Edgar Filing: ASPEN TECHNOLOGY INC /DE/

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 2

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2006.

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-24786

Aspen Technology, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		04-2739697
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)
Ten Canal Park
Cambridge, Massachusetts		02141
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code:

(617) 949-1000

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

None

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

Common stock, $0.10 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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

Indicate by check mark 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 the 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. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated Filer x

Non-accelerated Filer o

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

As of December 31, 2005, the aggregate market value of common stock (the only outstanding class of common equity of the Registrant) held by nonaffiliates of the Registrant was $319,758,462 based on a total of 40,733,562 shares of common stock held by nonaffiliates and on a closing price of $7.85 on December 31, 2005 for the common stock as reported on the Nasdaq Global Market.

As of March 9, 2007, 87,749,130 shares of common stock were outstanding.

TABLE OF CONTENTS

		Page
Explanatory Notes			ii
	PART II
Item 6.	Selected Financial Data		1
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		4
Item 8.	Financial Statements and Supplementary Data		28
Item 9A.	Controls and Procedures		28
	PART IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		41
Signatures			48

This Amendment No. 2 on Form 10-K, which we refer to as this Form 10-K/A, amends and restates portions of our Annual Report on Form 10-K for the fiscal year ended June 30, 2006 as originally filed with the SEC on September 28, 2006, which we refer to as the original Form 10-K, and our Amendment No. 1 to our Annual Report on Form 10-K as filed with the SEC on November 14, 2006, which we refer to as the first Form 10-K/A.

Aspen is our registered trademark.

This Form 10-K/A contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created thereby. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. Readers are cautioned that all forward-looking statements involve risks and uncertainties, many of which are beyond our control, including the factors set forth under “Item 1A. Risk Factors” in the original Form 10-K. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate and there can be no assurance that actual results will be the same as those indicated by the forward-looking statements included in this Form 10-K/A. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Moreover, we assume no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.

EXPLANATORY NOTES

Purpose of this Form 10-K/A (Third Restatement)

Subsequent to our issuance of the restatement of the consolidated financial statements for the year ended June 30, 2006, and in the course of preparing the condensed consolidated financial statements for the three and six months ended December 31, 2006, we identified errors in the accounting for foreign currency denominated transactions in the fiscal years ended June 30, 2002 through 2006. We incorrectly accounted for transaction gains and losses on intercompany balances denominated in currencies other than the functional currency as if such balances were of a long term investment nature and included the impact as a component of accumulated other comprehensive income (loss) rather than earnings. These transaction gains and losses should have been included in earnings as the conditions for accounting for these intercompany balances as a long term investment were not met. In addition, we identified errors in the recording of purchase accounting in other than the functional currency of the acquired entity. These purchase accounting adjustments should have been denominated in the currency of the applicable subsidiary and translated to United States Dollars and were incorrectly recorded as United States Dollar denominated net assets in the consolidated financial statements. Accordingly, translation of the balance sheet position related to the purchase accounting allocations and translation impact of the amortization of intangible assets was not properly recorded.

In addition, we identified other errors in the course of preparing the condensed consolidated financial statements for the three and six months ended December 31, 2006. These errors related to the timing of recognition of service revenue and facility leasing costs, and losses on sale of assets and elimination of accounts receivable and offsetting deferred revenues for amounts due from customers that have not met revenue recognition criteria as of June 30, 2006. The tax effect of correcting all of the above errors required further adjustments and we added disclosure relative to reseller relationships in Note 13 to the financial statements.

In order to correct the errors, we are restating our financial statements for the fiscal years ended June 30, 2004, 2005 and 2006, in order to reflect (a) foreign currency transaction gains of $3.8 million, losses of $3.1 million, and losses of $4.4 million, respectively, (b) additional amortization of technology related intangible assets of $0.7 million, $1.1 million, and $1.5 million, respectively, (c) additional facility lease costs of less than $0.1 million per fiscal year, (d) for the year ended June 30, 2006, a reduction in service revenues of $0.4 million, (e) for the year ended June 30, 2004, an increase in loss on sales and disposals of assets of $0.1 million, (f) income tax provision increases of $0.1 million and decreases of $1.5 million and $2.0 million, respectively, and, (g) the reduction of accounts receivable and offsetting reduction in deferred revenues of $6.5 million at June 30, 2006 to eliminate the gross presentation of amounts due from customers that had not met revenue recognition criteria, and the related balance sheet adjustments. We refer to this as the third restatement. These errors had a cumulative effect of decreasing net loss by $2.9 million, net of income taxes, for the periods prior to fiscal 2004, which is reflected in the July 1, 2003 beginning accumulated deficit.

This Form 10-K/A is being filed for the purpose of restating our consolidated financial statements below for the years ended June 30, 2004, 2005 and 2006. See Note 17 to the consolidated financial statements under the caption “Third Restatement” for a discussion of the third restatement. This Form 10-K/A updates the information provided in Items 6, 7, 8, 9A and 15 of the first Form 10-K/A for the effects of the third restatement. This Form 10-K/A has not been updated for events occurring after the filing of the previous Form 10-K/A, except to reflect the third restatement.

Second Restatement

The following describes the second restatement reflected in the first Form 10-K/A. We refer to this as the second restatement. This description has not changed in any material respect from the explanatory note provided in the first Form 10-K/A.

In the course of preparing our condensed consolidated financial statements for the three months ended September 30, 2006, we identified errors in the accounting for stock-based compensation and certain revenue transactions in the fiscal year ended June 30, 2006. The stock-based compensation error was due to a calculation error associated with forfeiture rates upon the adoption of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS No. 123R), as of July 1, 2005.

In order to correct these errors, we restated our financial statements for the fiscal year ended June 30, 2006 in order to reflect (a) additional stock-based compensation expense of approximately $1.4 million and (b) additional revenues of approximately $0.3 million. These errors had no effect on the fiscal year ended June 30, 2004 or 2005. See Note 17 to the consolidated financial statements under the caption “Second Restatement” for a discussion of the second restatement.

First Restatement

The following describes the first restatement reflected in the original Form 10-K. We refer to this as the first restatement. This description has not changed in any material respect from the explanatory note provided in the original Form 10-K.

In connection with the preparation of financial statements for the fiscal year ended June 30, 2006, a subcommittee of independent members of our board of directors reviewed our accounting treatment for all stock options granted since we completed our initial public offering in fiscal 1995. Based upon the subcommittee’s review, the Audit Committee and management determined that certain option grants during fiscal years 1995 through 2004 were accounted for improperly, and concluded that stock-based compensation associated with certain grants was misstated in fiscal years 1995 through 2005, and in the nine months ended March 31, 2006. The subcommittee identified errors related to the determination of the measurement dates for grants of options allocated among a pool of employees when the specific number of options to be awarded to specific employees had not yet been finalized, and other measurement date errors. As a result of the errors in determining measurement dates, we also recorded payroll withholding tax-related adjustments for certain options formerly classified as Incentive Stock Option (ISO) grants under Internal Revenue Service regulations. These options were determined to have been granted with an exercise price below the fair market value of our stock on the actual grant date, so do not qualify for ISO tax treatment. The disqualification of ISO classification and the resulting conversion to non-qualified status results in additional withholding taxes on exercise of those options. We recorded estimated payroll withholding tax charges of $0.5 million, $0.2 million, and $1.2 million for the years ended June 30, 2004, 2005, and 2006, respectively, in connection with the disqualification of such ISO tax treatment. The stock-based compensation charges, including the aforementioned withholding tax adjustments, increased net loss for the fiscal years ended June 30, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, and the nine months ended March 31, 2006 by $0.2 million, $1.5 million, $10.0 million, $7.0 million, $10.4 million, $11.5 million, $9.5 million, $7.2 million, $0.5 million, and $ 1.0 million, respectively.

In addition, as a result of the errors in determining measurement dates, certain options were determined to have been granted with an exercise price below the fair market value of our stock on the actual grant date. These discounted options vesting subsequent to December 2004 result in nonqualified deferred compensation for purposes of Section 409A of the Internal Revenue Code, and holders are subject to an excise tax on the value of the options in the year in which they vest. We have concluded that it is probable we will either implement a plan to assist the affected employees for the amount of this tax, or

iii

adjust the terms of the original option grant which would also have financial statement ramifications. As such, we recorded an estimated liability of approximately $1.0 million in the fourth quarter of fiscal 2006 in connection with this contingency.

The restatement of prior year financial statements also included the adjustments for other errors identified after the applicable period had been reported. Such errors were not previously recorded because we believed the amount of any such errors, both individually and in the aggregate, were not material to our consolidated financial statements. These errors related to the timing of revenue recognition, losses on sales and disposals of assets, interest income, and the calculation of foreign currency gains and losses.

As a result of the foregoing, we restated our financial statements as of June 30, 2005 and for the fiscal years ended June 30, 2004 and 2005 in our consolidated financial statements, in the original Form 10-K. We show the effects of the first restatement on our financial statements for the years ended June 1999, 2000, 2001, 2002 and 2003 in Item 6, “Selected Financial Data.” We show the effects of the third restatement on our finanical statements for the years ended June 30, 2002 and 2003 in Item 6, “Selected Financial Data”.

We have not amended and we do not intend to amend any of our other previously filed annual reports on Form 10-K or quarterly reports on Form 10-Q for the periods affected by the first, second or third restatements, except for the filing of this Form 10-K/A and the Form 10-Q/A for the quarter ended September 30, 2006. For this reason, the consolidated financial statements and related financial information contained in such previously filed reports should not be relied upon.

PART II

Item 6. Selected Financial Data

The following selected consolidated financial data have been derived from our consolidated financial statements. The financial information set forth below reflects the restatements of our financial statements as discussed in Note 17 of the Notes to Consolidated Financial Statements. These data should be read in conjunction with the Consolidated Financial Statements and Notes thereto, and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Year Ended June 30,

2002

2003

2004

2005

2006

As
Previously
Reported

First
Restatement
Adjustments(3)

Third
Restatement
Adjustments

As
Restated(2)

As
Previously
Reported

First
Restatement
Adjustments(3)

Third
Restatement
Adjustments

As
Restated(2)

As
Restated(1)

(In thousands, except per share data)

Consolidated Statement of Operations Data:

Revenues:

Software licenses	$	136,377		$	—		$	—		$	136,377		$	162,354		$	(270	)	$	—		$	162,084		$	158,150		$	129,621		$	152,773
Service and other	186,005			—			—			186,005			184,102			—			—			184,102			174,296			140,373			140,375
Total revenues	322,382			—			—			322,382			346,456			(270		)	—			346,186			332,446			269,994			293,148
Cost of revenues:
Cost of software licenses	11,830			—			—			11,830			13,916			—			—			13,916			15,577			16,864			16,805
Cost of service and other	118,772			4,121			—			122,893			106,868			3,381			—			110,249			101,823			82,744			72,690
Amortization of technology related intangible assets	5,042			—			3			5,045			8,219			—			106			8,325			7,976			8,220			8,559
Impairment of technology related intangible and computer software development assets	1,169			—			—			1,169			8,704			—			—			8,704			3,250			—			—
Total cost of revenues	136,813			4,121			3			140,937			137,707			3,381			106			141,194			128,626			107,828			98,054
Gross profit	185,569			(4,121		)	(3		)	181,445			208,749			(3,651		)	(106		)	204,992			203,820			162,166			195,094
Operating costs:
Selling and marketing	114,755			2,943			—			117,698			105,879			2,414			—			108,293			101,806			96,275			84,505
Research and development	74,176			1,943			—			76,119			65,143			1,595			—			66,738			60,111			47,276			44,322
General and administrative	29,673			2,487			14			32,174			29,644			2,125			27			31,796			34,380			49,315			42,529
Long-lived asset impairment charges	—			—			—			—			105,543			—			—			105,543			967			—			—
Restructuring charges and FTC legal costs	14,914			—			—			14,914			41,080			564			—			41,644			20,085			24,960			3,993
Charges for in-process research and development	14,900			—			—			14,900			—			—			—			—			—			—			—
Loss (gain) on sales and disposals of assets	(346		)	—			—			(346		)	(52		)	—			—			(52		)	(747		)	14,314			898
Total operating costs	248,072			7,373			14			255,459			347,237			6,698			27			353,962			216,602			232,140			176,247
Income (loss) from operations	(62,503		)	(11,494		)	(17		)	(74,014		)	(138,488		)	(10,349		)	(133		)	(148,970		)	(12,782		)	(69,974		)	18,847
Interest income	6,209			—			—			6,209			8,191			—			—			8,191			7,296			6,204			5,034
Interest expense	(5,591		)	—			—			(5,591		)	(7,132		)	—			—			(7,132		)	(4,940		)	(4,170		)	(985		)
Write-off of investments	(8,923		)	—			—			(8,923		)	—			—			—			—			—			—			—
Foreign currency exchange gain (loss)	(1,424		)	—			2,970			1,546			(195		)	(117		)	2,004			1,692			4,832			(3,599		)	(3,360		)
Income (loss) before provision for (benefit from) income taxes and equity in earnings from joint ventures	(72,232		)	(11,494		)	2,953			(80,773		)	(137,624		)	(10,466		)	1,871			(146,219		)	(5,594		)	(71,539		)	19,536
Provision for income taxes	(3,599		)	—			20			(3,579		)	(1,076		)	15			911			(150		)	(20,239		)	(2,031		)	(6,713		)
Equity in losses from joint ventures	(166		)	—			—			(166		)	(514		)	—			—			(514		)	(351		)	—			—
Net income (loss)	(75,997		)	(11,494		)	2,973			(84,518		)	(139,214		)	(10,451		)	2,782			(146,883,		)	(26,184		)	(73,570		)	12,823
Accretion of preferred stock discount and dividend	(6,301		)	—			—			(6,301		)	(9,184		)	—			—			(9,184		)	(6,358		)	(14,450		)	(15,383		)
Income (loss) attributable to common stockholders	$	(82,298	)	$	(11,494	)	$	2,973		$	(90,819	)	$	(148,398	)	$	(10,451	)	$	2,782		$	(156,067	)	$	(32,542	)	$	(88,020	)	$	(2,560	)
Basic and Diluted income (loss) per share attributable to common stockholders	$	(2.55	)	$	(0.35	)	$	0.09		$	(2.81	)	$	(3.86	)	$	(0.27	)	$	0.07		$	(4.06	)	$	(0.80	)	$	(2.08	)	$	(0.06	)
Weighted average shares outstanding—Basic and Diluted	32,308			—			—			32,308			38,476			—			—			38,476			40,575			42,381			44,627

	June 30,
	2002 As Restated(2)(4)			2003 As Restated(2)(4)			2004 As Restated(2)			2005 As Restated(1)				2006 As Restated(1)
	(In thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	33,571		$	51,567		$	107,633		$	68,149			$	86,272
Working capital		43,567			36,409			14,694			2,586				24,743
Total assets		538,219			377,422			354,404			246,430				274,636
Long-term obligations, less current maturities		92,135			89,911			1,952			338				149
Redeemable convertible preferred stock		—			57,537			106,761			121,210				125,475
Total stockholders’ equity (deficit)		223,321			33,985			30,474			(46,169		)		(14,555		)

(1) See Note 17 to the Notes to the Consolidated Financial Statements for a discussion of the restatements.

(2) The restated amounts for these years are unaudited. The unaudited financial results for 1997 and 1998, which are not presented here, the unaudited financial results for 1999, 2000 and 2001, which are presented below in condensed form, and the selected consolidated financial data for 2002 and 2003, presented above, have been restated to reflect adjustments related to the restatement described in “Explanatory Notes—First Restatement” above, and in Note 17 of the Notes to Consolidated Financial Statements. The restatement adjustments affecting these periods primarily related to compensation expense associated with the stock option review, and result in an increased loss applicable to common stockholders for the fiscal years ended June 30, 1997, 1998, 1999, 2000, 2001, 2002 and 2003 of $0.2 million, $1.5 million, $10.0 million, $7.0 million, $10.4 million, $11.5 million and $10.5 million, respectively. The selected consolidated financial data for 2002 and 2003, presented above, have also been restated to reflect adjustments related to the restatements described in “Explanatory Notes—Third Restatement” above, and in Note 17 of the Notes to Consolidated Financial Statements. The restatement adjustments affecting these periods primarily related to foreign currency transaction gains on intercompany balances, and result in a decreased loss applicable to common shareholders for the years ended June 30, 2002 and 2003 of $3.0 million and $2.8 million, respectively. In the consolidated financial statements for the year ended June 30, 2004 these cumulative amounts are reflected as adjustments to the beginning balances of the accumulated deficit of Stockholders’ Equity in the Statement of Stockholders’ Equity (Deficit) and Comprehensive Income (Loss).

(3) The adjustments related to the year ended June 30, 2002 relate to compensation expense associated with the stock option review. Of the adjustments related to the year ended June 30, 2003, $9.5 million related to compensation expense associated with the stock option review and $1.0 million related to other adjustments. These adjustments are further described in “Explanatory Notes—First Restatement” above, and in Note 17 of the Notes to Consolidated Financial Statements.

(4) Of the adjustments related to the year ended June 30, 2002, $3.0 million related to foreign currency transaction gains on intercompany balances and less than $0.1 million related to other adjustments. Of the adjustments related to the year ended June 30, 2003, $2.9 million related to foreign currency transaction gains on intercompany balances, net of income taxes, and was offset by $0.1 million related to other adjustments. These adjustments are further described in “Explanatory Notes—Third Restatement” above, and in Note 17 of the Notes to Consolidated Financial Statements.

Basic and diluted income (loss) per share and weighted average shares outstanding in the preceding table have been computed as described in note 2(i) to the Consolidated Financial Statements included elsewhere in this Form 10-K/A. We have never declared or paid cash dividends on our common stock.

Restatement of Financial Results for Periods Prior to Fiscal 2002

The financial information set forth below reflects the restatement of our financial statements for the years ended June 30, 1999, 2000 and 2001 for the items discussed in “Explanatory Notes—First Restatement” above and in Note 17 of the Notes to Consolidated Financial Statements. The restatement also affects periods prior to fiscal 1999, for which the impact on the net loss for these periods is approximately $1.7 million in the aggregate. All adjustments for these periods relate to compensation expense associated with the stock option review.

Year Ended June 30,

1999

2000

2001

As
Previously
Reported

Adjustments

As
Restated(1)

As
Previously
Reported

Adjustments

As
Restated(1)

As
Previously
Reported

Adjustments

As
Restated(1)

Total revenues	$	219,688		$	—		$	219,688		$	261,070		$	—		$	261,070		$	314,937		$	—		$	314,937
Gross profit	126,684			(3,680		)	123,004			165,047			(2,528		)	162,519			183,820			(3,741		)	180,079
Income (loss) from operations	(47,775		)	(9,985		)	(57,760		)	(4,218		)	(7,013		)	(11,231		)	(44,347		)	(10,389		)	(54,736		)
Net income (loss)	$	(27,626	)	$	(9,985	)	($37,611		)	$	(3,226	)	$	(7,013	)	$	(10,239	)	$	(36,809	)	$	(10,389	)	$	(47,198	)
Diluted net income (loss) per share	$	(1.01	)	$	(0.36	)	$	(1.37	)	$	(0.10	)	$	(0.23	)	$	(0.33	)	$	(1.23	)	$	(0.35	)	$	(1.58	)

(1) The Consolidated Financial Statements as of and for the years ended June 30, 1999, 2000 and 2001 were previously audited by Arthur Andersen LLP. The restated amounts for these years were derived from restated financial statements that have not been audited.

Restatement of Pro Forma Disclosures of Stock-Based Compensation for Periods Prior to Fiscal 2004

The financial information set forth below reflects the restatement of our pro forma disclosures made in accordance with Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation” for the years ended June 30, 1999, 2000, 2001, 2002 and 2003 for the items discussed in “Explanatory Notes” above and in Note 17 of the Notes to Consolidated Financial Statements.

	1999			2000			2001			2002			2003
	All amounts as restated
Income (loss) attributable to common shareholders (in thousands)
—As reported	$	(37,611	)	$	(10,239	)	$	(47,198	)	$	(90,819	)	$	(156,067	)
Less: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(30,483		)	(30,558		)	(36,043		)	(33,228		)	(24,081		)
Add: Stock-based compensation expense included in reported net income (loss).	9,985			7,013			10,389			11,494			9,515
Pro forma	$	(58,109	)	$	(33,784	)	$	(72,852	)	$	(112,553	)	$	(170,633	)
Income (loss) attributable to common shareholders per share
—Basic and diluted—
As reported	$	(1.37	)	$	(0.36	)	$	(1.58	)	$	(2.81	)	$	(4.06	)
Pro forma	(2.11		)	(1.20		)	(2.43		)	(3.48		)	(4.43		)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatements discussed in Note 17 to the Consolidated Financial Statements.

Overview

We are a leading supplier of integrated software and services to the process industries, which consist of oil and gas, petroleum, chemicals, pharmaceuticals and other industries that manufacture and produce products from a chemical process. We provide a comprehensive, integrated suite of software applications that utilize proprietary empirical models of chemical manufacturing processes to improve plant and process design, economic evaluation, production, production planning and scheduling, and operational performance, and an array of services designed to optimize the utilization of these products by our customers.

Restatements of Financial Results

First Restatement

The restatement of prior year financial statements relating to option grants also includes the adjustments for other errors identified after the applicable period had been reported. We refer to this as

the first restatement. The adjustments for such other errors were not previously recorded because we believed the amount of any such errors, both individually and in the aggregate, were not material to our consolidated financial statements. These errors related to the timing of revenue recognition, losses on sales and disposals of assets, interest income, and the calculation of foreign currency gains and losses.

Second Restatement

In the course of preparing the condensed consolidated financial statements for the three months ended September 30, 2006, we identified errors in the accounting for stock-based compensation and certain revenue transactions in the fiscal year ended June 30, 2006. The stock-based compensation error was due to a calculation error associated with forfeiture rates upon the adoption of SFAS No. 123R, as of July 1, 2005.

In order to correct these errors, we have restated our financial statements for the fiscal year ended June 30, 2006 in order to reflect (a) additional stock-based compensation expense of approximately $1.4 million and (b) additional revenues of approximately $0.3 million. We refer to this as the second restatement. These errors had no effect on the fiscal years ended June 30, 2004 or 2005.

Third Restatement

Subsequent to our issuance of the restatement of the consolidated financial statements for the year ended June 30, 2006, and in the course of preparing the condensed consolidated financial statements for the three and six months ended December 31, 2006, we identified errors in the accounting for foreign currency denominated transactions in the fiscal years ended June 30, 2002 through 2006. We incorrectly accounted for transaction gains and losses on intercompany balances denominated in currencies other than the functional currency as if such balances were of a long term investment nature and included the impact as a component of accumulated other comprehensive income (loss) rather than earnings. These transaction gains and losses should have been included in earnings as the conditions for accounting for these intercompany balances as a long term investment were not met. In addition, we identified errors in the recording of purchase accounting entries in other than the functional currency of the acquired entity. These purchase accounting adjustments should have been denominated in the currency of the applicable subsidiary and translated to United States Dollars and were incorrectly recorded as United States Dollar denominated net assets in the consolidated financial statements. Accordingly, translation of the balance sheet position related to the purchase accounting allocations and translation impact of the amortization of intangible assets was not properly recorded.

In addition, we identified other errors in the course of preparing the condensed consolidated financial statements for the three and six months ended December 31, 2006. These errors related to the timing of recognition of service revenue and facility leasing costs, and losses on sale of assets and elimination of accounts receivable and deferred revenue for amounts due from customers that have not met revenue recognition criteria as of June 30, 2006. The tax effect of correcting all of the above errors required further adjustments.

In order to correct these errors, we are restating our financial statements for the fiscal years ended June 30, 2004, 2005 and 2006, in order to reflect (a) foreign currency transaction gains of $3.8 million, losses of $3.1 million, and losses of $4.4 million, respectively, (b) additional amortization of technology related intangible assets of $0.7 million, $1.1 million, and $1.5 million, respectively, (c) additional facility lease costs of less than $0.1 million per fiscal year, (d) for the year ended June 30, 2006, a reduction in service revenues of $0.4 million, (e) for the year ended June 30, 2004, an increase in loss on sales and disposals of assets of $0.1 million (f) income tax provision increases of $0.1 million and decreases of $1.5 million and of $2.0 million, respectively, and, (g) the reduction of accounts receivable and offsetting reduction in deferred revenues of $6.5 million at June 30, 2006 to eliminate the gross presentation of

amounts due from customers that had net revenue recognition criteria, and the related balance sheet adjustments. We refer to this as the third restatement. These errors had a cumulative effect of decreasing net loss by $2.9 million, net of income taxes, for the periods prior to June 30, 2003 which is reflected in the July 1, 2003 beginning accumulated deficit.

Effects of Restatements

As a result of the foregoing, we have restated our financial statements as of June 30, 2005 and 2006 and for the fiscal years ended June 30, 2004, 2005 and 2006 in our consolidated financial statements, beginning on page F-3. We show the effects of the first, second and third restatements on our financial statements for the years ended June 1999, 2000, 2001, 2002 and 2003 in Item 6, “Selected Financial Data.” We show the effects of the restatements on each of the quarters in the years ended June 30, 2005 and 2006 in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quarterly Data.”

Significant Events—Year Ended June 30, 2006

Following mediation, on November 16, 2005, we and the plaintiffs on behalf of putative class members, defined to include all persons who purchased our common stock between October 29, 1999 and March 15, 2005, inclusive, whom we refer to collectively as the “Class”, entered into a Stipulation and Agreement of Compromise, Settlement and Release of Securities Action, which we refer to as the “Stipulation,” which was filed with the Court on the same date providing, among other things, for settlement and release of all direct and indirect claims of the Class concerning matters covered by the Stipulation. On December 12, 2005, the Court granted preliminary approval of the settlement provided for in the Stipulation. After notice to the Class and hearing, on March 6, 2006, the Court granted final approval of the settlement, and the class action lawsuit was dismissed with prejudice. We entered into the Stipulation to resolve the matter and without acknowledging any fault, liability or wrongdoing of any kind. There has been no adverse determination by the Court against us or any of the other defendants in the case.

Pursuant to the terms of the settlement, we paid $1.9 million and our insurance carrier paid $3.7 million into a settlement fund for a total of $5.6 million. Our $1.9 million payment was recorded in general and administrative expenses in the quarter ended September 30, 2005. All costs of preparing and distributing notices to members of the Class and administration of the settlement, together with all fees and expenses awarded to plaintiffs’ counsel and certain other expenses, will be paid out of the settlement fund, which will be maintained by an escrow agent under the Court’s supervision.

Summary of Restructuring Accruals

Restructuring charges originally arising in Q4 FY05

In May 2005, we initiated a plan to consolidate several corporate functions and to reduce our operating expenses. The plan to reduce operating expenses primarily resulted in headcount reductions, and also included the termination of a contract and the consolidation of facilities. These actions resulted in an aggregate restructuring charge of $3.8 million, recorded in the fourth quarter of fiscal 2005. During the year ended June 30, 2006, we recorded an additional $1.8 million related to headcount reductions, relocation costs and facility consolidations associated with the May 2005 plan that did not qualify for accrual at June 30, 2005.

As of June 30, 2006, there was $0.6 million remaining in accrued expenses relating to the remaining severance obligations and lease payments. The components of the restructuring plan are as follows (in thousands):

Fiscal 2005 Restructuring Plan	Closure/ Consolidation of Facilities				Employee Severance, Benefits, and Related Costs			Contract Termination Costs				Total
Restructuring charge		$	84		$	3,465			$	300		$	3,849
Fiscal 2005 payments		—			(1,005		)		(300		)	(1,305		)
Accrued expenses, June 30, 2005		84			2,460				—			2,544
Restructuring charge		614			1,157				—			1,771
Restructuring charge—Accretion		1			21				—			22
Fiscal 2006 payments		(600		)	(3,125		)		—			(3,725		)
Accrued expenses, June 30, 2006		$	99		$	513			—			$	612
Expected final payment date		May 2007			December 2006

Restructuring charges originally arising in Q4 FY04

In June 2004, we initiated a plan to reduce our operating expenses in order to better align our operating cost structure with the then-current economic environment and to improve our operating margins. The plan to reduce operating expenses resulted in the consolidation of facilities, headcount reductions, and the termination of operating contracts. These actions resulted in an aggregate restructuring charge of $23.5 million, recorded in the fourth quarter of fiscal 2004. During the year ended June 30, 2005, we recorded $14.4 million related to headcount reductions and facility consolidations associated with the June 2004 restructuring plan that did not qualify for accrual at June 30, 2004. In addition, we recorded $0.4 million in restructuring charges related to the accretion of the discounted restructuring accrual and a $0.8 million decrease to the accrual related to changes in estimates of severance benefits and sublease terms. During the year ended June 30, 2006, we recorded a $0.7 million increase to the accrual primarily due to a change in the estimate of future operating costs and sublease assumptions associated with the facilities.

As of June 30, 2006, there was $7.0 million remaining in accrued expenses relating to the remaining severance obligations and lease payments. The components of the restructuring plan are as follows (in thousands):

Fiscal 2004 Restructuring Plan	Closure/ Consolidation of Facilities and Contract exit costs			Employee Severance, Benefits, and Related Costs			Asset Impairments				Total
Restructuring charge	$	20,484		$	1,191			$	1,776		$	23,451
Fiscal 2004 payments	(8,435		)	(280		)		—			(8,715		)
Impairment of assets	—			—				(1,776		)	(1,776		)
Accrued expenses, June 30, 2004	12,049			911				—			12,960
Restructuring charge	9,132			4,349				968			14,449
Impairment of assets	—			—				(968		)	(968		)
Fiscal 2005 payments	(12,915		)	(4,534		)		—			(17,449		)
Restructuring charge—Accretion	446			3				—			449
Change in estimate—Revised assumptions	(287		)	(497		)		—			(784		)
Accrued expenses, June 30, 2005	8,425			232				—			8,657
Change in estimate—Revised assumptions	643			27				—			670
Restructuring charge—Accretion	432			—				—			432
Fiscal 2006 payments	(2,645		)	(67		)		—			(2,712		)
Accrued expenses, June 30, 2006	$	6,855		$	192			$	—		$	7,047
Expected final payment date	September 2012			December 2006

Restructuring charges originally arising in Q2 FY03

In October 2002, we initiated a plan to further reduce operating expenses in response to first quarter revenue results that were below expectations and to general economic uncertainties. In addition, we revised revenue expectations for the remainder of the fiscal year and beyond, primarily related to the manufacturing/supply chain product line, which had been affected the most by the economic conditions. The plan to reduce operating expenses resulted in headcount reductions, consolidation of facilities, and discontinuation of development and support for certain non-critical products. These actions resulted in an aggregate restructuring charge of $28.7 million. During fiscal 2004, we recorded a $4.9 million decrease to the accrual related to revised assumptions associated with lease exit costs, particularly the buyout of a remaining lease obligation, and severance obligations. During fiscal 2005 and fiscal 2006, we recorded $7.0 million and $1.0 million increases, respectively to the accrual primarily due to a change in the estimate of the facility vacancy term, extending to the term of the lease.

As of June 30, 2006, there was $10.0 million remaining in accrued expenses relating to the remaining lease payments. The components of the restructuring plan are as follows (in thousands):

Fiscal 2003 Restructuring Plan	Closure/ Consolidation of Facilities			Employee Severance, Benefits, and Related Costs				Impairment of Assets and Disposition Costs				Total
Restructuring charge	$	17,347			$	10,028			$	1,278		$	28,653
Additional impairment of assets	—				—				302			302
Fiscal 2003 payments	(3,548		)		(7,297		)		—			(10,845		)
Accrued expenses, June 30, 2003	13,799				2,731				1,580			18,110
Fiscal 2004 payments	(2,567		)		(2,170		)		(770		)	(5,507		)
Change in estimate—Revised assumptions	(4,507		)		(269		)		(134		)	(4,910		)
Accrued expenses, June 30, 2004	6,725				292				676			7,693
Fiscal 2005 payments	(2,266		)		(63		)		(403		)	(2,732		)
Change in estimate—Revised assumptions	7,239				(69		)		(195		)	6,975
Accrued expenses, June 30, 2005	11,698				160				78			11,936
Change in estimate—Revised assumptions	1,116				(95		)		—			1,021
Fiscal 2006 payments	(2,848		)		(65		)		(78		)	(2,991		)
Accrued expenses, June 30, 2006	$	9,966			$	—			$	—		$	9,966
Expected final payment date	September 2012

Restructuring charges originally arising in Q4 FY02

In the fourth quarter of fiscal 2002, we initiated a plan to reduce operating expenses and to restructure operations around our two primary product lines, engineering software and manufacturing/supply chain software. We reduced worldwide headcount by approximately 10%, or 200 employees, closed and consolidated facilities, and disposed of certain assets, resulting in an aggregate restructuring charge of $13.2 million. During fiscal 2004, we recorded a $1.5 million decrease to the accrual related to revised assumptions associated with lease exit costs, particularly the buyout of a remaining lease obligation, and severance obligations. During fiscal 2005, we recorded a $0.2 million increase to the accrual due to changes in estimates of sublease assumptions and severance settlements. During fiscal 2006, we recorded a $0.1 million increase to the accrual due to changes in estimates of sublease assumptions.

As of June 30, 2006, there was $0.5 million remaining in accrued expenses relating to the remaining severance obligations and lease payments. The components of the restructuring plan are as follows (in thousands):

Fiscal 2002 Restructuring Plan	Closure/ Consolidation of Facilities			Employee Severance, Benefits, and Related Costs			Total
Restructuring charge	$	4,901		$	8,285		$	13,186
Fiscal 2002 payments	—			(1,849		)	(1,849		)
Accrued expenses, June 30, 2002	4,901			6,436			11,337
Fiscal 2003 payments	(695		)	(4,748		)	(5,443		)
Accrued expenses, June 30, 2003	4,206			1,688			5,894
Fiscal 2004 payments	(1,302		)	(1,060		)	(2,362		)
Change in estimate—Revised assumptions	(1,221		)	(320		)	(1,541		)
Accrued expenses, June 30, 2004	1,683			308			1,991
Fiscal 2005 payments	(994		)	(284		)	(1,278		)
Change in estimate—Revised assumptions.	93			87			180
Accrued expenses, June 30, 2005	782			111			893
Change in estimate—Revised assumptions	75			—			75
Fiscal 2006 payments	(375		)	(66		)	(441		)
Accrued expenses, June 30, 2006	$	482		$	45		$	527
Expected final payment date	September 2012			December 2006

Critical Accounting Estimates and Judgments

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

· revenue recognition for both software licenses and fixed-fee consulting services;

· impairment of long-lived assets, goodwill and intangible assets;

· accrual of legal fees associated with outstanding litigation;

· accounting for income taxes;

· allowance for doubtful accounts;

· accounting for securitization of installments receivable;

· restructuring accruals; and

· accounting for stock-based compensation.

Revenue Recognition—Software Licenses

We recognize software license revenue in accordance with SOP No. 97-2, “Software Revenue Recognition”, as amended by SOP No. 98-4 and SOP No. 98-9, as well as the various interpretations and clarifications of those statements. When we provide professional services considered not essential to the functionality of the software, and for which Vendor Specific Objective Evidence of fair value, or VSOE, has been established, we recognize revenue for the delivered software when the basic criteria of SOP 97-2 are met. VSOE has been established, in most instances, for Software Maintenance Services, Training and professional services rates. When we provide professional services that are considered essential to the functionality of the software, we recognize revenue when the basic criteria of SOP 97-2 are met and when the services have been completed. When we provide professional services, which involve significant production, modification or customization of the licensed software, we recognize such revenue and any related software licenses in accordance with SOP 81-1, “Accounting for Performance of Construction Type and Certain Performance Type Contracts”. These statements all require that four basic criteria must be satisfied before software license revenue can be recognized:

· persuasive evidence of an arrangement between ourselves and a third party exists;

· delivery of our product has occurred;

· the sales price for the product is fixed or determinable; and

· collection of the sales price is reasonably assured.

Our management uses its judgment concerning the satisfaction of these criteria, particularly the criteria relating to the determination of whether the fee is fixed and determinable and the criteria relating to the collectibility of the receivables, particularly the installments receivable, relating to such sales. These two criteria are particularly relevant to reseller transactions where, specifically, revenue is only recognized upon delivery to the end user, since the determination of whether the fee is fixed or determinable and whether collection is probable is more difficult. Should changes and conditions cause management to determine that these criteria are not met for certain future transactions, all or substantially all of the software license revenue recognized for such transactions could be deferred.

Revenue Recognition—Fixed-Fee Consulting Services

We recognize revenue associated with fixed-fee service contracts in accordance with the proportional performance method, measured by the percentage of costs (primarily labor) incurred to date as compared to the estimated total costs (primarily labor) for each contract. When a loss is anticipated on a contract, the full amount of the anticipated loss is provided currently. Our management uses its judgment concerning the estimation of the total costs to complete the contract, considering a number of factors including the experience of the personnel that are performing the services and the overall complexity of the project. We have a significant amount of experience in the estimation of the total costs to complete a contract and have not typically recorded material losses related to these estimates. We do not expect the accuracy of our estimates to change significantly in the future. Should changes and conditions cause actual results to differ significantly from management’s estimates, revenue recognized in future periods could be adversely affected.

Impairment of Long-lived Assets, Goodwill and Intangible Assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review the carrying value of long-lived assets when circumstances dictate that they should be reevaluated, based upon the expected future operating cash flows of our business. These future cash flow estimates are based on historical results, adjusted to reflect our best estimate of future markets and operating conditions, and are continuously reviewed based on actual operating trends. Historically, actual

results have occasionally differed from our estimated future cash flow estimates. In the future, actual results may differ materially from these estimates, and accordingly cause a full impairment of our long-lived assets.

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we conduct at least an annual assessment on December 31st of the carrying value of our goodwill assets, which is based on either estimates of future income from the reporting units or estimates of the market value of the units, based on comparable recent transactions. These estimates of future income are based upon historical results, adjusted to reflect our best estimate of future markets and operating conditions, and are continuously reviewed based on actual operating trends. Historically, actual results have occasionally differed from our estimated future cash flow estimates. In the future, actual results may differ materially from these estimates. In addition, the relevancy of recent transactions used to establish market value for our reporting units is based on management’s judgment.

During the year ended June 30, 2004, we recorded $4.2 million in charges related to the impairment of certain long-lived assets and technology related intangible and computer software development assets. The timing and size of future impairment charges involves the application of management’s judgment and estimates and could result in the impairment of all or substantially all of our long-lived assets, intangible assets and goodwill, which totaled $49.0 million as of June 30, 2006.

Accrual of Legal Fees Associated with Outstanding Litigation

We accrue estimated future legal fees associated with outstanding litigation for which management has determined that it is probable that a loss contingency exists. This requires management to estimate the amount of legal fees that will be incurred in the defense of the litigation. These estimates are based heavily on our expectations of the scope, length to complete and complexity of the claims. Historically, as these factors have changed after our original estimates, we have adjusted our estimates accordingly. In the future, additional adjustments may be recorded as the scope, length or complexity of outstanding litigation changes.

Accounting for Income Taxes

As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax liabilities together with the assessment of temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. Deferred tax assets also result from unused operating loss carryforwards, research and development tax credit carryforwards and foreign tax credit carryforwards. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase or decrease this allowance in a period, the impact will be included in the tax provision in our statement of operations.

Significant management judgment is required in determining any valuation allowance recorded against these deferred tax assets and liabilities. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance which could result in a tax provision equal to the carrying value of our deferred tax assets. During the year ended June 30, 2004, we recorded a $14.6 million valuation allowance against our U.S. domiciled net deferred tax assets. Since that point, we have provided a full valuation allowance for all U.S. domiciled net deferred tax assets.

Allowance for Doubtful Accounts

We make judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables for which collection is doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. In determining these provisions, we analyze our historical collection experience and current economic trends. If the historical data we use to calculate the allowance provided for doubtful accounts do not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be required for all or substantially all of certain receivable balances.

Accounting for Securitization of Installments Receivable

We made judgments with respect to several variables associated with our June 2005 securitization transaction that had a significant impact on the valuation of our retained interest in the sold receivables, as well as the calculation of the loss on the transaction. These judgments include the discount rate used to value the retained interest in the sold receivables, and estimates of rates of default. In determining these factors, we consulted third parties with respect to fair market discount rates, and analyzed our historical collection experience to default rates and collection timing. If the historical collection data do not reflect the future ability to collect outstanding receivables, the value of our retained interest may fluctuate.

Accounting for Restructuring Accruals

We follow SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.” In accounting for these obligations, we are required to make assumptions related to the amounts of employee severance, benefits, and related costs and to the time period over which facilities will remain vacant, sublease terms, sublease rates and discount rates. We base our estimates and assumptions on the best information available at the time the obligation has arisen. These estimates are reviewed and revised as facts and circumstances dictate; changes in these estimates could have a material effect on the amount accrued on the balance sheet.

Accounting for Stock-Based Compensation

We adopted SFAS No. 123(R), “Share-Based Payment,” effective July 1, 2005. Under the fair value provisions of this statement, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. SFAS 123(R) requires significant judgment and the use of estimates, particularly for assumptions such as stock price volatility and expected option lives, as well as expected option forfeiture rates to value stock-based compensation in net income. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could fluctuate significantly.

Results of Operations

The following table sets forth the percentages of total revenues represented by certain consolidated statement of operations data for the periods indicated:

	Year Ended June 30,
	2004		2005		2006
Revenues:
Software licenses	47.6	%	48.0	%	52.1	%
Service and other	52.4		52.0		47.9
Total revenues	100.0		100.0		100.0
Cost of revenues:
Cost of software licenses	4.7		6.3		5.7
Cost of service and other	30.6		30.6		24.8
Amortization of technology related intangible assets	2.4		3.0		2.9
Impairment of technology related intangible and computer software development assets	1.0		—		—
Total cost of revenues	38.7		39.9		33.4
Gross margin	61.3		60.1		66.6
Operating costs:
Selling and marketing	30.6		35.7		28.9
Research and development	18.1		17.5		15.1
General and administrative	10.3		18.3		14.5
Long-lived asset impairment charges	0.3		—		—
Restructuring charges and FTC legal costs	6.0		9.2		1.4
Loss (gain) on sales and disposals of assets	(0.2	)	5.3		0.3
Total operating costs	65.2		86.0		60.2
Income (loss) from operations	(3.9	)	(25.9	)	6.4
Interest income	2.2		2.3		1.7
Interest expense	(1.5	)	(1.6	)	(0.3	)
Foreign currency exchange gain (loss)	1.5		(1.3	)	(1.1	)
Income (loss) before provision for income taxes and equity in earnings from joint ventures	(1.7	)%	(26.5	)%	6.7	%

Comparison of Fiscal 2006 to Fiscal 2005

Revenues. Revenues are derived from software licenses, consulting services and maintenance and training. Total revenues for fiscal 2006 increased 8.6% to $293.1 million from $270.0 million in fiscal 2005. Total revenues from customers outside the United States were $167.0 million or 56.9% of total revenues and $162.7 million or 60.3% of total revenues for fiscal 2006 and 2005, respectively. The geographical mix of revenues can vary from period to period.

Software license revenues represented 52.1% and 48.0% of total revenues for fiscal 2006 and 2005, respectively. Revenues from software licenses in fiscal 2006 increased 17.9% to $152.8 million from $129.6 million in fiscal 2005. Software license revenues are attributable to software license renewals covering existing users, the expansion of existing customer relationships through licenses covering additional users, licenses of additional software products, and, to a lesser extent, to the addition of new customers. Our new customer base is less significant since we believe that we already have the significant players in the process industries as existing customers. We believe that the increase principally reflected

strength in our energy end-market, as well as continued strength in our chemicals and engineering & construction end-markets, combined with the increased efforts and time that our management were able to dedicate to software license activities, and the increased willingness of our customers to make investments in our products, following the resolution of the Federal Trade Commission, or FTC, proceedings and the audit committee investigation in fiscal 2005.

Revenues from service and other consist of consulting services, post-contract support on software licenses, training and sales of documentation. Revenues from service and other were relatively unchanged at $140.4 million for fiscal 2006 and fiscal 2005 as a 1.8% decline in the consulting services business was offset by an increase in maintenance and training revenues. Consulting services declined due to the December 2004 sale of a portion of our consulting business to Honeywell, as part of our settlement with the FTC.

Cost of Software Licenses. Cost of software licenses consists of royalties, amortization of previously capitalized software costs, costs related to delivery of software, including disk duplication and third-party software costs, printing of manuals and packaging. Cost of software licenses for fiscal 2006 decreased to $16.8 million from $16.9 million in fiscal 2005. Cost of software licenses as a percentage of revenues from software licenses decreased to 11.0% for fiscal 2006 from 13.0% for fiscal 2005. The reduction in cost as a percentage of revenue is due to the increase in revenue over a base of costs, of which many are fixed in nature.

Cost of Service and Other. Cost of service and other consists of the cost of execution of application consulting services, technical support expenses and the cost of training services. Cost of service and other for fiscal 2006 decreased 12.2% to $72.7 million from $82.7 million for fiscal 2005. Cost of service and other, as a percentage of revenues from service and other, decreased to 51.6% for fiscal 2006 from 58.9% for fiscal 2005. The decrease in cost is primarily due to decreased payroll costs of $8.9 million and decreased rent and facility costs of $3.5 million related to reductions in headcount and facility consolidations offset in part by increases of $3.1 million in reimbursable costs and $2.1 million in stock-based compensation costs.

Amortization of Technology Related Intangible Assets. Amortization of technology related intangible assets consists of the amortization from intangible assets obtained in acquisitions. These assets are generally being amortized over a period of three to five years. Amortization expense was $8.6 million and $8.2 in fiscal 2006 and fiscal 2005, respectively. The increase is primarily the result of changes in foreign currency translation rates affecting amortization expense incurred in subsidiaries operating in currencies other than the U.S. dollar.

Selling and Marketing. Selling and marketing expenses for fiscal 2006 decreased 12.2% to $84.5 million from $96.3 million for fiscal 2005, declining as a percentage of total revenues to 28.9% from 35.7%. The reduction in cost is primarily due to a decrease in payroll costs of $4.0 million, lower rent and facility costs of $5.9 million, lower marketing and advertising costs of $2.2 million, lower travel expenses of $1.5 million and a $2.7 million decrease in advertising costs related to AspenWorld, which took place in October 2004, partially offset by a $3.1 million increase in stock-based compensation costs.

Research and Development. Research and development expenses consist of personnel and outside consultancy costs required to conduct our product development efforts. Research and development expenses for fiscal 2006 decreased 6.2% to $44.3 million from $47.3 million for fiscal 2005, and decreased as a percentage of total revenues to 15.1% from 17.5%. The decrease is primarily attributable to a $0.7 million decrease in payroll costs, a $1.7 million reduction in consultant costs, a $1.0 million reduction in depreciation, and a $0.5 million decrease in rent and facility costs, partially offset by a $1.2 million decrease in software development costs eligible for capitalization and a $1.6 million increase in stock-based compensation costs.

We capitalized software development costs that amounted to 13.9% of our total engineering costs during fiscal 2006, as compared to 15.3% in fiscal 2005. These percentages will vary from quarter to quarter and year to year, depending upon the stage of development for the various projects in a given period.

General and Administrative. General and administrative expenses consist primarily of salaries of administrative, executive, financial and legal personnel, and outside professional fees. General and administrative expenses for fiscal 2006 decreased 13.8% to $42.5 million from $49.3 million for fiscal 2005, and decreased as a percentage of total revenues to 14.5% from 18.3%. This decrease is due to a $7.1 million reduction in legal, accounting and consulting costs associated with the internal investigation by the audit committee, a $1.9 million decrease in payroll costs, and a $1.0 million reduction in rent and facility costs, partially offset by a $3.3 million increase in stock-based compensation costs and increased recruiting costs of $0.7 million.

Restructuring Charges and FTC Legal Costs. During fiscal 2006 we recorded an additional $1.8 million related to headcount reductions, relocation costs and facility consolidations associated with the May 2005 plan that did not qualify for accrual at June 30, 2005. The remaining $2.2 million relates to revisions of estimates associated with lease exit costs and accretion of the discounted restructuring accruals under previous restructuring plans. During fiscal 2005, we recorded $25.0 million in restructuring charges and FTC legal costs. Of this amount, $14.4 million related to headcount reductions and facility consolidations associated with the June 2004 restructuring plan that did not qualify for accrual at June 30, 2004, $3.8 million related to the May 2005 restructuring charge, $0.4 million related to the accretion of discounted restructuring accruals, and $6.5 million related to adjustments to prior restructuring accruals, all offset by $0.2 million in FTC legal cost, related to the FTC challenge of our acquisition of Hyprotech.

Loss (Gain) on Sales of Assets. Losses and gains on sales and disposals of assets primarily result from our programs to sell installment receivable contracts and from disposals of fixed assets. Loss on sales of assets was a $0.9 million loss in fiscal 2006 as compared to a $14.3 million loss in fiscal 2005. This decline is due to the absence of the $14.6 million loss incurred on the securitization of installments receivable in fiscal 2005.

Interest Income. Interest income is generated from investment of excess cash and from the license of software pursuant to installment contracts. Under these installment contracts, we offer a customer the option to make annual payments for its term licenses instead of a single license fee payment at the beginning of the license term. Historically, a substantial majority of the asset optimization customers have elected to license these products through installment contracts. Included in the annual payments is an implicit interest rate established by us at the time of the license. As we sell more perpetual licenses for value chain solutions, these sales are being paid for in forms that are generally not installment contracts. If the mix of sales moves away from installment contracts, interest income in future periods will be reduced.

We sell a portion of the installment contracts to unrelated financial institutions. The interest earned by us on the installment contract portfolio in any one year is the result of the implicit interest rate established by us on installment contracts and the size of the contract portfolio. Interest income was $5.0 million for fiscal 2006 as compared to $6.2 million in fiscal 2005. This decrease primarily is due to the securitization of approximately $71.2 million of our installments receivable in June 2005, which significantly lowered the average carrying balance of our installments receivable.

Interest Expense. Interest expense was incurred under our convertible debentures and through the course of other financing transactions. Interest expense in fiscal 2006 decreased to $1.0 million from $4.2 million in fiscal 2005. This decrease in interest expense resulted from the retirement of our convertible debentures in June 2005.

Foreign currency exchange gain (loss). Foreign currency exchange gains and losses are primarily incurred as a result of the revaluation of intercompany accounts denominated in foreign currencies and reflect movement in period end exchange rates. The revaluation adjustments are primarily related to unrealized gains and losses on intercompany balances that have not settled in cash. In fiscal 2006 we recorded a foreign currency exchange loss of $3.4 million, compared to a $3.6 million loss in fiscal 2005.

Provision for/Benefit from Income Taxes. We recorded a provision for income taxes of $6.7 million for fiscal 2006, primarily related to foreign taxes. We recorded a provision for income taxes of $2.0 million for fiscal 2005 and provided a full valuation allowance against the net operating losses generated during fiscal 2005.

Under SFAS No. 109, a deferred tax asset related to the future benefit of a tax loss carryforward should be recorded unless we make a determination that it is “more likely than not” that such deferred tax asset would not be realized. Accordingly, a valuation allowance would be provided against the deferred tax asset to the extent that we cannot demonstrate that it is “more likely than not” that the deferred tax asset will be realized. In determining the amount of valuation allowance required, we consider numerous factors, including historical profitability, estimated future taxable income, the volatility of the historical earnings, and the volatility of earnings of the industry in which we operate. We periodically review our deferred tax asset to determine if such asset is realizable.

Comparison of Fiscal 2005 to Fiscal 2004

Revenues. Total revenues for fiscal 2005 decreased 18.8% to $270.0 million from $332.4 million in fiscal 2004. Total revenues from customers outside the United States were $162.7 million or 60.3% of total revenues and $190.8 million or 57.4% of total revenues for fiscal 2005 and 2004, respectively. The geographical mix of revenues can vary from period to period.

Software license revenues represented 48.0% and 47.6% of total revenues for fiscal 2005 and 2004, respectively. Revenues from software licenses in fiscal 2005 decreased 18.3% to $129.6 million from $158.2 million in fiscal 2004. Software license revenues are attributable to software license renewals covering existing users, the expansion of existing customer relationships through licenses covering additional users, licenses of additional software products, and, to a lesser extent, to the addition of new customers. We believe that the decrease was primarily due to distractions caused by the ongoing uncertainty of the FTC proceedings, our audit committee investigation, changes in sales management and delays in purchasing from customers.

Revenues from service and other for fiscal 2005 decreased 19.5% to $140.4 million from $174.3 million for fiscal 2004. These decreases were attributable primarily to the consulting services business. Consulting services decreased due to the general low-level of licenses of our supply chain products during the two most recent fiscal years. Our consulting services are more heavily linked to the implementation of our supply chain products than they are to our other products. We believe that the decrease was also due to distractions caused by the ongoing uncertainty of the FTC proceedings and our audit committee investigation.

Cost of Software Licenses. Cost of software licenses for fiscal 2005 increased 8.3% to $16.9 million from $15.6 million in fiscal 2004. Cost of software licenses as a percentage of revenues from software licenses increased to 13.0% for fiscal 2005 from 9.8% for fiscal 2004. The cost increase is primarily due to an increase in amortization of computer software development costs of $0.9 million. The increase in the amortization of computer software development costs is related to several significant product releases, including aspenONE in December 2004.

Cost of Service and Other. Cost of service and other for fiscal 2005 decreased 18.7% to $82.7 million from $101.8 million for fiscal 2004. Cost of service and other, as a percentage of revenues from service and

other, increased to 58.9% for fiscal 2005 from 58.4% for fiscal 2004. The decrease in cost is primarily due to decreased payroll costs of $10.7 million related to reductions in headcount, as well as a decrease in reimbursable expenses of $5.5 million and a $2.3 million reduction in stock-based compensation.

Amortization of Technology Related Intangible Assets. Amortization expense for fiscal 2005 increased 3.1% to $8.2 million from $8.0 million for fiscal 2004. The increase is primarily the result of changes in foreign currency translation rates affecting amortization expense incurred in subsidiaries operating in currencies other than the U.S. dollar.

Selling and Marketing. Selling and marketing expenses for fiscal 2005 decreased 5.4% to $96.3 million from $101.8 million for fiscal 2004, while increasing as a percentage of total revenues to 35.7% from 30.6%. The decrease in cost is primarily due to a decrease in payroll costs of $6.0 million attributable to the headcount reductions effected in the June 2004 restructuring plan and a $1.7 million decrease in stock-based compensation expense, offset by an increase in advertising costs of $2.6 million related to AspenWorld, which took place in October 2004.

Research and Development. Research and development expenses for fiscal 2005 decreased 21.4% to $47.3 million from $60.1 million for fiscal 2004, and decreased as a percentage of total revenues to 17.5% from 18.1%. The decrease is primarily attributable to a $5.6 million decrease in payroll costs and a $2.7 million decrease in facilities related costs associated with the June 2004 restructuring plan, and a $2.1 million decrease in consulting costs, partially offset by a decline in stock-based compensation expense of $1.1 million.

We capitalized software development costs that amounted to 15.3% of our total engineering costs during fiscal 2005, as compared to 11.2% in fiscal 2004. These percentages will vary from quarter to quarter, depending upon the stage of development for the various projects in a given period. This increase is primarily due to the significant amount of effort associated with the development and release of AspenONE in December 2004 and AspenONE 2004.1 in May 2005.

General and Administrative. General and administrative expenses for fiscal 2005 increased 43.4% to $49.3 million from $34.4 million for fiscal 2004, and increased as a percentage of total revenues to 18.3% from 10.3%. This increase is due to a $7.1 million increase in legal, accounting and consulting costs associated with the internal investigation by the audit committee, $3.8 million in litigation defense and settlement costs related to KBC, a $1.9 million increase in audit and consulting fees associated with the Sarbanes-Oxley Act, specifically our Section 404 efforts, and $3.4 million in contract and employment termination costs, offset in part by a $1.5 million decline in stock-based compensation expense.

Long-Lived Asset Impairment Charges. In fiscal 2004, this amount consisted of $1.0 million in impairment charges based on our decision to discontinue certain internal capital projects that had previously been put on hold. In addition, certain fixed assets that supported research and development efforts were considered impaired as a result of the product consolidation decisions made in the April 2004 product review.

Restructuring Charges and FTC Legal Costs. During fiscal 2005, we recorded $25.0 million in restructuring charges and FTC legal costs. Of this amount, $14.4 million related to headcount reductions and facility consolidations associated with the June 2004 restructuring plan that did not qualify for accrual at June 30, 2004, $3.8 million related to the May 2005 restructuring charge, $0.4 million related to the accretion of discounted restructuring accruals, and $6.5 million related to adjustments to prior restructuring accruals, all offset by $0.2 million in FTC legal costs, related to the FTC challenge of our acquisition of Hyprotech.

aggregate restructuring charge of $3.8 million, recorded in the fourth quarter of fiscal 2005. The components of the restructuring plan are as follows:

Closure/consolidation of facilities: Approximately $0.1 million of the restructuring charge relates to the termination of a facility lease. The facility lease had a remaining term of two years. The amount accrued is an estimate of the remaining obligation under the lease, reduced by expected income from the sublease of the underlying properties.

Employee severance, benefits and related costs: Approximately $3.4 million of the restructuring charge relates to the reduction in headcount. Approximately 130 employees, or 10% of the workforce, were eliminated under the restructuring plan. The employees were primarily located in North America and Europe. All business units were affected, including services, sales and marketing, research and development, and general and administrative.

Contract termination costs: Approximately $0.3 million of the restructuring charge relates to charges associated with the termination of a contract for a future user conference. The contract was terminated in June 2005.

Loss (Gain) on Sales of Assets. Loss (gain) on sales of assets was a $14.3 million loss in fiscal 2005 as compared to $0.7 million gain in fiscal 2004. This decrease is primarily due to the loss of $14.6 million incurred on the June 2005 securitization of installments receivable.

Interest Income. Interest income was $6.2 million for fiscal 2005 as compared to $7.3 million in fiscal 2004. This decrease primarily is due to the increased sale of receivables and lower license revenues, resulting in the decrease of installments receivable balance.

Interest Expense. Interest expense in fiscal 2005 decreased to $4.2 million from $4.9 million in fiscal 2004. This decrease in interest expense results from the elimination of interest bearing debt, such as the retirement of a portion of the convertible debentures in January 2004, March 2004 and May 2004, and the retirement of the remaining portion in June 2005.

Foreign currency exchange gain (loss). Foreign currency exchange gains and losses are primarily incurred as a result of the revaluation of intercompany accounts denominated in foreign currencies and reflect movement in period end exchange rates. The revaluation adjustments are primarily related to unrealized gains and losses on related intercompany balances that have not settled in cash.

In fiscal 2005 we recorded a foreign currency exchange loss of $3.6 million, compared to a $4.8 million gain in fiscal 2004. This increase was due to favorable exchange rate fluctuations.

Provision for/Benefit from Income Taxes. We recorded a provision for income taxes of $2.0 million for fiscal 2005, primarily related to foreign taxes. We recorded a provision for income taxes of $20.2 million for fiscal 2004. The provision for fiscal 2004 includes a $14.6 million valuation allowance against U.S. domiciled net deferred tax assets and a $6.8 million provision primarily related to foreign taxes. Additionally, as part of a change in the Japan-US tax treaty, the Japanese withholding tax law was repealed effective July 1, 2004 and provided approximately $1.5 million of income tax relief to the Company as of the enactment date of the tax law change which occurred in the quarter ended March 31, 2004. We provided a full valuation allowance against the net operating losses generated during fiscal 2004 and 2005.

deferred tax asset to determine if such asset is realizable. In fiscal 2004, we concluded, in accordance with SFAS No. 109, that we should record a valuation allowance on a significant portion of our deferred tax asset under the “more likely than not” test and therefore increased the amount of the valuation allowance. See Note 10 to Consolidated Financial Statements.

Equity in earnings from joint ventures. Equity in earnings from joint ventures was a $0.4 million loss in fiscal 2004. These losses relate to net losses incurred by certain joint ventures in which we have an equity interest. These investments were liquidated during fiscal 2005, and there were no material gains or losses realized.

Quarterly Results

Our operating results and cash flow have fluctuated in the past and may fluctuate significantly in the future as a result of a variety of factors, including purchasing patterns, timing of introductions of new solutions and enhancements by us and our competitors, and fluctuating economic conditions. Because license fees for our software products are substantial and the implementation of our solutions often involve the services of engineers over an extended period of time, the sales process for our solutions is lengthy and can exceed one year. Accordingly, software revenues are difficult to predict, and the delay of any order could cause our quarterly revenues to fall substantially below expectations. Moreover, to the extent that we succeed in shifting customer purchases away from point solutions and toward integrated solutions, the likelihood of delays in ordering may increase and the effect of any delay may become more pronounced.

We ship software products within a short period after receipt of an order and usually do not have a material backlog of unfilled orders of software products. Consequently, revenues from software licenses, including license renewals, in any quarter are substantially dependent on orders booked and shipped in that quarter. Historically, a majority of each quarter’s revenues from software licenses has been derived from license agreements that have been consummated in the final weeks of the quarter. Therefore, even a short delay in the consummation of an agreement may cause revenues to fall below expectations for that quarter. Since our expense levels are based in part on anticipated revenues, we may be unable to adjust spending in a timely manner to compensate for any revenue shortfall and any revenue shortfall would likely have a disproportionately adverse effect on net income. We expect that these factors will continue to affect our operating results for the foreseeable future.

The following tables presents previously reported and restated quarterly consolidated statement of operations data for fiscal 2005 and 2006. These data are unaudited but, in our opinion, reflect all adjustments necessary for a fair presentation of these data in accordance with US GAAP. See
“—Restatements of Financial Results” above and Note 17 to the Notes to the Consolidated Financial Statements for a discussion of the first, second, and third restatements.

	Quarter ended September 30, 2004											Quarter ended December 31, 2004

			First Restatement					Third Restatement						First Restatement					Third Restatement
	As Previously Reported		Stock-based Compensation and Related Tax Adjustments		Other Adjustments			Adjustments		As Restated (1)		As Previously Reported		Stock-based Compensation and Related Tax Adjustments		Other Adjustments			Adjustments		As Restated (1)
	(In thousands, except per share data)
Revenues:
Software licenses		$ 25,273		$ —		$ (220	)		$ —		$ 25,053		$ 36,732		$ —		$ (116	)		$ —		$ 36,616
Service and other		37,997		—		(70	)		—		37,927		34,893		—		(70	)		—		34,823
Total revenues		63,270		—		(290	)		—		62,980		71,625		—		(186	)		—		71,439
Cost of revenues:
Cost of software licenses		3,941		—		—			—		3,941		4,731		—		—			—		4,731
Cost of service and other		22,108		56		—			—		22,164		21,913		50		—