological competitiveness, implement emerging standards and satisfy an evolving range of customer requirements for existing and new input management problems. Our research and development employees are responsible for achieving these objectives, and we have and intend to continue to devote substantial resources to these efforts.

We have assembled a team of skilled software development, quality assurance and documentation engineers with substantial industry experience and believe they represent a significant competitive advantage. This team includes many individuals who have previously worked together in other organizations where they developed alternative input management products. In the second quarter of 2004, we established a research and development subsidiary in Russia to supplement our product development efforts.

Our research and development expenditures were approximatelytotaled $9.7 million, $9.0 million and $5.9 million in 2004, 2003 and $4.9 million in 2003, 2002, and 2001, respectively. As of December 31, 2003, our research and development staff consisted of 65 employees. All research and development expenditures are expensed as incurred.

Intellectual Property

We have invested and will continue to invest significantly in the development of proprietary technology and information, and we believe our success and ability to compete is dependent on our ability to protect this intellectual property. We rely on a combination of patent, trademark, trade secret and copyright laws and confidentiality, non-disclosure and other contractual arrangements to protect these rights.

Our customers’ use of our software products is governed by shrink-wrap or executed license agreements. We also enter into written agreements with each of our resellers, system integrators and distributors governing the licensing of our software products. In addition, we seek to avoid disclosure of our proprietary technology and information by requiring each of our employees and others with access to our intellectual property to execute confidentiality and/or non-disclosure agreements with us. We protect our software products, documentation and other written materials under trade secret and copyright laws. All of these measures afford only limited protection. Despite our precautions, it may be possible for competitors or users to copy or reproduce aspects of our software or to obtain information that we regard as trade secrets. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States.

Competition

The market for our products is highly competitive, evolving and subject to rapid technological change. We believe the principal competitive factors in the input management market are:

We believe we compare favorably with our competitors with respect to the above factors.

OurWe believe that our principal competitors are:

EmployeesPersonnel

As of December 31, 2003,2004, we had 266 employees. This included 97316 employees worldwide, including 112 in sales and marketing, and business development; 69 employees70 in professional and technical services; 65 employeesservices, 94 in research and development;development and 3540 employees in finance and administration. Our acquisition of Context on February 1, 2004 added 34 employees. Our employees are not represented by a labor union or subject to a collective bargaining agreement, and we believe that our employee relations are generally good.

Risk Factors

You should carefully consider the following risk factors and all other information contained in this Annual Report on Form 10-K. Investing in our common stock involves a high degree of risk. Risks and uncertainties, inIn addition to those we describe below, risks and uncertainties that are not presently known to us or that we currently believe are immaterial may also impair our business operations. See “Forward-Looking Statements” above. If any of the following risks occur, our business could be harmed, the price of our common stock could decline and you couldmay lose all or part of your investment.

Because of the unpredictability and variability of revenues from our products, we may not accurately forecast revenues or match expenses to revenues, which could harm our quarterly operating results and cause volatility or declines in our stock price.

Our quarterly revenues, expenses and operating results have varied significantly in the past, and our quarterly revenues, expenses and operating results may fluctuate significantly from period to period in the future due to a variety of factors, including:

We believe that comparisons of quarterly operating results will not necessarily be meaningful and should not be relied upon as the sole measure of our future performance. In addition, we may from time to time provide estimates of our future performance. For example, we typically estimate that the first quarter of each year is our weakest quarter and the fourth quarter of each year is our strongest quarter. Estimates are inherently uncertain, and actual results are likely to deviate, perhaps substantially, from our estimates as a result of the many risks and uncertainties in our business, including, but not limited to, those set forth in these risk factors. We do not undertake noany duty to update estimates if given. Our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors. If this occurs, the trading price of our stock couldis likely to decline significantly.

If we fail to rapidly reduce expenses rapidly in the event our revenues unexpectedly decline, our results may be harmed.

We currentlytypically operate with virtuallylittle or no software order backlog because our software products are shipped shortly after orders are received. This fact makes software revenues in any quarter substantially dependent on orders booked and shipped throughout that quarter. In addition, a large portion of our orders are generallytends to be booked late in each quarter and we obtain a significant portion of our revenues from indirect sales channels over which we have little control. The combination of these factors makes our revenues difficult to predict from period to period. Expense levels are based, to a significant extent, on expectations of future revenues and therefore are relatively fixed in the short term. In particular, we increased hiring and product development expenses in the fourth quarter of 2003 in anticipation of an improving economic environment. We expect to continue these higher levels of expenses and, ifIf revenue levels are below expectations, our operating results are likely tocould be harmed because only small portionsharmed.

Our future success depends on our key management, sales and marketing, professional services, technical support and research and development personnel, whose knowledge of our expenses vary directlybusiness and technical expertise would be difficult to replace.

Our products and technologies are complex, and we are substantially dependent upon the continued service of existing key management, sales and marketing, professional services, technical support and research and development personnel. All of these key employees are employees “at will” and can resign at any time. The loss of the services of one or more of these key employees could slow product development processes or sales and marketing efforts or otherwise harm our business.

A significant aspect of our ability to attract and retain highly qualified employees is the equity compensation that we offer, typically in the form of stock options. In December 2004, the Financial Accounting Standards Board issued Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment (for further discussion regarding this pronouncement, refer toRecent Accounting Pronouncements in Item 7 of this Report). As a result, beginning on July 1, 2005, we will be required to include in our statements of operations compensation expense relating to the issuance of employee stock options. As a result, we may decide to issue fewer stock options and may be impaired in our efforts to attract and retain necessary personnel.

If we fail to recruit and retain a significant number of qualified technical personnel, we may not be able to develop, introduce or enhance products on a timely basis.

We require the services of a substantial number of qualified professional services, technical support and research and development personnel. The market for these highly skilled employees is characterized by intense competition, which is heightened by their high level of mobility. These factors make it particularly difficult to attract and retain the qualified technical personnel we require. We have experienced, and may continue to experience, difficulty in hiring and retaining highly skilled employees with revenues.appropriate technical qualifications.

If we are unable to recruit and retain a sufficient number of technical personnel with the skills required for existing and future products, we may not be able to complete development of, or upgrade or enhance, our products in a timely manner. Even if we are able to expand our staff of qualified technical personnel, they may require greater than expected compensation packages that would increase operating expenses.

We have a long sales cycle, and our solutionsproducts and services require a sophisticated sales effort.effort, so we cannot predict when expected sales will occur and we may experience unexpected delays in sales despite expending significant sales resources.

Given the high average selling price and the cost and time required to implement our solutions,products and services, a customer’s decision to license our products typically involves a significant commitment of resources and is influenced by the customer’s budget cycles and internal approval procedures for IT purchases. In addition, selling our solutionsproducts and services requires us to educate potential customers on our solutions’the uses and benefits.benefits of our products and services. As a result, our solutionsproducts and services have a long sales cycle, which can take from three to six months or more. Consequently, we facehave difficulty predicting the quarter in which sales to expected customers may occur. The salesales of our solutions isproducts and services are also subject to delays from the lengthy budgeting, approval

and competitive evaluation processes of our customers, thatwhich typically accompany significant capital expenditures.

Our solutionsproducts and services require a sophisticated sales effort targeted at senior management of our prospective customers. New hiresemployees in our sales department require extensive training and typically take at least six months to achieve full productivity. There is no assurance that new sales representatives will ultimately become productive. If we were to lose qualified and productive sales personnel, our revenues could be adversely impacted.

We may not be able to compete successfully against current and potential competitors.

The input management software industry is currently fragmented and extremely competitive, with no one company having a significant market share. We expect that competition in the input management softwarethis industry will intensify in the future. The market for forms processing and document capture solutions is very competitive and subject to rapid change. In addition, because there are relatively low barriers to entry into the software market, we may encounter additional competition from both established and emerging companies. Our current competitors could be acquired by larger companies and could become more formidable competitors. Many potential competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than ours,we do, in addition to significantly greater name recognition and a larger installed base of customers. As a result, these potential competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of competitive products than we can. There is also a substantial risk that announcements of competing products by current or potential competitors could result in the delay or postponement of customer orders in anticipation of the introduction of the competitors’ new products.

In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address customer needs. These cooperative relationships may limit our ability to sell our products through particular reseller partners.products. Accordingly, new competitors or competitive cooperative relationships may emerge and rapidly gain significant market share. Contributing to these challenges, our industry is subject to consolidation, which could subject us to competition with larger companies offering integrated solutions and a widergreater breadth of products. Potential competitors may bundle their products or incorporate additional components into existing products in a manner that discourages users from purchasing our products.

Increased competition as a result of any combination of the above factors is likely to result in price reductions, fewer customer orders, reduced margins andand/or loss of market share, any of which could harm our revenues, business and operating results.

We have incurred losses in the past and we may incur losses in the future.

We have only recently become profitable with net income of $2.6 million for the year ended December 31, 2003. We incurred a net loss of $0.5 million and $1.9 million for the years ended December 31, 2002 and 2001, respectively. Given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability on a quarterly or annual basis, which would likely cause our stock price to decline.

If the market for input management software does not grow, our revenues may notare unlikely to grow.

The market for input management software is fragmented and extremely competitive and in recent years has had limited if any, growth.growth in recent years. In addition, the concept of input management software is not widely understood in the marketplace. We have spent, and intend to continue to spend, considerable resources educating potential customers about our software products and the input management market in general. These expenditures may fail to achieve any broadening of the market or additional degree of market acceptance for our products. The rate at which organizations have adopted our products has varied significantly in the past, and we expect to continue to experience such variations in the future. If the market for input management products grows more slowly than we anticipate or not at all, our revenues will notare unlikely to grow and our operating results will suffer.

We currently depend on repeat business for a substantial portion of our revenues and needour business and operating results may be harmed if we fail to increase our customer base to grow in the future.

Currently, a significant and increasing portion of our revenues is generated from existing customers. Many of our customers initially make a limited purchase of our products and services on a departmentalline of business basis or for limited form or

document types. These customers may not choose to purchase additional licenses to expand their use of our products. If this occurs, or if existing customers fail to renew services or maintenance contracts, then our revenues from new customer revenuecustomers may not be sufficient to offset this and enable us to sustain our current revenue levels.

Conversely, a significant factor in our ability to grow our revenues in the future iswill be our ability to expand our customer base. We believe our ability to grow depends in part on our ability to expand into the “mid-market” segment of the input management market. Some of our competitors are more established in this segment of the market, and price is a more significant factor in the mid-market segment than the ability of our products to handle large volumes of documents. We have recently released products that address this market segment, and it is uncertain whether and to what extent these products will be successful and to what extent price-driven competition will erode our margins. If we are unsuccessful in expanding into the mid-market segment, or otherwise fail to increase our customer base, our business and operating results wouldwill be harmed.

If we are unable to respond in an effective and timely manner to technological change and new products in theour industry, our revenues and operating results will suffer.

We currently expect to release a number of new products and enhancements to existing products in 2004the future and anticipate that a substantial portion of our product revenue growth will come from these new releases. If we experience material delays in introducing new products andor product enhancements, our customers may forego the use of our products and use those of our competitors. The market for input management is characterized by rapid technological change, frequent new product introductions and enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. Our future success will depend upon our ability to continue to enhance our current products while developing and introducing new products on a timely basis that keep pace with technological developments and satisfy increasingly sophisticated customer requirements. As a result of the complexities inherent in our software,

new products and product enhancements can require long development and testing periods. Significant delays in the general availability of these new releases or significant problems in the installation or implementation of these new releases could harm our operating results and financial condition. We have experienced delays in the past in the release of new products and new product enhancements. We may fail to develop and market on a timely and cost effectivecost-effective basis new products or new product enhancements that respond to technological change, evolving industry standards or customer requirements. We may also experience difficulties that could delay or prevent the successful development, introduction or marketing of our products or reduce the likelihood that our new products and product enhancements will achieve market acceptance. Any such failures or difficulties would harm our business and operating results.

We may not be successful in expanding into new vertical markets.

One element of our strategy involves applying our technology in new applications for new verticaladditional markets. To be successful in expanding our sales in new vertical markets, we will need to develop additional expertise in these markets. We may be required to hire new employees with expertise in new target markets in order to compete effectively in those markets. If we are not successful in growing our sales in other verticaladditional markets, we may not achieve desired sales growth.

We have incurred losses in the past and we may incur losses in the future.

We have been profitable in 2004 and 2003, achieving net income of $4.1 million and $2.6 million, respectively. We have incurred net losses as recently as 2002, when we incurred a net loss of $0.5 million, as well as in prior periods. Given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability on a quarterly or annual basis, which would likely cause our stock price to decline.

We could be subject to potential product liability claims and third-party litigation related to our products and services, and as a result our operating results might suffer.

Our products are used in connection with critical business functions and may result in significant liability claims if they do not work properly. Limitation of liability provisions included in our license agreements may not sufficiently protect us from product liability claims because of limitations in existing or future laws or unfavorable judicial decisions. Although we have not experienced any material product liability claims in the past, theThe sale and support of our products may give rise to claims in the future that may be substantial in light of the use of those products in business-critical applications. Liability claims could require expenditure of significant time and money in litigation or payment of significant damages.

Software defects could also damage our reputation, causing a loss of customers and resulting in significant costs.

Our software products are complex and may contain errors or defects, particularly when first introduced or when new versions or enhancements are released. In the past, we have discovered software errors in certain products after they were released to the market. In addition, our products are combined with complex products developed by other vendors. As a result, should problems occur, it may be difficult to identify the source or sources of the problems. Defects and errors or end-userthe perception of defects and errors, found in current versions, new versions or enhancements of these products after commencement of commercial shipments may result in:

The occurrence of any one or more of these factors could harm our operating results and financial condition.

If we cannot manage and expand our international operations or respond to changing regulatory conditions in international markets, our revenues may not increase and our business and results of operations could be harmed.

We currently have international operations, including offices in the United Kingdom, Germany, Australia and Australia. For the year ended December 31,Russia. During 2004, 2003 and 2002, international sales represented approximately20%, 21% and 25% of our revenues.revenues, respectively. We anticipate that our international sales will increase as a percentage of our revenues and that, for the foreseeable

future, a significant portion of our revenues will be derived from sources outside the United States. We intend to continue to expand sales and support operations internationally. We could enter additional international markets, which would require significant management time and financial resources and which, in turn, could adversely affect our operating margins and earnings. To expand international sales, we may establish additional international operations, expand international sales channelchannels, management and support organizations, hire additional personnel, customize our products for local markets, recruit additional international resellers and attempt to increase the productivity of existing international resellers. If we are unable to do any of the foregoing in a timely and cost-effective manner, our international sales growth, internationally, if any, will be limited, and our business, operating results and financial condition may be harmed. Even if we are able to expand international operations successfully, we may not be able to maintain or increase international market demand for our products. Our international operations are generally subject to a number of risks, including:

The majority of our international revenues and costs are denominated in foreign currencies. Although we do not currently undertake foreign exchange hedging transactions to reduce foreign currency transaction exposure, we may do so in the future. However, we do not have any plans to eliminate all foreign currency transaction exposure. Foreign currency exchange rate fluctuations and other risks associated with international operations could increase our costs, which, in turn, could harm our business. If we are unable to expand and manage our international operations effectively, our business maywould be harmed.

Failure to further develop and sustain our indirect sales channelchannels could limit or prevent future growth.

Our strategy for future growth depends in part on our ability to increase sales through our indirect sales channel.channels. We have a limited number of distribution relationships for our products with distributors, systems integrators and other resellers, and we may not be able to maintain our existing relationships or form new or successful relationships. Competitors may have existing relationships with these partiesvarious distributors, systems integrators and other resellers that maycould make it difficult for us to form new relationships in some cases. If our indirect sales channel doeschannels do not continue to grow, our ability to generate revenues may be harmed.

Our current agreements with our distribution partnersindirect sales channels typically do not prevent these companies from selling products of other companies, (includingincluding products that may compete with our products),products, and they do not generally require these companies to purchase minimum quantities of our products. Some of these relationships are governed by agreements that can be terminated by either party with little or no prior notice. These distributorsindirect sales channels could give higher priority to the products of other companies or to their own products than they give to our products. The loss of, or significant reduction in, sales volume from any of our current or future distribution partnersindirect sales channels as a result of any of these or other factors could harm our revenues and operating results.

Our future success is dependent on the services of our key management, sales and marketing, professional services, technical support and research and development personnel, whose knowledge of our business and technical expertise would be difficult to replace.

Our products and technologies are complex, and we are substantially dependent upon the continued service of existing key management, sales and marketing, professional services, technical support and research and

development personnel. All of these key employees are employees “at will” and can resign at any time. The loss of the services of one or more of these key employees could slow product development processes or sales and marketing efforts or otherwise harm our business.

A significant aspect of our ability to attract and retain highly qualified employees is the equity compensation that we offer, typically in the form of stock options. Bills are currently pending before Congress, and the Financial Accounting Standards Board is expected to propose standards, that would require companies to include compensation expense in their statement of operations relating to the issuance of employee stock options. As a result, we may decide to issue fewer stock options and may be impaired in our efforts to attract and retain necessary personnel.

If we fail to recruit and retain a significant number of qualified technical personnel, we may not be able to develop, introduce or enhance products on a timely basis.

We require the services of a substantial number of qualified professional services, technical support and research and development personnel. The market for these highly skilled employees is characterized by intense competition, which is heightened by their high level of mobility. These factors make it particularly difficult to attract and retain the qualified technical personnel required. We have experienced, and expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate technical qualifications.

If we are unable to recruit and retain a sufficient number of technical personnel with the skills required for existing and future products, we may not be able to complete development of, or upgrade or enhance, our products in a timely manner. Even if we are able to expand our staff of qualified technical personnel, they may require greater than expected compensation packages that would increase operating expenses.

If we are unable to protect our intellectual property, our business may be harmed.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology, particularly in international countries where the laws may not protect our proprietary rights as fully as in the United States. In particular, we could begin

We have begun performing significant research and development outside of the United States, where intellectual property protection could beis less stringent than in the United States. In addition, our competitors might independently develop similar technology, duplicate our products or circumvent any patents or other intellectual property rights that we may have. Due to rapid technological change in our market, we believe the various legal protections available for our intellectual property are of limited value. Instead, we seek to establish and maintain a technology leadership position by leveraging the technological and creative skills of our personnel to create new product developmentsproducts and enhancements to existing products.

We depend upon software that we license from and products provided by third parties, the loss of which could increase our expenses or even harm our revenues.ability to deliver our products to customers.

We rely upon certain software licensed from third parties, including software that is integrated with our internally developed software and used in our products to perform key functions. There can be no assurance that these technology licenses will not infringe the proprietary rights of others or will continue to be available to us on commercially reasonable terms, if at all. The loss of or inability to maintain any suchof these software licenses could result in shipment delays or reductions until equivalent software could be developed, identified, licensed and integrated. Delays of this type could materially adversely affect our business, operating results and financial condition.

In addition, we have recently derivedderive a significant portion of our revenues from reselling third-party products, primarily digital scanners. These third-party products may not continue to meet industry standards or be available to us at all or on commercially reasonable terms if at all, in which case our operating results and financial condition would be harmed. In addition, we have little control over the quality of these third-party products other than our decisions as to which products to resell.

If we are subject to a claim that we infringe a third-party’sthird party’s intellectual property, our operating results could suffer.

Substantial litigation regarding intellectual property rights and brand names exists in the software industry. We expect that software product developers increasingly will be subject to infringement claims as the number of products and competitors in thisour industry segment grows and the functionality of products in related industry segmentsindustries overlaps. However, thirdThird parties, some with far greater financial resources than ours, may claim infringement of their intellectual property rights by our products, both those developed by us and obtained through the acquisition of other businesses.products.

Any such claims,claim of this type, with or without merit, could:

If we are required to enter into royalty or licensing agreements to resolve an infringement claim, we may not be able to enter into those agreements on favorable terms. A successful claim of product infringement against us, or failure or inability either to either license the infringed or similar technology or to develop alternative technology on a timely basis could harm our operating results, financial condition or liquidity.

If we are unable to continue to implement and improve financial and managerial controls and continue to improve our reporting systems and procedures, we may not be able to manage growth effectively and our operating results may be harmed.

Growth will place a significant strain on our management, information systems and resources. In order to manage this growth effectively, we will need to continue to improve our financial and managerial controls and our reporting systems and procedures. Any inability of our management to integrate employees, products, technology advances and customer service into our operations and to eliminate unnecessary duplication may have a materially adverse effect on our business, financial condition and results of operations.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations, Nasdaq Stock Market rules, and new accounting pronouncements are creating uncertainty and additional complexities for companies such as ours. To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonable necessary resources to comply with evolving standards. This investment may result in increased general and administrative expenses and a diversion of management time and attention from strategic revenue generating and cost management activities.

If we are unable to build awareness of our brands, we may not be able to compete effectively against competitors with greater name recognition and our sales could be adversely affected.

If we are unable to economically achieve and maintain a leading position in input management software or to promote and maintain our brands,brands; our business, results of operations and financial condition could suffer. Development and awareness of our brands will depend largely on our success in increasing our customer base. In order to attract and retain customers and to promote and maintain our brands, in response to competitive pressures, we may be required to increase our marketing and advertising budget or otherwise increase our other sales expenses. There can be no assurance that our efforts will be sufficient or that we will be successful in attracting and retaining customers or promoting our brands. Failure in this regard could harm our business and results.

Most of our revenues are currently derived from sales of and service of threeservices associated with four software product lines. If demand for these productsproduct lines declines or fails to grow as expected, our revenues will be harmed.

Historically, we have derivedWe derive substantially all of our revenues from theour FormWare, InputAccel, Pixel and PixToolsContext product lines. Our future operating results will depend heavily upon continued and widespread market acceptance for the FormWare, InputAccel and PixToolsthese product

lines and enhancements to thosethese products. A decline in the demand for any of these productsproduct lines as a result of competition, technological change or other factors may cause our revenues to decrease.

We may not be successful in our efforts to identify, acquire or integrate acquisitions.

Our failure to manage risks associated with acquisitions could harm our business. A component of our business strategy is to enter new markets and to expand our presence in new or existing markets by acquiring additional businesses.complementary technologies that allow us to increase our product offerings, augment our distribution channels, expand our market opportunities or broaden our customer base. For example, we most recently acquired ADP Context Inc. in February 2004. Acquisitions involve a number of risks, including:

We may be unable to meet our future working capital requirements which could harm our business.

We could experience negative cash flow from operations in the future and could require substantial working capital to fund our business. We cannot be certain that financing will be available to us on favorable terms if and when required, or at all.

In the past, we have depended heavily on service revenues to increase overall revenues, and we may not be able to sustain the existing levels of profitability of this part of our business.

Many of our customers enter into professional services and maintenance agreements, which made uptogether comprise a significant portion of our revenues in the past.revenues. Service revenues represented 40%, 40% and 32% of our total revenues for the years ended December 31, 2003, 2002in each of 2004 and 2001, respectively.2003. The level of service revenues in the future will depend largely upon growing our professional services group and ongoing renewals of customer maintenance contracts by our growing installed customer base. Our professional services revenues could decline if third-party organizations such as systems integrators compete for the installation or servicing of our products. In addition, our customer maintenance contracts might be downsizedreduced in size or scope or might not be renewed in the future.

We are subject to the effects of general economic and geopolitical conditions.

Our business is subject to the effects of general economic conditions and, in particular, market conditions in the industries that we serve. Recent political turmoil in many parts of the world, including terrorist and military actions, may put pressure on global economic conditions. Our customers’ decisions to purchase our products are discretionary and subject to their internal budget and purchasing processes, which may be affected by the above factors. If economic conditions deteriorate, our business and operating results are likely to be adversely impacted.

Accounting charges resulting from mergers and acquisitions will continue to have a negative effect on earnings over future quarters.

The mergerAs a result of ActionPointthe Merger and Old Captiva has resulted in approximately $13.0 millionour acquisition of Context, we have recorded substantial goodwill and other intangible assets being recorded on the books of the combined company. Of this amount, amortizationassets. Amortization of purchased intangibles which is included as part of our cost of revenues,totaled $2.6 million during 2004, and is expected to be $2.1approximate $1.9 million, $1.3$0.8 million, $0.3 million and $0.2 million and $0.1 million for the years ending December 31, 2004,in 2005, 2006, 2007 and 2007, respectively.2008, respectively, excluding any incremental expense that could result if we consummate future acquisitions. These non-cash charges and additional charges arising from our acquisition of ADP Context, Inc. in February 2004 will negatively affect earnings during thethese amortization period,periods, which could have a negative effect on our stock price. Additionally, we are required to test our goodwill for impairment at least annually, and more often if impairment indicators arise, and to review our intangible assets for impairment if indicators of impairment are present. In the event that we determine that our goodwill or intangible assets have become impaired, we would be required to recognize a non-cash charge that would negatively impact earnings in the impairment period, which could also have a negative effect on our stock price.

Provisions in our charter documents, Delaware law and our stockholder rights plan may have anti-takeover effects that could discourage or prevent a change in control, which may depress our stock price.

Provisions in our certificate of incorporation and bylaws and aour stockholder rights plan may discourage, delay or prevent a merger or acquisition of us that the majority of our stockholders may consider favorable. Provisions of our certificate of incorporation and bylaws:

The terms of theour stockholder rights plan are set forth in the rights agreement entered into by us and the rights agent. The rights granted pursuant to the rights agreement have anti-takeover effects, which may cause substantial dilution to any party that attempts to acquire us or our stock on terms that our board of directors determines are not in the best interests of our stockholders.stockholders and therefore may have anti-takeover effects. Certain provisions of Delaware law also may discourage, delay or prevent a party from acquiring or merging with us, which may cause the market price of our common stock to decline.

We may incur increased costs as a result of recently enacted and proposed changes in laws and regulations relating to corporate governance matters and public disclosure.

Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), rules adopted or proposed by the SEC and by the Nasdaq National Market, and new accounting pronouncements will have resulted in increased costs to us as we have evaluated the implications of these laws, regulations and standards and responded to their requirements. To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonable necessary resources to comply with evolving and increasingly complex and stringent standards. This investment has resulted in increased general and administrative expenses and a diversion of management time and attention from strategic revenue generating and cost management activities.

If we fail to maintain effective internal control over financial reporting, we may be required to make additional public disclosures related to our internal control deficiencies and our management may not be able to conclude that our internal control over financial reporting is effective in future periods.

Although we believe our existing internal controls over financial reporting are effective, there is no assurance that we will meet the certification requirements at the end of any reporting period, which could result in inclusion of a negative attestation report of our independent registered public accounting firm in our subsequent annual report and cause a decline in our stock price.

Our principal offices are located in San Diego, California and consist of approximately 25,000 square feet of office space held under a lease that expires in January 2009. We also lease approximately 24,000 square feet of office space in San Jose, California under a lease expiring in February 2010, approximately 11,000 square feet of office space in Westmont, Illinois under a lease expiring in March 2012, approximately 8,200 square feet of office space in Park City, Utah under a lease expiring in June 2006,November 2005, and 4,600 square feet of office space in Waltham, Massachusetts under a lease expiring in March 2007, all of which house a portion of our professional and technical services and software development employees. We also lease office space for sales and professional and technical services employees in Westmont, Illinois; Guildford, United Kingdom; Freiburg, Germany;Kingdom, Munich, Germany;Germany, and Toorak, Australia.Australia, and for a portion of our software development employees in St. Petersburg, Russia. We believe these offices are adequate to meet our needs for the foreseeable future.

Captiva Software CorporationWe are subject to various legal proceedings from time to time in the ordinary course of business, none of which is not a partyrequired to any material legal proceedings.be disclosed under this Item 3.

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2003.2004.

PART II

Our common stock is traded on the Nasdaq National Market under the symbol “CPTV.” Our common stock was initially offered to the public in September 1993. The following table sets forth the range of high and low sales prices on the Nasdaq National Market of our common stock for the periods indicated, as reported by Nasdaq. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.

There were approximately 191169 holders of record of our common stock as of February 29,28, 2004.

To date, we have neither declared nor paid any dividends on our common stock. We currently intend to retain all future earnings, if any, for use in the operation and development of our business and, therefore, do not expect to declare or pay any cash dividends on the common stock in the foreseeable future. In addition, any such dividends would be required to be approved pursuant to the terms and conditions of our line of credit.

The information required to be disclosed by Item 201(d) of Regulation S-K “Securities Authorized for Issuance Under Equity Compensation Plans” is included under Item 12 of Part III of this Annual Report on Form 10-K.

InWe have prepared the table below we provide you with our summaryselected historical consolidated financial data. We have prepared this information usingdata from our consolidated financial statements for the years ended December 31, 2004, 2003, 2002, 2001, 2000, and 1999. When you read this2000. This selected historical consolidated financial data it is important that youshould be read thein conjunction with our historical consolidated financial statements and related notes, as well as the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations,” included elsewhere in this Form 10-K.report. Historical results are not necessarily indicative of future results. As a result of the Merger and our acquisition of Context in 2002 and 2004, respectively, the comparability of the data below is impacted. Amounts below are in thousands, except per share data.

OVERVIEW:OVERVIEW

We develop, market, deploy and serviceare a leading provider of input management solutions useddesigned to manage business criticalbusiness-critical information from paper, faxed and electronic forms, documents and transactions into an organizations’s internal computingthe enterprise. Our solutions automate the processing of billions of forms, documents and transactions annually, converting their content into information that is usable in database, document, content and other information management systems. We believe that our products and services enable organizations to reduce operating costs, obtain higher information accuracy rates and speed processing times. Our objective is to extend our position as a leading provider of input management solutions. Key elements of our growth strategy include:include leveraging our existing customer base, leveraging and expandingbroadening our sales channels and expanding our markets, expanding our international presence, broadening our product offerings and pursuing strategic acquisitions.

In 2003,Our products offer organizations a cost-effective, accurate and automated alternative to both manual data entry and EDI. These traditional approaches are typically labor intensive, time consuming and costly methods of managing the input of information into the enterprise. Organizations can utilize our revenues increasedproducts to $57.1 million from $35.6 millioncapture information digitally, extract the meaningful content or data, and $22.0 million in 2002 and 2001, respectively. In addition, in 2003, we became profitable with net income of $2.6 million, as compared to net losses of $0.5 million and $1.9 million in 2002 and 2001, respectively.apply business rules that ensure the data’s accuracy.

On July 31, 2002,Captiva Software Corporation was formed by the Merger, pursuant to which ActionPoint Inc. merged withacquired all of the capital stock of Old Captiva. In the Merger,Captiva, Old Captiva became a wholly-owned subsidiary of ActionPoint and ActionPoint changed its name to Captiva Software Corporation and remained a Delaware corporation. As a result of the purchase accounting that applied to the Merger, theCorporation. The results of operations of Old Captiva are included in our 2002 results of operations for the year ended December 31, 2002 only frombeginning on August 1, 2002. We have included a pro forma presentation below to assist in making comparisons of our results on a combined company basis.

On February 1, 2004, we completedacquired Context. Context’s products provide automated solutions to complex medical claims coding, editing and reimbursement challenges in the acquisition of all of the issuedhealthcare industry and outstanding capital stock of ADP Context, Inc., an Illinois corporation (Context) for approximately $5.2 million of cash derived fromallow us to better serve our existing cashclaims processing customers and cash equivalents. We acquired Context to expand our presence and application expertisereach in the payor sidehealthcare insurance market. The results of operations of Context are included in our 2004 results of operations beginning on February 1, 2004.

Our business has historically been subject to some seasonality, principally as it relates to software license revenues. Our first quarters have generally been our weakest in terms of software license sales volume while our fourth quarters have generally been our strongest. We believe that this seasonality is attributable primarily to information technology spending budgets and related purchasing patterns of our customers, and would expect this trend to continue in future periods.

In December 2004, the healthcare market andFinancial Accounting Standards Board issued Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment, which we will be required to extend our reach into the provider side of this market. We are not planning any significant changes to Context’s cost structure, and we expect both our consolidated revenues and expenses to increase in the future asadopt on July 1, 2005. As a result of this acquisition.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

A critical accounting policy is one that is both importantpronouncement, beginning in our third quarter commencing July 1, 2005, we will be required to the portrayal of a company’s financial condition or resultsinclude in our statements of operations compensation expense relating to employee stock options and requires significant judgment or complex estimation processes. We believe that the following accounting policies fit this definition:

Revenue Recognition

Our revenue is generated primarily from three sources: (i) software, primarily software licenses and royalties, (ii) services, including software license maintenance fees, training fees and professional services revenue and (iii) hardware and other products, primarily salesshares of digital scanners in the years ended December 31, 2003 and 2002.

Software license revenue is recognized upon shipment provided that persuasive evidence of an arrangement exists, fees are fixed or determinable, collection is probable and no significant undelivered obligations remain. Royalty revenue is recognized whenstock issued under our resellers ship or pre-purchase rights to ship products incorporating our software, provided collection of the revenue is determined to be probable and we have no further obligations. Services revenue is recognized ratably over the period of the maintenance contract or as the services are provided. Payments for maintenance fees are generally made in advance and are non-refundable. Revenue for hardware and other products is recognized when the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably assured.

For arrangements with multiple elements (e.g., delivered and undelivered products, maintenance and other services), we allocate revenue to each element of the arrangementemployee stock purchase plan, based on the fair value of the undelivered elements, which is specific to us, using the residual value method. The fair values for ongoing maintenance and support obligations are based upon separate salessuch awards. Our adoption of renewals to customers or upon substantive renewal rates quoted in the agreements. The fair values for services, such as training or consulting, are based upon prices of these services when sold separately to other customers. Deferred revenue is primarily comprised of undelivered maintenance services and in some cases hardware and other products delivered but not yet accepted. When software licenses are sold with professional services and those services are deemed essential to the functionality of the software, combined software and service revenue is recognized as the services are performed. When software licenses are sold with professional services and those services are not considered essential to the functionality of the software, software revenue is recognized when the above criteria are met and service revenue is recognized as the services are performed.

Intangible Assets

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill is not amortized, but is tested at least annually for impairment. Other intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from less than one year to five years.

The determination of the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions. Determining the fair values and useful lives of intangible assets especially requires the exercise of judgment. While there are a number of different generally accepted valuation methods to estimate the value of intangible assets acquired, we primarily used the discounted cash flow method. This method requires significant management judgment in forecasting the future operating results used in the analysis. This method also requires other significant estimates, such as residual growth rates and discount factors. The estimates we have used are consistent with the plans and estimates that we use to manage our business, based on available historical information and industry averages. The judgments made in determining the estimated useful lives assigned to each class of assets acquired can significantly affect our net operating results. Amortization of purchased intangiblesthis pronouncement is expected to increase our operating expenses and reduce our operating income and net income significantly, although it will not impact our overall financial position. A reasonable estimate of the impact of adoption of this pronouncement cannot be $2.1 million, $1.3 million, $0.2 million and $0.1 million formade at this time because it will depend on the years ending December 31, 2004, 2005, 2006 and 2007, respectively.

In addition, the valuelevels of our intangible assets, including goodwill, is subject to future impairment if we experience declines in operating results or negative industry or economic trends or if our future performance is below our projections and estimates.

Valuation of Goodwill

We assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment is reviewed at least annually.

Factors we consider important that could trigger an impairment include the following:

If there were an indication that the carrying value of goodwill might not be recoverable based upon the existence of one or more of the above indicators, we would recognize an impairment loss if the carrying value exceeds its fair value. We performed our annual impairment review in the quarter ended June 30, 2003 and determined there was no impairment.

Income Tax Valuation Allowance

On a quarterly basis, management evaluates the realizability of our net deferred tax assets and assesses the need for a valuation allowance. Realization of our net deferred tax assets is dependent on our ability to generate sufficient future taxable income. The amount of the net deferred tax assets actually realized could vary if there are differences in the timing or amount of future reversals of existing deferred tax liabilities or changes in the actual amounts of future taxable income. If we do not generate our forecasted taxable income, we may be required to establish a valuation allowance against all or part of our net deferred tax assets based upon applicable accounting criteria. To the extent we establish a valuation allowance, an expense will be recorded within the provision for income taxes line in our Statement of Operations. As of December 31, 2003, management has determined that it is more likely than not that our net deferred tax assets will be realized based on forecasted taxable income.further discussion regarding this new pronouncement.

RECENT ACCOUNTING PRONOUNCEMENTS:

Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46), “ConsolidationResults of Variable Interest Entities,” was issued in January 2003, and a revision of FIN 46 was issued in December 2003 (FIN 46R). FIN 46R requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46R were effective immediately for all arrangements entered into after January 31, 2003. Since January 31, 2003, we have not invested in any entities that we believe are variable interest entities. Had we entered into such arrangements prior to February 1, 2003, we would be required to adopt the provisions of FIN 46R at the end of the first quarter of 2004, in accordance with the FASB Staff Position 46-6 which delayed the effective date of FIN 46R for those arrangements. We expect the adoption of FIN 46R will have no effect on our financial statements.

RESULTS OF OPERATIONS:Operations

The results of operations of Old Captiva are included in the year ended December 31,our 2002 results of operations only from August 1, 2002, and the results of operations of Context are included in accordance with generally accepted accounting principles (GAAP). Certain prior year items have been reclassified to conform with the current year’s presentation. These reclassifications had no impact on net revenues, income (loss)our 2004 results of operations only from operations or net income (loss) as previously reported.

February 1, 2004. The following table sets forth, as a percentage of total revenues, certain statement of operations data for the periods indicated.2004, 2003 and 2002:

Results of Operations

YearsYear Ended December 31, 2004 compared to Year Ended December 31, 2003 and 2002

Revenues

TotalOur total revenues increased 61%from $57.1 million in 2003 to $57.1 million from $35.6$68.0 million in 2002.2004, or 19%.

Our software revenues increased 33%from $27.0 million in 2003 to $27.0 million from $20.3$33.8 million in 2002. As a percentage2004, or 25%. Software revenues accounted for 50% of total revenues softwarein 2004 and 47% of total revenues accounted for 47% in 2003 and 57% in 2002.2003. The increase in software revenues in absolute termsdollars and as a percentage of total revenues was primarily attributable to our acquisition of Context in February 2004, whose products contributed $4.4 million to 2004 software revenues, along with a net increase in revenues associated with our other products, including our new Digital Mailroom and InputAccel for Invoices product offerings. Additional revenue contributions from our channel partners also contributed to the overall increase in software license revenues. In absolute dollars and as a percentage of total revenues, we expect our software revenues to increase in 2005 from 2004 levels.

Our service revenues increased from $22.7 million in 2003 to $27.5 million in 2004, or 21%. Service revenues accounted for 40% of total revenues in both 2004 and 2003. The increase in service revenues in absolute dollars was attributable primarily to an increase in maintenance revenues, due, in part, to a growing installed base of customers, most of whom purchase and renew ongoing maintenance and support, and to a lesser degree an increase in professional service revenues, primarily due to an increase in product installation and consulting projects. In absolute dollars, we expect service revenues to increase in 2005 from 2004 levels, as we continue to grow our installed base of customers and maintain our maintenance renewal rates, while as a percentage of total revenue we expect service revenues to remain relatively flat as compared to 2004 levels.

Our hardware and other revenues decreased from $7.4 million in 2003 to $6.7 million in 2004, or 9%. Hardware and other revenues accounted for 13% of total revenues in 2003 and 10% of total revenues in 2004. The decrease in hardware and other revenues in absolute dollars and as a percentage of total revenues resulted primarily from a decrease in digital scanner sales. In absolute dollars, we expect hardware and other revenues to remain relatively flat in 2005 as compared to 2004 levels, and to decrease slightly as a percentage of total revenues.

International revenues totaled $13.9 million and $12.0 million in 2004 and 2003, respectively, representing 20% and 21% of total consolidated revenues in each of these years. We expect that the percentage of our revenues derived from international sales may increase in the future as we continue to increase sales efforts through our international channels.

Gross Profit

Gross profit increased from $36.5 million in 2003 to $45.1 million in 2004, or 24%. Gross profit as a percentage of total revenues increased from 64% in 2003 to 66% in 2004. The increase in both absolute dollars and as a percentage of total revenue was attributable primarily to the increase in software revenues, which have higher margins than service and hardware revenues, and to economies of scale gained by leveraging existing professional service and maintenance service infrastructure to support higher services revenues. To a lesser degree, the decrease in hardware and other revenues, which have lower gross margins than software and service revenues, also contributed to the gross profit percentage increase. In absolute dollars, we expect our gross profit to increase in 2005 as compared to 2004, primarily from the expected increase in software revenues.

Research and Development

Research and development expenses increased from $9.0 million in 2003 to $9.7 million in 2004, or 8%. As a percentage of total revenues, research and development expenses decreased from 16% in 2003 to 14% in 2004. The increase in absolute dollars was primarily attributable to increased headcount and related labor costs

resulting from our acquisition of Context, and to a lesser degree increased software localization costs. The decrease in research and development expenses as a percentage of total revenues was attributable primarily to a lower research and development cost base associated with the Context product line, as a percentage of Context revenues, and to our utilization of lower cost research and development personnel in Russia beginning in the second quarter of 2004, to supplement our product development efforts. In 2005, we expect research and development expenses to continue to increase in absolute dollars, as we continue to expand our research and development staff to support the development of new products and enhancements to current products.

Sales and Marketing

Sales and marketing expenses increased from $17.8 million in 2003 to $21.5 million in 2004, or 21%. As a percentage of total revenues, sales and marketing expenses increased from 31% in 2003 to 32% in 2004. The increase in absolute dollars was attributable primarily to the expansion of our sales force, which included our addition of Context personnel, and related labor cost increases. The increase in sales and marketing expenses as a percentage of total revenues was attributable primarily to this sales force expansion and related labor cost increases that, on a percentage basis, slightly exceeded our corresponding growth in 2004 revenues. In 2005, we expect sales and marketing expenses to continue to increase in absolute dollars, as we continue to expand our sales force and channel relationships in anticipation of continued revenue growth.

General and Administrative

General and administrative expenses increased from $6.1 million in 2003 to $7.0 million in 2004, or 15%. As a percentage of total revenues, general and administrative expenses decreased from 11% in 2003 to 10% in 2004. The increase in absolute dollars resulted primarily from increased headcount and related labor costs resulting from our acquisition of Context, and to a lesser degree increases in professional service fees, including audit and consulting fees, related to our Sarbanes-Oxley compliance initiatives. The decrease in general and administrative expenses as a percentage of total revenues was attributable primarily to administrative and overhead cost efficiencies gained in connection with the growth of our operations. In 2005, we expect general and administrative expenses to increase slightly in absolute dollars, as we build infrastructure to support the expected growth in our operations.

Merger-related restructuring costs

During 2004 and 2003, we recorded credits of $0.2 million and $0.1 million, respectively, in connection with revisions made to estimated future excess lease costs that were accrued by us in connection with the Merger. Estimated excess lease costs were based on the expected differences between our lease payments and the sublease receipts that could be realized on a potential sublease.

In-Process Research and Development

In connection with our acquisition of Context in 2004, we recorded a $0.1 million charge related to acquired in-process research and development. No in-process research and development charge was recorded in 2003.

Write-off of withdrawn stock offering costs

In April 2004, we filed a registration statement with the Securities and Exchange Commission to register shares of the Company’s common stock in preparation for an underwritten public offering. In May 2004, we decided not to proceed with this offering, withdrew this registration statement and wrote off $0.2 million of direct costs associated with this planned offering, which we recorded as a charge to operations.

Interest and Other Income, Net

Interest and other income, net, increased from $0.1 million in 2003 to $0.3 million in 2004. This increase was attributable primarily to additional interest income earned on higher average cash and cash equivalent balances in 2004 as compared to 2003.

Provision for Income Taxes

Our effective tax rate for 2004 was 41.6%, as compared to an effective tax rate in 2003 of 31.0%. Our effective tax rate in 2003 was affected positively by the release of our deferred tax asset valuation allowance in the prior year, which reduced our 2003 effective tax rate by 11.1%. Had we not recorded the tax benefit from the release of this valuation allowance, our 2003 rate would have approximated 42.1%. The impact of the results of foreign operations also contributed to an increase in our 2004 tax rate, but this was principally offset by an increase in research and development tax credits generated by us in 2004.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Revenues

Our total revenues increased from $35.6 million in 2002 to $57.1 million in 2003, or 61%. This increase was attributable primarily to the Merger, as Old Captiva solutions contributed a full year of 2003 revenues and only five months of 2002 revenues.

Our software revenues increased from $20.3 million in 2002 to $27.0 million in 2003, or 33%. Software revenues accounted for 47% of total revenues in 2003 and 57% of total revenues in 2002. The 2003 increase was attributable primarily to the Merger. The decrease in software revenues as a percentage of total revenues reflects theprimarily lower software revenues, as a percentage of total revenues, forwithin the Old Captiva business and theas well as an increase in hardware and other revenues as a percentage of total revenues in 2003, as a result of an increase in sales of digital scanners. In absolute terms and as a percentage of total revenues, we expect software revenues to increase from 2003 to 2004.discussed below.

Our service revenues increased 61% in 2003 to $22.7 million from $14.1 million in 2002. As a percentage2002 to $22.7 million in 2003, or 61%. Service revenues accounted for 40% of total revenues services accounted for 40% forin both 2003 and 2002. The 2003 increase in service revenues in absolute terms was attributable primarily to the Merger. The consistency of service revenues as a percentage of total revenues was due to thereflective primarily of higher service revenues as a percentage of total revenues for the Old Captiva business

and a growing installed base of customers, most of which purchase ongoing software maintenance support, offset by thean increase in hardware and other revenues as a percentage of total revenues in 2003, as a result of an increase in sales of digital scanners. We expect service revenues to increase in absolute terms in the future as we continue to grow our installed base of customers and maintain our maintenance renewal rates.discussed below.

Our hardware and other revenues increased 533% in 2003 to $7.4 million from $1.2 million in 2002. As a percentage of total revenues, hardware2002 to $7.4 million in 2003, or 533%. Hardware and other revenues accounted for 13% of total revenue in 2003 and 3% of total revenues in 2002. The increase in hardware and other revenues was attributable primarily attributable to an increase in sales of digital scannersscanner sales in 2003, which wereas we did not sold by uscommence the sale of these products until the third quarter ofin 2002. In absolute terms, we expect hardware and other revenues to remain constant from 2003 to 2004.

Gross Profit

Gross profit increased 40% in 2003 to $36.5 million from $26.1 million in 2002.2002 to $36.5 million in 2003, or 40%. Gross profit as a percentage of total revenues decreased from 73% in 2002 to 64% in 2003 from 73% in 2002.2003. The increase in absolute termsdollars was attributable primarily attributable to the increased revenues related to the Merger, and partially offset by thea $1.1 million increase in intangible asset amortization of intangible assets of $1.1 million alsoexpense related to the Merger. The decrease in percentage terms was primarily attributable to Old Captiva’s revenue mix,product solutions, which equatedcontributed to a lower gross margin percentage than our historical gross margin, andas well as the increase in hardware and other revenues in 2003, which have lower gross margins relative tothan our software and service revenues.services.

Research and Development

Research and development expenses increased 52% in 2003 to $9.0 million from $5.9 million in 2002. The increase is primarily attributable2002 to the Merger.$9.0 million in 2003, or 52%. As a percentage of total revenues, research and development expenses decreased from 17% in 2002 to 16% in 2003 from 17%2003. The increase in 2002.absolute dollars was primarily attributable to the Merger. The decrease in research and development expenses as a percentage of total revenues was attributable primarily reflectsto a lower percentage of research and development expenseexpenses relative to revenue forassociated with the Old Captiva business and the increase in absolute terms being offset by the increase in total revenues in 2003 compared to 2002. We expect research and development expenses to increase in absolute terms in 2004 due to an expansion of our research and development staff.business.

Sales and Marketing

Sales and marketing expenses increased 30% in 2003 to $17.8 million from $13.7 million in 2002.2002 to $17.8 million in 2003, or 30%. As a percentage of total revenues, sales and marketing expenses weredecreased from 39% in 2002 to 31% in 2003 and 39% in 2002.2003. The increase in absolute termsdollars was primarily attributable to the Merger. The decrease in sales and marketing expenses as a percentage of total revenues reflects the lower percentage of sales and marketing expense relative to revenue forassociated with the Old Captiva business and the increase in absolute terms being offset by the increase in total revenues in 2003. We expect sales expenses to continue to increase in absolute terms in 2004 due to an expansion of our sales force and revenue growth.business.

General and Administrative

General and administrative expenses increased 41% in 2003 to $6.1 million from $4.3 million in 2002.2002 to $6.1 million in 2003, or 41%. As a percentage of total revenues, general and administrative expenses weredecreased from 12% in 2002 to 11% in 2003 and 12% in 2002.2003. The increase in absolute termsdollars was attributable primarily attributable to increasesan increase in staffingpersonnel and related costs resulting from the Merger. The decrease in general and administrative expenses as a percentage of total revenues was dueattributable primarily to cost efficiencies that have been realized post-Merger and the increase in absolute terms being offset by the increase in total revenues in 2003.

Merger Costspost-Merger.

WeMerger-related restructuring costs

During 2002, in connection with our review of the combined operation post-Merger, we recorded Merger costsa charge of $2.1 million during 2002, including estimatedin connection with our adoption of a plan to reduce workforce and office space made redundant by the merger. This original charge reflected a $0.9 million accrual for future cash workforce reduction costs, an $0.8 million accrual for excess lease costs, of $0.8 million. Estimated excess lease costs were based on the expected differences between our lease payments and the sublease receipts that could be realized on a potential sublease. Insublease, and a $0.4 million charge related to the impairment of an asset.

During 2003, we reduced our accrual for excess lease costs by $0.1 million, based on revisions made to our original estimate, and recorded sublease receipts in excess of estimated receipts of $58,000.this amount as a credit to operations.

Details of the Merger costs are as follows (in thousands):

In-processIn-Process Research and Development

In connection with the Merger, we wrote-off the purchasedrecorded a $0.9 million charge related to acquired in-process research and development of $0.9 million, which was charged to operations in 2002.development.

Other Income, NetGain on Sale of Product Line

ApproximatelyDuring 2002, we received and recognized as income $0.6 million of amounts previously held in escrow in conjunction with the May 2001 saledisposition of theour Dialog Server business to Chordiant Software, Inc. were received and recognized asproduct line, which was recorded in other income, in 2002.net.

Provision for Income Taxes

InOur effective tax rate for 2003 we recorded a tax provision of $1.2 million, comprised of a provision for federal and state taxes of approximately $1.5 million, a provision for foreign taxes of approximately $0.4 million, research and development credits of approximately $(0.3) million, and a release of a valuation allowance of $(0.4) million, the net of which representedwas 31.0%, as compared to an effective tax rate in 2002 of 31%(118%). We releasedOur tax rate in 2003 was affected positively by the release of our deferred tax asset valuation allowance, of $(0.4) million based upon management’s determination that it is more likely than not thatwhich reduced our net deferred tax assets will be realized. A tax provision of $0.3 million was recorded for 2002, which represented an2003 effective tax rate by 11.1%. Had we not recorded the tax benefit from the release of (118)%this valuation allowance, our 2003 rate would have approximated 42.1%. As a result of the MergerOur tax rate in 2002 we recorded substantial non-deductible amortization charges andwas adversely impacted by a non-deductible in-process research and development write-off.

Years Ended December 31, 2002 and 2001

Revenues

Total revenues increased 62%charge recorded in 2002 to $35.6 million from $22.0 million in 2001.

Our software revenues increased 36% in 2002 to $20.3 million from $15.0 million in 2001. As a percentage of total revenues, software revenues accounted for 57% in 2002 and 68% in 2001. The increase in software revenues in absolute terms was attributable primarily to the Merger. The decrease in software revenues as a percentage of total revenues reflects the lower software revenues as a percentage of total revenues for the Old Captiva business.

Our service revenues increased 100% in 2002 to $14.1 million from $7.1 million in 2001. As a percentage of total revenues, services accounted for 40% in 2002 and 32% in 2001. The increase in service revenues both in

absolute and percentage terms was attributable primarily to the Merger. The increases in service revenues as a percentage of total revenues reflect the higher service revenues as a percentage of total revenues for the Old Captiva business.

Our hardware and other revenues in 2002 were $1.2 million. There were no hardware and other revenues in 2001.

Gross Profit

Gross profit increased 48% in 2002 to $26.1 million from $17.7 million in 2001. The increase in gross profit in 2002 is due primarily to the increase in revenues, partially offset by the amortization of intangible assets resulting from the Merger and the increase of hardware and other revenues as a percentage of total revenues, which carries lower gross profit.

Gross profit as a percentage of total revenues decreased to 73% in 2002 from 80% in 2001. The decrease is primarily attributable to the amortization of purchased intangibles which resulted from the Merger and the increase of service and hardware and other revenues as a percentage of total revenues.

Research and Development

Research and development expenses increased 20% in 2002 to $5.9 million from $4.9 million in 2001. The increase is attributable to the Merger. As a percentage of total revenues, research and development expenses decreased to 17% in 2002 from 22% in 2001. The decrease in research and development expenses as a percentage of total revenues reflects a lower percentage of research and development expense to revenues for the Old Captiva business, and a higher percentage of research and development expense to revenues for the Dialog Server product line, which was sold in May 2001.

Sales and Marketing

Sales and marketing expenses increased 14% in 2002 to $13.7 million from $12.0 million in 2001. The increase is primarily attributable to the Merger, partially offset by reductions in marketing expenses incurred in 2001 for the launch of the Company’s Dialog Server product, which was sold in May 2001.

As a percentage of total revenues, sales and marketing expenses decreased to 39% for 2002 from 55% in 2001.The decreases in sales and maketing expenses as a percentage of total revenues reflect a lower percentage of marketing expense to revenue for the Old Captiva business.

General and Administrative

General and administrative expenses increased 33% for 2002 to $4.3 million from $3.3 million in 2001. The increase is attributable to the Merger, partially offset by professional fees and expenses incurred in 2001 in conjunction with various strategic initiatives.

As a percentage of total revenues, general and administrative expenses decreased to 12% in 2002, from 15% in 2001. The decrease in general and administrative expenses as a percentage of total revenues reflects a lower percentage of general and administrative expense to revenues for the Old Captiva business.

Merger Costs

Details of the Merger costs are as follows (in thousands):

In 2002, as the result of a review of the combined operation, we adopted a plan that included a reduction of our workforce and office space made redundant by the Merger. Implementation of this plan was largely completed during 2003. As a result of the adoption of this plan, we recorded charges of $2.1 million in 2002. These charges primarily related to the consolidation of our continuing operations resulting in the impairment of an asset, excess lease costs and a reduction in workforce, resulting in costs incurred for employee severance.

Employee reductions occurred primarily in marketing and administrative areas. As a result of this plan, we reduced our workforce by approximately 20 employees. Substantially all workforce reductions occurred during 2002. During 2002, charges related to the reduction of workforce totaling $0.9 million were recorded and activities costing $0.7 million were completed.

As a part of this plan, the carrying value of a prepaid royalty fee was written off. The technology associated with this royalty fee was utilized in certain of our products and because of technology acquired in the Merger it was no longer going to be utilized. In the third quarter, we recorded a loss from impairment of an asset of $0.5 million, which was classified as a Merger cost.

Also as part of this plan, we elected to consolidate our operations and attempt to sublease certain of our facilities which housed portions of our operations, marketing, sales and administrative activities. In 2002, we recorded estimated excess lease costs of $0.8 million which were recorded as Merger costs. Estimated excess lease costs are based on assumptions of differences between our lease payments and the sublease receipts that could be realized on a potential sublease and assumed carrying terms. In January 2003, we entered into an agreement to sublease the excess facility space. The sublease commenced in February 2003 and expires in February 2004. Future expected receipts under the sublease are $0.2 million and $40,000 in 2003 and 2004, respectively. These expected receipts are in excess of the estimated receipts used to estimate the Merger costs recorded during 2002, however, due to the uncertanty of collectibility of these amounts, the estimated Merger costs will be reduced as the sublease receipts are collected or reasonably expected to be collected.

In-Process Research and Development

In connection with the Merger, we wrote-off the purchased in-process research and development of $0.9 million, which was charged to operations in 2002. The purchased in-process research and development was solely related to the next version of Old Captiva’s FormWare software. The latest release of Old Captiva’s FormWare software prior to the Merger was introduced in March 2002. Old Captiva’s forms processing solutions complement our existing line of document capture solutions to create a more complete input management software solution. Based on time spent on the next version of Old Captiva’s Formware software system and costs incurred, this project was estimated to be approximately 44% complete as of the Merger date. At the date of acquisition, the total cost to complete the project was estimated to be approximately $0.8 million, primarily consisting of salaries, and the project was completed during the second quarter of 2003, as expected. The estimated fair value of the project was estimated utilizing a discounted cash flow model which was based on estimates of operating results and capital expenditures for the period from August 1, 2002 to December 31, 2006 and a risk adjusted discount rate of 30%.Merger.

Provision for Income Taxes

A tax provision of $0.3 million was recorded for 2002, which represents an effective tax rate of (118)%. As a result of the Merger, we recorded a substantial amount of non-deductible amortization charges and a non-deductible in-process research and development write-off. In addition, as a result of the Merger, our ability to utilize our historical net operating losses and tax credits as well as the historical net operating losses and tax credits of the Old Captiva business may have become limited. At December 31, 2002, it was more likely than not that a substantial portion of those deferred tax assets would not be realized. The income tax provision of $4.2 million recorded during the year ended December 31, 2001 is comprised of the following: tax on the gain from the sale of our Dialog Server product of $1.7 million, the change in valuation allowance of approximately $3.3 million to reduce net deferred tax assets based on management’s assessment of the uncertainty of the realizability of such assets, and a provision for foreign taxes of approximately $0.2 million offset by the utilization of net operating losses of $1.0 million.

Sale of the Dialog Server Product

We sold our Dialog Server product to Chordiant Software, Inc. on May 17, 2001 for approximately $7.1 million consisting of $2.0 million in cash and 1.7 million shares of Chordiant common stock, which was valued at $3.00 per share at the transaction date. We sold all of our Chordiant common stock in July 2001 for a price of approximately $2.73 per share and recognized a loss of approximately $0.4 million in the third quarter of 2001. We recognized a pretax gain on the transaction of approximately $4.6 million ($2.3 million net of tax) comprised of proceeds other than amounts in escrow and less transaction expenses. A portion of the total proceeds remained in escrow for one year pursuant to the asset sale agreement with Chordiant and $0.6 million of this amount was received by us in May 2002. The escrow funds were not included on the balance sheet or in the computation of gain on sale; hence, the receipt of funds in May 2002 was recognized as other income in 2002.

RESULTS OF OPERATIONS – PRO FORMA COMBINED COMPANY:

The results of operations of Old Captiva are included in the year ended December 31, 2002 beginning August 1, 2002, in accordance with GAAP. Accordingly, the following pro forma presentation is included to assist in making comparisons of our results on a combined company basis. This pro forma presentation is prepared in a manner consistent with the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations”.

The pro forma financial information presented below includes the results of operations from the Old Captiva business from January 1, 2001. In addition, the pro forma financial information below includes the amortization of purchased intangible assets from the beginning of each of the periods presented and $2.1 million in merger costs in the year ended December 31, 2002 and excludes a write-off of in-process research and development of $0.9 million in the year ended December 31, 2002. The following table sets forth certain pro forma income (loss) data for the periods indicated. Certain prior year items have been reclassified to conform with the current year’s presentation. These reclassifications had no impact on net revenues, income (loss) from operations or net income (loss) as previously reported.

The following table sets forth, as a percentage of total revenues, certain pro forma statement of operations data for the periods indicated.

Results of Operations—Proforma Combined Company

Years Ended December 31, 2003 and 2002

Revenues

Total revenues increased 18% in 2003 to $57.1 million from $48.6 million in 2002.

Our software revenues increased 5% in 2003 to $27.0 million from $25.7 million in 2002. As a percentage of total revenues, software revenues accounted for 47% in 2003 and 53% in 2002. The decrease in software revenues as a percentage of total revenues was primarily attributable to the increase in hardware and other revenues as a percentage of total revenues in 2003 as a result of an increase in sales of digital scanners. In absolute terms and as a percentage of total revenues, we expect software revenues to increase from 2003 to 2004.

Our service revenues increased 9% in 2003 to $22.7 million from $20.9 million in 2002. As a percentage of total revenues, services accounted for 40% in 2003 and 43% in 2002. The increase in service revenues in absolute terms reflects a growing installed base of customers, most of which purchase ongoing software maintenance support. The decrease in service revenues as a percentage of total revenues was primarily attributable to the increase in hardware and other revenues as a percentage of total revenues in 2003 as a result of an increase in sales of digital scanners. We expect service revenues to increase in absolute terms in the future as we continue to grow our installed base of customers and maintain our maintenance renewal rates.

Our hardware and other revenues increased 279% in 2003 to $7.4 million from $2.0 million in 2002. As a percentage of total revenues, hardware and other revenues accounted for 13% in 2003 and 4% in 2002. The increases in hardware and other revenues in absolute terms and as a percentage of total revenues reflect an increase in sales of digital scanners, which Old Captiva introduced in the first quarter of 2002. In absolute terms, we expect hardware and other revenues to remain constant from 2003 to 2004.

Gross Profit

Gross profit increased 13% in 2003 to $36.5 million from $32.3 million in 2002. Gross profit as a percentage of total revenues decreased to 64% in 2003 from 69% in 2002. The decrease in gross profit as a percentage of total revenues was due primarily to the change in revenue mix due to the increase in hardware and other revenues, which have lower gross margins relative to software and service revenues.

Research and Development

Research and development expenses increased 16% in 2003 to $9.0 million from $7.7 million in 2002. As a percentage of total revenues, research and development expenses were 16% in both 2003 and 2002. The increase in research and development expenses in absolute terms was attributable to increases in headcount and related labor costs needed to meet product development requirements. The consistency in research and development expenses as a percentage of total revenues was due to the increase in absolute terms being offset by the increase in total revenues in 2003. We expect research and development expenses to increase in absolute terms in 2004 due to an expansion of our research and development staff.

Sales and Marketing

Sales and marketing expenses decreased 6% in 2003 to $17.8 million from $18.9 million in 2002. As a percentage of total revenues, sales and marketing expenses were 31% in 2003 and 39% in 2002. The decrease in sales and marketing expenses in absolute terms and as a percentage of total revenues was primarily attributable to the cost efficiencies that have been realized post-Merger through combining the sales and marketing operations of Old Captiva and ActionPoint. The decrease in sales and marketing expenses as a percentage of total revenues was also due to the increase in total revenues in 2003. We expect sales expenses to increase in absolute terms in 2004 due to an expansion of our sales force and revenue growth.

General and Administrative

General and administrative expenses remained constant at $6.1 million in 2003 and 2002. As a percentage of total revenues, general and administrative expenses decreased to 11% in 2003 from 13% in 2002, as a result of the increase in total revenues in 2003.

Merger Costs

We recorded Merger costs of $2.1 million during 2002, including estimated excess lease costs of $0.8 million. Estimated excess lease costs were based on the expected differences between our lease payments and the sublease receipts that could be realized on a potential sublease. In 2003, we recorded sublease receipts in excess of estimated receipts of $58,000.

Details of the Merger costs are as follows (in thousands):

Other Income, Net

Approximately $0.6 million of amounts held in escrow in conjunction with the May 2001 sale of the Dialog Server business to Chordiant Software, Inc. were received and recognized as other income in 2002.

Provision for Income Taxes

In 2003, we recorded a tax provision of $1.2 million, comprised of a provision for federal and state taxes of approximately $1.5 million, a provision for foreign taxes of approximately $0.4 million, research and development credits of approximately $(0.3) million, and a release of a valuation allowance of $(0.4) million, the net of which represented an effective tax rate of 31%. We released the valuation allowance of $(0.4) million based upon management’s determination that it is more likely than not that our net deferred tax assets will be realized. A tax benefit of $0.3 million was recorded for 2002, which represented an effective tax rate of 20%. As a result of the Merger in 2002, we recorded substantial non-deductible amortization charges and a non-deductible in-process research and development write-off.

Years Ended December 31, 2002 and 2001

Revenues

Total revenues increased 5% in 2002 to $48.6 million from $46.3 million in 2001.

Our software revenues were relatively constant, increasing only 1% in 2002 to $25.7 million from $25.5 million in 2001. As a percentage of total revenues, software revenues accounted for 53% in 2002 and 55% in 2001. The decrease in software revenues as a percentage of total revenues reflects an increase in total revenues in 2002.

Our service revenues were constant at $20.9 million in 2002 and $20.8 million in 2001. As a percentage of total revenues, services accounted for 43% in 2002 and 45% in 2001. The decrease in service revenues as a percentage of total revenues reflects an increase in total revenues in 2002.

Our hardware and other revenues in 2002 were $2.0 million. There were no hardware and other revenues in 2001.

Gross Profit

Gross profit increased 6% in 2002 to $33.3 million from $31.5 million in 2001. Gross profit as a percentage of total revenues increased to 69% in 2002 from 67% in 2001. The increase in gross profit for 2002 is due primarily to the increase in revenues and reflects decreases in combined headcount for 2002, which is partially offset by the increase in hardware and other revenues, which have lower margins.

Research and Development

Research and development expenses were $7.7 million in 2002 and $7.8 million in 2001. As a percentage of total revenues, research and development expenses were 16% in 2002 and 17% in 2001. The decrease in research and development expenses as a percentage of total revenues reflects the increase in total revenues.

Sales and Marketing

Sales and marketing expenses decreased 9% in 2002 to $18.9 million from $20.7 million in 2001. As a percentage of total revenues, sales and marketing expenses decreased to 39% in 2002 from 45% in 2001. The higher cost in 2001 was primarily attributable to marketing expenses incurred in early 2001 for the launch of our Dialog Server product, which was sold in May 2001.

General and Administrative

General and administrative expenses decreased 8% in 2002 to $6.1 million from $6.7 million in 2001. As a percentage of total revenues, general and administrative expenses decreased to 13% in 2002, from 14% in 2001. Both decreases were attributable to professional fees and expenses incurred in 2001 in conjunction with various strategic initiatives.

Merger Costs

Details of the Merger costs are as follows (in thousands):

In 2002, as the result of a review of the combined operation, we adopted a plan that included a reduction of our workforce and office space made redundant by the Merger. Implementation of this plan was largely completed during 2003. As a result of the adoption of this plan, we recorded charges of $2.1 million in 2002. These charges primarily related to the consolidation of our continuing operations resulting in the impairment of an asset, excess lease costs and a reduction in workforce, resulting in costs incurred for employee severance.

Employee reductions occurred primarily in marketing and administrative areas. As a result of this plan, we reduced our workforce by approximately 20 employees. Substantially all workforce reductions occurred during 2002. During 2002, charges related to the reduction of workforce totaling $0.9 million were recorded and activities costing $0.7 million were completed.

As a part of this plan, the carrying value of a prepaid royalty fee was written off. The technology associated with this royalty fee was utilized in certain of our products and because of technology acquired in the Merger it was no longer going to be utilized. In the third quarter, we recorded a loss from impairment of an asset of $0.5 million, which was classified as a Merger cost.

Also as part of this plan, we elected to consolidate our operations and attempt to sublease certain of our facilities which housed portions of our operations, marketing, sales and administrative activities. During 2002, we recorded estimated excess lease costs of $0.8 million which were recorded as Merger costs. Estimated excess lease costs are based on assumptions of differences between our lease payments and the sublease receipts that could be realized on a potential sublease and assumed carrying terms. In January 2003, we entered into an agreement to sublease the excess facility space. The sublease commenced in February 2003 and expires in February 2004. Future expected receipts under the sublease are $0.2 million and $40,000 in 2003 and 2004, respectively. These expected receipts are in excess of the estimated receipts used to estimate the Merger costs recorded during 2002, however, due to the uncertanty of collectibility of these amounts, the estimated Merger costs will be reduced as the sublease receipts are collected or reasonably expected to be collected.

Provision for Income Taxes

A tax benefit of $0.3 million was recorded for 2002, which represented an effective tax rate of 20%. As a result of the Merger, we recorded a substantial amount of non-deductible amortization charges and a non-deductible in-process research and development write-off. In addition, as a result of the Merger, our ability to utilize our historical net operating losses and tax credits as well as the historical net operating losses and tax credits of the Old Captiva business may have become limited. At December 31, 2002, it was more likely than not that a substantial portion of those deferred tax assets would not be realized. The income tax provision of $4.0 million recorded during the year ended December 31, 2001 is comprised of the following: tax on the gain from the sale of our Dialog Server product of $1.7 million, the change in valuation allowance of approximately $3.1 million to reduce net deferred tax assets based on management’s assessment of the uncertainty of the realizability of such assets, and a provision for foreign taxes of approximately $0.2 million offset by the utilization of net operating losses of $1.0 million.

Sale of the Dialog Server Product

We sold our Dialog Server product to Chordiant Software, Inc. on May 17, 2001 for approximately $7.1 million consisting of $2.0 million in cash and 1.7 million shares of Chordiant common stock, which was valued at $3.00 per share at the transaction date. We sold all of our Chordiant common stock in July 2001 for a price of approximately $2.73 per share and recognized a loss of approximately $0.4 million in the third quarter of 2001. We recognized a pretax gain on the transaction of approximately $4.6 million ($2.3 million net of tax) comprised of proceeds other than amounts in escrow and less transaction expenses. A portion of the total proceeds remained in escrow for one year pursuant to the asset sale agreement with Chordiant and $0.6 million of this amount was received by us in May 2002. The escrow funds were not included on the balance sheet or in the computation of gain on sale; hence, the receipt of funds in May 2002 was recognized as other income in 2002.

Liquidity and Capital Resources

AtOur working capital increased from $12.0 million at December 31, 2003 we hadto $21.5 million at December 31, 2004. The $9.5 million increase in working capital during 2004 was attributable to an $11.2 million increase in cash and cash equivalents and a $2.8 million increase in accounts receivable, net, partially offset by a $2.0 million increase in deferred revenue and a $2.5 million combined increase in other current liabilities. The increase in cash and cash equivalents was attributable primarily to $12.5 million in net cash provided by operating activities and $4.9 million in net cash provided by financing activities, partially offset by $6.3 million in net cash used in investing activities, as described further below. The increase in accounts receivable, net, was attributable primarily to an increase in revenues in the fourth quarter of $16.0 million,2004 as compared to $7.5 millionthe fourth quarter of 2003, including increases resulting from our acquisition of Context, as our days-sales-outstanding at December 31, 2002. On February 1, 2004 we completedremained consistent with the acquisitionprior year. The increase in deferred revenue was attributable primarily to the addition of Context deferred revenue as well as increases in deferred maintenance revenues associated with the growth of our software maintenance subscriber base. The increase in other current liabilities was attributable primarily to an increase in accounts payable to third-party hardware vendors, an increase in third-party royalties and an increase in commissions payable, all of which were principally due to higher revenue volumes in the issued and outstanding capitalfourth quarter of Context for approximately $5.2 million in cash derived from our existing cash and cash equivalents.2004 as compared to the fourth quarter of 2003.

Our primary method for funding operations and growth has been through cash flows generated from operations. Net cash provided by operating activities wasincreased from $5.9 million in 2003 compared to net cash used in operating activities of $0.1$12.5 million in 2002.2004. The net cash provided by operating activitiesincrease was attributable primarily to an increase in 2003 was primarily attributable to net income of $2.6 million,before non-cash charges, including depreciation and amortization of $2.7 million and a decrease in accounts receivable of $1.0 million. In addtion, the tax benefit we received from stock option exercises, had a positive effectalong with the favorable impact on ourcash of other net cash used in operating activities and could continue to have a positive effect if stock options continue to be exercised. The net cash used in operating activities in 2002 was largely due to the payment of Merger costs, and increased accounts receivable, offset by an increase in deferred revenue.working capital changes, as described above.

Net cash used in investing activities was $6.3 million in 2003 was2004 and $0.5 million and $0.9 million in 2002.2003. Net cash used in investing activities in 2003 was exclusively for additions2004 primarily included $5.5 million in cash paid to acquire Context, and to a lesser degree $0.9 million in property and equipment and is consistent with our expected rate of capital expenditures in the short-term. Net cash used in investing activities in 2002 included direct costs of the Merger of $1.6 million and purchases of property and equipment of $0.4 million, partially offset by proceeds from the Dialog Server escrow account of $0.6 million and cash received in the Merger of $0.6 million.expenditures.

Net cash provided by financing activities was $4.9 million in 2003 was2004 and $2.9 million and $47,000 in 2002.2003. Net cash provided by financing activities in 2003 consisted of $4.7 million of2004 related exclusively to proceeds from the exercise of common stock optionsoption exercises and $0.3 million of proceeds from the sale of common stock under our employee stock purchase plan, offset by discretionary principal repayments totaling $2.1 million against our line of credit. Net cash provided by financing

activities in 2002 consisted of $124,000 of proceeds from the sale of common stock under our employee stock purchase plan, offset by $77,000 of issuance costs for common stock issued in the Merger. In the future, we expect to generate further net cash from financing activities from the sale of common stock under our employee stock purchase plan and the exercise of stock options.plan.

In connectionWe are party to a credit agreement with the Merger, we assumed a bank that provides for a revolving line of credit with a bank. On the effective date of the Merger, July 31, 2002, and on December 31, 2002, the outstanding principal balance was $2.1 million. On December 31, 2003, there was no outstanding principal balance.through August 2005. Borrowings under the line of credit agreement are limited to the greaterlesser of $3.0 million or 80% of eligible accounts receivable. Any outstanding balances under the line of credit wouldreceivable, as defined, and bear interest at the bank’s prime rate plus 0.5%. AllBorrowings under this agreement are secured by substantially all of our assets collateralize the line of credit. In August 2003, we extended the term of our line ofassets. At December 31, 2004, there were no outstanding borrowings under this credit which is now scheduled to expire in August 2004.agreement. The line of credit agreement restricts us from paying dividends on our common stock. The linestock, conducting merger and acquisition activities, or otherwise effecting material changes to our business without the express written consent of creditthe bank, and also includesstipulates various financial covenants relatedthat include, but are not limited to, our operating results. As ofminimum monthly working capital and quarterly earnings levels. At December 31, 2003,2004, we were in compliance with all loan covenants. We expect to renew the line ofcovenants prescribed by this credit prior to its expiration, however, there is no assurance that we will be able to do so under comparable terms or at all.agreement.

Our principal sourcesAs of liquidity areDecember 31, 2004, we had $27.3 million in cash and cash equivalents, as well as expectedequivalents. We believe that these balances, anticipated future cash flows from operationsoperating and the line of credit. We may also continue to receivefinancing activities and, use proceeds from the sale of common stockas necessary, borrowings under our employee stock purchase plan and the exercise of stock options. We believe that our cash, cash equivalents and cash flows from operationscredit agreement, will be sufficient to meetfund our liquidityworking and other capital requirements for at leastover the course of the next 12 months.twelve months and for the foreseeable future. We may, however, seek additional equity or debt financing to fund further expansion.expansion, including potential future acquisitions of technologies or businesses. There can be no assurance that additional financing will be available on terms favorable to us, or at all.

Contractual Obligations

We hadFuture minimum obligations under non-cancelable operating leases expiring, which relate primarily to our facility and sales office leases, and purchase orders, outstanding at December 31, 2003 relatedwhich relate primarily to purchasesour procurement of digital scanners for resale. We have also entered into various operating leases for our facilities and sales offices, which expire at various dates through 2009. We have entered into capital leases for certainresale, are as follows as of our property and equipment which expire in 2004. Future purchase order obligations and future minimum lease commitments at December 31, 2003 due under these non-cancelable operating and capital leases are as follows2004 (in thousands):

Off-Balance Sheet Arrangements

We do not have noany off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. These accounting principles require management to make certain judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as definedof the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We periodically evaluate our estimates including, but not limited to, those relating to revenue recognition, our allowance for doubtful accounts, goodwill and other intangible assets resulting from business acquisitions and income taxes. We base our estimates on historical experience and various other assumptions that we believe to be reasonable based on the specific circumstances, the results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

We believe the following critical accounting policies involve the most significant judgments and estimates used in Regulation S-K 303(a)(4)the preparation of our consolidated financial statements:

Revenue Recognition

Our revenue is generated primarily from three sources: (i) software revenues, consisting primarily of software license revenue, subscription revenue and royalty revenue, (ii). service revenues, consisting primarily of software maintenance and support revenue, training revenue and professional service revenues and (iii) hardware and other revenues, consisting primarily of revenues related to our sale of digital scanners.

Software license revenue is recognized upon shipment provided that persuasive evidence of an arrangement exists, fees are fixed or determinable and collection is probable. Revenue under software subscription arrangements is recognized ratably over the term of the arrangements. Royalty revenue is recognized when our resellers ship or pre-purchase rights to ship products incorporating our software, provided that the above revenue recognition criteria are met, specifically ensuring that our resellers’ obligations to us are are non-cancelable and are not subject to any acceptance or rights of return. In instances where we rely on reporting from our resellers to substantiate revenues earned based on usage and other factors, we do not recognize revenues until corroborative evidence is reported to us by the reseller, assuming that all other revenue recognition criteria are met. The timing of royalty reporting by our resellers, which is generally one quarter in arrears, has historically been consistent period to period.

Summarized Quarterly Data (Unaudited)We use the residual method to recognize revenue when an arrangement includes one or more elements to be delivered at a future date and vendor-specific objective evidence of the fair value of all undelivered elements exists. Vendor-specific objective evidence of fair value for ongoing maintenance and support obligations is determined based upon separate sales of renewals to customers or upon substantive renewal rates quoted in the agreements. Vendor-specific objective evidence of fair value for professional services is determined based on the pricing of these services when sold separately to other customers. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If evidence of the fair value of one or more undelivered elements does not exist, the revenue is deferred and recognized when delivery of those elements occurs or when fair value can be established.

When software licenses are sold together with professional services, license fees are recognized upon delivery provided that the above revenue recognition criteria are met, payment of the license fees is not dependent upon the performance of the services, and the services do not provide significant customization or modification of the software products and are not essential to the functionality of the software that was delivered. For arrangements with services that do not meet this criteria, the license and related service revenues are recognized using contract accounting as described below.

Service revenues include software maintenance and support revenues, training revenues and professional service revenues. Revenues from software maintenance and support agreements are recognized on a straight-line basis over the term of the support period, generally twelve months. The majority of our software maintenance and support agreements provide technical support as well as unspecified software product upgrades and releases when and if made available by us during the term of the support period. We provide training, consulting and software integration services under both hourly-based time and materials and fixed-priced contracts. Revenues from these services are generally recognized as the services are performed. For fixed-price service contracts, we apply the percentage-of-completion method of contract accounting to determine progress towards completion, which requires the use of estimates. In such instances, management is required to estimate the input measures, generally based on hours incurred to date compared to total estimated hours of the project. Adjustments to estimates are made in the period in which the facts requiring such revisions become known and, accordingly, recognized revenues and profits are subject to revisions as the contract progresses to completion. Estimated losses, if any, are recorded in the period in which current estimates of total contract revenue and contract costs indicate a loss. If substantive uncertainty related to customer acceptance of services exists, we apply the completed contract method of accounting and defer the associated revenue until the contract is completed.

Revenue related to the sale of hardware and other products, which we typically procure from third-party vendors and resell to our customers for use with our software solutions, is recognized upon delivery provided that persuasive evidence of an arrangement exists, the selling price is fixed or determinable and collectibility is reasonably assured. Hardware and other product revenues is generally recognized on a gross basis because: (i) we are the primary obligor in our customer arrangements; (ii) we assume inventory, credit and collection risk with respect to these products; and (iii) we have latitude in establishing the price of such products with our customers. In instances where these criteria are not met, we would recognize revenue on a net, or commission basis.

If at the outset of an arrangement we determine that the arrangement fee is not fixed or determinable, revenue is deferred until the arrangement fee becomes due. If at the outset of an arrangement we determine that collectibility is not probable, revenue is deferred until the earlier of when collectibility becomes probable or the receipt of payment. If an arrangement provides for customer acceptance, revenue is not recognized until the earlier of receipt of customer acceptance or expiration of the acceptance period.

Deferred revenue is primarily comprised of undelivered maintenance services and to a lesser degree hardware and other products delivered but not yet accepted.

The following tables present unaudited quarterlydetermination of whether fees are fixed or determinable and whether collection is probable or reasonably assured involves the use of assumptions. We evaluate contract terms and customer information to ensure that

these criteria are met prior to our recognition of revenues. Additionally, our accounting for fixed-price service contracts using the percentage-of-completion method of contract accounting involves the use of estimates. We have not experienced significant variances between our assumptions and estimates and actual results in the past, and anticipate that we will be able to continue to make reasonable assumptions and estimates in the future. However, differences in our assumptions and estimates could result in changes to the amount and timing of revenue recognition in any period.

Allowance for Doubtful Accounts

We make estimates regarding the collectibility of our accounts receivable. When we evaluate the adequacy of our allowance for doubtful accounts, we analyze specific accounts receivable balances, historical bad debts, customer creditworthiness and changes in our customer payment cycles. Material differences may result in the amount and timing of expenses for any period if we were to make different judgments or utilize different estimates. If the financial informationcondition of our customers deteriorates resulting in accordancean impairment of their ability to make payments, additional allowances might be required. We have not experienced significant variances in the past between our estimated and actual doubtful accounts and anticipate that we will be able to continue to make reasonable estimates in the future. If for some reason we did not reasonably estimate the amount of our doubtful accounts in the future, it could have a material impact on our consolidated results of operations.

Business Acquisitions; Valuation of Goodwill and Other Intangible Assets

Our business acquisitions typically result in the recognition of goodwill and other intangible assets, and in certain cases non-recurring charges associated with generally accepted accounting principles for the eight quarters ended December 31, 2003. This information reflects all adjustments (consisting only of normal recurring adjustments, except for Merger costs of $2.1 million and a write-off of in-process research and development (IPR&D), which affect the amount of $0.9 millioncurrent and future period charges and amortization expenses. Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including identified intangible assets, in connection with our business combinations accounted for by the quarter ended September 30, 2002) that we consider necessarypurchase method of accounting. We amortize our definite-lived intangible assets using the straight-line method over their estimated useful lives, while IPR&D is recorded as a non-recurring charge on the acquisition date. Goodwill is not amortized, but rather is periodically assessed for a fair presentation of this information in accordance with generally accepted accounting principles. The results for any quarter are not necessarily indicative of results for any future period. (in thousands, except per share data):impairment.

The firstdetermination of the value of these components of a business combination, as well as associated asset useful lives, requires management to make various estimates and assumptions. Critical estimates in valuing intangible assets may include but are not limited to: future expected cash flows from product sales and services, maintenance agreements, consulting contracts, customer contracts, and acquired developed technologies and patents or trademarks; expected costs to develop the IPR&D into commercially viable products and estimating cash flows from the projects when completed; the acquired company’s brand awareness and market position, as well as assumptions about the period of time the acquired products and services will continue to be used in our product portfolio; and discount rates. Management’s estimates of fair value and useful lives are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Unanticipated events and circumstances may occur and assumptions may change. Estimates using different assumptions could also produce significantly different results.

We continually review the events and circumstances related to our financial performance and economic environment for factors that would provide evidence of the impairment of our intangible assets. When impairment indicators are identified with respect to our previously recorded intangible assets, we test for impairment using undiscounted cash flows. If such tests indicate impairment, we measure the impairment as the difference between the carrying value of the asset and the fair value of the asset, which is measured using discounted cash flows. Significant management judgment is required in forecasting of future operating results, which are used in the preparation of the projected discounted cash flows and should different conditions prevail, material write downs of net intangible assets and other long-lived assets could occur. We periodically review the estimated remaining useful lives of our acquired intangible assets. A reduction in our estimate of remaining useful lives, if any, could result in increased amortization expense in future periods.

We test goodwill for impairment at least annually during the second quarter of each year is generallyand more frequently if impairment indicators are identified. In connection with our weakestmost recent annual impairment testing date in the second quarter of 2004, we determined that there was no impairment. The timing and frequency of our goodwill impairment test is based on an ongoing assessment of events and circumstances that would more than likely reduce the yearfair value of our business below its carrying value. We will continue to monitor our goodwill balance and conduct formal tests on at least an annual basis or earlier when impairment indicators are present. There are various assumptions and estimates underlying the determination of an impairment loss, and estimates using different, but reasonable assumptions could produce significantly different results. Therefore, the timing and recognition of impairment losses by us in the future, if any, may be highly dependent upon our fourth quarter of each year is generally our strongest quarter of the year.estimates and assumptions.

Income Taxes

We use the asset and liability approach to account for income taxes. This methodology recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax base of assets and liabilities and operating loss and tax credit carryforwards. As necessary, we record a valuation allowance to reduce deferred tax assets to an amount that more likely than not will be realized. We consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, which requires the use of estimates. Although we believe that our estimates are reasonable, there is no assurance that a valuation allowance will not need to be established or, if previously established, will not need to be increased to cover additional deferred tax assets that may not be realizable, and such a determination could have a material adverse impact on our income tax provision and results of operations in the period in which such determination is made. In addition, the calculation of tax liabilities also involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws, including those in international jurisdictions. Resolution of these uncertainties in a manner inconsistent with management’s expectations could also have a material impact on our income tax provision and results of operations in the period in which such determination is made.

Recent Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),Share-Based Payment(SFAS No. 123(R)), which is a revision of SFAS No. 123,Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees, and amends SFAS No. 95,Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) will require all share-based payments to employees, including grants of employee stock options and other stock-based awards, to be recognized in our statements of operations based on their fair values. Pro forma disclosures, previously allowed by SFAS No. 123, will no longer be an alternative. We will be required to adopt SFAS No. 123(R) on July 1, 2005 (the effective date), and expect to adopt such standard using the modified prospective method, under which compensation cost will be recognized based on the requirements of SFAS No. 123(R) for all share-based awards granted to employees on or after the effective date and based on our original fair value calculations in accordance with SFAS No. 123 for all share-based awards granted to employees prior to the effective date, to the extent that they remain unvested on the effective date. Upon our adoption of SFAS No. 123(R), we anticipate that we will continue to apply the Black-Scholes option pricing model to estimate the fair value of our share-based awards. However, we may elect to use another valuation model as prescribed by SFAS No. 123(R).

As permitted by SFAS No. 123, we currently account for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally do not recognize compensation cost for employee stock option awards. Accordingly, the adoption of SFAS No. 123(R)’s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on the levels

of share-based awards granted by us in the future. SFAS No. 123(R) also requires the benefit of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow, as is currently prescribed by SFAS No. 95. To the extent that we continue to recognize tax benefits upon the exercise or disqualifying disposition of employee stock options, our adoption of SFAS No. 123(R) will reduce our net operating cash flows and increase our net financing cash flows in periods after adoption.

Effective February 9, 2005, our Board of Directors approved the acceleration of vesting of certain unvested and “out-of-the-money” stock options previously awarded to employees and officers under our stock options plans. This action affected all unvested options with exercise prices greater than $11.51 on February 9, 2005. As a result of this action, options to purchase approximately 500,000 shares of our common stock that would have otherwise vested over an approximate 39 month period became fully vested. The decision to accelerate the vesting of these options was made primarily to reduce compensation expense that would be recorded in future periods following our adoption of SFAS No. 123(R) effective July 1, 2005.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We maintain an investment policy that is intended to ensure the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. Our investment policy allows us to invest in high credit quality securities such as money market funds, debt instruments of the United States government and its agencies and high quality corporate issuers. To date, our investments of excess cash have principally consisted of bank money market funds. We do not currently use, nor have we historically used, derivative financial instruments to manage or reduce market risk. We mitigate default risk for our investments by investing in high credit quality securities such as debt instruments of the United States government and its agencies and high quality corporate issuers, as well as money market funds. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity and maintains a prudent amount of diversification. As ofAt December 31, 2003, we had approximately $16.0 million in2004, our cash and cash equivalents. On February 1, 2004, we completed the acquisitionequivalents totaled $27.3 million, and consisted primarily of all of the issued and outstanding capital of Context for approximately $5.2 million in cash derived from our existing cash and cash equivalents.money market funds in banks with an original maturity of 90 days or less at the time of purchase. We do not maintain any marketable equity or debt security or other investment instruments at December 31, 2004.

We have significant international operations internationally and, as a result, are subject to various risks, including foreign currency risks. We have not entered into foreign currency contracts for purposes of hedging or speculation. To date, we have not realized any significant gaingains or losslosses from transactions denominated in foreign currencies. For

the year ended December 31, 2003, approximately 21%During 2004, 20% of our sales and approximately 15%17% of our operating expenses were denominated in currencies other than our functional currency, the United States dollar. These foreign currencies are primarily British pounds,Pounds, Euros, Russian Roubles and Australian dollars. Additionally, substantially all of the receivables and payables of our international subsidiaries are denominated in their respective local currencies.

Our consolidated financial statements atas of December 31, 20032004 and 2002,2003, and for each of the three years in the period ended December 31, 2003,2004, and the Report of Independent Auditors,Registered Public Accounting Firm, are included in this Report on pages F-1 through F-18.F-23.

Summarized Quarterly Data (Unaudited)

The following table presents selected unaudited consolidated financial results for each of the eight quarters in the two-year period ended December 31, 2004. In the opinion of management, this unaudited consolidated financial information has been prepared on the same basis as the audited information and reflects all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of this consolidated information for the periods presented. The results for any quarter are not necessarily indicative of results for any future period. Amounts below are in thousands, except per share data.

None.

Evaluation of Controls and Procedures

We maintain controlsOur chief executive officer and procedures, which have been designed to ensure that material information related to Captiva Software Corporation, including its consolidated subsidiaries, is made known to management on a timely and consistent basis. In response to recent legislation and proposed regulations, we have been reviewing our internal control structure and have established a disclosure committee, which consists of certain memberschief financial officer, after evaluating the effectiveness of our management. Although we believe our existing disclosure controls and procedures are adequate to enable us to comply with(as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) as of December 31, 2004, have concluded that as of such date, our disclosure obligations,controls and procedures were adequate and sufficient to ensure that information required to be disclosed by us in the reviewreports that we file under the Securities Exchange Act of 1934 is recorded, processed, summarized and documentation of ourreported within the time period specified in the SEC’s rules and forms.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control structureover financial reporting, as such term is a process that will continue to evolve.

As of the end of the period covered by this report, the disclosure committee carried out an evaluation, underdefined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer, Mr. Bish,principal executive officer and Chief Financial Officer, Mr. Russo,principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the design and operationframework inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our disclosure controls and procedures (as defined in Rule 13a-15(e)evaluation under the Securities Exchange Act of 1934). Based upon that evaluation, Mr. Bish and Mr. Russoframework inInternal Control—Integrated Framework, our management concluded that our disclosure controls and procedures areinternal control over financial reporting was effective as of December 31, 2004.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in causing material information relating to us to be collected, communicated and analyzed by management on a timely basis and disclosed in a timely manner in compliance with SEC disclosure obligations.their report which is included herein.

Changes in Controls and Procedures

��

There was no change in our internal controls that occurred during the fourth fiscal quarter in the period covered by this report that has materially affected, or is reasonably likely to affect, our internal controls over financial reporting.

None.

PART III

Some information required by Part III is incorporated by reference from our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for our 20042005 Annual Meeting of Stockholders (the Proxy(Proxy Statement).

The information required by this item is incorporated by reference from the sections entitled “Election of Directors” and “Executive Officers” in theour Proxy Statement.

The information required by this item is incorporated by reference to the section in theour Proxy Statement entitled “Compensation of Directors and Executive Officers.”

The information relating to the security ownership of certain beneficial owners and management required by this item is incorporated by reference from the section entitled “Security Ownership ofOf Certain Beneficial Owners and Management and Related Stockholder Matters”Management” in theour Proxy Statement.

Information about our equity compensation plans at December 31, 2003 was as follows: