OPEN TEXT CORP - Annual Report: 2004 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

For the fiscal year ended June 30, 2004.

OR

For the transition period from                      to                     

Commission file number 0-27544

OPEN TEXT CORPORATION

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: (519) 888-7111

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

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

Common Shares, without par value

(Title of Class)

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 75 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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 an accelerated filer (as defined in Exchange Act Rule12b-2).    Yes  x    No  ¨

Aggregate market value of the Registrant’s Common Shares held by non-affiliates as of June 30, 2004 was approximately $1,113 million. The number of the Registrant’s Common Shares outstanding as of September 1, 2004 was 51,235,368.

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PART I

Forward-Looking Statements

Certain statements in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance or the outcome of litigation (often, but not always, using words or phrases such as “believes”, “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, or “intends” or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken or achieved) are not statements of historical fact, but are “forward-looking statements”. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or developments in the Company’s business or in its industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward- looking statements. Any forward-looking statements should be considered in light of the risks and uncertainties discussed in Item 7 under “Risk Factors That May Affect Future Results” beginning on page 50 of this Annual Report on Form 10-K. Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date they are made. Forward-looking statements are based on management’s current plans, estimates, opinions and projections, and the Company assumes no obligation to update forward-looking statements if assumptions related to these plans, estimates, opinions and projections should change.

Item 1. Business

The Company

Open Text Corporation was incorporated on June 26, 1991 pursuant to articles of incorporation under the Business Corporations Act (Ontario). The Company amended its articles on August 1, 1995 and November 16, 1995, respectively, and filed articles of amalgamation on June 30, 1992, December 29, 1995, July 1, 1997, July 1, 1998, July 1, 2000, July 1, 2002, and July 1, 2003. References herein to the “Company” or “Open Text” refer to Open Text Corporation and its subsidiaries. The Company’s principal executive offices are located at 185 Columbia Street West, Waterloo, Ontario, Canada N2L 5Z5, and its telephone number at that location is (519) 888-7111. The Company’s World Wide Web homepage address is www.opentext.com. Throughout this Form 10-K, the term “fiscal 2004” means the Company’s fiscal year beginning on July 1, 2003 and ending on June 30, 2004 and the term “fiscal 2003” means the Company’s fiscal year beginning July 1, 2002 and ending on June 30, 2003. Unless otherwise indicated, all amounts included in this Form 10-K are expressed in U.S. dollars.

Access to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished to the Securities and Exchange Commission may be obtained through the Investor Relations section of our website at www.opentext.com as soon as reasonably practical after we electronically file or furnish these reports. We do not charge for access to and viewing of these reports. Information on our Investor Relations page and our website is not part of this Annual Report on Form 10-K or any other securities filings of the Company unless specifically incorporated herein by reference. In addition, our filings with the Securities and Exchange Commission may be accessed through the Securities and Exchange Commission’s Electronic Data Gathering, Analysis and Retrieval system at www.sec.gov. All statements made in any of our securities filings, including all forward-looking statements or information, are made as of date of that document in which the statement is included, and we do not assume or undertake any obligation to update any of those statements or documents unless we are required to do so by law.

BUSINESS OF THE COMPANY

Open Text^™ is an independent software vendor providing enterprise content management (“ECM”) solutions that bring together people, processes, and information. In today’s highly regulated and interactive

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business world, organizations need to operate in structured ways while simultaneously giving people the freedom to innovate and grow. By enabling organizations to manage content from initial creation to final archive, we offer the most comprehensive, end-to-end content lifecycle management solutions. Our software seamlessly combines collaboration with content management, transforming information into knowledge that provides the foundation for innovation, compliance and accelerated growth.

The Company’s software enables organizations to effectively address a diverse range of business needs including the ability to: comply with increasing and changing regulatory requirements, classify and organize information, manage the retention and archiving of massive information volumes, unify globally distributed teams, capture market opportunities, accelerate product cycles, improve customer and partner relationships, and alter business strategies.

Open Text develops, markets, licenses and supports its software for use by global organizations on intranets, extranets and the Internet. The Company’s principal product line is Livelink^®, which seamlessly combines collaboration and content management, transforming information into knowledge and providing the foundation for innovation, compliance, and accelerated growth. The software enables users to capture, and find and retrieve electronically stored information, work together in both creative and collaborative processes as well as more structured processes, perform group calendaring and scheduling, and distribute or make available to users across networks or the Internet the resulting work product and other information. This collaborative environment enables ad hoc teams to form quickly across functional and organizational boundaries, which enables information to be accessed by employees using any standard Web browser. Fully Web-based with open architecture, Livelink provides comprehensive configuration, rapid deployment, accelerated adoption, and low cost of ownership. Open Text provides integrated solutions that enable people to use information and technology more effectively at departmental levels and across enterprises. The Company offers its solutions both as end-user stand-alone products and as fully integrated modules, which together provide a complete solution that is easily incorporated into existing enterprise business systems. Although most of the Company’s technology is proprietary in nature, the Company does, on occasion, include certain third party software in its products.

In the eight years since the introduction of the Livelink product line, Livelink has achieved significant market acceptance. Organizations with tens of thousands of users are deploying Livelink for business-critical applications. The Company believes two key factors distinguish Livelink from competing alternatives. First, unlike collaborative software developed for client/server environments, Livelink was designed from the outset to run on the Internet. As a Web-based technology, Livelink scales easily and rapidly to thousands of users, gigabytes of data, and millions of documents. Second, unlike solutions offering tools for users to build custom collaborative applications, Livelink is a ready-to-install configurable application. It has open architecture, is easy to customize and requires no special development for project teams to quickly become productive. As a result, time required to deploy the software is shorter than competing alternatives, allowing companies to enhance their ability to realize their return on investment quickly.

With its acquisition of IXOS Software AG (“IXOS”) during fiscal 2004, the Company has added a second primary product line focused on enabling document archiving and retrieval from enterprise applications such as Enterprise Resource Planning (“ERP”) and Customer Relationship Management (“CRM”) systems. IXOS developed this business in cooperation with SAP AG initially around SAP’s product, SAP R/3 and later broadened the offering to support other enterprise applications. The deployment typically involves management of massive business documents associated with primary accounts payable and accounts receivable processes. More recently, IXOS implemented a strategy to expand its product portfolio to include broader ECM capabilities. Those non-SAP capabilities primarily include Web Content Management, e-mail archiving, and business process management. These capabilities will continue to be supported for existing customers and the Company has begun integrating some of these capabilities into the Livelink product line. The ERP document enabling function retains the IXOS branding whose base technology provides the foundation for enterprise content repository services that could be commonly exploited by Livelink, SAP R/3, email applications, and other enterprise applications. The combined companies offer a comprehensive set of integrated capabilities that allow an organization to work with content in context.

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As an extension to its solutions-based offerings, the Company also provides professional services, training, documentation and technical support services to accelerate its customers’ implementation of, and satisfaction with, its products. Open Text believes its ability to offer a high level of customer support and service is critical to its success. The Company’s major products are typically licensed with an annual maintenance contract which entitles the customer to remote support, product updates and maintenance releases. For additional fees, Open Text also offers training and consulting services and provides integration services for the purpose of configuring and customizing the Company’s software to specific customer needs.

The Company maintains its Global Alliance Program that provides the commercial and technical training and support for systems integrators (“SIs”), management consultants, solution providers, technology providers, storage vendors, independent software vendors (“ISVs”), value-added resellers (“VARs”), and application service providers (“ASPs”) to work with the Company toward mutually beneficial business objectives. Business, technical, and marketing relationships have been formed with industry leaders such as Adobe, Accenture, Bearing Point, Cap Gemini Ernst & Young, CSC, Deloitte, EDS, Hewlett Packard, Hitachi Data Systems, Microsoft, Network Appliance, Oracle, SAP, Siebel Systems, Siemens Business Services, StorageTek, and Sun.

Open Text has consistently sought to broaden its technology base and product offerings and to strengthen its sales and customer support capabilities through acquisitions. Open Text assesses each potential acquisition target with specific emphasis on three main factors. First, the Company seeks to acquire businesses with technologies that can be integrated with its existing technologies to create new products and enhance the existing product family. Second, the Company seeks to acquire businesses with experienced personnel that may have specific domain expertise. Third, the Company seeks to acquire businesses that offer a new distribution channel or customer base for Open Text’s products.

Products and Technology

The Livelink brand is Open Text’s premier brand, representing its commitment to providing innovative, reliable, and scalable ECM software. Livelink Enterprise Server (formerly known as Livelink) continues to be the Company’s flagship collaboration and content management product, but the Company’s product portfolio has significantly expanded, reflecting the emergence of the Enterprise Content Management market.

The Livelink Enterprise Server runs on a variety of computing platforms, including Microsoft^™ Windows NT^™, Microsoft Windows 2000^™, Sun SPARC/Solaris^™, and Hewlett-Packard HP-UX^™ operating systems. Livelink provides a comprehensive combination of collaborative knowledge management services, custom workspaces, and a modular architecture with value-added application modules. The latest release of Livelink Enterprise Server includes English, French, German, and Japanese language versions. Livelink is certified with a variety of relational database management systems: Microsoft SQL Server^™, Oracle 9i^™, and Sybase Adaptive Server^™, HTTP servers (iPlanet Web Server Enterprise Edition^™ and Microsoft Internet Information Server^™), and Web browsers (Netscape Navigator^™ and Microsoft Internet Explorer^™).

Livelink Enterprise Server 9.2, the latest release, significantly improves the ease of use of the system by providing an improved user interface, more personalization of appearance options, new one-click links, one-click “breadcrumbs” that clarify the navigation path, additional wizards that easily guide users through the project creation process, and improved project status and reporting capabilities. Additionally, many other components of the product, such as Livelink MeetingZone^™, received incremental improvements and corrections to identified software deficiencies.

In June 2004, Open Text announced the release of Livelink Portal^™, an optional module for Livelink Enterprise Server that provides a powerful enterprise integration portal framework. Livelink Portal enables the aggregation, integration, and personalization of enterprise content, including pre-defined connectors for Livelink content such as threaded discussions, document management, news channels, and search. A connector development kit provides companies with the flexibility to easily develop and customize connectors for all of the applications unique to their businesses—as well as their unique views into those applications.

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In March 2004, Open Text introduced Livelink MeetingZone^™ 2.1. This significant new release of our Web conferencing and online meetings product provided the capability to record meetings in real-time, including all standard Livelink MeetingZone interface activities; users can record slide show presentations, application sharing, whiteboard collaboration and more, as well as the accompanying conference call audio communication. After recording a meeting, users can view synchronized teleconference audio with presented visuals of recorded meetings using the Livelink Eloquent Media Server player.

In March 2004, Open Text announced the release of Livelink Instant Messenger^™ 1.0, an optional module for Livelink Enterprise Server that provides secure enterprise instant messaging capabilities. In addition to facilitating real-time spontaneous collaboration between enterprise users, Livelink Instant Messenger introduced the concept of user presence to Livelink. Anywhere that a user name appears in the Livelink Enterprise Server interface—such as the project participants list, discussion topics, workflow assignments, and audit trails—that user’s online presence is also indicated, and other users can initiate an instant messaging session with a single click from that user’s name. Similarly, “presence objects” enable users to create an actual Livelink object that represents their online status, and place it in any Livelink container, enabling other users to initiate messaging sessions with them from that presence object.

In March 2004, Open Text introduced Livelink Eloquent Media Server^™, a re-branded version of its rich media knowledge delivery and sales readiness solution. This release provided tighter integration with Livelink Enterprise Server, including an updated user interface. Enhanced quiz capabilities and improved system reporting provide a more robust closed-loop training and certification application. Based on rich-media technology acquired by Open Text from Eloquent, Livelink Eloquent Media Server significantly accelerates training for sales forces, provides a training and certification solution for compliance applications, and simultaneously helps large organizations save money.

In February 2004, Open Text announced a modular upgrade for Livelink Enterprise Server’s workflow and forms core components. The focus of this release was on improved usability, performance, and archival as well as improving the automation of common publishing tasks related to revisions, renditions, and generations of documents.

In January 2004, Open Text announced the release of Livelink Enterprise Server 9.2 SP1. This service pack provided enhanced security and controls for administrators, an optimized user authentication cookie, as well as support for Microsoft Office 2003, and other emerging formats.

IT Solutions Based on Livelink Enterprise Server

Open Text offers a range of products based on the Livelink Enterprise Server software platform. Each of the Livelink Enterprise Server products have the server and content repository at its foundation and adds to it a set of specialized capabilities designed to address a particular IT business problem.

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Business Solutions Based on Livelink Enterprise Server

Open Text offers a selection of business applications built on the Livelink Enterprise Server platform that enable organizations to address particular business needs. The following Livelink Enterprise Server-based applications are available:

Industry Specific Solutions Based on Livelink Enterprise Server

Open Text offers a selection of industry-specific applications built on the Livelink Enterprise Server platform that enables organizations to address industry-specific business needs. The following Livelink-based applications are available:

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Livelink Development Tools

Livelink Enterprise Server is highly scalable, extensible and customizable through the use of the Livelink SDK^™ (Software Development Kit). The Livelink SDK consists of the Livelink Application Program Interface^™ (“LAPI”) and the Livelink Builder^™, an object-oriented application development environment designed specifically for building collaborative intranet solutions. Livelink Builder offers customers the ability to customize and extend the features of Livelink to meet their particular needs. LAPI includes Web Services for supporting application development in Microsoft .NET and J2EE environments, as well as native programming interfaces.

Scalability and extensibility have come as much to the forefront as factors in corporate spending decisions as return on investment. Organizations need to be able to develop business cases that not only show short-term profitability, but also long-term interoperability. They need to support direct interactions between all of their applications, to build an environment that makes the most out of corporate content—regardless of where it resides, in what format and on what platform. The integration of structured and unstructured data into a consolidated Enterprise Content Management (ECM) repository requires a framework of communication that supports XML and Internet-based protocols, to extract the maximum value from information and make the most of business opportunities.

Open Text recognizes the need for interoperability; extending the capabilities introduced by the Livelink SDK to leverage the scalability of XML, Livelink Web Services enables rapid development and deployment of customizations to Livelink Enterprise Server, and to integrations between Livelink Enterprise Server and other enterprise applications.

Livelink Optional and Embedded Modules

Open Text offers a wide selection of modules that allow organizations to easily extend and enhance the functionality of Livelink Enterprise Server to suit their evolving business requirements. The following modules are available separately or bundled as part of a solution offering described above:

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The ability to maintain work-in-progress drawings within the Livelink Enterprise Server repository provides a secure and collaborative work environment for engineers. With Livelink CADManager for MicroStation, engineers can leverage other Livelink Enterprise Server tools, such as Livelink Enterprise Server’s workflow engine to route documents for review and approval and the Livelink MeetingZone online meeting tool to conduct real-time collaborative reviews of drawings and other documents.

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Information Retrieval is Pervasive

Open Text’s heritage is rooted in information retrieval and that heritage is pervasive throughout the Livelink Enterprise Server product. Livelink Enterprise Server’s Information Retrieval functionality helps users find and access information from anywhere throughout the enterprise—including the corporate information repository, corporate Web sites and across the Internet. Authorized users have on-demand access to information even if their knowledge base spans distributed and diverse network environments. More than full-text search and retrieval, Livelink Enterprise Server provides an integrated set of information retrieval tools, including intelligent agents and sophisticated reports that give users unprecedented insight into the knowledge, actions and activities being developed throughout an organization.

Livelink Enterprise Server’s Information Retrieval provides high performance and linear scaling, even across millions of documents and terabytes of information. Livelink Enterprise Server allows an organization to build searchable databases of virtually any size by indexing documents, files and other objects in any standard format, including XML, HTML, PDF and other popular file formats. It recognizes that documents are often

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characterized by complex structures. For example, documents often contain titles, headings, sections, subsections and paragraphs. Open Text’s search engine can search any number of different, user-defined document structures. It supports SGML and XML, the key international standards for structured documents.

Sophisticated search features include the ability to examine a subset of the index (“slices”), contextual/proximity searching, an advanced query builder interface, thesaurus support, word stemming, “sounds like” searching, and a powerful end-user query language. Livelink Enterprise Server’s Data Flows facilitate moving information between Livelink Enterprise Server and other data sources (e.g., a user could create a data flow which crawls a number of competitor’s Web sites, converts all the information to PDF format, and indexes it as different slices for searching).

IXOS Products and Solutions

With the acquisition and integration of IXOS, Open Text’s product suite continues to expand. The IXOS 6 Suite of products break down the barriers to business content by integrating seamlessly into and across ERP, CRM, portals, and groupware applications by leading vendors like SAP, Siebel, Microsoft, and IBM Lotus. Finding the right information and documents quickly reduces processing time in fundamental business processes supported by these enterprise systems. Additionally, proper management of the supporting business documents in these enterprise processes is a growing subject of additional regulatory scrutiny.

IXOS Suite Products

The IXOS 6 Suite consists of the following product and solution components:

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IXOS Suite for SAP and IXOS Suite for Siebel

There are a number of application-specific solutions based on IXOS 6 Product Suite that extend an SAP and Siebel environment with robust data and document management and archiving capabilities. The solutions in this suite are:

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IXOS Suite for Groupware

The IXOS Suite for Groupware applies the IXOS ECR to the challenge of managing an organization’s email repositories from cost effectiveness and compliance perspectives. Support is provided for both Microsoft Exchange and Lotus Notes.

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Open Text and IXOS—First Fruits of Integration and Synergy

Once the business combination agreement between Open Text and IXOS was publicly announced, the companies focused on meeting with customers and seeking validation of the contemplated joint development plans. Those plans were unveiled initially at the LinkUp Europe events held in London, Paris, and Munich in April 2004. In addition to the resale of existing products into the respective customer bases, the companies committed to release offerings that combine the best of Open Text and IXOS technologies to deliver new Web Content Management, flexible storage options for Livelink, and E-mail Management solutions.

Livelink Web Content Management Server became generally available in April 2004 and was the first product released by the combined Open Text and IXOS companies. This integrated product offering includes technology integration from Open Text, Gauss, and IXOS that enables organizations to create and manage content once and reuse it as many times as necessary in a variety of publication types, including intranet, extranet, and Internet sites.

Flexible storage options for Livelink provide customers a choice in storage hardware. Customers can take advantage of the most appropriate storage for the job, comfortable in the fact that, as new devices become available, they won’t be locked into obsolete technology. By adding the IXOS 6 ECR as an optional Livelink Storage Provider, Livelink can leverage access to all of the hardware devices supported by IXOS. The IXOS 6 storage gateway has connectors for all the leading storage vendors, exposes device-specific capabilities such as unalterable storage, and provides migration capabilities if/when new devices are brought online.

Open Text’s e-mail management solution combines Livelink’s proven ECM platform (including search, classifications, records management, and collaboration) with IXOS’ proven archiving platform. Using the IXOS technology, the system can track any or all incoming and outgoing e-mail while continuing to make e-mail “always available”. The combined solution provides the compliant environment required in business today, addressing SEC 17a-3, NASD Rules 3010/3110, NYSE Rule 440, Sarbanes-Oxley, and country-specific regulations worldwide. All of this working together can reduce costs associated with legal discovery motions and overburdened e-mail servers and bring e-mail into the collaborative work environment.

Open Text Provides Additional Specialized ECM Products and Solutions

Open Text provides a series of specialized collaboration, content, and knowledge-based products that are sold independent of, or integrated with, the Livelink Enterprise Server platform. Customers of these products have the confidence of moving forward with these more specialized products knowing that a single reliable vendor can deliver comparable functionality integrated into the broader Livelink Enterprise Server platform as their requirements evolve to do so:

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Web browser and JDBC interfaces have made Livelink Collections Server applications more economical to deploy since more people can easily access and exploit the available information. Furthermore, as organizations continue to encounter information overload, library science expertise in subject categorization and classification is being deployed to improve the usability of enterprise intranet and extranet applications.

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The proliferation of paper invoices and documents increases operating costs, creates a tremendous burden to both securing and providing long-term storage, and carries inherent risks that can undermine regulatory compliance, disaster recovery, and business continuity. To minimize expenses, enable business users to extract the maximum value from business documents, and in due course strengthen customer relationships and corporate reputation, organizations need a robust production imaging solution.

Traditionally, organizations have relied on paper-based processes to support these requirements—processes that were adequate when operations were nominal, but that impair the accessibility and usability of critical corporate information as enterprises reach a global scale. Livelink for Enterprise Report Management^™ enables organizations to reduce operating costs, and ensure that appropriate business users can extract the maximum value from report content.

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Product Development

Open Text intends to pursue its strategy of growing the capabilities of its ECM software offerings through the in-house research and development of new product offerings as well as the addition of technologies and expertise through the acquisition of other companies, technologies and products.

During fiscal 2004, the Company enhanced the Livelink portfolio and several of its optional components to continue to set the standard for ECM capabilities and in response to customer requests. Examples include the addition of secure Instant Messaging capability and the ability to distribute rich-media presentations including video, voice and text components to a wide audience over the web. The modular architecture of Livelink allows for the release of new and improved product components independently of the baseline platform. The modular architecture also supports the Company’s acquisition strategy, allowing new product components and technologies to be quickly assimilated into Livelink. New offerings based on technologies acquired in fiscal 2004 from IXOS and Gauss Interprise AG (“Gauss”) were developed and are evidence of the continued success of this architectural approach.

The strategic intent of the Company’s product developments is to offer customers in the world’s largest and most complex organizations, a scalable infrastructure for managing all their enterprise content. Large organizations are expected to continue to invest in infrastructure and solutions for ECM for several years as they look for better ways to manage risk and comply with regulations; find ways to extend their investment in enterprise applications like ERP; and provide tools to make their innovating and problem-solving processes more efficient. The company’s product development will continue to focus on offering customers infrastructure products that provide high value and low total cost of ownership, as well as innovative solutions for important business problems.

The product development organization, in coordination with its Professional Services function, partners, and identified lighthouse customers, continues to advance the Livelink platform and technology to support rapid development of knowledge-based applications.

As of June 30, 2004, the Company’s research and development team consisted of 546 employees. During fiscal 2004, through the acquisitions of IXOS, Gauss, and DOMEA eGovernment, the Company acquired new technologies that are being integrated with its Livelink technology with the goal of producing a more diverse product offering. Amounts spent on research and development during fiscal 2004, fiscal 2003, and fiscal 2002 were $43.6 million, $29.3 million, and $24.1 million, respectively.

Customer Support and Global Services

The Company offers its customers a broad range of support, consulting, and learning services aimed at providing the highest level of customer satisfaction. These services include:

Customer Support

The Company’s worldwide Customer Support organization has the technical expertise and experience needed to get the most out of a customer’s investment in our technology. The Company’s staff of Product Specialists, Team Leaders, and Customer Service Representatives provide technical assistance to customers who are enrolled in Support Programs. Support teams handle questions on the use, configuration, and functionality of products. In addition, these teams can help to identify software issues, develop creative solutions, and document enhancement requests for consideration in future product releases. By allowing each customer to select a level of service that corresponds with specific requirements, the Company is able to deliver highly appropriate and effective service to maximize customers’ investment in their implementation.

Global Services

Open Text offers both training and consulting services, as well as integration services for the purpose of configuring and adapting the Company’s software to specific customer needs. Consultants orchestrate the strategic planning, implementation and governance of our solutions, and deliver rapid implementation and upgrade services to accelerate customer return on investment. The Company’s consulting group can help build

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solutions that enable customers to leverage their investment in our technology, as well as in existing enterprise systems. As consulting engagements, service packages include tasks and deliverables as defined on a per-engagement basis. The implementation of these service packages can range from simple modifications to meet specific departmental needs to enterprise applications that integrate with multiple existing systems. Open Text’s Global Services Implementation Framework provides the proven methods, procedures, and guidelines to successfully roll out ECM solutions.

The Company’s Learning Services area provides the educational programs for its products. The Company provides a variety of educational offerings from educational planning and custom curriculums to e-learning, certification programs, courses and workshops.

Competition

The Company positions itself within the market category of ECM. This market category represents an aggregation of capabilities from what were previously distinct markets that are consolidating due to pressure from buyers wanting an increasingly higher level of integration and interoperability. Therefore, the Company’s products and services compete in several market segments that are at various stages of maturity and each market has both distinct and overlapping competitors. These markets include business process management, collaboration and team support software, compliance management, conferencing software, document management, document archiving and retrieval, e-mail management, knowledge management, eLearning, learning management, project management, portals, records management, and web content management, each of which is intensely competitive and subject to rapid technological change. Despite growing adoption of the term ECM, other terms exist to describe all or sub-sets of these markets including Knowledge Management (KM), Smart Enterprise Suites (by Gartner Group), and the Knowledge Worker Infrastructure (by Meta). It is in the integration of functionality in these otherwise distinct market segments that the Company believes it differentiates itself.

The Company competes with repository-based collaboration software solutions such as IBM’s Lotus Notes/Domino, Microsoft’s Sharepoint, and EMC’s Documentum eRoom, collaboration service providers such as WebEx Communications Inc. and Centra Software Inc., and with e-mail-based collaboration solutions from Microsoft Corp, International Business Machines Corporation, and Groove Networks Inc. In the document management market, the Company competes with vendors such as EMC’s Documentum Division, FileNet Corp, and Hummingbird Ltd. Companies like FileNet Corp and TIBCO Software Inc. also offer integrated document and business process management solutions similar to the archiving, forms, workflow, and BPM capabilities provided by the Company. As the Company envisioned over five years ago with its acquisition of PS Software, nearly all remaining pure-play records management vendors have now been acquired over the past two years. Those acquiring vendors include EMC’s Documentum Division, IBM Corporation, and Vignette Corporation. Web content management vendors such as EMC’s Documentum Division, Interwoven Inc., Vignette Corporation, and Stellent Inc. compete aggressively with the Company to manage content for purpose-built web sites. In the e-learning market for regulatory compliance training and accreditations, the Company competes with learning management solutions from vendors such as SumTotal Systems Inc., Saba Software Inc., and Centra Software Inc. In the email management market, the Company competes against vendors such as KVS Inc., which was recently acquired, and EMC’s Legato Division. In the portal marketplace, the Company competes with Plumtree Software Inc. and portal solutions from major infrastructure providers. In all the above cases, the Company will also compete against vendors having a particular regional strength (such as Easy Software AG in Germany) or systems integrators purpose-built composite applications based on web development techniques rather than a commercial off-the-shelf (“COTS”) product like those provided by some of the vendors above.

The Company expects competition to increase in the future as the markets for its products develop and as additional players enter these markets. The Company believes that the principal competitive factors in these markets include:

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The Company’s competitors can be expected to enhance their existing products or to develop new products that will further integrate collaboration, content, and process features.

The Company’s markets are the subject of intense industry interest, and the Company is aware of numerous other major software vendors as well as smaller entrepreneurial companies focusing significant resources on developing and marketing software products and services that may compete with the Company’s products and services. Numerous releases of products and services that compete with those of the Company can be expected in the near future. Moreover, certain of the Company’s current and potential competitors may bundle their products with other software in a manner that may discourage users from licensing products offered by the Company.

Many of the Company’s current and potential competitors in each of its markets have longer operating histories and significantly greater financial, technical and marketing resources, name recognition and installed product base than the Company. There can be no assurance that the Company will be able to compete effectively with current and future competitors. Increased competition from existing or potential competitors could result in the reduction of prices and revenues, reduced margins, and loss of customers and market share, any one of which would negatively impact the Company’s operating results.

Sales and Marketing

Open Text employs multiple distribution channels, including direct sales, distributors, systems integrators, independent software vendors (“ISVs”) and VARs to market, license and sell its products and services throughout the world. Given the significant investment and commitment of resources required by an organization in order to implement the Company’s software, the Company’s sales cycle tends to take considerable time to complete. Particularly in the current economic environment of reduced information technology spending, it can take several months, or even quarters, for sales opportunities to translate into revenue. It was the Company’s experience throughout most of fiscal 2003 and 2004 that customers were more hesitant to commit to large, enterprise-wide deployments of the Company’s software and as a result, the Company has experienced a lengthening of its sales cycles and increased demands for return on investment analysis.

Direct Sales. The Company employs a direct sales force as the primary method to market, license and sell its products and services. As of June 30, 2004, Open Text’s worldwide sales organization consisted of 417 employees located in approximately 150 cities. Historically, a significant percentage of the Company’s revenues have been generated through its direct sales force. For fiscal 2004, the Company’s license revenues were significantly generated through its direct sales force.

Distributors. Open Text has distribution agreements in Japan with Canon Sales Inc. and Infocom Corporation, pursuant to which each of them markets, licenses and sells Open Text products and services within the country of Japan.

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ISVs. Open Text markets and licenses its products to select independent software vendors, in order to have its products embedded in high-value application products marketed by manufacturers with specific industry or application domain expertise. Such partners generally sell an entire product portfolio into the target market, thereby having more cost effective access to that market than Open Text.

Alliance Partners. The Company’s Livelink Alliance Partner program includes VARs, solution providers, technology partners, ASPs, and systems integrators. Alliance Partners license, customize, configure and install the Company’s software products with complementary hardware, software and services. In combining these products and services, Alliance Partners are able to deliver complete solutions to address specific customer needs.

Employees

As of June 30, 2004, the Company employed a total of 2,105 individuals. The composition of this employee base is approximately as follows: 498 employees in sales and marketing, 546 employees in product development, 475 employees in professional services, 238 employees in customer support, and 348 employees in general and administrative roles. The Company’s employees are not subject to a labor union or collective bargaining agreement. The Company is of the opinion that relations with its employees are strong.

Intellectual Property Rights

The Company’s success and ability to compete are dependent on our ability to develop and maintain our intellectual property and proprietary technology and to operate without infringing on the proprietary rights of others. Open Text’s software products are generally licensed to customers on a nonexclusive basis for internal use in a customer’s organization. The Company also grants rights in its intellectual property to third parties that allow them to market certain of the Company’s products on a nonexclusive or limited-scope exclusive basis for a particular application of the product(s) or to a particular geographic area.

Open Text relies on a combination of copyright, trademark and trade secret laws, non-disclosure agreements and other contractual provisions to establish and maintain its proprietary rights. The Company has obtained or applied for trademark registration for most strategic product names in all major markets. During fiscal 2003 the Company indirectly acquired a patent relating to collaborative technology. The Company is currently exploring opportunities to exploit this patent and these opportunities may include licensing it. The Company now owns, mainly as a result of its acquisition program, four US patents and has an additional four patent applications filed with the US Patent and Trademark Office. Some of these patents and patent applications have been filed in other jurisdictions. Recently the Company has embarked on a program to identify and seek patent protection for the intellectual property that results from its internal research and development efforts. There can be no assurance that any patentable elements will be identified or, if identified, that patent protection will be obtained. Although the Company intends to protect its rights vigorously, there can be no assurance that these measures will, in all cases, be successful. Enforcement of the Company’s intellectual property rights may be difficult, particularly in some nations outside of the United States and Canada in which the Company seeks to market its products. Certain of the Company’s license arrangements have required the Company to make a limited confidential disclosure of portions of the source code for its products, or to place such source code into an escrow for the protection of another party. Despite the precautions taken by the Company, it may be possible for unauthorized third parties to copy certain portions of the Company’s products or to reverse engineer or obtain and use information that the Company regards as proprietary. Also, the Company’s competitors could independently develop technologies that are perceived to be substantially equivalent or superior to the Company’s technologies. The Company’s competitive position may be affected by its ability to protect its intellectual property. Although the Company does not believe it is infringing on the intellectual property rights of others, claims of infringement are becoming increasingly common as the software industry develops and related legal protections, including patents, are applied to software products.

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Although most of the Company’s technology is proprietary in nature, the Company does include certain third party software in its products. In these cases, this software is licensed from the entity holding its intellectual property rights. Although the Company believes that it has secured proper licenses for all third-party software that has been integrated into its products, third parties may assert infringement claims against the Company in the future, and any such assertion may result in litigation, which may be costly and require the Company to obtain a license for the software. Such licenses may not be available on reasonable terms or at all.

Item 2. Properties

The Company leases approximately 451,571 square feet of office space in two office parks in Grasbrunn (Munich), Germany pursuant to four distinct leases expiring on: August 31, 2007, February 28, 2011, June 30, 2007 and March 31, 2011; 101,458 square feet of office space in Richmond Hill, Ontario, Canada pursuant to a lease agreement which expires on June 30, 2011; approximately 82,558 square feet of office space in three facilities in Waterloo, ON, Canada including its corporate headquarters pursuant to one lease that expires on September 30, 2005, one that expires on August 31, 2005 and one that expires on June 30, 2006; approximately 66,155 square feet in Basel, Switzerland pursuant to two leases, one terminating on March 31, 2009 and the other on April 30, 2005; and 38,115 square feet in its operational headquarters in Lincolnshire, Illinois pursuant to a lease that terminates on April 30, 2012. The Company also leases US field offices in Dublin, Ohio; Philadelphia, Pennsylvania; San Mateo, California; Carlsbad, California; Irvine, California; Livonia, Michigan; Boston, Massachusetts; and Albany, New York; Canadian field offices in Ottawa, Ontario and international field offices, the most important of which are located in Hamburg, Germany; Paris, France; Amsterdam, The Netherlands; Prague, Czech Republic; St. Gallen, Switzerland; Melbourne, Australia and Beaconsfield, UK. After executing its restructuring plans, this space is considered adequate for the Company’s needs. The current annualized head-lease rent paid by the Company, including operating costs, is approximately US $22.7 million. The current annualized sub-lease rent collected by the Company, including operating costs, is approximately US $7.42 million.

Item 3. Legal Proceedings

The Harold Tilbury and Yolanda Tilbury Family Trust have brought an action against the Company, before a single arbitrator, under the Ontario Arbitrations Act. The complaint alleges failure to pay amounts owing under a stock purchase agreement relating to the Company’s acquisition of Bluebird Systems Inc (“Bluebird”). The claim is for $10 USD million, plus $5 USD million in punitive damages. The Company was not a party to the stock purchase agreement, but has been held to be the principal behind the transaction by the arbitrator so that if Open Text’s subsidiary Bluebird is liable, Open Text would also be liable. Bluebird and Open Text have counterclaimed against the Tilburys claiming that not only is no further amount owing for the purchase of shares, but they are entitled to a return of the money already paid to the Tilburys, based on misrepresentations at the time of sale. Bluebird has also asked for rescission of the lease assumed on the purchase of the shares located in Carlsbad, California or damages of $7 USD million together with punitive damages of $1 USD million. It is not expected this matter will be completed until the fall of 2004. The Company believes the claim made against it is without merit, and intends to defend the action vigorously. The arbitration process is inherently uncertain and unpredictable and accordingly there can be no assurances as to the ultimate outcome of the arbitration.

Beginning in July 2001, Eloquent Inc, (“Eloquent”, a company acquired during fiscal 2003) and certain of its officers and directors were named as defendants in several class action shareholder complaints filed in the United States District Court for the Southern District of New York. These actions include (1) Pond Equities v. Eloquent, Inc., et al., Case No. 01-CV-6775; (2) Zitto Investments, Inc. v. Eloquent, Inc., et al., Case No. 01-CV-7591; (3) Bartula v. Eloquent, Inc., et al., Case No. 01-CV-7607; and (4) Holleran v. Eloquent, Inc., et al., Case No. 01-CV-7698. Similar complaints were filed in the same Court against hundreds of other public companies that conducted initial public offerings (“IPOs”) of their common stock in the late 1990s (the “IPO Lawsuits”). In each of these complaints, the plaintiffs allege that Eloquent, certain of its officers and directors and its IPO underwriters violated the federal securities laws because Eloquent’s IPO registration statement and prospectus contained untrue statements of material fact or omitted material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. The plaintiffs sought unspecified monetary damages and other relief.

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On August 8, 2001, the IPO Lawsuits were consolidated for pretrial purposes before United States Judge Shira Scheindlin of the Southern District of New York. In late 2002 and early 2003 the various plaintiffs and issuer defendants entered into settlement discussions. In June, 2003, the Company’s Board of Directors agreed in principle to a settlement proposal as described in a Memorandum of Understanding with the plaintiffs and a Issuer-Insurer Agreement with the Company’s insurers. In May, 2004, the plaintiffs and counsel for various defendants, including the Company, reached agreement on a proposed form of settlement agreement (the “Settlement Agreement”). Under the proposed Settlement Agreement, the issuers (including the Company, as successor to Eloquent) are to be dismissed as parties from the litigation and will be released from all claims by the plaintiffs without admission of wrongdoing on behalf of the Company. Under the proposed Settlement Agreement, if the plaintiffs fail to obtain a minimum settlement or judgment against certain underwriter defendants in related cases, each of the settling issuer defendants will pay their proportionate share of the difference. Under the Issuer-Insurer Agreement, however, the Company and the other settling issuers have agreed with their insurers that in the event that the issuer defendants ultimately owe any payment to the plaintiffs under the settlement, the issuers’ insurers will be responsible for making any such payment to the plaintiffs subject to the applicable deductible ($250,000, in the case of the Company) and up to the coverage amount of each Issuers’ insurance policy. The Company believes that its coverage is sufficient to cover its obligations, if any, under the proposed Settlement Agreement. Implementation of the Settlement Proposal requires execution and delivery of the proposed Settlement Agreement and Issuer-Insurer Agreement by the Company and other parties, and approval by the court, which is expected to occur in late 2004 or early 2005. The Company believes that these lawsuits are without merit and, if the proposed Settlement Agreement is not implemented, intends to defend against them vigorously.

The settlement was finalized and executed in mid-June 2004. Following submission to the court of the executed settlement agreement, the plaintiffs filed a motion on June 25 for the court’s preliminary approval of the settlement. Thereafter, on July 14, 2004, the Underwriters filed an opposition to the plantiffs’ motion for preliminary approval. Judge Scheindlin has not, at this time scheduled a preliminary-approval.

The Company is also subject to legal proceedings and claims that arise in the ordinary course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on its financial results.

Item 4. Submission of Matters to a Vote of Security Holders

None.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

The Common Shares have traded on the NASDAQ National Market since January 23, 1996 under the symbol “OTEX”. The Common Shares have traded on the Toronto Stock Exchange (“TSX”) since June 26, 1998 under the symbol “OTC”. The following table sets forth the high and low sales prices for the Common Shares, as reported by the TSX, and the high and low bid prices, as reported by NASDAQ, for the periods indicated below.

On June 30, 2004, the closing price of the Company’s Common Shares on NASDAQ was $31.90 USD per share. On June 30, 2004, the closing price of the Company’s Common Shares on the TSX was $42.70 CDN per share.

On September 1, 2004, the closing price of the Company’s Common Shares on NASDAQ was $16.72 USD per share. As at September 1, 2004, there were approximately 18,385 shareholders of record of the Company’s Common Shares. As at September 1, 2004, there were approximately 5,834 U.S. shareholders of record, holding Common Shares.

All of the share information presented above and throughout this report has been adjusted for the stock split that took place in fiscal 2004 as described below.

There have been no recent sales of unregistered securities and no repurchases of securities by the Company or its affiliates.

Dividend Policy

The Company has never paid cash dividends on its capital stock. The Company currently intends to retain earnings, if any, for use in its business and does not anticipate paying any cash dividends in the foreseeable future. In fiscal 2004, as a one time event, the Company declared a two-for-one split of the Company’s Common Shares effected by means of a dividend.

Exchange Controls and Other Limitations Affecting Holders of Common Shares

Investment Canada Act

Canada has no system of exchange controls. There is no law, government decree or regulation in Canada restricting the export or import of capital or affecting the remittance of dividends, interest or other payments to a non-resident holder of Common Shares, other than withholding tax requirements.

There is no limitation imposed by Canadian law or by the articles or other charter documents of the Company on the right of a non-resident to hold or vote Common Shares or Preferred Shares of the Company with

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voting rights (collectively, “Voting Shares”), other than as provided in the Investment Canada Act (the “Investment Act”), as amended by the World Trade Organization Agreement Implementation Act (the “WTOA Act”). The Investment Act generally prohibits implementation of a reviewable investment by an individual, government or agency thereof, corporation, partnership, trust or joint venture that is not a “Canadian,” as defined in the Investment Act (a “non-Canadian”), unless, after review, the minister responsible for the Investment Act is satisfied that the investment is likely to be a net benefit to Canada. An investment in Voting Shares of the Company by a non-Canadian (other than a “WTO Investor,” as defined below) would be reviewable under the Investment Act if it were an investment to acquire direct control of the Company, and the value of the assets of the Company were $5.0 million or more. Except for certain economic sectors with respect to which the lower threshold would apply, an investment in Voting Shares of the Company by a WTO Investor would be reviewable under the Investment Act if it were an investment to acquire direct control of the Company, and the value of the assets of the Company equaled or exceeded $237 million CDN. A non-Canadian, whether a WTO Investor or otherwise, would acquire control of the Company for purposes of the Investment Act if he or she acquired a majority of the Voting Shares of the Company. The acquisition of less than a majority, but at least one-third of the Voting Shares of the Company, would be presumed to be an acquisition of control of the Company, unless it could be established that the Company was not controlled in fact by the acquirer through the ownership of Voting Shares. In general, an individual is a WTO Investor if he or she is a “national” of a country (other than Canada) that is a member of the World Trade Organization (“WTO Member”) or has a right of permanent residence in a WTO Member. A corporation or other entity will be a WTO investor if it is a “WTO Investor-controlled entity” pursuant to detailed rules set out in the Investment Act. The United States is a WTO Member.

Certain transactions involving Voting Shares of the Company would be exempt from the Investment Act, including: (a) an acquisition of Voting Shares of the Company if the acquisition were made in connection with the person’s business as a trader or dealer in securities; (b) an acquisition of control of the Company in connection with the realization of a security interest granted for a loan or other financial assistance and not for any purpose related to the provisions of the Investment Act; and (c) an acquisition of control of the Company by reason of an amalgamation, merger, consolidation or corporate reorganization, following which the ultimate direct or indirect control of the Company, through the ownership of voting interests, remains unchanged.

Canadian Federal Income Tax Considerations

The following summary is based upon the current provisions of the Income Tax Act (Canada) (the “ITA”) and the regulations thereunder, all proposed amendments to the ITA and the regulations thereunder are publicly announced by the Department of Finance, Canada prior to the date hereof, the administrative policies and assessing practices of the Canada Revenue Agency (“CRA”), made publicly available prior to the date hereof and the Canada-United States Income Tax Convention (1980), as amended by the 1983, 1984, 1995 and 1997 Protocols thereto (the “Convention”). Except for the foregoing, this summary does not take into account or anticipate changes in the law or the administrative policies or assessing practices of the CRA whether by legislative, governmental or judicial action and does not take into account or anticipate provincial, territorial or foreign tax considerations.

This summary relates to the principal Canadian federal income tax considerations under the ITA and the regulations thereunder generally applicable to purchasers of Common Shares hereunder who: (i) for purposes of the ITA, are not, have not been and will not be or be deemed to be resident in Canada at any time while they held or hold Common Shares (or other property for which Common Shares were substituted on a tax deferred exchange), deal at arm’s length and are not affiliated with the Company, will hold their Common Shares as capital property, and do not use or hold, and will not and will not be deemed to use or hold their Common Shares in, or in the course of carrying on a business in Canada through a permanent establishment or in connection with a fixed base in Canada, and (ii) for purposes of the Convention, are residents of the United States and not residents of Canada.

Amounts in respect of Common Shares paid or credited or deemed to be paid or credited as, on account or in lieu of payment of, or in satisfaction of, dividends to a non-resident holder will generally be subject to Canadian

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non-resident withholding tax. Such withholding tax is levied at a basic rate of 25%, which may be reduced pursuant to the terms of an applicable tax treaty between Canada and the country of residence of the non-resident holder. Currently, under the Convention, the rate of Canadian non-resident withholding tax on the gross amount of dividends beneficially owned by a person who is a resident of the United States for the purpose of the Convention and who does not have a “permanent establishment” or “fixed base” in Canada to which the holding of Common Shares is effectively connected is 15% except where such beneficial owner is a company which owns at least 10% of the voting stock of the Company (in which case the rate of such withholding tax is 5%).

A purchase of Common Shares by the Company (other than a purchase of Common Shares by the Company on the open market in the manner in which shares would be purchased by any member of the public in the open market) will give rise to a deemed dividend under the ITA equal to the difference between the amount paid by the Company on the purchase and the paid-up capital of such shares determined in accordance with the ITA. The paid-up capital of such shares may be less than the non-resident holder’s cost of such shares. Any such dividend deemed to have been received by a non-resident holder would be subject to a non-resident withholding tax as described above. The amount of any such deemed dividend will reduce the proceeds of disposition of the Common Shares to the non-resident holder for purposes of computing the amount of the non-resident holder’s capital gain or loss under the ITA.

A holder who is not resident in Canada for purposes of the ITA will generally not be subject to tax under the ITA in respect of any capital gain or entitled to deduct any capital loss realized on a disposition of Common Shares unless at the time of such disposition such Common Shares constitute “taxable Canadian property” of the holder for purposes of the ITA and the holder is not entitled to relief under the Convention. If the Common Shares are listed on a prescribed stock exchange (which includes the NASDAQ National Market) at the time they are disposed of, they will generally not constitute “taxable Canadian property” of the non-resident holder at the time of a disposition of such shares unless such holder uses or holds or is deemed to use or hold such shares in or in the course of carrying on business in Canada or, at any time during the 60 month period immediately preceding the disposition of the Common Shares, 25% or more of the issued shares of any class or series of the Company were owned by the non-resident holder, by persons with whom the non-resident holder did not deal at arm’s length or by the non-resident holder and persons with whom the non-resident holder did not deal at arm’s length. In any event, under the Convention, gains derived by a resident of the US from the disposition of Common Shares will generally not be taxable in Canada unless such Common Shares form part of the business property of a permanent establishment which such US resident has or had (within the twelve-month period preceding the date of disposition) or pertain to a fixed base which is or was available (within the twelve-month period preceding the date of disposition) to such US resident in Canada or unless the value of the Common Shares is derived principally from real property situated in Canada.

When a non-resident holder dies holding Common Shares, such holder will be deemed to have disposed of such Common Shares for proceeds equal to the fair market value thereof immediately before such holder’s death and will be subject to the tax treatment with respect to dispositions described above. Any person who acquires such Common Shares as a consequence of the death of such holder will be deemed to have acquired such shares at a cost equal to their fair market value at that time.

United States Federal Income Taxation

The following discussion summarizes certain US federal income tax considerations relevant to an investment in the Common Shares by individuals, corporations, estates and trusts who, for income tax purposes, are resident in the US and not in Canada, hold Common Shares as capital assets, do not use or hold the Common Shares in carrying on a business through a permanent establishment or in connection with a fixed base in Canada and, in the case of individual investors, are also US citizens (collectively, “Unconnected US Shareholders”). The tax consequences of an investment in the Common Shares by investors who are not Unconnected US Shareholders may be expected to differ substantially from the tax consequences discussed herein. Further, this summary is not a comprehensive description of all of the tax considerations that may be relevant to an

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Unconnected US Shareholder based on such Shareholder’s particular circumstances. In particular, this discussion does not address the potential application of the alternative minimum tax. In addition, this discussion does not address the US federal income tax consequences to Unconnected US Shareholders that are subject to special treatment under US federal income tax laws, including, but not limited to:

This discussion does not address any aspect of US federal gift or estate tax, or of state, local or non-U.S. tax laws and does not address aspects of US federal income taxation applicable to Unconnected US Shareholders holding options, warrants or other rights to acquire Common Shares.

The discussion is based upon the provisions of the US Internal Revenue Code of 1986, as amended (the “Code”), the existing and proposed Treasury regulations promulgated thereunder, the Convention, the administrative practices published by the US Internal Revenue Service (“IRS”) and US judicial decisions, all of which are subject to change. This discussion does not consider the potential effects, both adverse and beneficial, of any recently proposed legislation which, if enacted, could be applied, possibly on a retroactive basis, at any time.

Unconnected US Shareholders generally will treat the gross amount of dividends paid by the Company equal to the US dollar value of such dividends on the date the dividends are received or treated as received (based on the exchange rate on such date), without reduction for the Canadian withholding tax, as dividend income for US federal income tax purposes to the extent of the Company’s current and accumulated earnings and profits. However, the amount of Canadian tax withheld (calculated in accordance with U.S. federal income tax principles) generally will give rise to a foreign tax credit or deduction for US federal income tax purposes. Investors should be aware that dividends paid by the Company generally will constitute “passive income” for purposes of the foreign tax credit, which could reduce the amount of the foreign tax credit available to a US shareholder. The Code applies various limitations on the amount of foreign tax credit that may be available to a US taxpayer. Investors should consult their own tax advisors with respect to the potential consequences of those limitations. Dividends paid on the Common Shares will not generally be eligible for the “dividends received” deduction. An investor that is a corporation may, under certain circumstances, be entitled to a 70% deduction of the US-source portion of dividends received from the Company if such investor owns shares representing at least 10% of the voting power and value of the Company. To the extent that distributions exceed current and accumulated earnings and profits of the Company, they will be treated first as a return of capital, up to the investor’s adjusted basis in Common Shares and thereafter as gain from the sale or exchange of the Common Shares.

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In the case of foreign currency received as a dividend that is not converted by the recipient into US dollars on the date of receipt, an Unconnected US Shareholder will have a tax basis in the foreign currency equal to its US dollar value on the date the dividends are received or treated as received. Any gain or loss recognized upon a subsequent sale or other disposition of the foreign currency, including an exchange for US dollars, will be US source ordinary income or loss.

Subject to the discussion below under “Passive Foreign Investment Company”, the sale of Common Shares generally will result in the recognition of gain or loss to the holder in an amount equal to the difference between the amount realized and the holder’s adjusted basis in the Common Shares. The tax basis will initially equal its cost to the Unconnected US Shareholder, as reduced by any distributions on the shares treated as return of capital. The Unconnected US Shareholder that is an individual will be taxed on the net amount of his or her capital gain at a maximum rate of 15% provided the Common Shares were held for more than 12 months at the time of sale or disposition. Special rules (and generally lower maximum rates) may apply to individuals in lower tax brackets.

Corporate taxpayers may deduct capital losses to the extent of capital gains. Non-corporate taxpayers may deduct excess capital losses, whether short-term or long-term, up to an additional US$3,000 a year (US$1,500 in the case of a married individual filing separately). Non-corporate taxpayers may carry forward unused capital losses indefinitely. Unused capital losses of a corporation (other than an S corporation) may be carried back three years and carried forward five years.

In general, dividends paid on Common Shares and payments of the proceeds of a sale of Common Shares, paid within the US or through certain US-related financial intermediaries, are subject to information reporting and may be subject to backup withholding at a 28% rate unless (i) the payor is entitled to, and does in fact, presume that the Unconnected US Shareholder of common shares is a corporation or other exempt recipient or (ii) the Unconnected US Shareholder provides a taxpayer identification number on a properly completed Form W-9 and certifies that no loss of exemption from backup withholding has occurred. The amount of any backup withholding will be allowed as a credit against an Unconnected US Shareholder’s US federal income tax liability and may entitle such holder to a refund, provided that the required information is furnished to the IRS. Unconnected US Shareholders should consult their tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining such an exemption if applicable.

Passive Foreign Investment Company

A non-US corporation will be classified as a passive foreign investment company (a “PFIC”) for US federal income tax purposes if it satisfies either of the following two tests: (i) 75% or more of its gross income for the taxable year is “passive income” (generally, interest, dividends, royalties, rent and similar income, and gains on disposition of assets that generate such income) or (ii) 50% or more of its assets produce or are held for the production of passive income on average for the taxable year (by value or, if the Company so elects, by adjusted basis). If the corporation owns, directly or indirectly, at least 25% by value of the stock of another corporation, it will be treated as if it holds directly its proportionate share of assets, and receives directly its proportionate share of income of such other corporation. Accordingly, the classification of the Company as a PFIC in any taxable year will depend on the character of the income and the assets of the Company and its subsidiaries.

The Company does not believe that it is currently a PFIC. If the Company were to be a PFIC for any taxable year, US investors would be required to (i) at disposition or when such investor receives an “excess distribution”, pay a penalty tax equivalent to US federal income tax at ordinary income rates, calculated as if any gain on that sale were realized (or the excess distribution were made) ratably over that holding period, plus an interest charge on taxes that are deemed due during the period that the investor owned that stock, (ii) if a Qualified Electing Fund election is made, include currently in their taxable income certain undistributed amounts of the Company’s income, or (iii) if a mark-to-market election is made, include currently an amount of ordinary income or loss (which loss is subject to limitations) each year in an amount equal to the difference between the fair market value of such investor’s shares in the Company and such investor’s adjusted tax basis therein.

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Controlled Foreign Corporation

If more than 50% of the voting power of all classes of stock or the total value of the stock of the Company is owned, directly or indirectly, by US persons including citizens or residents of the US, US domestic partnerships and corporations or estates or trusts other than foreign estates or trusts, each of whom owns 10% or more of the total combined voting power of all classes of stock of the Company (“10% US Shareholders”), the Company would be treated as a “controlled foreign corporation” under Subpart F of the Code. This classification would have many complex results, including the required inclusion by such 10% US Shareholders in income of their pro rata shares of “Subpart F income” (as specifically defined by the Code) of the Company. The Company does not believe that it is currently a controlled foreign corporation.

Item 6—Selected Consolidated Financial Data

The following table sets forth selected consolidated financial data of the Company for the periods indicated. The financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Consolidated Financial Statements and related notes of the Company appearing elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of income data set forth below for the fiscal years ended June 30, 2004, 2003 and 2002 and the consolidated balance sheet data as of June 30, 2004 and 2003 are derived from our consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of income data set forth below for the fiscal years ended June 30, 2001 and 2000 and the consolidated balance sheet data as of June 30, 2002, 2001 and 2000 are derived from audited consolidated financial statements that are not included in this Annual Report on Form 10-K.

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

The following discussion and analysis should be read together with the Company’s Consolidated Financial Statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K, including the following discussion, contains trend analyses and other forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are made pursuant to the safe habor provisions of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Any statements in this Annual Report on Form 10-K that are not statements of historical fact are forward-looking statements. These forward-looking statements are based on a number of assumptions and involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or developments in the Company’s business or its industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. These risks, uncertainties, and factors include, but are not limited to, those set forth under “Risk Factors That May Affect Future Results” and elsewhere in this Annual Report on Form 10-K. Forward-looking statements are based on management’s current plans, estimates, opinions and projections, and the Company assumes no obligation to update forward-looking statements if assumptions or these plans, estimates, opinions or projections should change.

Overview

The Company’s Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and are presented in United States dollars unless otherwise indicated. All references in this Annual Report on Form 10-K to financial information concerning the Company refer to such information in accordance with U.S. GAAP and all dollar amounts in this Annual Report on Form 10-K are in United States dollars unless otherwise indicated.

Open Text is the market leader in providing Enterprise Content Management (“ECM”) solutions that bring together people, processes and information. The Company’s principal product line is Livelink^®, a leading collaboration and content management software product for global enterprises. The software enables users to capture as well as find electronically stored information, work together in both creative and collaborative processes as well as more structured processes, perform group calendaring and scheduling, and distribute or make available to users across networks or the Internet the resulting work product and other information. This collaborative environment enables ad hoc teams to form quickly across functional and organizational boundaries, which enables information to be accessed by employees using any standard Web browser. Fully Web-based with open architecture, Livelink provides comprehensive configurations, rapid deployment, accelerated adoption, and low cost of ownership. Open Text provides integrated solutions that enable people to use information and technology more effectively at departmental levels and across enterprises. The Company offers its solutions both as end-user stand-alone products and as fully integrated modules, which together provide a complete solution that is easily incorporated into existing enterprise business systems. Although most of the Company’s technology is proprietary in nature, the Company does on occasion include certain third party software in its products.

In fiscal 2004, the Company recorded total revenues of $291.1 million, a record for a Company fiscal year, due to a number of factors including an increase in new customers, additional license transactions completed with existing customers, and the acquisitions of IXOS, Gauss, and DOMEA eGovernment. The Company achieved overall profitability in fiscal 2004 for the sixth straight year, while it achieved profitability from operations for the fourth straight year. In addition, cash and cash equivalents increased to $157.0 million as of June 30, 2004, while cash flow from operations totaled $37.5 million for fiscal 2004.

During fiscal 2004, the Company did not repurchase any Common Shares in the open market, whereas during fiscal 2003, 1,512,000 Common Shares were repurchased in the open market for a total purchase price of $17.3 million. The Company’s days sales outstanding (DSO) increased from 61 days at June 30, 2003 to 71 days at June 30, 2004. The main reason for this increase is due to IXOS, which has a higher DSO than the Company.

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The Company expects that over time, the Company DSO will trend towards historical levels. Geographic segment information regarding the Company is presented in Note 16 to the Company’s Consolidated Financial Statements.

On February 19, 2004, Open Text Corporation acquired a total of 19,157,428 IXOS shares or approximately 88% of the ordinary share capital and voting rights of IXOS through its wholly owned subsidiary 2016091 Ontario Inc. (“Ontario”). Of these IXOS shares, 17,792,529 shares (approximately 93% of the tendered shares) were tendered for the Alternative Consideration (as described below), with the balance, including shares purchased on the open market, acquired for approximately $15.3 million in cash. The Alternative Consideration for each IXOS share consisted of 0.5220 of an Open Text Common Share and 0.1484 of a warrant. Each whole warrant is exercisable to purchase one Open Text Common Share and may be exercised at any time prior to February 19, 2005, at a strike price of $20.75 per share. Between the closing date of the tender offer and June 30, 2004, Open Text acquired an additional 203,647 Common Shares of IXOS for $2.3 million in cash. As a result of the additional purchase, Ontario obtained a total of 19,361,075 IXOS shares or approximately 89% ownership of IXOS. It is the Company’s intention to acquire 100% of IXOS, as discussed further on page 86. At this time, it is not determinable when this process will be completed. The results of IXOS’ operations have been included in the consolidated financial statements of Open Text since March 1, 2004.

On October 16, 2003, Open Text acquired approximately 75% of the shares of Gauss Interprise AG (“Gauss”) for total cash consideration of $9.8 million pursuant to several sale and purchase agreements with major shareholders. The results of Gauss’ operations have been included in the consolidated financial statements of Open Text since that date. As of June 30, 2004, Open Text had acquired approximately 92% of the common shares of Gauss as a result of these agreements, as well as through the purchase of common shares on the open market and through a public tender offer. It is the Company’s intention to acquire 100% of Gauss, as discussed further on page 88. At this time, it is not determinable how long this process will take.

On October 23, 2003, Open Text acquired all the common shares of SER Solutions Software GmbH and SER eGovernment Deutschland GmbH (together “DOMEA eGovernment”) for total consideration of up to $11.4 million, subject to meeting certain revenue performance and certain adjustments based on the Company’s assets and liabilities. The results of DOMEA eGovernment’s operations have been included in the consolidated financial statements of Open Text since that date. The purchase price of $11.4 million includes contingent consideration of $3.8 million that may be earned by the former shareholders of DOMEA eGovernment based on the achievement of certain revenue targets through December 31, 2004. Amounts earned under this arrangement will be paid in the form of 50% cash and 50% in Open Text Common Shares. As of June 30, 2004, approximately $0.6 million of the purchase price is being held to secure certain warranties, representations and covenants in the acquisition agreement. As this amount is also being held as security for certain pre-acquisition contingencies, the resolution of which is uncertain, the Company is unable to estimate when this amount will be paid. When paid, these amounts will be recorded as additional goodwill.

On March 20, 2003, Open Text completed an acquisition of all of the issued and outstanding shares of Eloquent for cash consideration of $6.7 million, of which $1.0 million is being held in escrow to secure certain representations, warranties and covenants of Eloquent in the acquisition agreement. The results of operations of Eloquent have been consolidated with those of Open Text beginning March 20, 2003.

On February 25, 2003, Open Text Inc. (“OTI”), a wholly-owned subsidiary of the Company, acquired all of the issued and outstanding shares of Corechange through the merger of a wholly-owned subsidiary of OTI, with and into Corechange, with Corechange as the surviving corporation. Consideration for this acquisition was comprised of (1) cash consideration of $3.6 million paid on closing; (2) additional cash consideration of $650,000 held in escrow in order to satisfy potential breaches of representations and warranties as provided for in the share purchase agreement; and (3) additional cash consideration to be earned over the one-year period following closing, contingent on Corechange meeting certain revenue targets. This acquisition was also subject to an adjustment of the purchase price based on the level of net assets in existence at closing. As of June 30, 2004, the Company is of the opinion that the level of net assets present at the closing date was sufficiently low such

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that no further amounts are due in respect of this purchase price. The results of operations of Corechange have been consolidated with those of Open Text beginning February 25, 2003.

On November 1, 2002, the Company completed the acquisition of all of the issued and outstanding shares of Centrinity Inc. for cash consideration of $20.3 million. The transaction was completed by way of an amalgamation of Centrinity with 3801853 Canada Inc., a wholly-owned subsidiary of Open Text. The results of operations of Centrinity have been consolidated with those of Open Text beginning November 1, 2002.

With respect to the Company’s strategy relating to acquisitions, Open Text has established the practice of integrating acquired technology into Livelink shortly following the completion of the respective acquisition. Consequently over time, the operational performance of the Company’s acquired entities on a stand-alone basis may not be tracked.

Significant Accounting Policies and Critical Accounting Estimates

The Company’s Consolidated Financial Statements are prepared in accordance with U.S. GAAP. The preparation of the Consolidated Financial Statements in accordance with U.S. GAAP necessarily requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenues, bad debts, investments, intangible assets, income taxes, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed at the time to be reasonable under the circumstances. Under different assumptions or conditions, the actual results will differ, potentially materially, from those previously estimated. Many of the conditions impacting these assumptions and estimates are outside of the Company’s control.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements.

Revenue: The Company currently derives all of its revenues from licenses of software products and related services. Revenue is recognized in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions, and to the extent applicable, Securities and Exchange Commission Staff Accounting Bulletin 104, “Revenue Recognition.”

Product license revenue is recognized under SOP 97-2 when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectibility is probable and supported and the arrangement does not require services that are essential to the functionality of the software.

(i) Persuasive Evidence of an Arrangement Exists—The Company determines that persuasive evidence of an arrangement exists with respect to a customer under (a) an executed license agreement, which is signed by both the customer and the Company, or (b) a purchase order, quote or binding letter-of-intent received from and signed by the customer, in which case the customer has either previously executed a license agreement with the Company or will receive a shrink-wrap license agreement with the software. The Company does not offer product return rights to end-users or resellers.

(ii) Delivery has Occurred—The Company’s software may be either physically or electronically delivered to the customer. The Company determines that delivery has occurred upon shipment of the software pursuant to the billing terms of the arrangement or when the software is made available to the customer through electronic delivery. Customer acceptance generally occurs at shipment.

(iii) The Fee is Fixed or Determinable—If at the outset of the customer arrangement, the Company determines that the arrangement fee is not fixed or determinable, revenue is typically recognized when the arrangement fee becomes due and payable.

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(iv) Collectibility is Probable and Supported—The Company determines whether collectibility is probable and supported on a case-by-case basis. The Company may generate a high percentage of its license revenue from its current customer base, for whom there is a history of successful collection. The Company assesses the probability of collection from new customers based upon the number of years the customer has been in business and a credit review process, which evaluates the customer’s financial position and ultimately their ability to pay. If the Company is unable to determine from the outset of an arrangement that collectibility is probable based upon its review process, revenue is recognized as payments are received.

With regard to software arrangements involving multiple elements, the Company allocates revenue to each element in the arrangement other than licenses based on the relative fair value of each element. The Company’s determination of fair value of each element in multiple-element arrangements is based on vendor-specific objective evidence (“VSOE”). The Company limits its assessment of VSOE for each element to the price charged when the same element is sold separately. The Company has analyzed all of the elements included in its multiple-element arrangements and has determined that it has sufficient VSOE to allocate revenue to consulting services and post-contract customer support (“PCS”) components of its license arrangements. The Company sells its consulting services separately, and has established VSOE for these services on this basis. VSOE for PCS is determined based upon the customer’s annual renewal rates for these elements. Accordingly, assuming all other revenue recognition criteria are met, revenue from perpetual licenses is recognized upon delivery using the residual method in accordance with SOP 98-9, and revenue from PCS is recognized ratably over the respective term of the maintenance contract, typically one year.

Services revenue consists of fees from consulting services and PCS. Consulting services include needs assessment, software integration, security analysis, application development and training. The Company generally bills consulting services fees on a time and materials basis. The Company’s consulting services are not essential to the functionality of its software. The Company’s software products are fully functional upon delivery and implementation and generally do not require any significant modification or alteration for customer use. Customers purchase consulting services to facilitate the adoption of the Company’s technology and may dedicate personnel to participate in the services being performed, but they may also decide to use their own resources or appoint other professional service organizations to provide these services. Software products are billed separately from professional services. The Company recognizes revenue from consulting services as services are performed. The Company’s customers typically purchase PCS annually, and the Company prices PCS based on a percentage of the product license fee. Customers purchasing PCS receive product upgrades, Web-based technical support and telephone hot-line support.

Customer advances and billed amounts due from customers in excess of revenue recognized are recorded as deferred revenue.

Allowance for Doubtful Accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company performs ongoing credit evaluations of its customer’s financial condition and if the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would likely be required. Actual collections could differ materially from our estimates.

Income Taxes. The Company records a valuation allowance against deferred income tax assets when management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Management considers factors such as the reversal of deferred income tax liabilities, projected taxable income, the character of the income tax asset and tax planning strategies. A change to these factors could impact the estimated valuation allowance and income tax expense. See page 43 for management’s discussion of the factors necessary for the Company to realize its deferred tax assets.

Litigation. The Company is a party, from time to time, in legal proceedings. In these cases, management assesses the likelihood that a loss will result, as well as the amount of such loss and the financial statements provide for the Company’s best estimate of such losses. To the extent that any of these legal proceedings are resolved and result in the Company being required to pay an amount in excess of what has been provided for in

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the financial statements, the Company would be required to record, against earnings, such excess at that time. If the resolution resulted in a gain to the Company, or a loss less than that provided for, such gain is recognized when received or receivable.

Valuation of Intangible Assets. The Company has a history of acquiring other businesses, and expects that this trend will likely continue in the future. As part of the completion of any business combination, the Company is required to value any intangible assets acquired at the date of acquisition. This valuation is inherently subjective, and necessarily involves judgments and estimates regarding future cash flows and other operational variables of the entity acquired. However, there can be no assurance that the judgments and estimates made at the date of acquisition will reflect future performance of the acquired entity. To assist management with the valuation process, the Company has adopted the practice of using independent valuation experts in the valuation process for intangible assets acquired through material acquisitions. However, if either management or the independent experts make judgments or estimates that differ from actual circumstances, the Company may be required to write-off certain of its intangible assets. Similarly, in accordance with SFAS No. 142 Goodwill and Other Intangible Assets, the Company is required to annually test the value of its goodwill as well as its acquired intangible assets. This testing requires management to make estimates of the market value of its various operating segments. Changes in estimates could result in different conclusions for the value of goodwill. The Company performs its annual impairment testing on its goodwill at June 30^th each fiscal year, provided that circumstances don’t arise during the year that would necessitate an earlier evaluation. Over the past two years, the value of the Company’s reporting units have exceeded their book value by a substantial margin. Based on currently available information, management does not anticipate that an impairment of its goodwill will occur in the foreseeable future, although there can be no assurances that at the time a future review is completed, a material impairment charge will not be required and recorded.

Results of Operations

The following table presents, for the periods indicated, certain components of the selected financial data of the Company as a percentage of total revenues. The historical results are not necessarily indicative of results to be expected for any future period.

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The ECM Market

According to the Meta group, the enterprise content management (ECM) market will reach $2.3 billion in software and $7 billion in services by 2007, representing a compound annual growth rate of 15%. They expect that many vendors will adopt the mantle of “enterprise content management” during the next 12 months, which they have stated has already begun. Over that same period and consistent with experience over the past several years, the Company does not expect total information technology spending to increase. This means that the growth in ECM is coming at the expense of other parts of the IT market. The vast majority of information contained in an organization is unstructured data—exactly the type of data that the ECM market is focused on managing. Whereas companies have spent the better part of the last decade focusing on managing the structured data that ERP systems center around, their focus has now shifted to the larger opportunity of managing the unstructured data.

Over the past year the Company has witnessed numerous changes to the social-political landscape that have had significant impacts on the ECM market, which the Company sees as now being at an inflection point. Events over the past several years such as the September 11^th terrorist attacks, the financial collapse of high-profile US corporations such as Enron and Worldcom, as well as ensuing changes to the regulatory environment such as Sarbanes-Oxley and the Patriot Act have placed a significant onus on the private and public sectors alike to adopt compliance driven software solutions. Simultaneously, more organizations continue to focus their attention on the preservation of their intellectual property and the knowledge residing throughout their workforces. With baby-boomers retiring, corporations have only recently become sensitive to the fact that a high percentage of the knowledge of their workforces may not be documented or archived in any organized fashion which future employees can retrieve.

The ECM sector has been marked by significant consolidation over the past several years. Sophisticated customers are demanding more robust suites of technology which address all aspects of ECM as compared with past practice of purchasing point solutions from separate vendors to address specific needs. The largest, most financially stable vendors have taken advantage of their financial position by acquiring many of their smaller competitors in an attempt to round out their product line. These smaller vendors had found that as the ECM market matured and as ECM technologies became mission critical within organizations, customers became increasingly hesitant to purchase their product if the vendor’s financial viability was at all a question. In many cases, these smaller companies have what is regarded as leading technology, but they lack the financial resources to convince customers that they will remain in business to support and enhance their products for years to come. Within the growing ECM sector, the Company has established itself by the end of fiscal 2004 as both the largest and fastest growing software vendor in this sector.

The Company has seen its competitive landscape evolve over the past year. Given the growth of the ECM market, new vendors continue to try and penetrate the market. Microsoft has recently entered the ECM market with a competitive product which is focused on departmental use rather than enterprise-wide deployment as the product does not possess the scalability of Livelink. With the content management offerings coming from the IXOS acquisition, the Company believes that it has the most comprehensive collaboration and content management software in the industry. As a result, the Company is increasingly competing against more traditional content management vendors such as Filenet. The Company feels that one of its key strategic advantages over its competition is the fact that its core technology has been in place for several years. This has allowed Open Text to spend the past couple of years focused on designing and delivering solutions to specific market participants. By contrast, many of the Company’s competitors are still in the process of acquiring and integrating the requisite technology to provide a complete product offering.

Market Trends

During fiscal 2004, many of the Company’s customers were dealing with internal mandates to significantly reduce information technology spending. Given these tighter budgets, customers have increasingly focused on

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purchasing software solutions which help organizations save money. Software that is quickly and easily deployable is currently viewed as being more attractive than software that takes a long time to implement, such as ERP systems. One area within information technology spending which companies are not reducing spending, and in many cases are increasing spending, is compliance-focused software. Companies are not able to defer spending to become or remain compliant with the regulatory environments they operate within. The Company is focused on exploiting this opportunity, particularly given the fact that compliance touches all employees in an organization. As a result, compliance opportunities can evolve into enterprise-wide deployments.

During fiscal 2004, the Company continued to experience a trend witnessed over the past several years of initial, limited-scope deployments quickly evolving into larger deploys. Initial deployments typically last for approximately nine months, subsequent to which the customer will frequently purchase additional licenses for further internal deployment, followed often by an enterprise-wide deployment. This strategy has been a focus of the Company’s sales efforts since post-September 11^th, when it became extremely difficult to close sales opportunities with new customers. In addition, over the past several years, as many customers imposed rigid spending freezes on purchases of new information technology solutions and initiatives, the Company has been able to continue to grow its revenue by further developing relationships and opportunities within its installed-base.

Historically, the Company has been able to generate revenue growth by selling and marketing its products on the proposition that they produced an extremely high return on investment and can actually save companies money. The fact that the Livelink product line is highly configurable without programming means that as soon as it is purchased, an organization can have it deployed almost immediately and can begin saving money. By contrast, many competitive products and solutions require a significant amount of customized programming and service work adding not only cost but also lead-time to the deployment cycle. Both of these factors adversely impact such product’s return on investment. Although today the high return on investment of the Company’s products remains a selling feature, during fiscal 2004 the Company experienced an increase in customers purchasing products to address key business problems that they cannot delay addressing.

Another recent operational trend has been the Company’s strong focus on vertical markets and designing products to address specific needs of those markets. The Company currently has four vertical sales groups focused on selling solutions to the government, pharmaceutical, financial services, and oil and gas sectors. The Company feels that customized Livelink solutions designed specifically for each of these verticals address specific mission critical problems that these industries confront. Pharmaceutical companies, for instance, are focused more than ever on bringing products to market faster and more cost-effectively than ever before while remaining fully-compliant with Food and Drug Administration regulations. Nearly all regulations require an organization to train and test all employees involved in processes associated with the regulation. The need for US government agencies to communicate, collaborate, and share knowledge has never been as important as it is today, and the Company is increasingly active in this sector.

Open Text continues to remain focused on selling to its large user installed base as an important source of sales opportunities. The Company has found that customers that initially purchase Livelink to address a specific need often expand the deployment of Livelink to address multiple other issues within the first year. The Company also feels that the acquisitions it completed over the past several years represent significant cross-selling opportunities, and that these cross-selling opportunities will represent a further source of future growth. Open Text anticipates that it will continue to develop and market ECM related solutions focused on addressing specific problems and specific industries.

Open Text has not engaged in overly aggressive discounting practices relative to many of its competitors. Over the past several years, the Company has maintained an average deal size of between $250,000 and $300,000. By contrast, IXOS content management products had been under significant pricing pressure, driving the average deal size to approximately $100,000 over the same period.

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Fiscal 2004 Overview

The most significant corporate transaction during fiscal 2004 was the acquisition of IXOS. The strength of IXOS’ product-line is its strong offering in the area of content management—a key aspect of ECM. Traditionally, the strength of Open Text’s product offering has been its collaboration functionality. Taken together, the Company believes that the unprecedented one-stop shopping combination of collaboration and content functionality achieved through this acquisition provides the Company with the most complete ECM suite in the industry. As of June 30, 2004, the two organizations are now organized as one global organization, and perhaps most importantly, the Company’s integrated product roadmap is now complete and published. General availability of the Company’s first integrated product—Livelink WCM Server occurred in the fourth quarter of fiscal 2004 with additional integrated products scheduled in the latter half of calendar 2004. The majority of the IXOS restructuring efforts were completed by June 30, 2004, although some aspects of the Company’s plans will get executed in early fiscal 2005. As a results, the Company believes that the synergies between the two companies are only now just starting to be realized, and the Company is optimistic that these will continue and broaden into fiscal 2005. The Company strives to prudently manage expenses. Expense management played a key role in the profitability achieved in fiscal 2004. From a products perspective, the continued growth in the Company’s core Livelink business reinforced the fact that the Company’s value proposition for the ECM market is being well received.

Fiscal 2004 Compared with Fiscal 2003

Revenues. Total revenues included license revenues, customer support revenues, and service revenues. Total revenues increased 64% from $177.7 million in fiscal 2003 to $291.1 million in fiscal 2004. License revenues increased 60% from $76.0 million in fiscal 2003 to $121.6 million in fiscal 2004. The overall increase in revenue was significantly impacted by several acquisitions that the Company completed in fiscal 2004. During fiscal 2004, the Company acquired Gauss, DOMEA eGovernment, and IXOS. On a combined basis, revenues stemming from these acquisitions accounted for approximately 76% of the revenue growth achieved during fiscal 2004 compared to fiscal 2003. The remaining $27.3 million or 15% represents organic revenue growth achieved during fiscal 2004. Additionally, $10.3 million was contributed from companies acquired during fiscal 2003 which were not included in fiscal 2003 results for the entire fiscal year. The impact that both fiscal 2004 and fiscal 2003 acquisitions had on the Company’s revenue growth was reasonably consistent across license, service and support revenues. As these results indicate, although acquisitions represented the largest component of growth during fiscal 2004, the Company’s core operations still achieved strong organic growth. This organic growth reflects the continued demand in the marketplace for the Company’s software solutions. The Company defines organic growth as being the period-to-period growth achieved when the impact of the current period’s acquisitions are removed. Consequently, organic growth in fiscal 2004 represents the fiscal 2004 revenue growth compared to fiscal 2003 once the impact of IXOS, Gauss and DOMEA eGovernment are removed. On this basis, the Company’s organic revenue growth during fiscal 2004 was 15%.

An important factor responsible for the increase in license revenues from $76.0 million to $121.6 million during fiscal 2004 was the impact of the fiscal 2004 acquisitions. These transactions accounted for approximately $34.0 million of license revenue growth from fiscal 2003 or approximately 75% of the year-to-year growth. Of the remaining growth, $3.7 million related to a full inclusion of fiscal 2003 acquisitions. The Company’s organic growth relating to license revenue was 14% during fiscal 2004 as compared with fiscal 2003. This strong organic growth was driven by the fact that customers who purchase the Company’s products to address a specific problem in their business very quickly find alternative uses for Livelink and within a year often have Livelink managing multiple processes. The organic growth also reflects the fact that the Company remains focused on specific industry verticals for its solution offerings. The Company operates sales verticals for the pharmaceutical, financial services, government, and oil and gas industries. During fiscal 2004, the continued development and strong performance in the Company’s government vertical had a particularly significant impact on the Company’s fiscal 2004 license revenue growth, although the Company’s pharmaceutical and financial services verticals also performed well. Additionally, the continued adoption of the Company’s newly introduced modules

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was a further contributor to growth. Most of these new products are small components of code licensed as point solutions designed to accelerate deployment by addressing very specific and recurring issues faced by customers. Revenue in this category totaled approximately $1.0 million during fiscal 2003, and increased to approximately $5.8 million during fiscal 2004. During fiscal 2004, the Company did not experience a significant variation from fiscal 2003 in the amount of revenue realized from large license transactions.

Customer support revenues increased 72% from $63.1 million in fiscal 2003 to $108.8 million in fiscal 2004. Support revenues stemming from fiscal 2004 acquisitions accounted for approximately 65% of the revenue growth achieved during fiscal 2004 compared to fiscal 2003. Of the remaining 35% or approximately $17.5 million of growth achieved during fiscal 2004, $5.5 million was contributed from companies acquired during fiscal 2003 which were not included in fiscal 2003 results for the entire fiscal year. The Company’s organic growth relating to license revenue was 28% during fiscal 2004 as compared with fiscal 2003. The increase in customer support revenues resulted from several factors including the increase in the number of licenses granted in fiscal 2004, as well as strong renewal rates for maintenance contracts for existing customers. The Company continued to experience very strong service contract renewal rates for all of its products, most notably its core Livelink products. Over the past year, the Company effectively implemented price increases in all regions for its customer support services. The increases contributed to the revenue growth achieved in fiscal 2004. Furthermore, growth in support revenue stemming from the Company’s core Livelink products was 24% as compared with fiscal 2003. The Company believes that this fact demonstrates that the Company’s customers are very satisfied and dedicated to the Company’s core product offering. The Company believes that during fiscal 2005 the integration of IXOS’ customer support organization will create further operational synergies.

Service revenues increased 57% from $38.6 million in fiscal 2003 to $60.6 million in fiscal 2004. Service revenues stemming from fiscal 2004 acquisitions accounted for the entire revenue growth achieved during fiscal 2004 compared to fiscal 2003. If the impact of the fiscal 2004 acquisitions were removed, the Company’s organic services revenue growth was a decrease of approximately 5%. This decrease in core service revenues was primarily attributable to the continued challenging market for services engagements globally. The Company is witnessing many of its customers addressing its services needs with in-house personnel as opposed to using third-parties. Given the difficult service environment, the Company is currently focusing on delivering services solutions which have been effective for other customers as opposed to trying to deliver unique consulting solutions to each customer. In response to this challenging services environment, the Company will be taking active steps in fiscal 2005 to maximize service revenue opportunities when it will align its services resources by vertical industry. This mirrors a similar change that the Company’s sales organization undertook approximately 2 years ago and which has demonstrated considerable success. The Company expects that this will result in the Company’s sales and services organization working more closely together, with similar areas of expertise, and that these changes will help create more revenue opportunities.

Cost of revenues. Cost of license revenues consisted primarily of the costs associated with the royalties payable to third parties whose software is bundled with the Company’s products, as well as product media, duplication, manuals, packaging expenses, and finder’s fees. Cost of license revenues increased 65% from $6.6 million in fiscal 2003 to $10.8 million in fiscal 2004. As a percentage of license revenues, the cost of license revenues remained consistent at 9% during fiscal 2004. The increase in cost of license revenues in absolute dollars is a reflection of the increase in license revenues. The consistency in the cost of license revenues as a percentage of license revenues is due to the fact that the cost structure has remained unchanged. In each of fiscal 2003 and fiscal 2004, costs related to third-party product costs, as well as royalties, represented the vast majority of the cost of license revenue. Also, the companies acquired in fiscal 2004 maintained a similar cost structure.

Cost of customer support revenues is comprised primarily of technical support personnel and their related costs. Cost of customer support revenues increased 95% from $10.4 million in fiscal 2003 to $20.3 million in fiscal 2004, primarily as a result of increased personnel costs in fiscal 2004 as compared with fiscal 2003. Over half of the increase in the cost of customer support revenues is attributable to personnel costs. The majority of the increase in personnel costs is attributable to personnel costs related to fiscal 2004 acquisitions, although the

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Company also experienced an increase in personnel costs for its core operations due to the inclusion of a full year’s impact of fiscal 2003 acquisition personnel costs. Support personnel increased from 140 at the end of fiscal 2003 to 238 at the end of fiscal 2004. Whereas historically the Company’s support personnel has resided predominantly in North America, the Company’s European based 2004 acquisitions have made Europe almost as significant as North America with respect to support personnel. The increased number of personnel in the Company’s customer support organization drove increases in variable expense categories including communication, travel and office expenses. Occupancy costs increased during fiscal 2004 commensurate with the increase in facilities due to fiscal 2004 acquisitions. As a percentage of customer support revenues, customer support costs increased from 16% in fiscal 2003 to 19% in fiscal 2004. This increase in percentage terms reflects the fact that the companies acquired during fiscal 2004 have higher cost structures compared to the Company’s core operations and the Company has not yet realized full synergies from their integration.

Cost of service revenues consisted primarily of the costs of providing integration, customization and training with respect to the Company’s various software products. The most significant component of cost of service revenue is personnel related expenses, while other components include costs associated with travel, occupancy, and third-party subcontracting. Cost of service revenues increased 68% from $28.2 million in fiscal 2003 to $47.3 million in fiscal 2004. Cost of service revenues as a percentage of service revenues increased from 73% in fiscal 2003 to 78% in fiscal 2004. Additional costs assumed as a result of the fiscal 2004 acquisitions effectively accounted for the entire increase in cost of service revenues; approximately 60% of this increase is the result of the added IXOS related expenses, while the balance is largely comprised of other expenses coming from Gauss and DOMEA eGovernment. The general mix of expenses associated with the cost of service revenues for the fiscal 2004 acquisitions is generally consistent with that of the Company’s core business, with personnel subcontracting and travel representing approximately three quarters of the entire expense base in this area. The Company experienced higher billing utilization rates during fiscal 2004 than it did during fiscal 2003. Service personnel increased from 229 at the end of fiscal 2003 to 475 at the end of fiscal 2004. This increase in headcount driven by the 2004 acquisitions occurred primarily in European countries; almost 70% of the service organization personnel were in Europe at the end of fiscal 2004, an increase of approximately 40% from the end of fiscal 2003.

Research and development expenses. Research and development expenses consisted primarily of engineering personnel expenses, contracted research and development expenses, and facilities and equipment costs. To date the Company has expensed all research and development costs as incurred. Research and development expenses increased 49% from $29.3 million in fiscal 2003 to $43.6 million in fiscal 2004 and, as a percentage of total revenues, decreased slightly from 16% in fiscal 2003 to 15% in fiscal 2004. The increase in research and developments expenses in absolute dollars in fiscal 2004 resulted primarily from approximately $12.0 million of additional expenses added as part of the integration of the development organizations of the fiscal 2004 acquisitions, primarily attributable to IXOS. The balance of the increase is attributable to increased spending within the Company’s core development organization, which recorded an additional $4 million in operating expenses during fiscal 2004 and was offset by increased tax credits associated with qualifying research and development activities of $2 million. Development personnel increased from 305 at the end of fiscal 2003 to 546 at the end of fiscal 2004. The vast majority of growth in the Company’s development organization was centered in Europe. Whereas the Company had effectively no European development presence at the end of fiscal 2003, at the end of fiscal 2004 over 40% of the Company’s development headcount was in Europe.

Sales and marketing expenses. Sales and marketing expenses consisted primarily of compensation of sales and marketing personnel, as well as expenses associated with advertising, trade shows, facilities and other expenses related to the sales and marketing of the Company’s products and services. Sales and marketing expenses increased 60% from $54.5 million in fiscal 2003 to $87.4 million in fiscal 2004. Sales and marketing expenses decreased slightly as a percentage of total revenues from 31% in fiscal 2003 to 30% in fiscal 2004. The vast majority of the increase in sales and marketing expense in absolute dollars was the result of costs added because of the fiscal 2004 acquisitions, as only approximately 10% of the increase in sales and marketing expenses relates to the Company’s core operations. Furthermore, the increased spending within the Company’s

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core operations was almost exclusively focused on marketing as the Company’s core spending on sales was consistent with the prior year. With ECM becoming a viable, growing segment of the software market, the Company is placing additional emphasis on marketing initiatives in an effort to be globally regarded as the ECM market leader. Sales and marketing personnel increased from 322 at the end of fiscal 2003 to 498 at the end of fiscal 2004. Similar to the other functional groups, this increase in headcount was focused in Europe due to the fiscal 2004 acquisitions. As of June 30, 2004, approximately 50% of the Company’s sales and marketing personnel were located in Europe as compared to 30% in the prior year.

General and administrative expenses. General and administrative expenses consisted primarily of the salaries of administrative personnel, related overhead, facilities expenses and corporate public company costs. General and administrative expenses increased 69% from $13.5 million in fiscal 2003 to $22.8 million in fiscal 2004 but remained consistent as a percentage of total revenues at 8% in both fiscal 2004 and 2003. Over half of the increase in general and administrative expenses relate to expenses added as part of the 2004 acquisitions. Approximately 50% of the remaining increase in general and administrative expenses relates to increased personnel the Company added throughout fiscal 2004. As the size and scope of the Company’s business continues to grow, Open Text requires a more sophisticated infrastructure to support the changing needs of the business. All areas within general and administrative expenses, including finance, information technology, and human resources, added headcount during the year. Total general and administrative personnel increased from 200 as of June 30, 2003 to 348 as of June 30, 2004. Whereas approximately 75% of the Company’s general and administrative personnel were located in North America as of June 30, 2003, this percentage has been reduced to a little over 50% as of June 30, 2004 as a result of the fiscal 2004 acquisitions. The remainder of the increase in general and administrative expenses is comprised of higher spending in a number of non-personnel areas, including compliance with new legislation including the Sarbanes-Oxley Act, as well as increased spending with respect to consulting and travel resulting from significant acquisition integration activities.

Depreciation expenses. Depreciation expense increased 42% from $5.0 million in fiscal 2003 to $7.1 million in fiscal 2004. Almost all of the increase in depreciation expense is a result of increased depreciation expenses recorded during the year relating to capital assets acquired as part of the fiscal 2004 acquisitions. Before the impact of the fiscal 2004 acquisition depreciation is considered, the Company’s depreciation expense remained consistent with the depreciation expense the Company recorded during fiscal 2003. During the year, the impact of the full depreciation of older assets was not offset by depreciation on newer capital assets.

Amortization of acquired intangible assets. Amortization of acquired intangible assets includes the amortization of both acquired technology and customer assets. Amortization of acquired intangible assets increased 249% from $3.2 million for fiscal 2003 to $11.3 million for fiscal 2004. This increase was principally the result of acquisitions during fiscal 2004, which accounted for 69% of the increase as the size of acquisitions completed during fiscal 2004 was far greater than those completed in any previous fiscal year. As a result, the amount allocated as part of the various purchase price allocations, to intangible assets, was also greater than in any previous fiscal year. Because the amortization of acquired intangible assets has only been included from the date of acquisition, this expense will continue to increase substantially in fiscal 2005 when a full year amortization is recorded for the fiscal 2004 acquisitions. The remaining 31% increase was due to amortization of acquired intangibles from acquisitions in fiscal 2003 being included for a full fiscal year as compared to the 3 months of amortization expense recorded on the 2003 acquisitions during fiscal 2003.

Other income. Other income decreased 92% from $2.8 million for fiscal 2003, compared to $0.2 million for fiscal 2004. Other income consists primarily of foreign exchange gains or losses, which reflect relative movements in the various foreign currencies in which the Company conducts business.

Interest. Interest income, net remained unchanged at $1.2 million in fiscal 2003 and fiscal 2004.

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Income taxes. During fiscal 2004, the Company recorded a tax provision of $7.3 million compared to $3.2 million during fiscal 2003. The increase in the Company’s tax provision is due to the fact that during fiscal 2004, the Company became taxable or began using acquired losses in certain taxing jurisdictions where it was previously able to use internally generated tax loss carry forwards. When the Company uses losses acquired in business combinations, the benefit of those losses impacts the purchase equation and not the income statement as occurs with internally generated loss carryforwards.

The Company’s deferred tax asset of $46.4 million arises from available income tax losses and future income tax deductions. The Company’s ability to use these income tax losses and future income tax deductions is dependent upon the operations of the Company in the tax jurisdictions in which such losses or deductions arose. The deferred tax liability arises from the amortization of timing differences relating to acquired intangible assets, non-capital losses acquired at a discount in asset acquisitions, and future income inclusions. Management records a valuation allowance against deferred income tax assets when management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Based on the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax asset and tax planning strategies, management has determined that a valuation allowance of $126.9 million is required in respect of its deferred income tax assets as at June 30, 2004. A valuation allowance of $5.7 million was required for the deferred income tax assets as at June 30, 2003. This increase is primarily attributable to valuation allowances against acquired loss carryforwards in the year. In order to fully utilize the recognized deferred income tax assets of $46.4 million, the Company will need to generate aggregate future taxable income in applicable jurisdictions of approximately $133 million. Based on the Company’s current projection of taxable income for the periods in the jurisdictions in which the deferred income tax assets are deductible, it is more likely than not that the Company will realize the benefit of the recognized deferred income tax assets at June 30, 2004.

During fiscal 2004, the Company recorded deferred tax assets of $11.9 million and deferred tax liabilities of $2.3 million in connection with its acquisition of IXOS. Deferred tax assets associated with the acquisition of Gauss were fully offset by a valuation allowance.

Fiscal 2003 Compared with Fiscal 2002

Revenues. Total revenues included license revenues, customer support revenues, and service revenues. Total revenues increased 15% from $154.4 million in fiscal 2002 to $177.7 million in fiscal 2003. Revenues from license increased 15% from $66.0 million in fiscal 2002 to $76.0 million fiscal 2003. The increase in license revenues was a result of several factors, including the Company’s focus on certain industry verticals for its solution offerings. In particular, the emergence of strong performance in the pharmaceutical, government, and financial services sectors contributed to the Company’s fiscal 2003 license revenue growth. Also contributing to license revenue growth were the acquisitions completed during fiscal 2003. Specifically, approximately $5.6 million of license revenue was recorded during the fiscal year relating to the fiscal 2003 acquisitions. Additionally, the introduction of new modules designed to accelerate deployment and address very specific issues faced by customers further contributed to the Company’s growth in license revenues. Revenue of these products totaled approximately $1.0 million during fiscal 2003. During fiscal 2003, the Company also saw the continued return of large license transactions, a trend that began during the fourth quarter of fiscal 2002.

Customer support revenues increased 30% from $48.7 million in fiscal 2002 to $63.1 million in fiscal 2003. The increase in customer support revenues resulted from several factors including the increase in the number of licenses granted in fiscal 2003, as well as strong renewal rates for maintenance contracts for existing customers. During fiscal 2003, the Company effectively implemented price increases in all regions for its customer support services and those increases contributed to the revenue growth achieved in fiscal 2003. Additionally, in fiscal 2003 the Company’s customer support organization began to offer to customers a number of value added support programs. The acquisitions in fiscal 2003 also contributed to the growth in customer support revenues. Approximately 11% of the growth in customer support revenues relates to the fiscal 2003 acquisitions, while the remaining 19% growth relates to the Company’s organic business. The Company’s renewal rate of maintenance contracts for the Company’s products was in excess of 90%.

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Service revenues decreased 3% from $39.7 million in fiscal 2002 to $38.6 million in fiscal 2003. The decrease in service revenues was primarily attributable to the continued challenging market for services engagements globally. Although in aggregate the Company’s service revenue decreased slightly from fiscal 2002 to fiscal 2003, the Company experienced an increase in Livelink-related service engagements. The Company also generated consulting and integration revenues relating to customers of companies acquired during fiscal 2003 totaling approximately $600,000 during fiscal 2003. These increases were more than offset by a decrease in services revenue relating to certain of the Company’s older products.

Cost of revenues. Cost of license revenues consisted primarily of the costs associated with the royalties payable to third-parties whose software is bundled with the Company’s products, as well as product media, duplication, manuals, packaging expenses, and finder’s fees. Cost of license revenues increased 23% from $5.3 million in fiscal 2002 to $6.6 million in fiscal 2003. As a percentage of license revenues, the cost of license revenues increased slightly from 8% during fiscal 2002 to 9% during fiscal 2003. The increase in cost of license revenues in absolute dollars was a reflection of the increase in license revenues. The increase in cost of license as a percentage of license revenues was due to higher third-party product costs included in licenses granted during fiscal 2003 associated largely with acquired companies’ products.

Cost of customer support revenues is comprised primarily of technical support personnel and their related costs. Cost of customer support revenues increased 24% from $8.4 million in fiscal 2002 to $10.4 million in fiscal 2003, primarily as a result of increased personnel costs in fiscal 2003 as compared with fiscal 2002. Increased personnel costs relating to the Company’s core operations increased approximately $1.1 million, while the impact of the Company’s fiscal 2003 acquisitions totaled approximately $900,000, the most significant component of which were personnel costs. As a percentage of customer support revenues, customer support costs decreased slightly from 17% in fiscal 2002 to 16% in fiscal 2003, reflective of the fact that the Company effectively restructured the acquired companies’ cost structures and that the Company realized some economies of scale as its support organization continued to grow.

Cost of service revenues consisted primarily of the costs of providing integration, customization and training. Cost of service revenues increased 3% from $27.4 million in fiscal 2002 to $28.2 million in fiscal 2003. Cost of service revenues as a percentage of service revenues increased from 69% in fiscal 2002 to 73% in fiscal, 2003. Additional costs assumed as a result of the fiscal 2003 acquisitions accounted for approximately $500,000 of the increase in absolute dollars in costs of service revenues compared with fiscal 2002. Also impacting costs of service revenues is the fact that in fiscal 2003 the Company recorded approximately $700,000 less of investment tax credits through its services organization, due to the fact that the amount of investment tax credits recorded during fiscal 2002 was atypically high. Investment tax credits are recorded as a credit to cost of service revenues. Consequently, once the impact of the 2003 acquisitions and investment tax credits are removed, the Company’s core services organization actually realized a decrease in costs in fiscal 2003 as compared with fiscal 2002. This decrease in core cost of services was a result of both a slight decrease in personnel costs related to lower personnel in the Company’s services organization during fiscal 2003, as well as lower expenses incurred with respect to the Company’s 2003 user’s conferences as compared with fiscal 2002.

Research and development expenses. Research and development expenses consisted primarily of engineering personnel expenses, contracted research and development expenses, and facilities and equipment costs. The Company expensed all research and development costs as incurred during the year. Research and development expenses increased 22% from $24.1 million in fiscal 2002 to $29.3 million in fiscal 2003 and, as a percentage of total revenues, remained relatively consistent at 16% in both fiscal 2002 and 2003. The increase in research and development expenses in absolute dollars in fiscal 2003 resulted primarily from approximately $4.0 million of additional expenses added as part of the integration of the development organizations of the companies acquired in fiscal 2003. The increase in research and development expense in fiscal 2003 as compared with fiscal 2002 also resulted from the fact that in fiscal 2003 the Company recorded approximately $750,000 less in investment tax credits, which were recorded as a reduction to research and development expenses. The investment tax credits recorded during fiscal 2002 were atypically high, and were not considered to be indicative of claims expected to be made in subsequent years.

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Sales and marketing expenses. Sales and marketing expenses consisted primarily of compensation of sales and marketing personnel, as well as expenses associated with advertising, trade shows, facilities and other expenses related to the sales and marketing of the Company’s products and services. Sales and marketing expenses increased from $51.1 million fiscal 2002 to $54.5 million in fiscal 2003. Sales and marketing expenses decreased as a percentage of total revenues from 33% in fiscal 2002 to 31% in fiscal 2003. Of the increase in sales and marketing expense in absolute dollars, $1.0 million related to additional marketing initiatives, approximately half of which related to the companies acquired in fiscal 2003. Additionally, sales costs assumed as part of the Company’s 2003 acquisitions accounted for an additional $5.4 million of sales and marketing expenses during fiscal 2003. Consequently, sales expenses decreased by approximately $1.4 million within the Company’s core business operations during fiscal 2003, the majority of which relates to approximately $900,000 less of severance costs during fiscal 2003 compared to fiscal 2002, when the Company underwent an internal resizing program aimed at reducing costs throughout the organization.

General and administrative expenses. General and administrative expenses consisted primarily of the salaries of administrative personnel and related overhead and facilities expenses. General and administrative expenses increased 8% from $12.5 million in fiscal 2002 to $13.5 million in fiscal 2003 but remained consistent as a percentage of total revenues at 8% in both fiscal 2002 and 2003. Of the $1.0 million increase in general and administrative expenses, approximately half related to the 2003 acquisitions, most notably Centrinity. The balance of the increase in general and administrative expenses related to increases in a number of administrative areas, the majority of which were driven by a higher volume of business activity in fiscal 2003 as compared with fiscal 2002.

Depreciation expenses. Depreciation expense decreased 10% from $5.6 million in fiscal 2002 to $5.0 million in fiscal 2003. The decrease in depreciation expense was a result of the fact the Company did not make significant capital expenditures in fiscal 2003. Depreciation relating to the capital assets added as part of the fiscal 2003 acquisitions was only recorded for a partial year, and as a result this additional depreciation did not offset the reduction realized from the Company’s core base of capital assets during the year.

Amortization of acquired intangible assets. Amortization of acquired intangible assets includes amortization of both acquired technology and customer assets. Additionally, during fiscal 2002 amortization of acquired intangible assets included amortization of goodwill on acquisitions. At the beginning of fiscal 2003, the Company discontinued its amortization of goodwill consistent with new accounting pronouncements. As a result, amortization of acquired intangible assets decreased 50% from $6.5 million for fiscal 2002 to $3.2 million for fiscal 2003. This decrease was principally the result of the discontinued amortization of goodwill, which was partially offset by additional amortization on the intangible assets recorded as part of the fiscal 2003 acquisitions.

Other income (loss). Other income increased 73% from $1.6 million for fiscal 2002, compared to $2.8 million for fiscal 2003. During fiscal 2002, the gain of $1.6 million related primarily to the Company’s attempted acquisition of Accelio Corporation, a software company located in Ottawa, Ontario. The gain that the Company realized on this attempted acquisition arose from the sale of shares of Accelio common stock owned by the Company and in connection with certain lock-up agreements in connection with the attempted acquisition, partially offset by the costs incurred. The $2.8 million gain in fiscal 2003 was primarily comprised of foreign exchange gains realized during the year, the most significant cause of which was the appreciation of the Euro against the U.S. dollar.

Interest. Interest income decreased 33% from $1.9 million in fiscal 2002, compared to $1.2 million in fiscal 2003. The decrease was due to lower interest rates realized during fiscal 2003 as compared with fiscal 2002.

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Income taxes. During fiscal 2003, the Company recorded a tax provision of $3.2 million compared to $289,000 during fiscal 2002. The increase in the Company’s tax provision was due to the fact that during fiscal 2003, the Company became taxable in certain taxing jurisdictions where it was previously able to use loss carryforwards.

Quarterly Results

The following table summarizes selected unaudited quarterly financial data for the past eight quarters: