OPEN TEXT CORP - Annual Report: 2005 (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, 2005.

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 90 days.    Yes  ¨    No  x

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 Rule 12b-2).    Yes  x    No  ¨

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

Aggregate market value of the Registrant’s Common Shares held by non-affiliates, based on the closing price of the Common Shares as reported by the NASDAQ National Market on December 31, 2004, was approximately $1.0 billion. The number of the Registrant’s Common Shares outstanding as of September 19, 2005 was 48,449,865.

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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, future events, 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”. 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.

The Company and Industry

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, July 1, 2003, July 1, 2004 and July 1, 2005. References herein to the “Company” or “Open Text” refer to Open Text Corporation and its subsidiaries. The Company’s current principal office is at 185 Columbia Street West, Waterloo, Ontario, Canada N2L 5Z5, and its telephone number at that location is (519) 888-7111. The Company is in the process of constructing a new office facility in Waterloo, Ontario, Canada. It is expected that the facility will be occupied on or before the end of the 2005 calendar year. As a result of this, the Company’s principal executive office will change to 275 Frank Tompa Drive, Waterloo, Ontario, Canada, N2L 0A1. The Company’s internet address is www.opentext.com. Throughout this Annual Report on Form 10-K, the term “Fiscal 2005” means the Company’s Fiscal year beginning on July 1, 2004 and ending on June 30, 2005, the term “Fiscal 2004” means the Company’s Fiscal year beginning 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 Annual Report on Form 10-K are expressed in U.S. dollars.

Access to the Company’s 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 United States Securities and Exchange Commission (the “SEC”) may be obtained through the Investor Relations section of the Company’s website at www.opentext.com as soon as reasonably practical after the Company electronically files or furnishes these reports. The Company does not charge for access to and viewing of these reports. Information on the Company’s Investor Relations page and the Company 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, the Company’s filings with the SEC may be accessed through the SEC’s Electronic Data Gathering, Analysis and Retrieval system at www.sec.gov. All statements made in any of the Company’s securities filings, including all forward-looking statements or information, are made as of the date of the document in which the statement is included, and the Company does not assume or undertake any obligation to update any of those statements or documents unless the Company is required to do so by law.

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Defining Enterprise Content Management (“ECM”)

The vast majority of information contained in an organization is unstructured data, (i.e. “words”). Whereas companies have spent the better part of the last decade focusing on managing the structured data (i.e. “numbers” that Enterprise Resource Planning (“ERP”) systems focus on), the focus has now shifted to the larger task of managing “words”. The management of “words” is the type of data that the ECM market is focused on.

ECM is the set of technologies used to capture, manage, store, preserve, and deliver content and documents related to organizational processes and that allow the management of an organization’s unstructured content. These ECM technologies include:

Open Text

Open Text^™ is an independent software vendor providing ECM solutions that bring together people, processes, and information. In today’s highly regulated and interactive business world, organizations need to operate in structured ways while simultaneously giving people the freedom to innovate and grow. The volume of content being generated in organizations today is overwhelming and is growing exponentially. This situation creates a significant challenge to physically manage the storage of this content, to operationally manage the content so that it adds value to the organization, and to legally manage the content to ensure compliance, security, and to protect intellectual property. By enabling organizations to manage content from initial creation to final archive, the Company offers comprehensive, end-to-end content lifecycle management solutions.

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 ECM^™, which seamlessly combines collaboration and content management, transforming information into knowledge and providing 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:

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Open Text is one of the leaders in creating ECM technologies as a result of Livelink ECM, a unified software platform upon which the Company’s content, support, and consulting services are layered to provide customers with complete solutions to their problems. Fully Web-based with an open architecture, Livelink ECM 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 complete solutions that are easily incorporated into existing enterprise business systems.

Many vendors have adopted the mantle of ECM, although the scope of definition still varies and continues to be central to vendor differentiation. Most industry analysts have also adopted research practices labeled ECM, and trade publications and trade associations have also adopted the ECM label, all signaling the viability of the market overall.

The Company believes three key factors distinguish Livelink ECM from competing alternatives.

During Fiscal 2005, the Company completed integrating technology acquired from IXOS Software AG (“IXOS”) into Livelink ECM. With this addition, Livelink ECM now provides comprehensive lifecycle management, operating on the most popular storage systems, for an organization’s primary enterprise business system, including email, ERP, Customer Relationship Management (“CRM”), Microsoft SharePoint^® and other ECM repositories. IXOS originally developed this business in cooperation with SAP AG^® around SAP’s R/3^® product and later broadened the offering to support other enterprise applications. This integrated technology provides superior capability for Livelink ECM to drive the behavior of the underlying storage systems based on the classification and disposition of content. Customers of Open Text products have the option of adding Open Text’s proven and robust lifecycle platform to their existing Livelink ECM deployment. Customers of IXOS have the option of adding a proven and robust collaborative content management system and other offerings.

Open Text has continued to advance its solutions strategy of identifying a select number of industry-specific or repeatable line-of-business problems for which the Livelink ECM software is uniquely well-suited. The addition of proven lifecycle technology from IXOS has accelerated Open Text’s entrance to specific solutions for email archiving and management, accounts payable and accounts receivable. All three of these solutions require proven scalability to manage the massive number of email messages or business documents. The IXOS brand name is mostly known within SAP circles and the Company continues to use it in that market for transition purposes. In all other cases, Open Text promotes the Livelink ECM brand, reflecting its suite of integrated offerings.

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During Fiscal 2005, Open Text also completed integration of other technology assets from acquired businesses, namely, advancing the Web publishing and Web page configuration capabilities of Livelink ECM by leveraging Web content management technology from both IXOS and Gauss Interprise AG (“Gauss”), which it acquired on October 16, 2003, and high-production business process management technology from IXOS.

In addition to these integrated products, the Company provides consulting 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 regarding its product offerings 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”). Business, technical, and marketing relationships have been formed with industry leaders such as Adobe Systems Incorporated, Accenture, BearingPoint Co., Ltd., Capgemini L.L.C, Computer Science Corporation (“CSC”), Deloitte and Touche L.L.P, Electronic Data Systems Corporation (“EDS”), EMC Corporation, Hewlett-Packard Development Company L.P, Hitachi Data Systems, Microsoft Corporation, Network Appliance, Inc., Oracle, SAP, Siebel Systems, Inc., Siemens Business Services, and Sun Microsystems.

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 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. The Company expects to continue to evaluate the acquisition of businesses and/or technologies that are complementary to its product offerings.

Products and Technology

Livelink

Livelink is the Company’s flagship ECM product. Livelink ECM is comprised of two platform components—the Archive Server and Enterprise Server. Archive Server provides a scalable content repository to various enterprise applications and is optimized across today’s most popular storage devices. Enterprise Server provides a full-range of spontaneous-to-rigorous collaboration and content management capabilities. Livelink ECM 9.5, the latest release, completed the foundational integration between the Enterprise Server and Archive Server. Archive Server is the highly scalable common Enterprise Content Repository (ECR) where all relevant content and its associated context information (meta-information like author, version, attributes, access rights, etc.) is stored and kept available for ongoing access. This comprehensive content management platform can manage and archive even the highest volumes of data and documents, and seamlessly integrates into leading enterprise applications. Because the Archive Server implements one consistent data archive infrastructure across all ECM components, it enables customers to apply one consistent content lifecycle policy across all content types—regardless of the content’s origin. Archive Server infrastructure seamlessly manages and integrates applications so that data redundancy can be avoided, while still providing access to all enterprise content.

Livelink ECM runs on a variety of operating systems, including Microsoft Windows Server 2003^® (Standard, Datacenter, Enterprise, and Web Editions), Microsoft Windows Server 2000 (Standard, Advanced,

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and Datacenter Editions), Sun SPARC/Solaris^™ 2.8 and 2.9 (64-bit), Hewlett-Packard HP-UX^™ 11i v1 (PA-RISC), and SUSE Linux SLES 9.0. The latest release of Livelink ECM includes English, French, German, and Japanese language versions. Livelink ECM is certified with a variety of relational database management systems (Microsoft SQL Server 2000 Standard and Enterprise Editions and Oracle 9i and 10g), Web servers (Sun Java Web Server 6.1, Sun ONE 6.0, Apache 2.0.x, and Microsoft Internet Information Server 5.0/6.0), Web application servers (Tomcat 5.0.x, BEA WebLogic 8.1, Sun Java Application Server 8, IBM WebSphere, and New Atlanta ServletExec), and Web browsers (Netscape Navigator^™, Microsoft Internet Explorer^™, Mozilla, and Safari).

Additional improvements in Livelink ECM 9.5 include:

Control of Content throughout its Entire Lifecycle is Pervasive

Compliance, security, and intellectual property protection are driving requirements for controlling content over its entire lifecycle. Businesses are faced with “too many bytes” to effectively manage the physical storage, “too much content” to effectively use operationally, and “too much liability” to the corporation for not doing this well. Livelink ECM provides an archive of data in a central repository, which remains secure and easily accessible and delivers a convenient and cost-effective storage medium. Livelink ECM manages and stores both the metadata (context information about content) and the content. Metadata is always stored online in a relational database. The Livelink ECM repository can maintain as much metadata as required to locate a document. Livelink ECM has an option to full-text index documents, which provides a way to fully exploit business-relevant information. The repository supports queries based on metadata, full-text index and even a combination of both. Another option is to render document content to a long-term format like TIFF or PDF. An administrator can choose to store the content on a file server, optical devices, tape or other long-term storage medium. Using digital signatures (time stamps) it can be assured that content cannot be modified without recognition. In Fiscal 2005, Open Text invested in expanding partnerships with storage vendors, manufacturing optical media (DVD-R, WORM), jukeboxes, and non-rewritable/non-erasable media. Open Text has set up partnerships with all major players including EMC², NetApp, StorageTek, HP, and Hitachi Data Systems (HDS), and is now able to offer the broadest spectrum of storage options in the market. Report output (print lists, document lists) can be captured and

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automatically indexed using COLD features. Metadata of COLD documents can be either kept in the SAP system or Livelink ECM, COLD content is available near-line after archiving. Users of Livelink ECM–DocuLink features can search and retrieve archived documents. Hyperlinks in the print lists provide access to archived originals as well.

Information Retrieval is Pervasive

Open Text’s heritage is rooted in information retrieval and that heritage is pervasive throughout Livelink ECM. Livelink ECM’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 ECM 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 ECM’s information retrieval provides high performance and linear scaling, even across millions of documents and terabytes of information. Livelink ECM 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 characterized by complex structures. For example, documents often contain titles, headings, sections, subsections and paragraphs. The Livelink ECM search engine can search any number of different, user-defined document structures. It supports SGML and XML, which are key international standards for structured documents.

Sophisticated search features include the ability to search within a subset of the overall index (including “from here” searching), contextual/proximity searching, intelligent natural language querying, an advanced search form, thesaurus support, word stemming, “sounds like” searching, “find similar document” searching, hit highlighting, clustering of results (by date, author, location, theme), auto-summarization, system and custom metadata searching, XML searching, personal and global search templates, ability to save queries and search results, federated querying, discovery of information in legacy content repositories, a powerful end-user query language, and more.

Solutions that Extend Enterprise Email and Groupware Based on Livelink ECM

Open Text offers a range of solutions based on Livelink ECM that extend ECM capabilities to enterprise email and groupware applications. Each of the Livelink ECM solutions have the Archive Server’s enterprise content repository at its foundation which extend those systems with a scalable platform for controlling content but without being disruptive to the end-user.

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Solutions that Extend Enterprise Applications Based on Livelink ECM

Open Text offers a range of solutions based on Livelink ECM that extend ECM capabilities to ERP and CRM applications. Each of these Livelink ECM solutions have the Archive Server’s enterprise content repository at its foundation, which extends those systems with a scalable platform for controlling content but without being disruptive to the end-user.

Enterprise-Wide Solutions Based on Livelink ECM

Open Text offers a range of enterprise wide solutions based on Livelink ECM. Each of the Livelink ECM solutions have the server and content repository at its foundation and adds to it a set of specialized capabilities designed to address a particular business problem that IT organizations are required to solve for the entire organization.

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Business Solutions Based on Livelink ECM

Open Text offers a selection of business solutions built on the Livelink ECM platform that enable organizations to address particular business needs. The following Livelink ECM business solutions are available:

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Industry Specific Solutions Based on Livelink ECM

Open Text offers a selection of industry-specific solutions built on the Livelink ECM platform that enable organizations to address industry-specific business needs. The following industry-specific Livelink ECM solutions are available:

Livelink ECM Architecture and Development Tools

Livelink ECM is highly scalable, extensible and customizable through the use of both the Livelink ECM—Enterprise Server Software Development Kit^™ (which includes the Enterprise Server Application Programming Interface (“LAPI”) and the Enterprise Server Builder development environment) and the Livelink ECM—Archive Server Application Programming Interface (“API”).

The Enterprise Server Software Development Kit, through Enterprise Server Builder, offers customers the ability to customize and extend the features of the Enterprise Server to meet their particular needs, and through the LAPI, includes Web Services for supporting application development in Microsoft .NET and Java 2 Enterprise Edition (“J2EE”) environments, as well as native programming interfaces.

The Archive Server API enables developers to connect legacy or custom content sources to the Archive Server’s enterprise content repository (“ECR”).

In addition to return on investment, scalability and extensibility have become primary factors in corporate spending decisions. 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 from any source into a consolidated ECM repository requires support for industry and Web standards such as HTTP(S), TCP/IP, HTML, XML, SMTP, Java, XML, WebDAV, J2EE, .NET, and Web Services standards such as SOAP and WSDL, to extract the maximum value from information and make the most of business opportunities.

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Livelink ECM Platform Features

The Livelink ECM Platform is based on a Service-Oriented Architecture (SOA), which is a service hub—a J2EE framework that adds support for distributed transactions, auto-persistence and indexing, and deployment across clusters of machines for scalability and reliability. It is powered by a library of core services, organized into User Services, Process Services, and Content Services. The shared repository and services of the Livelink ECM Platform enables Open Text and its partners to offer a range of Livelink ECM Solutions built on the Platform. The Livelink ECM Platform SOA helps the Company bring new solutions to market more quickly and helps the Company’s customers deploy them more quickly as well. Customers can start with one departmental ECM solution today, add another tomorrow, and ultimately deploy a comprehensive ECM strategy company wide, while leveraging the investments in the initial deployment.

Additional Specialized ECM Products and Solutions

Open Text provides a series of specialized collaboration, content, and knowledge-based products that can be sold independently or in combination with offerings based on the Livelink ECM platform’s Enterprise Server and/or Archive Server. Customers of these specialized products have the confidence of knowing that a single, reliable vendor can deliver a range of functionality integrated into the broader Livelink ECM platform. As their requirements evolve, these customers can acquire other solutions based on and integrated with the Livelink ECM platform, further leveraging their initial investments. Open Text’s specialized ECM products and solutions include:

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Product Development

Open Text expects to continue 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 complementary companies, technologies, and products.

Fiscal 2005 was a significant year for the Company, in terms of product development efforts. The Company successfully integrated the IXOS archiving products with the Open Text LiveLink records management and collaboration products and Open Text now has solutions on the market to archive and provide records management for content from SAP, Lotus Notes, SharePoint, and Outlook. In addition, the Company integrated the IXOS Web Content Management products with the Open Text Web Content Management products and is continuing to successfully sell their business solutions for pharmaceutical, financial services, federal government and the energy sector.

During Fiscal 2005, the Company made significant improvements advancing its Service-Oriented Architecture to even better integrate and assemble ECM components into specific business solutions rapidly and without programming skills. During Fiscal 2005, the foundational integration required to bring together the product lines of Open Text and IXOS was completed. The Company invested in research and development to provide new product solutions to help companies address the enormous volumes of content that must be managed in today’s environment. The Company continually focuses on customer requests and suggestions, particularly from customers believed to be “thought leaders” within their sectors, in its product research and development activities.

The Company’s product development efforts are aimed at providing customers in the world’s largest and most complex organizations, a scalable infrastructure for managing all their enterprise content. The Company expects large organizations will continue to invest in infrastructure and solutions for ECM as they look for better ways to manage risk and comply with regulations; find ways to extend their investment in enterprise applications

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like ERP; and make their innovating and problem-solving processes more efficient. The Company’s product development is expected to 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.

In July 2004, Open Text formed a European alliance with Siemens Business Services. The alliance combines Siemens’ broad range of IT services—consulting, systems integration and IT systems management— with Open Text’s Livelink ECM solutions. Through the alliance, the companies leverage complementary expertise and provide combined solutions to major European customers.

In August 2004, Open Text acquired the Vista Plus^® suite of products and related assets from Quest Software Inc. Vista Plus captures and stores business-critical information from packaged applications like Oracle E-Business Suite, PeopleSoft and mySAP as well as custom and mainframe legacy environments. Vista provides a strong platform from which to address report content found in ERP applications, and business intelligence (BI) software from Cognos, Business Objects, Crystal Reports and others. Vista Plus’ integration with SAP R/3, PeopleSoft and Oracle Applications provides value for automating and tracking the delivery of reports and documents to physical destinations like printers and fax servers, as well and electronic delivery to end users. The acquisition expands Open Text’s integration and report management capabilities as part of its comprehensive ECM suite.

In August 2004, Open Text’s Livelink ECM—Email Archiving for Microsoft^® Exchange software was the first to complete the Microsoft Certified for Windows Server 2003 program. This stringent third-party testing by VeriTest of Open Text’s archiving solution for Microsoft Exchange ensures ultimate compatibility with Microsoft Windows Server 2003 standards, and guarantees both higher reliability and lower total cost of ownership than non-certified applications. After intensive testing, VeriTest found that the solution complies with all Microsoft standards, and will easily accommodate upgrades, offering the highest quality and longevity to customers.

In August 2004, Open Text’s FirstClass Division released FirstClass^® 8.0, a major evolution of the Company’s suite of collaboration and communications software for academic organizations. FirstClass 8.0 provides a wealth of new features created in response to changing customer requirements, including advances in system security and manageability, in performance and scalability, and in collaboration and customization capabilities. In addition, the release continues FirstClass’ industry-leading support for a wide range of computing platforms to provide customers with flexibility and choice as they deploy FirstClass in diverse computing environments.

In August 2004, Open Text acquired Artesia Technologies, Inc. of Rockville, MD, an important step towards helping customers better integrate and manage all types of digital media for improved enterprise content management. The acquisition expands Open Text’s rich media integration and management capabilities as part of its comprehensive ECM suite, and provides a strong platform from which to address the growing content management needs of media and marketing professionals worldwide.

In September 2004, Open Text introduced a new Livelink ECM solution which integrates with PeopleSoft Enterprise Financial Management 8.8 to improve invoice handling and reduce processing costs for customers. The Open Text solution, called Livelink ECM—Accounts Payable for PeopleSoft Enterprise, applies Livelink ECM’s flexible workflow and document management tools to facilitate the processing and tracking of invoice documentation. Accounts Payable for PeopleSoft Enterprise offers a complete solution that includes flexible workflow to manage invoice routing, document management capabilities and flexible data capture technology.

In October 2004, Open Text’s Livelink ECM—Records Management software was approved by the UK Government’s National Archives electronic records management systems (ERMS) program. The UK government’s ERMS program, which incorporates the management of classified records, involves a rigorous testing process to ensure that organizations using records management software can adequately control and

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manage those records. Open Text was also the first to receive Chapter 4 Classified Records certification under the U.S. Department of Defense’s 5015.2 certification program, an important qualification for records management solutions used by the Department of Defense and other U.S. Federal agencies.

In October 2004, Open Text introduced a solution for online “communities of practice”, which bring together people in an organization with similar responsibilities or interests. The solution allows marketing professionals or purchasing managers to connect in new ways, providing a forum where they can share information and best practices, and improve processes. Called Livelink ECM—Communities of Practice, the solution provides a central workspace in Livelink ECM where members can publish relevant news, share documents, participate in member Weblogs, arrange online meetings and hold Webcasts. The solution also tracks the contributions of participants to help members identify experts in the community on specific subjects.

In October 2004, Open Text introduced a major extension of its Livelink ECM—Suite for SAP^® Solutions, which allows customers to store, manage, retrieve and archive documents from mySAP^™ ERP Financials, and mySAP ERP Human Capital Management. The new version of the product, Version 6.0, includes integration with SAP NetWeaver, which lets customers standardize on a single ERP software platform. By integrating with SAP NetWeaver, Open Text provides a complementary standard platform for managing documents and other content—a central repository that links with other systems to provide more cost-effective information management and easier access to documents.

In November 2004, Open Text introduced a revolutionary new collaboration platform called Livelink ECM— Touchpoint^™, the first solution to unify Web conferencing, blogs, team workspaces, instant messaging, and the ability to see the online presence of others into a single, seamless interface. Touchpoint is designed to better match the dynamics of human interaction, while eliminating the need for users to switch between applications to use different collaboration tools. For example, a user can see the presence of a co-worker online, instant message that person, then, with one click and within the same interface, quickly escalate that interaction into a Web meeting where the two can share documents or “white board” ideas. If necessary, the two can involve others and create a team workspace for an ongoing project.

In December 2004, Open Text released Artesia for Digital Asset Management (DAM), Version 6.0, a solution for managing digital content in large organizations. Artesia for DAM 6.0 lets customers easily administer a highly scalable, flexible, and sophisticated security model across an entire company, not just within a few departments. The solution also delivers new digital asset management services in a J2EE-based Service-Oriented Architecture. The new features were added in response to the overwhelming adoption of digital asset management solutions among customers and the need to deploy them broadly in an organization.

In March 2005, Open Text joined the Compliance and Management of Electronic Information (CMEI) Working Group. Led by the Internet Law & Policy Forum, the CMEI Working Group develops and publishes best practices, checklists and summaries of legal and regulatory requirements to provide compliance guidance. Additionally, the group holds forums where technology vendors, regulated entities, government leaders and policy experts can discuss the impact of law on end users and develop recommendations and guidelines that will facilitate compliance while allowing companies to continue effective business operations. Open Text joined Hitachi Data Systems, Hewlett Packard, Network Appliance, Oracle, Plasmon, Sun Microsystems, and Symantec Corporation to provide guidance on best practices for compliance with information retention and maintenance regulations.

In April 2005, Open Text became the first to integrate email archiving, records management and search capabilities, when it completed its rollout of the industry’s most advanced suite of email management solutions. Designed to work with Lotus Notes and Microsoft Exchange, the solutions offer the ability to address specific legal, policy and compliance requirements. The solutions include: Livelink ECM—Email Archiving, which is designed for organizations requiring lower storage costs and improved system performance, providing a basic

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email archiving infrastructure; Livelink ECM—Email Management, which lets customers set specific retention and disposition policies to emails and manage them as corporate records; and Livelink ECM—Email Monitoring, which adds support for legal discovery processes and structured retention management of all emails.

In April 2005, Open Text introduced its Livelink ECM Platform, a secure, integrated framework that combines a shared content repository with user, content, and process services in an SOA. With the introduction of the Livelink ECM Platform, Open Text marked the completion of its integration of Livelink ECM—Enterprise Server (formerly “Livelink”) with the content archive (Livelink ECM—Archive Server) from IXOS Software. The Livelink ECM Platform allows Open Text to offer a shared platform for multiple solutions, universal access to enterprise content, a common user experience, and simplified maintenance and administration. With the platform as a foundation, customers can more quickly and easily deploy a comprehensive range of Livelink ECM solutions as their needs evolve.

In May 2005, Open Text introduced a production document management solution that dramatically improves the way companies manage and store the millions of documents used in large-scale processes such as invoicing, ordering, or claims processing. The solution reduces costs, increases productivity, and helps companies gain greater value from content by providing a single access point to information and the ability to link documents to other core business applications. The Livelink ECM—Production Document Management solution works with Open Text’s new BPM offering, Livelink ECM—BPM Server, giving customers an end-to-end solution—process management, document management and a single document repository—to improve business-critical functions such as customer account statements for banks, policy statements for insurance companies, or outgoing invoices for utilities. The Production Document Management solution includes sophisticated imaging and archiving technology to import and consolidate huge volumes of paper documents into an electronic form. The system maintains every incoming document and makes it available on demand to multiple users simultaneously.

In May 2005, Open Text unveiled a new BPM solution called Livelink ECM—BPM Server, that improves customers’ business-critical processes, reduces costs and tightly integrates processes with the important documents and other content vital to users. The new BPM Server solution allows customers to automate and optimize high-volume processes comprising millions of transactions, thousands of users and multiple applications. With its comprehensive capabilities, the solution eliminates inefficiencies in processes to, for example, optimize cash flow in accounts receivable, improve response times for faster customer service, or reduce costs in procurement. The BPM Server solution integrates with a wide range of business applications, so that more required contributors can be easily incorporated into a process to improve efficiency. Its standards-based, open architecture allows it to work easily with ERP, supply chain, CRM, and office applications such as Microsoft Outlook.

The Company employed approximately 500 people in research and development and spent $138.1 million on research and development in the last three fiscal years.

Sales and Marketing

Open Text employs multiple distribution channels, including direct sales, distributors, systems integrators, ISVs and VARs to market and license its products and sell its 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 the last fiscal year that customers committing to larger purchases, particularly those that were compliance driven, were less predictable in terms of timing and likelihood of purchase as more people within their organizations became involved in the procurement decision. This also added to the lengthening of the sales cycle for such customers. Additionally, some customers remained hesitant to commit to large, enterprise-wide deployments of the

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Company’s software in Fiscal 2005. The Company, in Fiscal 2005, has also experienced more variability in its sales cycles since customers didn’t commit to a license or took longer to commit to a deal.

In Fiscal 2005, the Company made substantial investments around a small number of alliances with leading system integrators, leading storage vendors, Microsoft and SAP, by adding experienced personnel dedicated to cultivating business with those vendors. In all cases, the Company’s product portfolio and sales strategies are aligned with each of these vendors for mutual benefit.

Direct Sales. The Company employs a direct sales force as the primary method to market and license its products and sell its services. As of June 30, 2005, Open Text’s worldwide sales and marketing organization consisted of 514 employees located in approximately 150 cities.

Distributors. Open Text has distribution agreements in geographies where it does not have an adequate direct sales presence. Distribution arrangements exist with such distributors, pursuant to which each of them markets, licenses and sells Open Text products and services within a particular geography.

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 Alliance Partner program includes VARs, solution providers, technology partners, Application System Providers (“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.

Competition

The market for the Company’s products is highly competitive and competition will continue to intensify as the ECM and BPM markets consolidate. The Company competes with a large number of enterprise content management, web content management, business process management, workflow, document imaging and electronic document management companies. IBM is the largest company that competes directly with Open Text in the enterprise content and business process management markets. Documentum, a competitor in the content management market, was acquired by EMC Corporation, a large storage technology company, during 2003. EMC is now a competitor offering both content management and storage management capabilities. Additionally the Company competes with FileNet^®, which is an entity that develops, markets, sells and supports a software platform and application development framework for ECM and BPM. Numerous smaller software vendors also compete in each product area. The Company also experiences competition from systems integrators who configure hardware and software into customized systems.

Large infrastructure vendors such as Oracle Corporation and Microsoft Corporation have developed products, or plan to offer products in the content management market. Software vendors such as Tibco Software, Inc., Savvion Inc. and Pegasystems, Inc., each with a different core product foundation, have approached the business process management market from their individual market segments and may compete more intensely with the Company in the future. It is also possible that new competitors or alliances among existing competitors may emerge and rapidly acquire significant market share. The Company also expects that competition will increase as a result of ongoing software industry consolidation.

The Company believes that the principal competitive factors affecting the market for its software products and services include vendor and product reputation; product quality, performance and price; the availability of software products on multiple platforms; product scalability; product integration with other enterprise

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applications; software functionality and features; software ease of use; and the quality of professional services, customer support services and training. The Company believes relative importance of each of these factors depends upon the specific customer involved.

No one single customer has accounted for more than 10% of the Company’s revenue in any of the past three fiscal years. See Note 15 to the Fiscal 2005 Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K for information on the results of operation of the Company’s operating and geographic segments for each of the years in the three year period ended June 30, 2005.

Employees

As of June 30, 2005, the Company employed a total of 2,241 individuals. The composition of this employee base is approximately as follows: 514 employees in sales and marketing, 549 employees in product development, 519 employees in professional services, 270 employees in customer support, and 389 employees in general and administrative roles. The Company’s employees are not subject to a labor union or collective bargaining agreement. The Company believes that relations with its employees are strong.

In July 2005, the Company announced a restructuring of its operations which resulted in a reduction of approximately 15% of its workforce. The details of this restructuring are covered in Management’s Discussion and Analysis, attached to this Annual Report on Form 10-K under Item 7 of Part II.

Intellectual Property Rights

The Company’s success and ability to compete depend on its ability to develop and maintain its 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 non-exclusive 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 non-exclusive 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, patent, 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 most major markets. The Company owns four U.S. patents and has four additional patent applications filed with the U.S. Patent and Trademark Office. Some of these patents and patent applications have been filed in other jurisdictions. 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.

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

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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.

As of June 30, 2005, the Company leases approximately:

The Company also leases U.S. field offices in Dublin, Ohio; Philadelphia, Pennsylvania; San Mateo, California; Carlsbad, California; Irvine, California; Los Angeles, California; Livonia, Michigan; Boston, Massachusetts; Albany, New York; Boulder, Colorado; Atlanta, Georgia; Houston, Texas; Rockville, Maryland and Scottsdale, Arizona; 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.

The Company continues to review its facilities portfolio in an effort to ensure that the Company’s operational needs are being met. The Company is in the process of constructing a facility for its own use in Waterloo, Ontario, Canada. The square footage of this facility is approximately 112,000.

In July 2005, the Company announced a restructuring of its operations which will result in the closure of 27 offices worldwide. The details of this restructuring are covered in Management’s Discussion and Analysis, attached to this Annual Report on Form 10-K under Item 7 of Part II.

The Harold Tilbury and Yolanda Tilbury Family Trust brought an action against the Company in July 2002, before a single arbitrator, under the Ontario Arbitrations Act alleging damages for breach of a stock purchase agreement relating to the Company’s acquisition of Bluebird Systems Inc. (“Bluebird”). The claim was for $10 million, plus $5 million in punitive damages. Bluebird and Open Text counterclaimed against the Tilburys claiming that not only was no further amount owing for the purchase of their shares, but that they were entitled to a return of the money already paid to the Tilburys, in respect of the business acquisition. Bluebird also claimed damages against Harold Tilbury with respect to the lease of the Bluebird premises. In April 2005, the arbitrator ruled that the sum of approximately $1.9 million, plus interest, was payable by the Company to the Tilburys under the terms of the share purchase agreement and for termination of employment related costs, and subsequently ruled that a further $222,000 was payable under the terms of the share purchase agreement as additional purchase consideration. The Company’s counterclaims were dismissed. A decision on reimbursement of costs had been deferred, at that date, and in August 2005 the arbitrator ruled that the sum of approximately $847,000 is payable by the Company to the Tilburys on account of costs. Based on these awards, a total amount of $3.7 million was recorded as being payable to the Tilburys. This consisted of $2.5 million as additional

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purchase consideration, $240,000 relating to severance related costs, $85,000 relating to improvements for leasehold properties occupied by Bluebird, $754,000 relating to interest and $129,000 relating to legal costs.

An employee of the Company commenced an action against the Company in September 1999 claiming specific performance of an alleged agreement made between him and the Company on July 11, 1996, concerning certain share options granted to the employee in 1996. The employee claimed that all options granted vested and were exercisable as of October 16, 1998. He also claimed the rights to exercise 112,500 options or alternatively, payment of $2.2 million as of August 30, 1999, as damages for the loss of opportunity for a return on any monies assessed to be owing to him, payment of bonuses in the total amount of $179,283, payment of vacation pay of $17,250, payment of consulting fees of $20,700 and interest. He was also seeking aggravated, exemplary and punitive damages of $500,000 and costs on a solicitor and client basis. This matter was settled in January 2005 with the employee receiving a certain number of shares which had been previously reserved for him under his stock option agreement. There was no financial impact to the Company as a result of this settlement.

In the normal course of business, the Company is subject to various other legal matters. While the results of litigation and claims cannot be predicted with certainty, the Company believes that the final outcome of these other matters will not have a materially adverse effect on its consolidated results of operations or financial conditions.

None.

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PART II

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, 2005, the closing price of the Company’s Common Shares on NASDAQ National Market was $14.16 USD per share. On June 30, 2005, the closing price of the Company’s Common Shares on the TSX was $17.33 CDN per share.

On September 1, 2005, the closing price of the Company’s Common Shares on NASDAQ National Market was $11.93 USD per share.

On September 1, 2005, the closing price of the Company’s Common Shares on the TSX was $14.16 CDN per share.

As at September 1, 2005, there were approximately 10,776 shareholders of record of the Company’s Common Shares. As at September 1, 2005, there were approximately 4,141 U.S. Shareholders of record holding Common Shares.

All of the share information presented above and throughout this Annual Report on Form 10-K has been adjusted for the two-for-one stock split that took place in Fiscal 2004.

There have been no sales of unregistered securities by the Company during the past three fiscal years.

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, the Company declared a two-for-one split of the Company’s Common Shares effected by means of a dividend.

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Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth summary information relating to the Company’s various stock option plans as of June 30, 2005:

Stock Repurchases

The following table provides details of Common Shares repurchased by the Company during the three months ended June 30, 2005:

PURCHASES OF EQUITY SECURITIES OF THE COMPANY FOR THE THREE

MONTHS ENDED JUNE 30, 2005

On May 10, 2005, the Company commenced a repurchase program (the “Repurchase Program”) that provided for the repurchase of up to a maximum of 2,388,233 Common Shares. Purchase and payment for the Common Shares, under the Repurchase Program, were determined by the Board of Directors of Open Text and were made in accordance with rules and policies of the TSX. No purchases of Common Shares were made other than by means of open market transactions through the facilities of the TSX without the approval of the TSX. The price paid for the Common Shares was at the prevailing market price at the time of purchase. The Repurchase Program terminated on September 6, 2005.

Item 6—Selected Financial Data

The following table sets forth selected consolidated financial data of the Company for the periods indicated. The selected consolidated 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, 2005, 2004 and 2003

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and the selected consolidated balance sheet data as of June 30, 2005 and 2004 are derived from the Company’s audited 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, 2002 and 2001 and the selected consolidated balance sheet data as of June 30, 2003, 2002 and 2001 are derived from audited consolidated financial statements, previously issued but that are not included in this Annual Report on Form 10-K.

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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 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 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

About Open Text

Open Text is one of the market leaders in providing Enterprise Content Management (“ECM”) solutions that bring together people, processes and information. The Company’s software combines collaboration with content management, transforming information into knowledge that provides the foundation for innovation, compliance and accelerated growth.

The Company’s legacy of innovation began in 1991 with the successful deployment of the world’s first search engine technology for the Internet. Today, Open Text supports approximately 20 million seats across 13,000 deployments in 114 countries and 12 languages worldwide.

Market Trends

Over the past year the Company has witnessed numerous changes to the social-political landscape that have had significant impacts on the ECM market. Events over the past several years such as the September 11^th terrorist attacks, the financial collapse of high-profile U.S. 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.

The volume of unstructured data being generated in organizations today is overwhelming and is growing exponentially. This situation creates a significant challenge to physically manage the storage of this content, to operationally manage the content so that it adds value back to the organization, and to legally manage the content to ensure compliance, security, and protection of intellectual property. Email archiving and management has emerged as a key solution within ECM and is seen as a significant opportunity by most ECM vendors.

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The content and volume of email in a company is becoming one of the greatest business challenges today. IDC, a provider of market intelligence, advisory services, and events for the information technology and telecommunications industries, predicted that the number of email messages would grow from 9.7 million a day in 2000 to 35 billion in 2005. This is causing the following business challenges:

Open Text’s Email Archiving solutions provide the ability to manually or automatically offload emails and attachments from Microsoft Exchange or Lotus Domino servers without adversely affecting the email experience of employees. By migrating email content to more cost-effective media, organizations can alleviate growing demand for storage space, improve mail server performance, and simplify backup and restore procedures.

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. ECM software is designed to solve these business needs.

According to Gartner, a provider of research and analysis about the global information technology industry, the ECM market will exceed $1.8 billion in software revenue in 2009, representing a compound annual growth rate of 10%. They expect that this growth will be driven by companies’ increasing need to manage content at the enterprise level.

Although the Company recognizes the potential of the ECM market, user adoption of ECM has yet to reach an inflection point. Various reasons cited include: a) constrained IT budgets; b) unanticipated increased spending on Sarbanes-Oxley and other regulatory matters to consulting and service organizations; c) avoiding larger more strategic ECM purchase decisions due to organizational challenges and initial time constraints.

Consistent with experience over the past several years, the Company does not expect total information technology spending to increase in the near term. This means that the growth in ECM will continue to come at the expense of standalone markets that ECM has subsumed and other parts of the IT market. 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 capitalizing on 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.

Consolidation and Acquisitions

The ECM sector has been marked by significant consolidation over the past several years. Sophisticated customers are demanding more robust suites of technology and are building out a long-term strategy to address all aspects of ECM. In previous years customers often purchased individual functionalities (“point solutions”) from separate vendors and then attempted to integrate these point solutions at the customer site. The largest, most financially stable vendors have taken advantage of their financial position by acquiring many of their smaller competitors in an attempt to enhance their product line. These smaller vendors will continue to be under increased pressure as ECM technologies become mission-critical. The Company expects customers will continue

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to show hesitancy to purchase from any vendor whose financial viability is in question. In many cases, these smaller vendors 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. Product breadth, ease of implementation, rapid deployment of solutions and financial stability of the vendor are critical.

Through internal development and the Company’s acquisition strategy, the Company has created a broad product line to offer to new and existing customers. In Fiscal 2005, the Company made three acquisitions.

In August 2004, Open Text acquired all of the issued and outstanding shares of Artesia Technologies, Inc. (“Artesia”) for cash consideration of $5.8 million. Artesia designs and distributes Digital Asset Management software. It has a customer base of over 120 companies and provides these customers and their marketing and distribution partners the ability to easily access and collaborate around a centrally managed collection of digital media elements. The results of operations of Artesia have been consolidated with those of Open Text beginning September 1, 2004.

In August 2004, Open Text acquired the Vista Plus (“Vista”) suite of products and related assets from Quest Software Inc. (“Quest”) for cash consideration of $23.7 million. Vista is a technology that captures and stores business-critical information from ERP applications. As part of this transaction certain Quest employees that developed, sold and supported Vista have been employed by Open Text. The revenues and costs related to the Vista product suite have been consolidated with those of Open Text beginning September 16, 2004.

In February 2005, Open Text acquired all of the issued and outstanding shares of Optura Inc. (“Optura”) for cash consideration of $3.7 million. Optura offers products and integration services that optimize business processes so that companies can collaborate across separate organizational functions, dissimilar systems and business partners. Optura products and services will enable Open Text customers, who use a SAP-based Enterprise Resource Planning (“ERP”) system, to improve the efficiencies of their document-based ERP processes. The results of operations of Optura have been consolidated with those of Open Text beginning February 12, 2005.

Open Text has increased its ownership of IXOS to approximately 94% during the year ended June 30, 2005. This was done by way of open market purchases of IXOS shares. Prior to these purchases, as of June 30, 2004, the Company held approximately 89% of the outstanding shares of IXOS. Total consideration of $13.8 million was paid for the purchase of IXOS shares during the year ended June 30, 2005. On January 14, 2005, IXOS shareholders voted to delist the shares from the German stock exchange. This delisting became effective on July 12, 2005. Subsequently, the Domination Agreement for IXOS has been officially registered with the Company’s intent to purchase the remaining IXOS minority shareholder interests.

In October 2003, Open Text acquired all the common shares of SER Solutions Software GmbH and SER eGovernment Deutschland GmbH (together “DOMEA eGovernment”) for a total consideration of $11.4 million. The purchase price included contingent consideration that could have been earned by the former shareholders of DOMEA eGovernment based on the achievement of certain revenue targets through December 31, 2004. The revenue targets were achieved and accordingly an aggregate amount of $1.6 million was recorded in the year ended June 30, 2005, as due and payable to the former shareholders of DOMEA eGovernment and was paid in cash on July 5, 2005 and in shares on September 1, 2005.

Open Text continues to seek opportunities to acquire or invest in businesses, products and technologies that expand, complement or are otherwise related to the Company’s current business. In the near future, the focus of such acquisition opportunities is expected to be on smaller organizations with specific vertical market expertise that can be strategically leveraged. The Company also considers, from time to time, opportunities to engage in joint ventures or other business collaborations with third parties to address particular market segments.

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Sales Strategy

The Company anticipates that it will continue to develop and market ECM related solutions to global organizations with an emphasis on addressing specific problems and specific industries. Operationally, the Company has solutions and sales teams that focus entirely on industry-specific or cross-industry line-of-business markets. The Company has key sales teams that focus on the following sectors: government, pharmaceutical and life sciences, financial services, oil and gas, and the media and entertainment sectors. The Company feels that customized Livelink ECM solutions designed specifically for each of these sectors address specific mission-critical problems that such organizations confront.

Open Text continues to focus on selling to its large user installed base, as it is an important source for sales opportunities. Moreover, the Company has integrated the technology and domain expertise from recent acquisitions, which represents new selling opportunities in the respective customer bases, wherein existing relationships can lead to new sales in other areas of the business. The Company believes the presence of such deployments will significantly enhance its ability to be regarded as the preferred ECM vendor of choice for a specific customer, when that customer is ready to make such a strategic move and to consolidate some or all of its component systems.

During Fiscal 2005, the Company experienced a change in the purchasing behavior of its ECM customers. Where customers had traditionally focused on collaborative functionalities when making initial software purchases, they began, in 2005, to look at comprehensive solutions for managing all of their enterprise content. Additionally, purchase decisions became more heavily weighted on archiving and managing records of enterprise content. The Company believes this change in purchasing behavior is a direct result of customer demand to meet compliance requirements. This type of initial sale is newer, and larger, for the Company, in terms of both the purchase amount and number of users that will deploy the software. This trend has resulted in longer sales cycles that could be 12 months or longer, driven both by the increased size of some of these transactions as well as a lengthened approval process by the customer. This is in contrast to past years where initial, limited-scope deployments with shorter sales cycles evolved into larger deployments. The Company will continue to place emphasis on refining its sales strategies to manage the changing patterns in customer demand.

In Open Text’s experience, ECM software has generally not faced pricing pressures when configured and marketed for specific business solutions. Rather, pricing of ECM solutions has remained stable as buyers place added value on software that will address their industry specific needs. However, the price point of certain ECM technology components is predictably eroding, following the natural commoditization of information technology. In view of this, the Company will continue to bundle its software components into larger solutions providing tangible returns for its customers.

Competitive Advantage

Historically, the Company has actively sold and marketed its products based on a superior return on investment and yet at a lower total-cost-of-ownership compared to other products offered by competing vendors. The fact that the Livelink ECM product line is highly configurable without end-user programming means that as soon as it is purchased, an organization can have it deployed almost immediately. By contrast, many competitive products and solutions require a significant amount of expensive, customized programming and service work, adding not only cost, but also time to the deployment cycle.

Open Text’s ECM products also have a competitive advantage of proven scalability in organizations of 100,000 or more users. This scalability advantage is a direct result of Livelink ECM’s initial design and development to operate on the Web. This gives the Company a direct advantage over competitive products that began as client-server based architecture which is an architecture that is inherently harder to scale.

The competitive landscape has evolved over the past year as new vendors attempt to try and penetrate the ECM market. Microsoft^®’s SharePoint^™ product has experienced significant recent adoption. However

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SharePoint is focused on departmental use rather than enterprise-wide deployment, and the product does not possess the scalability of Livelink ECM. Although SharePoint competes with some historical aspects of the Company’s business around team workspaces, it also creates new opportunities for the Company around the long-term lifecycle management of that SharePoint content. On August 9, 2005 the Company announced a partnership with Microsoft to address these opportunities by offering ECM archiving solutions specially designed for SharePoint users.

Open Text also continues to compete with traditional competitors such as EMC’s Documentum^®, where document-centric requirements dominate, and with FileNet^® where business process requirements dominate. IBM^® continues to broaden its ECM capabilities, but is doing so in the context of its WebSphere and DB2 products in the hope of driving their vast integration and professional services business.

The Company feels that its key strategic advantages over its competition are the comprehensive scope of its ECM offering, its rapid deployment capabilities which reduce total cost-of-ownership, the integration maturity and scalability of its core ECM components, its customer-centric approach, and its financial viability.

Customers

Open Text supports approximately 20 million seats across 13,000 deployments in 114 countries and 12 languages worldwide. The Company’s customer base is diversified by industry and geography, the result of a continued focus on licensing to the 2,000 largest global organizations as the primary target market. In Fiscal 2005, Open Text issued press releases for its significant customer related transactions as listed below:

In July 2004, the University of Southern California’s Information Sciences Institute (“USC-ISI”) selected the Company’s software as the foundation for its Web Content Management strategy. Researchers at the USC-ISI will use Livelink Web Content Management Server to share data and study results with fellow computer scientists, faculty, students, and other members of the information technology community.

In September 2004, SI Corporation (“SI”), a major textiles producer, selected the Company’s software solution to replace a manual invoicing system in its Accounts Payable department. Part of SI’s corporate drive to raise productivity and lower costs, the solution seamlessly integrates into SI’s SAP financial system to enable the Company to maximize its SAP investment, strengthen its corporate compliance strategy and reduce operating costs.

In September 2004, the British Council completed one of the most complex Web strategies in the UK with the help of Open Text’s Web Content Management software. The government-backed agency responsible for providing educational opportunities and cultural relations in Britain, has worked on a project to revamp its online presence. By consolidating its websites onto one content management system, the British Council expects to save USD $2.3 million by 2005.

In October 2004, U.S. Office of Naval Research adopted Livelink software to improve collaboration and to better manage documents and data for the organization’s research projects. The solution was developed by Open Text and partner Formark^® Ltd., the leading supplier of guided collaboration applications for Livelink.

In October 2004, Suncor Energy Services Inc. chose to extend its Open Text solutions, including IXOS Suite for SAP, and add Livelink to support integrated collaboration and content management activities throughout the enterprise.

In November 2004, Sandia National Labs announced its plans to implement Open Text’s Artesia Digital Asset Management (DAM) solution to manage its digital content, including a large store of historical images.

In December 2004, the Company signed a contract with Siemens Business Services to provide Livelink licenses to its technology partner, the BBC. With these licenses, Siemens will introduce a new information

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management system to 25,000 managed desktop users in the BBC providing a foundation for the creation and maintenance of a document archive.

In January 2005, Vintage Petroleum, Inc., a growing independent oil and gas company with operations in the United States, South America and Yemen, announced it is using Livelink as a platform for business process improvements to increase productivity, control information, and meet compliance requirements associated with the Sarbanes-Oxley Act of 2002.

In February 2005, Livelink revolutionized the UK-based Transport Research Laboratory’s (“TRL”) information environment by converting 40 years of paper records to electronic files in just four months. TRL adopted an Electronic Document Records Management System (“EDRMS”) to rationalize documentation that was taking up 30 kilometers of shelf space.

In March 2005, German banking giant Norddeutsche Landesbank (“NORD/LB”) chose Livelink to provide a full range of ECM capabilities to support its new staff information portal. With the new system, staff at NORD/LB have access to a centralized, Web-based and customizable information system that is easy to maintain.

In April 2005, Major League Baseball Advanced Media, the interactive media and Internet company of Major League Baseball, selected Open Text’s Artesia for Digital Asset Management solution to provide a powerful tool for editing and managing its valuable and growing collection of professional baseball audio and video footage.

In May 2005, LVA Rheinprovinz, one of Germany’s largest insurance and pension firms with approximately 7 million customers, announced that it had chosen the Company’s new Production Document Management solution to archive and manage a huge store of paper documents of approximately 122 million documents in all.

In May 2005, the San Diego Blood Bank announced it would extend its Livelink ECM solution to improve information access and blood ordering processes, and to help meet regulatory requirements.

Alliances

Relationships with strategic alliance partners enhance the Company’s ability to deliver complete solutions on a global basis, and to ensure that the Company’s customers have solutions and support that enable the success of their businesses. Some of the more significant strategic alliances that the Company has secured are: Microsoft^®, SAP^®, Deloitte, and Accenture.

Open Text has worked with SAP, for two decades, creating integrated solutions that enable users to create, access, manage, and securely archive SAP content, data and documents. These solutions address stringent requirements for risk reduction, operational efficiency, and IT consolidation.

With the acquisition of Documentum by storage vendor EMC Corporation, other storage vendors have taken initiatives to partner with independent ECM providers. Open Text has strengthened its relationships with key storage vendors such as Hitachi Data Systems, StorageTek^®, and Hewlett-Packard Company and the Company continues to maintain an active relationship with EMC Corporation. These relationships allow third party storage vendors to license Livelink ECM to both their existing customer base and broaden their product offerings when competing with other storage vendors for new customer accounts.

The Company’s objective is to grow revenues from these relationships in the future, and the Company will seek to leverage existing relationships as well as look for new opportunities. In Fiscal 2005, Open Text formed several new relationships as listed below:

In July 2004, Open Text announced a European alliance with Siemens Business Services, a fully owned subsidiary of Siemens AG. The relationship is intended to provide customers with a comprehensive one-stop solution for consulting and system design, systems integration, deployment and ongoing support.

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In November 2004, Open Text formed an alliance with Deloitte Canada, a professional services firm, to provide ECM solutions and services to North American clients. Open Text and Deloitte Canada formed this relationship to reduce the complexity of business change, regulatory compliance and deployment, and help clients streamline and automate processes, connect with information systems, and access and manage all forms of content.

In December 2004, Open Text announced that it had extended its relationship with Hitachi Data Systems to provide combined ECM and storage solutions to large organizations. The relationship provided solutions that integrate Hitachi Data Systems’ advanced storage infrastructure technology with the Company’s leading ECM software to meet customers’ complete range of information management requirements.

In May 2005, Open Text announced a relationship with PureEdge to deliver new solutions that will help large organizations streamline and improve complex processes that require electronic forms.

In August, 2005, Open Text unveiled a content archiving solution for Microsoft SharePoint products and technologies, giving customers a powerful, long-term archive to store documents from SharePoint sites. The solution helps large organizations address the demands and rising costs of preserving huge stores of electronic documents for court cases and compliance mandates.

Restructuring Charge

In July 2005, Open Text announced a restructuring of its operations relating primarily to a reduction of its workforce and abandonment of excess facilities. The Company expects to take a charge of approximately $25 million to $30 million as a result of this restructuring. In addition, the Company expects that 60% of this expense will be incurred relating to personnel costs and 40% on account of facilities. The majority of the significant actions to be initiated under this restructuring will be completed in the first six months of the Fiscal 2006 year.

As of the current date, approximately 15% of the Company’s workforce has been terminated and the Company expects to eventually close 27 offices worldwide. The Company’s near-term focus is about increasing profitability, which it is addressing by streamlining its organization with its recent restructuring. The long-term focus is about adapting to long-term changes in the ECM marketplace and by broadening its integrations and relationships with other vendors.

Executive Transition

In addition to his role as President, John Shackleton assumed the role of CEO effective July 1, 2005, replacing P. Thomas Jenkins. In his seven years at Open Text as President, John has led the transformation of Open Text from a single product technology company to a global solutions organization. During that time, John has recruited and developed an experienced management team, and has been instrumental in the integration of a variety of acquisitions. In the role of CEO, John will continue to oversee all the operations of the business and will be the primary communicator for Open Text business activities.

Effective July 1, 2005, P. Thomas (“Tom”) Jenkins assumed the role of Executive Chairman and Chief Strategy Officer for Open Text. In this role, Tom will remain a full-time employee, concentrating on leading certain strategic activities of the organization including potential acquisitions. Tom will serve an integral role ensuring that management is acting through its strategies, decisions and actions in the long-term interests of all the Company’s shareholders. In addition to encouraging a professional environment and productive process for the Board of Directors, Tom will also assist in setting the Company’s policy for communications with all stakeholders.

Anik Ganguly, took on an expanded role in Fiscal 2005 as Executive Vice President Operations, assuming responsibility for Business Segment Management, as well as the functions of Information Systems & Technology, Human Resources, Real Estate & Facilities Management and Legal.

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Expiry of Outstanding Warrants

During Fiscal 2005, 2,376,681 warrants to acquire Common Shares that had been issued in connection with the acquisition of IXOS expired unexercised. The warrants had a carrying value of $22.3 million and this amount was reclassified into additional paid-in capital from warrants issued, within shareholders’ equity.

Waterloo Building

In July 2004, the Company entered into a commitment to construct a building in Waterloo, Ontario, with the objective of consolidating its existing facilities in Waterloo. The facility will consist of four floors and will occupy approximately 112,000 square feet. The cost of this project has been estimated to be approximately $14 million. The Company has financed this investment through its working capital. As of June 30, 2005, approximately $9.7 million had been capitalized on this project. The Company expects that its staff will commence usage of this facility before the end of the 2005 calendar year.

Significant Accounting Policies and Critical Accounting Estimates

The Company’s discussion and analysis of its financial condition and results of operations are based on its Consolidated Financial Statements, which 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 re-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.

Open Text believes that the accounting policies described below are critical to understanding its business, results of operations and financial condition because they involve significant judgments and estimates used in the preparation of its Consolidated Financial Statements. An accounting policy is deemed to be critical if it requires a judgment or accounting estimate to be made based on assumptions about matters that are highly uncertain, and if different estimates that could have been used, or if changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the Company’s Consolidated Financial Statements. Management has discussed the development, selection and application of its critical accounting policies with the audit committee of its board of directors, and the Company’s audit committee has reviewed its disclosure relating to its critical accounting policies in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed below, are also critical to understanding the Company’s Consolidated Financial Statements. The notes to the Consolidated Financial Statements contain additional information related to the Company’s accounting policies and should be read in conjunction with this discussion.

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

Revenue

Open Text currently derives all of its revenues from licenses of software products and related services. The accounting related to revenue recognition is complex and affected by interpretations of the rules and an understanding of industry practices. As a result, revenue recognition accounting rules require the Company to

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make significant judgments. 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 additional services to be delivered 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. Open Text does not offer product return rights to end-users or resellers.

(ii) Delivery has Occurred—The 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.

(iv) Collectibility is Probable—The Company determines whether collectibility is probable on a case-by-case basis. The Company generates a high percentage of license revenue from the current customer base, for which 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 the 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 using the residual value approach. 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. All of the elements included in the multiple-element arrangements have been analyzed and it has been determined that there is sufficient VSOE to allocate revenue to consulting services and to post-contract customer support (“PCS”) components of the license arrangements. The Company sells consulting services separately, and it 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.

Service revenues consist of revenues from consulting, implementation, training and integration services. These services are set forth separately in the contractual arrangements such that the total price of the customer arrangement is expected to vary as a result of the inclusion or exclusion of these services. For those contracts where the services are not essential to the functionality of any other element of the transaction, the Company determines VSOE of fair value for these services based upon normal pricing and discounting practices for these

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services when sold separately. These consulting and implementation services contracts are primarily time and materials based contracts that are, on average, less than six months in length. Revenue from these services is recognized at the time such services are rendered as the time is incurred by the Company.

The Company also occasionally enters into contracts that are primarily fixed fee arrangements to render specific consulting services. The percentage of completion method is applied to these more complex contracts that involve the provision of services relating to the design or building of complex systems, because these services are essential to the functionality of other elements in the arrangement. Under this method, the percentage of completion is calculated based on actual hours incurred compared to the estimated total hours for the services under the arrangement. For those fixed fee contracts where the services are not essential to the functionality of a software element, the proportional performance method is applied to recognize revenue. Revenues from training and integration services are recognized in the period in which these services are performed.

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

Purchase price allocations in business combinations

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, amongst other opening balance sheet items, any intangible assets acquired at the date of acquisition. Intangible assets include acquired technology and customer relationships.

Acquired technology is initially recorded at fair value based on the present value of the estimated net future income-producing capabilities of software products acquired on acquisitions. Acquired technology is amortized over its estimated useful life on a straight-line basis.

Customer relationships represent relationships that are with certain customers on contractual or legal rights and are considered separable. These contractual relationships were acquired by Open Text through business combinations and were initially recorded at their fair value based on the present value of expected future cash flows. Contractual relationships are amortized over their useful lives.

The valuation of these assets is inherently subjective, and necessarily involves judgments and estimates regarding future cash flows and other operational variables of the entity acquired. There can be no assurance that the judgments and estimates made at the date of acquisition will reflect future performance of the acquired entity. If management makes judgments or estimates that differ from actual circumstances, Open Text may be required to write-off certain of its intangible assets.

The Company continually evaluates the remaining useful life of its intangible assets being amortized to determine whether events and circumstances warrant a revision to the remaining period of amortization.

Impairment of long-lived assets and goodwill

The Company accounts for the impairment and disposition of long-lived assets in accordance with FASB Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for Impairment or Disposal of Long–Lived Assets” (“SFAS 144”). The Company tests long-lived assets or asset groups, such as capital assets and definite lived intangible assets, for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant adverse changes in the business climate or legal factors; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and a current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.

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Recoverability is assessed based on comparing the carrying amount of the asset to the aggregate pre-tax undiscounted cash flows expected to result from the use and the eventual disposal of the asset or asset group. An impairment is recognized when the carrying amount is not recoverable and exceeds the fair value of the asset or asset group. The impairment loss, if any, is measured as the amount by which the carrying amount exceeds fair value.

Similarly, in accordance with FASB SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”), the Company is required to annually test the value of goodwill. This testing requires management to make estimates of the market value of its various reporting units. Changes in estimates could result in different conclusions for the value of goodwill. The Company performs the annual impairment testing on goodwill on April 1 of each fiscal year, provided that circumstances do not arise during the year that would necessitate an earlier evaluation. Over the past two years, the value of the reporting units has exceeded their book value. Based on currently available information, management does not anticipate that an impairment of 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.

Allowance for doubtful accounts

Open Text maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make payments. The Company evaluates the credit worthiness of its customers prior to order fulfillment and based on these evaluations, adjusts credit limits to the respective customers. In addition to these evaluations, the Company conducts on-going credit evaluations of the customers’ payment history and current credit worthiness. The allowance is maintained for 100% of all accounts deemed to be uncollectible and, for those receivables not specifically identified as uncollectible, an allowance is maintained for a specific percentage of those receivables based upon the aging of accounts, its historical collection experience and current economic expectations. To date, the actual losses have been within management expectations. No single customer accounted for more than 10% of the accounts receivable balance as of June 30, 2005 and 2004. Actual collections could differ materially from the Company’s estimates.

Income taxes

Open Text accounts for income taxes in accordance with FASB SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). Deferred tax assets and liabilities arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. These temporary differences are measured using the enacted tax rates. A valuation allowance is recorded to reduce deferred tax assets to the extent that management considers it is more likely than not, that such a deferred tax asset will not be realized. In determining the valuation allowance, management considers factors such as the reversal of deferred income tax liabilities, projected taxable income, and the character of income tax assets and tax planning strategies. A change to these factors could impact the estimated valuation allowance and income tax expense.

In addition, the Company is subject to examinations by taxation authorities of the jurisdictions in which it operates in the normal course of operations. The Company regularly assesses the status of these examinations and the potential for adverse outcomes to determine the adequacy of the provision of income and other taxes.

Restructuring charges

Open Text records restructuring charges relating to contractual lease obligations and other exit costs in accordance with FASB SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 requires recognition of costs associated with an exit or disposal activity when the liability is incurred and can be measured at fair value.

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The Company records restructuring charges relating to employee termination costs in accordance with FASB SFAS No. 112 “Accounting for Post Employment Benefits” (“SFAS 112”). SFAS 112 applies to post-employment benefits provided to employees under on-going benefit arrangements. In accordance with SFAS 112, the Company records such charges to restructuring, when the termination benefits are capable of being determined or estimated in advance from either the provisions of Open Text’s policy or from past practices, the benefits are attributable to services already rendered and the obligation relates to rights that vest or accumulate.

The recognition of restructuring charges requires management to make certain judgments regarding the nature, timing and amount associated with the planned restructuring activities, including estimating sublease income and the net recoverable amount of equipment to be disposed of. At the end of each reporting period, the Company evaluates the appropriateness of the remaining accrued balances.

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 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.

Recently Issued Accounting Pronouncements

Accounting changes and error corrections

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, (“SFAS 154”), which replaces Accounting Principles Board Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements—An Amendment of APB Opinion No. 28”. SFAS 154 provides guidance on the accounting for and reporting of changes in accounting principles and error corrections. SFAS 154 requires retrospective application to the prior period’s financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. Certain disclosures are also required for restatements due to the correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact that the adoption of SFAS 154 will have on the Company’s results of operations and financial condition will depend on the nature of future accounting changes and the nature of transitional guidance provided in future accounting pronouncements.

Share-Based compensation

In December 2004, the FASB issued SFAS No. 123R “Share Based Payment” (“SFAS 123R”). The new Statement is effective for fiscal years beginning on or after June 15, 2005. SFAS 123R addresses the accounting for transactions in which an enterprise receives services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. This Statement eliminates the ability to account for share-based compensation transactions using APB 25 and requires that such transactions be accounted for using a fair-value based method. As required by SFAS 123R, the Company will be required to recognize an expense for compensation cost related to share-based payment arrangements including stock options and compensatory employee stock purchase plans. The new rules will be effective for the Company beginning July 1, 2005. The Company is currently evaluating option valuation methodologies and assumptions in light of the evolving accounting standards related to share-based payments and also the impact of other aspects of SFAS 123R, including transitional adoption alternatives.

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In March 2005, the Securities and Exchange Commission (“SEC”) released SEC Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”). SAB 107 provides the SEC staff position regarding the application of SFAS 123R. SAB 107 contains interpretive guidance related to the interaction between SFAS 123R and certain SEC rules and regulations, as well as provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also highlights the importance of disclosures made related to the accounting for share-based payment transactions. The Company is currently evaluating SAB 107 and will be incorporating it as part of its adoption of SFAS 123R.

Results of Operations

Overview

The following table presents an overview of selected financial data of the Company.

Revenue

Total revenue increased by $123.8 million or 42.5% in Fiscal 2005 (“2005”) compared to Fiscal 2004 (“2004”) due to a combination of the following:

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During Fiscal 2005 Open Text had 16 transactions that were greater than $1 million dollars, and average deal size on an annual basis was approximately $250,000. No single customer contributed more than 10% of total revenue during the year.

The IXOS acquisition (which was included in the results for the last four months of 2004 and for the full year in 2005) together with other acquisitions made during 2004 and 2005 acquisitions (Artesia, Vista and Optura) substantially drove this increase in total revenue as follows:

Total revenue increased by $113.3 million or 63.8% in 2004 compared to Fiscal 2003 (“2003”) due to a combination of the following:

The increase in 2004 revenue can be attributed in part to the acquisitions of IXOS, Gauss and DOMEA eGovernment. These acquisitions accounted for $86.0 million of additional revenue in 2004 while the remaining $27.3 million of the increase was caused by organic growth in the Company’s business.

Gross Margin

Gross margin declined from 74.6% in 2003, to 73.1% in 2004, to 69.6% in 2005.

Overall, the decline in gross margin was due to the change in the Company’s revenue-product mix:

A full discussion of each of the above metrics follows after the quarterly overview.

Quarterly Overview

The following table summarizes selected un-audited quarterly financial data for the past eight fiscal quarters:

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The Company experienced significant variations in revenues, expenses and gross profit from quarter to quarter and such variations are likely to continue. Quarterly revenues, expenses and gross profit are affected by a variety of factors, including, amongst other things, the timing of large enterprise transactions, acquisitions, seasonality of economic activity, and to some degree the timing of capital spend by the Company’s customers.

The results for any quarter are not necessarily indicative of future quarterly results, and the Company believes that period-to-period comparisons should not be relied upon as an indication of future performance.

Outlook for 2006

The Company’s outlook for 2006 is to focus on near-term profitability by streamlining its operations in terms of the restructuring announced in July 2005. Additionally, the Company will continue to adapt to long-term changes in the ECM marketplace and increase its focus on marketing its archiving records management as the on-ramp to ECM sales and expanding its partner program.

Revenues

Revenue by Product Type

The following tables set forth the increase in revenues by product and as a percentage of the related product revenue for the periods indicated:

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License Revenue

License revenue consists of fees earned from the licensing of software products to customers.

License revenue increased in 2005, compared to 2004, by 12.2% or $14.9 million. The Company generated approximately $26 million in revenue from acquisitions and approximately $6 million related to the positive impact of foreign exchange rates. This increase was offset by the discontinuance of unprofitable revenue streams obtained through acquisitions. In addition, 2005 revenue was negatively impacted by a shift in the Company’s business model that saw customers increasingly interested in buying, substantially, a full ECM platform, which had the impact of lengthening the sales cycle and close process for new deals and deals in the pipeline. Further, sales were impacted due to the Company’s need to partially rebuild its North American sales force, during the year, to meet the needs of its evolving business model. Finally, the large drop in the Euro during the fourth quarter had the effect of delaying purchase decisions with respect to several of the Company’s large European customers. For these reasons, the Company’s organic growth decreased in 2005.

License revenue increased in 2004, compared to 2003, by 60.1% or $45.7 million. Of this increase, $34.0 million of the increase was due to the impact of acquisitions made in 2004. These acquisitions accounted for approximately 75% of the year-to-year growth. Of the remaining growth, $3.7 million related to a full inclusion of 2003 acquisitions. The Company’s organic growth relating to license revenue was 14% during 2004 as compared with 2003.

Customer Support Revenue

Customer support revenue consists of revenue from the Company’s software maintenance contracts and customer support agreements. Typically the term of these maintenance contracts is twelve months with customer renewal options, and the Company has historically experienced a 90% renewal rate, thus contributing greatly to its customer support revenue. Customer support revenue is directly related to software licenses sold in prior periods.

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Customer support revenues increased 64.7% from $108.8 million in 2004 to $179.2 million in 2005. The increase in customer support revenues resulted from several factors. Customer support revenues related to the 2004 and 2005 acquisitions accounted for approximately 47% and 8%, respectively, of the revenue growth. The increase in the number of licenses granted in 2004, which resulted in an increased number of maintenance contracts, contributed to the growth in customer support revenues in 2005. Moreover, the Company continued to experience very strong service support contract renewal rates for all of its products, which also contributed to the growth in customer support revenue.

Customer support revenues increased 72.5% from $63.1 million in 2003 to $108.8 million in 2004. Customer support revenues related to the 2004 acquisitions accounted for approximately 65% of the revenue growth achieved during 2004 compared to 2003. Of the remaining 35%, $5.5 million related to companies acquired during 2003 which were not included in fiscal results for the entire Fiscal 2003. The remainder resulted from increased licenses in 2003 and continued high maintenance renewal rates.

Service Revenue

Service revenue consists of revenues from consulting contracts and contracts to provide training and integration services.

Service revenues increased 63.6% from $60.6 million in 2004 to $99.1 million in 2005. Service revenues related to 2005 acquisitions represented 10% of the growth while 2004 acquisitions represented approximately 45% of the growth. In 2005, the Company completed the integration of the 2004 acquisitions (most notably IXOS), aligning services with the sales verticals for consistent teaming on strategic accounts as well as delivering repeatable services solutions (as opposed to trying to deliver unique consulting solutions to each customer), which resulted in the growth in these revenues.

Service revenues increased 56.8% from $38.6 million in 2003 to $60.6 million in 2004. Service revenues related to 2004 acquisitions accounted for all of the revenue growth achieved in this period. Without the impact of the 2004 acquisitions, the Company’s organic service revenues would have declined by approximately 5% as a result of the continued challenging market for service engagements globally. During this period, many of the customers addressed their service needs with in-house personnel as opposed to using third-parties.

Revenue and Operating Margin by Segment

The following table sets forth information regarding the Company’s revenue by geography

Revenue by Geography