Captiva Software Corporation (together with its consolidated subsidiaries, referred to herein as we, us, our, and Captiva ) develops, markets, and services input management software that helps automate and manage the capture of Preparation and Accounting Policiesexternal information into an organization’s internal computing systems.

Unaudited Interim Financial InformationPrinciples of Consolidation and Basis of Presentation

In this document, “we,” “our,” “us” andWe have prepared the “Company” refer to Captiva Software Corporation, formerly known as ActionPoint, Inc., and its subsidiaries, unless the context otherwise requires. The accompanying unaudited interim condensed consolidated condensed financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financialthe instructions to Form 10-Q. Consequently, we have not necessarily included in this Quarterly Report on Form 10-Q all information and pursuant to the rules and regulations of the Securities and Exchange Commission. The December 31, 2003 balance sheet data was derived fromfootnotes required for audited financial statements. In our opinion, the accompanying unaudited interim condensed consolidated financial statements contained in the Company’s 2003this Quarterly Report on Form 10-Q reflect all adjustments (consisting only of normal recurring adjustments, except as otherwise indicated) necessary for a fair statement of our financial position and results of operations. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with our audited consolidated financial statements and notes thereto presented in our Annual Report on Form 10-K but doesfor the fiscal year ended December 31, 2004. The interim financial information contained in this report is not necessarily indicative of the results to be expected for any other interim period or for the entire fiscal year.

The consolidated financial statements include all disclosures required by accounting principles generally accepted in the United Statesaccounts of America.Captiva and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the datedates of the financial statements and the reported amounts of revenues and expenses during the reporting period.periods. Actual results maycould differ from those estimates.

In These estimates and assumptions include, but are not limited to, assessing the opinionfollowing: the recoverability of management,accounts receivable, goodwill, intangible assets and deferred tax assets; the unaudited consolidated condensed financial statements for the three and nine-month periods ended September 30, 2004 and 2003 include all adjustments necessaryability to state fairly the financial information set forth herein, consisting only of normal recurring adjustments except for the write-off of withdrawn stock offering costs as discussed belowestimate hours in connection with fixed-fee service contracts; and the purchase accounting entries for the Company’s acquisitiondetermination of ADP Context, Inc. as discussed in Note 2. These consolidated condensed financial statements and notes hereto should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003. The results of operations for the interim periods presented in this quarterly report on Form 10-Q are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year and should not be relied upon as such.

Revenue Recognition

Revenue is generated primarily from three sources: (i) software, which is primarily software license revenue, software subscription license revenue, which includes subscriptions to information databases, and royalty revenue, (ii) services, which includes software license maintenance fees, training and professional services revenue and (iii) hardware and other products, which were primarily sales of digital scanners in the three and nine months ended September 30, 2004 and 2003. Software license revenue is recognized upon shipment provided that persuasive evidence of an arrangement exists,whether fees are fixed or determinable and collection is probable and no significant undelivered obligations remain. Software subscription license revenue is recognized over the term of the license, generally twelve months. Royalty revenue is recognized when partners ship or pre-purchase rights to ship products incorporating the Company’s software, provided collection of such revenue is determined to be probable and the Company has 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., deliveredStock-Based Compensation

We measure compensation expense for our employee stock-based compensation awards using the intrinsic value method and undelivered products, maintenanceprovide pro forma disclosures of net income and other services),earnings per share as if a fair value method had been applied. Therefore, compensation cost for fixed employee stock awards would be measured as the Company allocates revenue to each elementexcess, if any, of the arrangement based onquoted market price of our common stock at the fairgrant date over the amount an employee must pay to acquire the stock, and would be amortized over the related service periods. Under the intrinsic value ofmethod, no compensation expense was recognized during the undelivered elements, which is specific to the Company, using the residual value method. The fair values for ongoing maintenance and support obligations are based upon separate sales of renewals to customersquarters ended March 31, 2005 or upon2004.

CAPTIVA SOFTWARE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTSSTATEMENTS—(Continued)

(UNAUDITED)

substantive renewal rates quotedHad compensation cost for our employee stock-based compensation awards been determined based on the fair value method, the amount of employee stock-based compensation cost and our pro forma results for the quarters ended March 31, 2005 and 2004 would have been as follows (in thousands, except per share data):

The pro forma net income and earnings per share amounts for the quarter ended March 31, 2004 have been adjusted from that originally reported, to reflect revisions in the agreements. The fair values for services, suchour calculation of stock-based employee compensation cost related to purchase rights issued under our employee stock purchase plan, 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 such services are deemed essential to the functionality of the software, combined software and service revenue is recognizedwell as the services are performed. When software licenses are sold with professional services and such 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.certain tax benefit attributes.

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, the Company primarily used the discounted cash flow method. This method requires significant management judgment to forecast the future operating results used in the analysis. In addition, other significant estimates are required, such as residual growth rates and discount factors. The estimates that the Company has used are consistent with the plans and estimates that the Company uses to manage its 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 also significantly affect the Company’s net operating results. Amortization of purchased intangibles is expected to be $2.6 million, $1.9 million, $0.7 million, $0.3 million and $0.2 million for the years ending December 31, 2004, 2005, 2006, 2007 and 2008 and thereafter, respectively.

In addition, the value of the Company’s intangible assets, including goodwill, is subject to future impairments if the Company experiences declines in operating results or negative industry or economic trends or if the Company’s future performance is below the Company’s projections and estimates.

Valuation of Goodwill

The Company assesses 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.

Important factors that could trigger impairment include the following:

CAPTIVA SOFTWARE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

When there is an indication that the carrying value of goodwill may not be recoverable based upon the existence of one or more of the above indicators, an impairment loss would be recognized if the carrying amount exceeds its fair value. The Company performed its annual impairment review during the quarter ended June 30, 2004 and determined there was no impairment.

Merger Costs

Merger costs relate to the merger of ActionPoint, Inc. and Old Captiva. In both the three and nine months ended September 30, 2004, the Company recorded sublease receipts in excess of estimated receipts of $0.2 million, and in the three and nine months ended September 30, 2003, the Company recorded sublease receipts in excess of estimated receipts of $10,000 and $54,000, respectively, related to an excess lease obligation recorded upon the merger.

Offering CostsRecent Accounting Pronouncements

On April 12,December 16, 2004, the Company filed a registration statement (the Registration Statement) with the Securities and Exchange Commission (SEC) to register shares of the Company’s common stock in preparation for an underwritten public offering. In May 2004, the Company decided not to proceed with the underwritten public offering, withdrew this Registration Statement and wrote off $0.2 million of costs incurred in the registration process and initially deferred in connection with the anticipated offering.

Stock-Based Compensation

The Company has elected to utilize the intrinsic value method to account for its employee stock option plans. When the exercise price of the Company’s employee stock options equals the fair value price of the underlying stock on the date of grant, no compensation expense is recognized in the Company’s financial statements. Compensation expense for options granted to non-employees is determined in accordance withFinancial 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 (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 Emerging Issues Task Force (EITF)amends SFAS No. 96-18 as95, Statement of Cash Flows (SFAS No. 95). 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.

Statement No. 123(R) was to be effective for public companies for annual or interim periods beginning after June 15, 2005. However, on April 14, 2005 the U.S. Securities and Exchange Commission announced a deferral of the effective date of SFAS 123(R) for calendar year companies until the beginning of 2006; accordingly, we will be required to adopt SFAS 123(R) on January 1, 2006 (the effective date). We 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 the consideration received or the fairour 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 of the equity instruments issued, whichever is more reliably measured. Deferred chargesmethod and, as such, generally do not recognize compensation cost for options granted to non-employees are periodically remeasured as the underlying options vest.

CAPTIVA SOFTWARE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTSSTATEMENTS—(Continued)

(UNAUDITED)

Had compensation cost foremployee stock option awards. Accordingly, the Company’s stock-based compensation to employees been determined based on theadoption of SFAS No. 123(R)’s fair value method the amountwill have a significant impact on our results of stock-based employee compensation cost and the Company’s pro forma results wouldoperations, although it will have been as indicated below (in thousands, except per share data):

Reclassifications

Certain prior period items have been reclassified to conform with the current period’s presentation. These reclassifications had no impact on totalour 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.

Intangible assets, net, revenues, operating income or net income as previously reported.

2.    Acquisition of ADP Context, Inc.

On February 1, 2004, the Company completed the acquisition of ADP Context, Inc., an Illinois corporation (Context). The Context products complement the Company’s existing ClaimPack product line and enhance the Company’s product offerings to its claim processing customers. The Context product line also allows the Company to extend its reach into the provider sideconsist of the healthcare market. The acquisition was effected in accordance with a stock purchase agreement dated as of February 1, 2004 by and among the Company, ADP Integrated Medical Solutions, a Delaware corporation (ADP), and ADP Claims Solutions Group, Inc. (CSG), pursuant to which the Company purchased all of the issued and outstanding capital stock of Context from ADP and paid to ADP approximately $5.3 million in immediately available cash (including a final cash payment of approximately $0.2 million which was paid to ADP in the second quarter of 2004). The sole source of the cash consideration the Company paid in the acquisition was the Company’s cash and cash equivalents. There were no material relationships between the Company or any of the Company’s affiliates, directors or officers, on the one hand, and ADP or CSG, on the other hand, at the time of the acquisition.

CAPTIVA SOFTWARE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

The purchase price was allocated as followsfollowing (in thousands):

In connection withAmortization expense related to our intangible assets totaled $0.7 million and $0.6 million during the acquisition, the Company wrote off the purchased in-process research and development of $0.1 million, which was charged to operations in the three monthsquarters ended March 31, 2004. The results2005 and 2004, respectively. Future amortization expense for the remainder of operations of Context are included in the nine months ended September 30, 2004 starting from February 1, 2004, the date of acquisition. If the acquisition had occurred on January 1, 2003, pro forma financial information would have been as follows (in thousands, except per share information):2005 and for 2006, 2007, and 2008 is expected to be $1.2 million, $0.8 million, $0.3 million, and $0.2 million, respectively, excluding any incremental expense that could result if we consummate future acquisitions.

CAPTIVA SOFTWARE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

3.    Composition of Certain Balance Sheet Captions (in thousands)

CAPTIVA SOFTWARE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

4.    Computation of Net Income Per Share

Basic net incomeearnings per share is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for that period. Diluted net incomeearnings per share is computed giving effect to all dilutivebased on the weighted-average number of common shares outstanding as well as potential common shares that were outstanding duringresulting from the period. Dilutive potential common shares consist of incremental common shares issuable upon exercise of outstanding stock options and warrants.

when they are dilutive under the treasury stock method. Dilutive securities include options subject to vesting on an as-if-converted-to-common stock basis. Dilutive securitiesconsisting of 1.31.1 million and 2.0 million shares and 1.6 million sharesrelated to outstanding stock options are included in the diluted earnings per share calculationcalculations for the threequarters ended March 31, 2005 and nine months ended September 30, 2004, respectively. DilutivePotentially dilutive securities consisting of 1.90.7 million and 0.2 million shares and 1.3 million shares are included inrelated to outstanding stock options were excluded from the diluted earnings per share calculation forcalculations in the threequarters ended March 31, 2005 and nine months ended September 30, 2003, respectively. Potentially dilutive securities totaling 0.8 million shares and 0.6 million shares for the three and nine months ended September 30, 2004, respectively, and 0.2 million shares and 1.5 million shares for the three and nine months ended September 30, 2003, respectively,because they were excluded from basic and diluted earnings per share because of their anti-dilutive effect.anti-dilutive.

5.    Comprehensive Income

Comprehensive income consists of the following components (in thousands):

CAPTIVA SOFTWARE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTSSTATEMENTS—(Continued)

(UNAUDITED)

6.    Line of Credit

The Company has a bank line of credit that will expire in August 2005. On September 30, 2004, there was no outstanding principal balance under the line of credit. Borrowings under the line of credit are limited to the lesser of $3.0 million or 80% of eligible accounts receivable. Any outstanding balances under the line of credit would bear interest at the bank’s prime rate plus 0.5%. The line of credit is collateralized by all assets of the Company. The Company is restricted from paying dividends under the terms of the line of credit. The line of credit includes various financial covenants related to the Company’s operating results. As of September 30, 2004 the Company was in compliance with all loan covenants.

7.    Income Taxes

The provision for income taxes for interim periods is based on estimated effective income tax rates for the year. The Company’s estimated effective tax rate for 2004 is 39%, which was applied to the results for the three and nine months ended September 30, 2004. The Company’s estimated effective income tax rate for 2004 differs from the U.S. federal statutory rate of 34% primarily due to state income taxes. The Company’s estimated effective tax rate for the three and nine months ended September 30, 2003 was 40%.

8.    Business Segments and Geographic Reporting

The Company hasWe have a single reportable operating segment consisting of the development, marketing and servicing of input management software. Management uses one measurementsolutions. Our President and Chief Executive Officer utilizes measurements of profitability related to this single operating segment, which are not disaggregated by product or geographical lines, to make primary business decisions and does not disaggregate its business for internal reporting. Operations outside the United Statesresource allocations.

International operations primarily consist of subsidiary sales operation offices of the Company’s subsidiaries in the United Kingdom, Germany and Australia, which are responsible for sales to international customers. The international subsidiaries do not carry any significant tangible long-lived assets,as well as a research and the total assetsdevelopment center in Russia, and represent extensions of the Company’s international subsidiaries were not significant for any period presented.our core input management business.

The following table presents revenueRevenues derived from domestic and international sales, which are determined based on location of customer forour primary selling office locations, were as follows during the threequarters ended March 31, 2005 and nine months ended September 30, 2004 and 2003, respectively (in thousands, except percentage data)thousands):

No single customer accounted for 10% or more of our total revenues in the quarters ended March 31, 2005 or 2004.

In February 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 option 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 0.5 million shares of our common stock that would have otherwise vested over an approximate 39 month period became fully vested. In connection therewith, all of our affected executive officers have entered into agreements not to sell shares acquired through the exercise of an accelerated option prior to the date on which exercise would have been permitted under the options’ original vesting terms, other than shares sold for payment of taxes resulting from the exercise or in the case of termination of employment. 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).

9.In the ordinary course of business, we are not subject to potential obligations under guarantees that fall within the scope of FIN No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others, except for standard indemnification and warranty provisions that are contained within many of our customer license and service agreements and certain vendor agreements, as well as standard indemnification agreements that we have executed with certain of our officers and directors, and give rise only to the disclosure requirements prescribed by FIN No. 45. In addition, under previously existing accounting principles generally accepted in the United States of America, we continue to monitor the conditions that are subject to the guarantees and indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under the guarantees and indemnifications when those losses are estimable.

CAPTIVA SOFTWARE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Indemnification and warranty provisions contained within our customer license and service agreements and certain supplier agreements are generally consistent with those prevalent in our industry. The Company provides indemnificationsduration of varying scopeour product warranties generally does not exceed 90 days following delivery or installation of our products. We have not incurred significant obligations under customer indemnification or warranty provisions historically and do not expect to customers againstincur significant obligations in the future. Accordingly, we do not maintain accruals for potential customer indemnification or warranty-related obligations. The indemnification agreements that we have executed with certain of our officers and directors would require us to indemnify such officers and directors in certain instances. We have not incurred obligations under these indemnification agreements historically and do not expect to incur significant obligations in the future. Accordingly, we do not maintain accruals for potential officer or director indemnification obligations. The maximum potential amount of future payments that we could be required to make under the indemnification provisions in our customer license and service agreements, and officer and director agreements is unlimited.

We are party to various claims and legal actions arising in the ordinary course of intellectual property infringement made by third parties arising frombusiness. We do not believe that any of these claims or actions will result in a material adverse impact to our consolidated results of operations, liquidity or financial condition. However, the useamount of the Company’s products. From time to time, indemnificationliabilities associated with these claims may arise; however, to date, the Company has not encountered material costs as a result of such obligations and has not accruedactions, if any, material liabilities related to such indemnifications in its financial statements. Any indemnification claims are reviewed on a quarterly basis.cannot be determined with certainty.

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

Forward-Looking Statements

ThisStatements in this Quarterly Report on Form 10-Q containsthat are not strictly historical in nature are forward-looking statements. These statements relate to, among other things, future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms, or other words of similar meaning. These statements are only predictions based on information currently available to us. Actual events or results may differ materially. Risks that may cause actual results to differ materially from the forward-looking statements are described in the section entitled “Risk Factors” in this Quarterly Report on Form 10-Q and identified from time to time in our filings with the Securities and Exchange Commission, press releases and other communications.

Commission. Although we believe that the estimates and expectations reflected in the forward-looking statements are reasonable at the time the statements are made, we cannot guarantee future results, levels of activity, performance or achievements. We assume no obligation to update any of the forward-looking statements contained in this Quarterly Report on Form 10-Q.

Overview

We are a leading provider of input management solutions designed to manage business-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 objective is to extend our position as a leading provider of input management solutions. Key elements of our growth strategy include leveraging our existing customer base, broadening our sales channels and expanding our markets, expanding our international presence, broadening our product offerings and pursuing strategic acquisitions.

Our products offer organizations a cost-effective, accurate and automated alternative to both manual data entry and electronic data interchange (EDI).interchange. 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 products to capture information digitally, extract the meaningful content or data, and apply business rules that ensure the data’s accuracy.

InWe are a Delaware corporation, formed by the three and nine months ended September 30, 2004, our revenues increased to $15.0 million and $47.7 million, respectively, from $14.5 million and $41.0 million in the three and nine months ended September 30, 2003, respectively. In the three months ended September 30, 2004, our net income decreased to $0.6 million from $0.7 million in the three months ended September 30, 2003 while in the nine months ended September 30, 2004, our net income increased to $1.9 million from $1.1 million in the nine months ended September 30, 2003.

On July 31, 2002,merger of ActionPoint, Inc. merged, a Delaware corporation (ActionPoint), with Captiva Software Corporation, a California corporation. As a resultcorporation (Old Captiva), in the third quarter of this transaction,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 and remained a Delaware corporation.Corporation.

On February 1, 2004, we completed the acquisition of all of the issuedacquired Context. Context’s products provide automated solutions to complex medical claims coding, editing and outstanding capital stock of ADP Context, Inc. (Context) for approximately $5.2 million of cash derived from our existing cash and cash equivalents. We made a final cash payment of approximately $0.2 millionreimbursement challenges in the second quarter of 2004. Under generally accepted accounting principles,healthcare industry and allow us to better serve our claims processing customers and expand our reach in the healthcare insurance market. The results of operations of Context are included in our 2004 results of operations for the nine months ended September 30, 2004 starting frombeginning 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.

Results of Operations

The Context products complementfollowing table sets forth, in absolute dollars and as a percentage of total revenues, certain statement of operations data for the quarters ended March 31, 2005 and 2004: