Our Management's Discussion and Analysis of Financial Condition and Results of Operations provides information we believe is relevant to an assessment and understanding of our results of operations and financial condition. This discussion should be read in conjunction with our Financial Statements and Supplementary Data that are included in Item 8 of this report. Also, the discussion of Critical Accounting Policies and Estimates in this section is an integral part of the analysis of our results of operations and financial condition. We report our operating results on the basis of a fiscal year that starts October 1 and ends September 30. For convenience, in this report we refer to our fiscal years as "2007," "2008," "2009" and "2010."

All dollar, option and share amounts are reported in thousands unless otherwise noted.

Special Note Regarding Forward-Looking Statements

This document contains forward-looking statements regarding our plans, objectives, expectations, intentions, future financial performance, future financial condition, and other statements that are not historical facts. These statements can be identified by our use of the future tense, or by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "intend," "estimate," "continue" and other similar words and phrases. These forward-looking statements involve many risks and uncertainties, described in Item 1A, Risk Factors, as well as in our other filings with the Securities and Exchange Commission ("SEC"). The occurrence of any of these risks and uncertainties may cause our actual results to differ materially from those anticipated in our forward-looking statements, which could have a material adverse effect on our business, results of operations, and financial condition. All forward-looking statements included in this report are based on information available to us as of the date of this report. We undertake no obligation to revise or update any such forward-looking statements for any reason.

Overview

We are a leading provider of on-demand Employee Spend Management solutions. Our integrated travel and expense software solutions enable organizations to control costs by automating the processes used to manage employee spending. Our solutions unite online travel procurement with automated expense reporting, streamline corporate event management, and optimize the process of managing vendor payments, employee check requests and direct reimbursements. Our unified approach to managing these processes provides our customers with visibility into their employee spending, which helps them analyze trends, influence budget decisions, improve forecasting, and monitor and enforce compliance with their corporate policies and external regulations, such as the Sarbanes-Oxley Act of 2002.

We generate our revenues predominantly from the delivery of subscription services, and to a much lesser degree from consulting services and other services, which includes the sale of software licenses. Our subscription services revenues are recognized over the time period we provide our services to customers, in contrast to license revenues, which typically are recognized upon software delivery to the customer.

On October 1, 2007, we completed our acquisition of H-G Holdings, Inc. and its subsidiaries, including Gelco Information Network, Inc. ("Gelco Acquisition"). Gelco provides a flexible on-demand expense management solution that enables organizations to control costs by gaining processing efficiencies, capturing spending data for analysis and ensuring policy compliance. Gelco offers different levels of outsourcing and is capable of providing a full range of services to streamline the expense management process, including expense data capture, multi-currency reimbursement, card payment processing, reporting and analysis, receipt imaging, and management and auditing.

On August 1, 2009, we completed the acquisition of Etap-On-Line ("Etap Acquisition"). Etap-On-Line is a leading European provider of business travel and expense management solutions, based in Paris, France. The Etap Acquisition is expected to strengthen our operations and client base in the European market.

Our strategic focus in 2010 is to continue to grow our core subscription business and to reduce our cost of deploying and operating our services as a percentage of revenue. We expect our subscription revenues to increase in 2010 compared to 2009 due to anticipated growth in demand. We expect our sales and marketing expenses to increase on both an absolute basis and as a percentage of revenues in 2010 compared to 2009, primarily reflecting our continued emphasis on growing our sales and marketing personnel to support expected demand and create additional awareness in our target market. While we observe trends of declining travel transactions, increased unemployment and business contraction generally, which tend to reduce revenue, we believe they will be outweighed by cross-selling additional services and expansion of our customer base.

We operate in and report on one segment, which is on-demand Employee Spend Management solutions.

In the following table we show financial data derived from our income statements as a percentage of total revenues for 2009, 2008 and 2007.

                                                 Year ended September 30,
                                               2009        2008         2007
       Revenues:
       Subscription                              96.6 %     95.7 %        89.8 %
       Consulting and other                       3.4        4.3          10.2

       Total revenues                           100.0      100.0         100.0

       Expenses:
       Cost of operations                        30.6       31.7          33.9
       Sales and marketing                       29.7       27.8          26.5
       Systems development and programming       10.2       10.7          12.3
       General and administrative                11.1       14.5          14.5
       Amortization of intangible assets          2.6        2.9           2.3

       Total expenses                            84.2       87.6          89.5

       Operating income                          15.8       12.4          10.5

       Other income (expense):
       Interest income                            0.9        0.8           0.7
       Interest expense                          (0.2 )     (0.7 )        (1.0 )
       Other, net                                (0.2 )     (0.2 )         0.2

       Total other income, net                    0.5       (0.1 )        (0.1 )

       Income before income tax                  16.3       12.3          10.4

       Income tax expense                         5.9        4.3           4.1

       Net income                                10.4 %      8.0 %         6.3 %

Results of Operations

Revenues



                                              Year Ended September 30,
                               2009      Change         2008      Change         2007
      Subscription           $ 239,189     15.9 %     $ 206,304     77.9 %     $ 115,996
      Consulting and other       8,407     (8.5 )%        9,187    (29.9 )%       13,111

      Total revenues         $ 247,596     14.9 %     $ 215,491     66.9 %     $ 129,107

                                           Year Ended September 30,
                          2009        %          2008        %          2007        %
       United States    $ 222,460    89.8 %    $ 192,922    89.5 %    $ 111,679    86.5 %
       Europe              14,538     5.9 %       12,658     5.9 %       11,812     9.1 %
       Other               10,598     4.3 %        9,911     4.6 %        5,616     4.4 %

       Total revenues   $ 247,596   100.0 %    $ 215,491   100.0 %    $ 129,107   100.0 %

Revenues. Subscription revenues consist of fees paid for subscription services, and to a much lesser degree the amortization of set-up fees paid to us in connection with those services, and the amortization of fees paid for software maintenance services under software license arrangements and in multiple element subscription arrangements where there is no vendor specific objective evidence of fair value for an undelivered subscription element. Subscription revenues are affected by pricing, the number of new customers, customer contract durations and our customer retention rate.

Subscription revenues increased 15.9%, or $32.9 million, in 2009 compared to 2008. Subscription revenues increased 77.9%, or $90.3 million, in 2008 compared to 2007. These increases reflect increases in the number of customers for our subscription services as well as the Gelco Acquisition. The growth in customers reflects increased market demand for our subscription services and strong retention of existing subscription customers. We believe this expansion is due primarily to the market's continued and growing awareness of our on-demand Employee Spend Management solutions, and the increasing acceptance of outsourced services which is driven in part by limited information technology capital budgets.

We expect subscription revenues to continue to grow in 2010 as a result of the growing demand for our subscription service offerings and our planned increase in spending on sales and marketing.

Consulting and other revenues consist of fees for client services, which include system implementation and integration, planning, data conversion, training and documentation of procedures. We anticipate that consulting and other revenues in 2010 will fluctuate on a quarterly basis but will be lower in 2010 compared to 2009 as a percentage of revenues, as fewer existing customers upgrade their on-premise license software, and the market continues to shift to the subscription services model.

International Revenues. We expect our international revenues to grow in the near term, as our products and services continue to gain acceptance in international markets, due to our Etap Acquisition, our investment in global distribution and increased awareness of our products in the international markets. Historically, fluctuations in foreign currency exchange rates have not had a material effect on our operating results.

Expenses



                                                             Year Ended September 30,
                                            2009       Change          2008       Change         2007
Cost of operations                        $  75,625      10.6 %      $  68,378      56.4 %     $  43,711
Sales and marketing                          73,459      22.6 %         59,912      75.4 %        34,154
Systems development and programming          25,295      10.1 %         22,974      44.8 %        15,866
General and administrative                   27,603     (12.0 )%        31,371      67.2 %        18,759
Amortization of intangible assets             6,396       3.2 %          6,196     109.0 %         2,965

Total operating expenses                  $ 208,378      10.4 %      $ 188,831      63.6 %     $ 115,455

Cost of Operations. Cost of operations expenses consist primarily of salaries and related expenses (including travel related expenses) and allocated overhead costs (including depreciation, occupancy, insurance, telecommunications and computer equipment expenses) associated with personnel who support our subscription

and consulting services. Cost of operations expenses also include co-location and related telecommunications costs, fees paid to third parties for referrals, resale arrangements, royalties and amortization of deferred set-up costs that we incur in connection with our subscription services.

Cost of operations expenses as a percentage of total revenues decreased to 30.6% in 2009 compared to 31.7% in 2008. Cost of operations expense increased 10.6%, or $7.3 million. Total salaries and related expenses increased 8.2%, or $3.1 million. Initial set-up costs that we incur in connection with our subscription services increased 15.7%, or $2.5 million. Allocated overhead costs increased 7.6%, or $0.7 million. In addition, partner royalty fees increased 235.5%, or $0.7 million. These increases were due to the larger number of subscribers, resulting primarily from organic growth in our subscription business.

Cost of operations expenses as a percentage of total revenues decreased to 31.7% in 2008 compared to 33.9% in 2007. Cost of operations expenses increased 56.4%, or $24.7 million, primarily as a result of the Gelco Acquisition. Total salaries and related expenses increased 42.2%, or $11.1 million. Co-location and related telecommunications costs and amortization of deferred set-up costs that we incur in connection with our subscription services increased 80.4%, or $3.6 million. Allocated overhead expenses increased 138.8%, or $5.1 million. In addition, equipment maintenance and software expenses increased 246.3%, or $4.3 million. These increases were due to the larger number of subscribers served, resulting primarily from organic growth in our subscription business as well as the Gelco Acquisition.

We expect cost of operations expenses to continue to trend down as a percentage of total revenues over the long term as the incremental cost to deploy and support each new customer is expected to decrease due to economies of scale anticipated in our subscription service model infrastructure. We anticipate that cost of operations will increase in absolute dollars as we continue to expand our capacity to deploy and support additional new customers.

Sales and Marketing. Sales and marketing expenses consist of salaries and related expenses (including sales commissions and travel related expenses) and allocated overhead costs associated with our sales and marketing personnel, miscellaneous sales and marketing costs, such as advertising, trade shows and other promotional activities.

Sales and marketing expenses as a percentage of total revenues increased to 29.7% in 2009, from 27.8% in 2008. Sales and marketing expenses increased 22.6%, or $13.5 million. Total salaries and related expenses increased 24.9%, or $10.6 million, primarily as a result of increases in sales personnel. Customer acquisition and initial set-up costs that we incur in connection with our subscription services increased 72.8%, or $4.3 million. The increases in sales and marketing expense were partially offset by a decrease of 28.5%, or $2.1 million in marketing and advertising campaigns.

Sales and marketing expenses as a percentage of total revenues increased to 27.8% in 2008, from 26.5% in 2007. Sales and marketing expenses increased 75.4%, or $25.8 million. Total salaries and related expenses increased 71.3%, or $17.6 million, primarily due to an increase in sales personnel. Advertising and marketing costs increased 93.4%, or $3.5 million. In addition, costs for professional fees and other increased 85.5%, or $3.6 million. These increases were primarily due to an increase in marketing programs.

We expect total sales and marketing expenses in 2010 to increase as a percentage of revenue and in absolute dollars compared to 2009, driven primarily by an increase in sales personnel and marketing programs globally. These increases reflect a key part of our strategic focus in 2010, which is to ensure that our sales and marketing efforts are expanded to create awareness in our target markets to support expected demand.

Systems Development and Programming Costs. Systems development and programming costs consist of salaries and related expenses and allocated overhead costs associated with employees and contractors engaged in software engineering, program management and quality assurance.

Systems development and programming costs decreased as a percentage of total revenues to 10.2% in 2009 compared to 10.7% in 2008. Systems development and programming costs increased by 10.1%, or $2.3 million. Allocated overhead costs increased 32.8%, or $2.6 million. These increases were primarily due to headcount-related costs.

Systems development and programming costs decreased as a percentage of total revenues to 10.7% in 2008 compared to 12.3% in 2007. Systems development and programming costs increased 44.8%, or $7.1 million. Total salaries and related expenses increased 49.0%, or $4.9 million. Depreciation, facilities and overhead allocation expense increased 45.6%, or $2.5 million. These increases were primarily due to the Gelco Acquisition.

In response to the demand for our subscription services, the majority of our systems and development resources are focused on developing internal-use software used to provide these services to our customers. We capitalize costs in accordance with accounting principles generally accepted in the United States ("GAAP") for corporate software developed or obtained for internal use and amortize it over its useful life. As of September 30, 2009 and 2008, capitalized internal-use software costs, net of amortization, increased $1.7 million, from $14.8 million at September 30, 2008, to $16.5 million at September 30, 2009.

We anticipate that recognized systems development and programming costs in 2010 will increase in absolute dollars and remain relatively consistent as a percentage of revenue compared to 2009 as we continue to focus on product innovation and enhancement.

General and Administrative. General and administrative expenses consist of salaries and related expenses and allocated overhead costs, all associated with employees and contractors in finance, human resources, legal and facilities, as well as miscellaneous costs, such as professional fees and public company regulatory compliance costs.

General and administrative expenses as a percentage of total revenues decreased to 11.1% in 2009 compared to 14.5% in 2008. General and administrative expenses decreased 12.0%, or $3.8 million. Total salaries and related expenses decreased 2.9%, or $0.6 million. Allocated overhead costs, professional fees, and other general and administrative expenses decreased 25.0%, or $3.0 million. These decreases were the result of lower expense for legal and accounting fees, travel, state and local taxes, and other miscellaneous costs.

General and administrative expenses as a percentage of total revenues was 14.5% in each of 2008 and 2007. General and administrative expense increased 67.2%, or $12.6 million. Total salaries and related expenses increased 69.6%, or $7.9 million, driven primarily by increases in personnel count related to the growth of our business and the Gelco Acquisition. Allocated overhead costs increased 62.9%, or $4.7 million. This increase includes an adjustment of $0.9 million during the second quarter of 2008 to record additional state and local taxes, the growth of our business and the Gelco Acquisition.

We expect the absolute dollar amount of general and administrative expenses to increase in 2010 compared to 2009 due to increases in personnel costs related to the growth of our business. However, we expect general and administrative costs as a percentage of revenue to remain relatively consistent with 2009 due to economies of scale.

Amortization of Intangible Assets. Amortization of intangible assets represents the amortization of the intangible assets from acquisitions, which includes the Gelco Acquisition, the Etap Acquisition, and our acquisition of Outtask, Inc. in January 2006. We are amortizing our intangible assets as non-cash charges to operations over an expected useful life which is consistent with the timing and level of expected cash flows attributed to customer relationships, use of acquired technology, trade name and trademarks, and non-compete agreements.

Other Income (Expense)



                                                Year Ended September 30,
                               2009        Change         2008        Change         2007
   Interest income            $ 2,149        24.9 %     $  1,720        91.8 %     $    897
   Interest expense              (481 )     (66.1 )%      (1,417 )      14.3 %       (1,240 )
   Other, net                    (598 )      23.0 %         (486 )    (310.4 )%         231

   Total other expense, net   $ 1,070      (684.7 )%    $   (183 )      63.4 %     $   (112 )

Interest Income, Interest Expense and Other, net. Interest income increased during the periods presented reflecting higher levels of interest-earning cash and cash equivalent investments. We record net gains and losses on fluctuations in exchange rates in the Other, net line of the income statement.

Income Tax Expense

We make estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. The effective income tax rate for 2009 was 36.3% compared to 35.1% for 2008. This rate increase is primarily due to state income tax increases and reserves for uncertainty in income taxes.

We assess the likelihood that we will be able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risk associated with estimates of future taxable income, ongoing, prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. If recovery is not likely, we record a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable.

Financial Condition

Our total assets were $670.9 million and $641.0 million as of September 30, 2009 and 2008, representing an increase of 4.7%, or $29.9 million. Our cash and cash equivalents were $119.2 million and $267.7 million, as of September 30, 2009 and 2008, representing a decrease of 55.5%, or $148.5 million, due to our net purchase of $143.4 million in investment grade short- term fixed income securities and money market funds during 2009. Our cash flow activity is described in more detail in the Liquidity and Capital Resources section below. Our accounts receivable balances, net of allowances of $3.7 million and $5.5 million, were $45.8 million and $38.5 million, as of September 30, 2009 and 2008, representing an increase of 19.0%, or $7.3 million.

Our total current liabilities were $125.1 million and $86.5 million as of September 30, 2009 and 2008, representing an increase of 44.6%, or $38.6 million. This increase was primarily due to an increase of $34.0 million in our customer funding liabilities reflecting an increase in the number of customers using our Pay services as well as an increase in the duration such funds are managed by our services.

Our additional paid in capital totaled $640.9 million and $679.5 million as of September 30, 2009 and 2008, a decrease of 5.7%, or $38.6 million. The decrease reflects $54.8 million used to repurchase shares of our outstanding common stock, partially offset by the issuance of shares as part of our acquisition of Etap-On-Line, the exercise of stock options under our stock-based compensation plans, and the purchase of stock under our employee stock purchase plan.

Liquidity and Capital Resources

Our available sources of liquidity as of September 30, 2009, consisted principally of cash and cash equivalents totaling $119.2 million. Our cash and cash equivalents held at financial institutions generally are in excess of the current Federal Deposit Insurance Corporation limits of $250. In addition, we have a revolving credit facility, which is discussed in more detail below.

Our operating cash inflows consist of payments received from our customers. Our operating cash outflows consist of employee salaries, payments to vendors directly related to subscription services, payments under arrangements with third parties who provide hosting infrastructure services in connection with our subscription services offerings, related sales and marketing and administrative costs, and systems development and programming costs. Operating activities provided $66.0 million, $63.8 million and $32.2 million in 2009, 2008 and 2007. The increase in cash provided by operating activities during 2009 compared to 2008 and 2007 was driven by higher net income offset by fluctuations in current assets and liabilities all in the ordinary course of business.

Our investing activities used $157.9 million, $175.2 million and $20.7 million in 2009, 2008 and 2007. Investing activities included $26.6 million, $163.2 million and $8.2 million in payments related to acquisitions in 2009, 2008 and 2007. Purchases of investments were $167.4 million in 2009. Investing activities also included a $4.0 million payment for a purchase of an investment in RideCharge, Inc. during 2009. Purchases of property and equipment totaled $17.3 million, $13.0 million and $12.5 million in 2009, 2008 and 2007. These amounts consisted mainly of computer equipment and software purchases and leasehold improvements, as well as amounts capitalized for the development of software used internally, as described in more detail in Results of Operations - Expenses
- Systems Development and Programming Costs, above. The increase in customer funding liabilities, net of changes in restricted cash resulted in $33.4 million and $1.0 million in cash provided in 2009 and 2008. Net cash provided by investing activities also included $24.0 million from the maturities of investments in 2009.

Our financing activities used $55.2 million in 2009, and provided $211.1 million and $140.4 million in 2008 and 2007. We used $54.8 million, $43.8 million and $1.9 million for the repurchase of 2,025 shares, 1,418 shares and 114 shares of common stock in 2009, 2008 and 2007. Net cash provided by financing activities in 2009, 2008 and 2007 include the net proceeds received from the exercise of stock options and vesting of share-based awards of $2.6 million, $11.2 million and $8.1 million and the sale of stock under our employee stock purchase plans of $1.2 million, $1.2 million and $0.8 million. Proceeds from financing activities in 2008 included the sale of 6.4 million shares of newly issued Concur common stock to American Express for $249.6 million in net proceeds. Financing activities in 2007 included $144.9 million in net proceeds from the public offering of 5.4 million shares of Concur common stock. These amounts were partially offset by the net repayment of debt of $7.0 million in 2008.

On June 1, 2007, we entered into a credit agreement with a financial institution ("Credit Agreement") that provides for a revolving loan for up to $50 million and expires in June 2010, or earlier as provided in the Credit Agreement. At our option, the interest rate on the revolving loan is equal to either (1) the greater of the Federal Funds Rate plus 0.5% and the financial institution's publicly announced prime rate at that time, or (2) the London Interbank Offered . . .