10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

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

For The Transition Period From                      To                     

Commission file number 0-22292

Captiva Software Corporation

(Exact name of Registrant as specified in its charter)

Delaware	77-0104275
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10145 Pacific Heights Boulevard

San Diego, CA 92121

(858) 320-1000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Former name, former address and former fiscal year, if changed since last report:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  x No  ¨

As of October 31, 2004, there were 12,187,592 shares of the registrant’s common stock, par value $0.01, outstanding.

CAPTIVA SOFTWARE CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2004

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Condensed Balance Sheets at September 30, 2004 and December 31, 2003 (unaudited)	3
	Consolidated Condensed Statements of Operations for the Three and Nine-Month Periods Ended September 30, 2004 and 2003 (unaudited)	4
	Consolidated Condensed Statement of Stockholders’ Equity and Total Comprehensive Income for the Three and Nine-Month Periods Ended September 30, 2004 (unaudited)	5
	Consolidated Condensed Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2004 and 2003 (unaudited)	6
	Notes to Consolidated Condensed Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Submission of Matters to a Vote of Security Holders	32
Item 5.	Other Information	32
Item 6.	Exhibits	32
Signatures		33

2

PART I – FINANCIAL INFORMATION

Item 1 - Financial Statements

CAPTIVA SOFTWARE CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS*

(UNAUDITED)

(IN THOUSANDS)

	September 30, 2004		December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	23,020	$	16,038
Accounts receivable, net		8,321		10,780
Prepaid expenses and other current assets		2,084		3,314
Total current assets		33,425		30,132
Property and equipment, net		1,303		924
Other assets		3,656		2,354
Goodwill		10,312		6,082
Other intangible assets, net		3,780		3,762
Total assets	$	52,476	$	43,254
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	436	$	891
Accrued compensation and related liabilities		2,710		2,793
Other liabilities		3,361		3,166
Deferred revenue		11,431		11,264
Total current liabilities		17,938		18,114
Deferred revenue		458		519
Other liabilities		262		235
Commitments
Stockholders’ equity:
Preferred stock		—		—
Common stock		121		108
Additional paid-in capital		31,683		24,171
Retained earnings		1,950		38
Accumulated other comprehensive income		64		69
Total stockholders’ equity		33,818		24,386
Total liabilities and stockholders’ equity	$	52,476	$	43,254

*The accompanying notes are an integral part of these consolidated condensed financial statements.

3

CAPTIVA SOFTWARE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS*

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Net revenues:
Software	$	6,562		$	7,092		$	21,666		$	19,452
Services		6,979			5,558			20,787			16,455
Hardware and other		1,466			1,867			5,218			5,096
Total revenues		15,007			14,517			47,671			41,003
Cost of revenues:
Software		862			741			2,887			1,881
Services		2,591			2,502			7,762			7,540
Hardware and other		1,183			1,465			4,236			4,106
Amortization of purchased intangible assets		654			523			1,919			1,571
Total cost of revenues		5,290			5,231			16,804			15,098
Gross profit		9,717			9,286			30,867			25,905
Operating expenses:
Research and development		2,242			2,181			7,439			6,406
Sales and marketing		4,858			4,294			15,504			13,188
General and administrative		1,919			1,609			4,891			4,521
Merger costs		(181	)		(10	)		(181	)		(54	)
Write-off of in-process research and development		—			—			66			—
Write-off of withdrawn stock offering costs		—			—			205			—
Total operating expenses		8,838			8,074			27,924			24,061
Income from operations		879			1,212			2,943			1,844
Other income (expense), net		62			(35	)		191			(28	)
Income before income taxes		941			1,177			3,134			1,816
Provision for income taxes		367			471			1,222			727
Net income	$	574		$	706		$	1,912		$	1,089
Basic net income per share	$	0.05		$	0.07		$	0.17		$	0.12
Diluted net income per share	$	0.04		$	0.06		$	0.15		$	0.10
Basic common equivalent shares		11,969			9,607			11,486			9,162
Diluted common equivalent shares		13,225			11,516			13,116			10,442

*The accompanying notes are an integral part of these consolidated condensed financial statements.

4

CAPTIVA SOFTWARE CORPORATION

CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY AND TOTAL

COMPREHENSIVE INCOME*

(UNAUDITED)

(IN THOUSANDS)

	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Number of Shares	Amount
Balance at December 31, 2003	10,790	$	108	$	24,171	$	38	$	69		$	24,386
Exercise of stock options	512		5		2,512							2,517
Tax benefit of stock option exercises					1,077							1,077
Comprehensive income:
Equity adjustment from foreign currencies									(13	)		(13	)
Net income							477					477
Total comprehensive income												464
Balance at March 31, 2004	11,302	$	113	$	27,760	$	515	$	56		$	28,444
Exercise of stock options	422		4		1,068							1,072
Issuance of common stock under employee stock purchase plan	116		1		294							295
Tax benefit of stock option exercises					1,084							1,084
Comprehensive income:
Equity adjustment from foreign currencies									(18	)		(18	)
Net income							861					861
Total comprehensive income												843
Balance at June 30, 2004	11,840	$	118	$	30,206	$	1,376	$	38		$	31,738
Exercise of stock options	303		3		463							466
Tax benefit of stock option exercises					1,014							1,014
Comprehensive income:
Equity adjustment from foreign currencies									26			26
Net income							574					574
Total comprehensive income												600
Balance at September 30, 2004	12,143	$	121	$	31,683	$	1,950	$	64		$	33,818

*The accompanying notes are an integral part of these consolidated condensed financial statements.

5

CAPTIVA SOFTWARE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS*

(UNAUDITED)

(IN THOUSANDS)

	Nine Months Ended September 30,
	2004			2003
Cash flows from operating activities:
Net income	$	1,912		$	1,089
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,355			2,041
Deferred income taxes		(1,889	)		(739	)
Tax benefit of stock option exercises		3,175			1,107
Write-off of in-process research and development		66			—
Changes in operating assets and liabilities, net of effect of acquisition of ADP Context, Inc.:
Accounts receivable		3,837			1,325
Other current assets and other assets		1,157			(113	)
Accounts payable		(455	)		(73	)
Deferred revenue		(1,358	)		(239	)
Other liabilities		(8	)		(1,079	)
Net cash provided by operating activities:		8,792			3,319
Cash flows from investing activities:
Purchases of property and equipment		(679	)		(301	)
Cash used in acquisition of ADP Context, Inc.		(5,343	)		—
Direct costs of acquisition of ADP Context, Inc.		(116	)		—
Net cash used in investing activities:		(6,138	)		(301	)
Cash flows from financing activities:
Proceeds from issuance of common stock		4,350			2,957
Payments on line of credit		—			(1,145	)
Net cash provided by financing activities		4,350			1,812
Effect of exchange rate changes on cash		(22	)		145
Net increase in cash and cash equivalents		6,982			4,975
Cash and cash equivalents at beginning of period		16,038			7,453
Cash and cash equivalents at end of period	$	23,020		$	12,428

*The accompanying notes are an integral part of these consolidated condensed financial statements.

6

CAPTIVA SOFTWARE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

1.    Basis of Preparation and Accounting Policies

Unaudited Interim Financial Information

In this document, “we,” “our,” “us” and the “Company” refer to Captiva Software Corporation, formerly known as ActionPoint, Inc., and its subsidiaries, unless the context otherwise requires. The accompanying unaudited interim consolidated condensed financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. The December 31, 2003 balance sheet data was derived from audited financial statements contained in the Company’s 2003 Annual Report on Form 10-K but does not include all disclosures required by accounting principles generally accepted in the United States of America.

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

In the opinion of management, the unaudited consolidated condensed financial statements for the three and nine-month periods ended September 30, 2004 and 2003 include all adjustments necessary to state fairly the financial information set forth herein, consisting only of normal recurring adjustments except for the write-off of withdrawn stock offering costs as discussed below and the purchase accounting entries for the Company’s acquisition of ADP Context, Inc. as discussed in Note 2. These consolidated condensed financial statements and notes hereto should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003. The results of operations for the interim periods presented in this quarterly report on Form 10-Q are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year and should not be relied upon as such.

Revenue Recognition

Revenue is generated primarily from three sources: (i) software, which is primarily software license revenue, software subscription license revenue, which includes subscriptions to information databases, and royalty revenue, (ii) services, which includes software license maintenance fees, training and professional services revenue and (iii) hardware and other products, which were primarily sales of digital scanners in the three and nine months ended September 30, 2004 and 2003. Software license revenue is recognized upon shipment provided that persuasive evidence of an arrangement exists, fees are fixed or determinable, collection is probable and no significant undelivered obligations remain. Software subscription license revenue is recognized over the term of the license, generally twelve months. Royalty revenue is recognized when partners ship or pre-purchase rights to ship products incorporating the Company’s software, provided collection of such revenue is determined to be probable and the Company has no further obligations. Services revenue is recognized ratably over the period of the maintenance contract or as the services are provided. Payments for maintenance fees are generally made in advance and are non-refundable. Revenue for hardware and other products is recognized when the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable and (iv) collectibility is reasonably assured.

For arrangements with multiple elements (e.g., delivered and undelivered products, maintenance and other services), the Company allocates revenue to each element of the arrangement based on the fair value of the undelivered elements, which is specific to the Company, using the residual value method. The fair values for ongoing maintenance and support obligations are based upon separate sales of renewals to customers or upon

7

CAPTIVA SOFTWARE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

substantive renewal rates quoted in the agreements. The fair values for services, such as training or consulting, are based upon prices of these services when sold separately to other customers. Deferred revenue is primarily comprised of undelivered maintenance services and in some cases hardware and other products delivered but not yet accepted. When software licenses are sold with professional services and such services are deemed essential to the functionality of the software, combined software and service revenue is recognized as the services are performed. When software licenses are sold with professional services and such services are not considered essential to the functionality of the software, software revenue is recognized when the above criteria are met and service revenue is recognized as the services are performed.

Intangible Assets

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill is not amortized but is tested at least annually for impairment. Other intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from less than one year to five years.

The determination of the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions. Determining the fair values and useful lives of intangible assets especially requires the exercise of judgment. While there are a number of different generally accepted valuation methods to estimate the value of intangible assets acquired, the Company primarily used the discounted cash flow method. This method requires significant management judgment to forecast the future operating results used in the analysis. In addition, other significant estimates are required, such as residual growth rates and discount factors. The estimates that the Company has used are consistent with the plans and estimates that the Company uses to manage its business, based on available historical information and industry averages. The judgments made in determining the estimated useful lives assigned to each class of assets acquired can also significantly affect the Company’s net operating results. Amortization of purchased intangibles is expected to be $2.6 million, $1.9 million, $0.7 million, $0.3 million and $0.2 million for the years ending December 31, 2004, 2005, 2006, 2007 and 2008 and thereafter, respectively.

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

Valuation of Goodwill

The Company assesses the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment is reviewed at least annually.

Important factors that could trigger impairment include the following:

• significant underperformance relative to historical or projected future operating results;

• significant changes in the manner of the Company’s use of the acquired assets or the strategy for the Company’s overall business;

• significant negative industry or economic trends;

• significant decline in the Company’s stock price for a sustained period; and

• decreased market capitalization relative to net book value.

8

CAPTIVA SOFTWARE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

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

Merger Costs

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

Offering Costs

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

Stock-Based Compensation

The Company has elected to utilize the intrinsic value method to account for its employee stock option plans. When the exercise price of the Company’s employee stock options equals the fair value price of the underlying stock on the date of grant, no compensation expense is recognized in the Company’s financial statements. Compensation expense for options granted to non-employees is determined in accordance with Statement of Financial Accounting Standards (SFAS) No. 123 and Emerging Issues Task Force (EITF) No. 96-18 as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Deferred charges for options granted to non-employees are periodically remeasured as the underlying options vest.

9

CAPTIVA SOFTWARE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

Had compensation cost for the Company’s stock-based compensation to employees been determined based on the fair value method, the amount of stock-based employee compensation cost and the Company’s pro forma results would have been as indicated below (in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Net income as reported	$	574		$	706		$	1,912		$	1,089
Stock-based employee compensation cost, net of tax, utilizing the intrinsic value method		—			—			—			—
Stock-based employee compensation cost, net of tax, utilizing the fair value method		(686	)		(208	)		(1,914	)		(542	)
Pro forma net income (loss) under SFAS No. 123	$	(112	)	$	498		$	(2	)	$	547
Pro forma basic net income (loss) per share under SFAS No. 123	$	(0.01	)	$	0.05		$	(0.00	)	$	0.06
Pro forma diluted net income (loss) per share under SFAS No. 123	$	(0.01	)	$	0.04		$	(0.00	)	$	0.05
Black-Scholes option pricing model assumptions:
Risk-free interest rate		2.9%			2.2%			2.5%			2.1%
Expected life		3.5 years			3.5 years			3.5 years			3.5 years
Expected volatility		90%			100%			98%			100%
Expected dividend yield		0%			0%			0%			0%

Reclassifications

Certain prior period items have been reclassified to conform with the current period’s presentation. These reclassifications had no impact on total assets, net revenues, operating income or net income as previously reported.

2.    Acquisition of ADP Context, Inc.

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

10

CAPTIVA SOFTWARE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

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

Identified intangibles	$	1,936
Goodwill		4,230
In-process research and development		66
Current assets		1,452
Non-current assets		133
Current liabilities		(1,778	)
Non-current liabilities		(580	)
Direct acquisition and equity issuance costs		(116	)
Total consideration	$	5,343

In connection with the acquisition, the Company wrote off the purchased in-process research and development of $0.1 million, which was charged to operations in the three months ended March 31, 2004. The results of operations of Context are included in the nine months ended September 30, 2004 starting from February 1, 2004, the date of acquisition. If the acquisition had occurred on January 1, 2003, pro forma financial information would have been as follows (in thousands, except per share information):

	Three Months Ended September 30,				Nine Months Ended September 30,
	(Actual) 2004		2003		2004		2003
Net revenues	$	15,007	$	15,832	$	48,104	$	44,886
Net income		574		757		1,879		1,348
Basic net income per share		0.05		0.08		0.16		0.15
Diluted net income per share		0.04		0.07		0.14		0.13

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CAPTIVA SOFTWARE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

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

	September 30, 2004			December 31, 2003
Accounts receivable, net:
Accounts receivable	$	8,964		$	11,556
Allowance for doubtful accounts		(643	)		(776	)
	$	8,321		$	10,780
Prepaid expenses and other current assets:
Purchased equipment inventory	$	—		$	1,258
Deferred taxes		689			794
Other		1,395			1,262
	$	2,084		$	3,314
Property and equipment, net:
Office equipment and machinery	$	3,014		$	2,738
Computer software		1,008			914
Leasehold improvements		121			561
		4,143			4,213
Less accumulated depreciation and amortization		(2,840	)		(3,289	)
	$	1,303		$	924
Other assets:
Deferred taxes	$	3,350		$	2,104
Other		306			250
	$	3,656		$	2,354
Accrued compensation and related liabilities:
Accrued vacation	$	1,310		$	1,118
Other		1,400			1,675
	$	2,710		$	2,793

12

CAPTIVA SOFTWARE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Intangible assets, net:
September 30, 2004:
Existing technology	$	5,820	$	(3,700	)	$	2,120
Tradename and trademarks		766		(306	)		460
Core technology		551		(298	)		253
Maintenance agreements		479		(346	)		133
Channel partner relationships		148		(88	)		60
Customer lists		810		(108	)		702
Patents		92		(40	)		52
	$	8,666	$	(4,886	)	$	3,780
December 31, 2003:
Existing technology	$	4,813	$	(2,273	)	$	2,540
Tradename and trademarks		679		(193	)		486
Core technology		551		(195	)		356
Maintenance agreements		479		(226	)		253
Channel partner relationships		116		(55	)		61
Patents		92		(26	)		66
	$	6,730	$	(2,968	)	$	3,762

4.    Computation of Net Income Per Share

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

Dilutive securities include options subject to vesting on an as-if-converted-to-common stock basis. Dilutive securities of 1.3 million shares and 1.6 million shares are included in the diluted earnings per share calculation for the three and nine months ended September 30, 2004, respectively. Dilutive securities of 1.9 million shares and 1.3 million shares are included in the diluted earnings per share calculation for the three and nine months ended September 30, 2003, respectively. Potentially dilutive securities totaling 0.8 million shares and 0.6 million shares for the three and nine months ended September 30, 2004, respectively, and 0.2 million shares and 1.5 million shares for the three and nine months ended September 30, 2003, respectively, were excluded from basic and diluted earnings per share because of their anti-dilutive effect.

5.    Comprehensive Income

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2004		2003			2004			2003
Foreign currency translation adjustment	$	26	$	(29	)	$	(5	)	$	(16	)
Net income as reported		574		706			1,912			1,089
Total comprehensive income	$	600	$	677		$	1,907		$	1,073

13

CAPTIVA SOFTWARE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

6.    Line of Credit

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

7.    Income Taxes

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

8.    Business Segments and Geographic Reporting

The Company has a single reportable segment consisting of the development, marketing and servicing of input management software. Management uses one measurement of profitability and does not disaggregate its business for internal reporting. Operations outside the United States primarily consist of sales offices of the Company’s subsidiaries in the United Kingdom, Germany and Australia, which are responsible for sales to international customers. The international subsidiaries do not carry any significant tangible long-lived assets, and the total assets of the Company’s international subsidiaries were not significant for any period presented.

The following table presents revenue derived from domestic and international sales, based on location of customer for the three and nine months ended September 30, 2004 and 2003, respectively (in thousands, except percentage data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
United States and Canada	$	11,321		$	11,865		$	37,108		$	32,266
% of total		75	%		82	%		78	%		79	%
International (excluding Canada)	$	3,686		$	2,652		$	10,563		$	8,737
% of total		25	%		18	%		22	%		21	%

9.    Guarantees

The Company provides indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of the Company’s products. From time to time, indemnification claims may arise; however, to date, the Company has not encountered material costs as a result of such obligations and has not accrued any material liabilities related to such indemnifications in its financial statements. Any indemnification claims are reviewed on a quarterly basis.

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms, or other words of similar meaning. These statements are only predictions based on information currently available to us. Actual events or results may differ materially. Risks that may cause actual results to differ materially from the forward-looking statements are described in the section entitled “Risk Factors” in this Quarterly Report on Form 10-Q and identified from time to time in our filings with the Securities and Exchange Commission, press releases and other communications.

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

Overview

We are a leading provider of input management solutions designed to manage business-critical information from paper, faxed and electronic forms, documents and transactions into the enterprise. Our solutions automate the processing of billions of forms, documents and transactions annually, converting their content into information that is usable in database, document, content and other information management systems. We believe that our products and services enable organizations to reduce operating costs, obtain higher information accuracy rates and speed processing times. Our objective is to extend our position as a leading provider of input management solutions. Key elements of our growth strategy include leveraging our existing customer base, broadening our sales channels and expanding our markets, expanding our international presence, broadening our product offerings and pursuing strategic acquisitions.

Our products offer organizations a cost-effective, accurate and automated alternative to both manual data entry and electronic data interchange (EDI). These traditional approaches are typically labor intensive, time consuming and costly methods of managing the input of information into the enterprise. Organizations can utilize our products to capture information digitally, extract the meaningful content or data, and apply business rules that ensure the data’s accuracy.

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

On July 31, 2002, ActionPoint, Inc. merged with Captiva Software Corporation, a California corporation. As a result of this transaction, Captiva became a wholly-owned subsidiary of ActionPoint, and ActionPoint changed its name to Captiva Software Corporation and remained a Delaware corporation.

On February 1, 2004, we completed the acquisition of all of the issued and outstanding capital stock of ADP Context, Inc. (Context) for approximately $5.2 million of cash derived from our existing cash and cash equivalents. We made a final cash payment of approximately $0.2 million in the second quarter of 2004. Under generally accepted accounting principles, the results of operations of Context are included in our results of operations for the nine months ended September 30, 2004 starting from February 1, 2004. The Context products complement our existing ClaimPack product line and enhance our product offerings to our claim processing customers. The Context product line also allows us to extend our reach into the provider side of the healthcare market. We are not planning to make significant changes to Context’s cost structure, and we expect both our consolidated revenues and expenses to increase in the future as a result of this acquisition.

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Critical Accounting Policies and Estimates

A critical accounting policy is one that is both important to the portrayal of a company’s financial condition or results of operations and requires significant judgment or complex estimation processes. We believe that the following accounting policies fit this definition:

Revenue Recognition

Our revenue is generated primarily from three sources: (i) software, primarily software license revenue, software subscription license revenue, which includes subscriptions to information databases, and royalty revenue, (ii) services, including software license maintenance fees, training fees and professional services revenue and (iii) hardware and other products, primarily sales of digital scanners in the three and nine months ended September 30, 2004 and 2003. Software license revenue is recognized upon shipment provided that persuasive evidence of an arrangement exists, fees are fixed or determinable, collection is probable and no significant undelivered obligations remain. Software subscription license revenue is recognized over the term of the license, generally twelve months. Royalty revenue is recognized when our resellers ship or pre-purchase rights to ship products incorporating our software, provided collection of the revenue is determined to be probable and we have no further obligations. Services revenue is recognized ratably over the period of the maintenance contract or as the services are provided. Payments for maintenance fees are generally made in advance and are non-refundable. Revenue for hardware and other products is recognized when the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable and (iv) collectibility is reasonably assured.

For arrangements with multiple elements (e.g., delivered and undelivered products, maintenance and other services), we allocate revenue to each element of the arrangement based on the fair value of the undelivered elements, which is specific to us, using the residual value method. The fair values for ongoing maintenance and support obligations are based upon separate sales of renewals to customers or upon substantive renewal rates quoted in the agreements. The fair values for services, such as training or consulting, are based upon prices of these services when sold separately to other customers. Deferred revenue is primarily comprised of undelivered maintenance services and in some cases hardware and other products delivered but not yet accepted. When software licenses are sold with professional services and those services are deemed essential to the functionality of the software, combined software and service revenue is recognized as the services are performed. When software licenses are sold with professional services and those services are not considered essential to the functionality of the software, software revenue is recognized when the above criteria are met and service revenue is recognized as the services are performed.

Management judgments and estimates are made in connection with certain revenues recognized in any accounting period. We must assess whether collection is probable for the fee associated with a revenue transaction and, for fixed-price contracts, make estimates of costs to complete. Differences could result in the amount and timing of revenues for any period if management were to make different judgments or utilize different estimates.

Intangible Assets

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill is not amortized, but is tested at least annually for impairment. Other intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from less than one year to five years.

The determination of the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions. Determining the fair values and useful lives of intangible assets especially requires the exercise of judgment. While there are a number of different generally accepted valuation methods to estimate the value of intangible assets acquired, we primarily used the discounted cash flow method. This method requires significant management judgment in forecasting the future operating

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results used in the analysis. This method also requires other significant estimates, such as residual growth rates and discount factors. The estimates we have used are consistent with the plans and estimates that we use to manage our business, based on available historical information and industry averages. The judgments made in determining the estimated useful lives assigned to each class of assets acquired can significantly affect our net operating results. Amortization of purchased intangibles is expected to be $2.6 million, $1.9 million, $0.7 million, $0.3 million and $0.2 million for the years ending December 31, 2004, 2005, 2006, 2007 and 2008 and thereafter, respectively.

In addition, the value of our intangible assets, including goodwill, is subject to future impairment if we experience declines in operating results or negative industry or economic trends or if our future performance is below our projections and estimates.

Valuation of Goodwill

We assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment is reviewed at least annually.

Factors we consider important that could trigger impairment include the following:

• significant underperformance relative to historical or projected future operating results;

• significant changes in the manner of our use of the acquired assets or the strategy for our overall business;

• significant negative industry or economic trends;

• significant declines in our stock price for a sustained period; and

• decreased market capitalization relative to our net book value.

If there were an indication that the carrying value of goodwill might not be recoverable based upon the existence of one or more of the above indicators, we would recognize an impairment loss if the carrying value exceeds its fair value. We performed our annual impairment review during the quarter ended June 30, 2004 and determined there was no impairment.

Income Tax Valuation Allowance

On a quarterly basis, management evaluates the realizability of our net deferred tax assets and assesses the need for a valuation allowance. Realization of our net deferred tax assets is dependent on our ability to generate sufficient future taxable income. The amount of the net deferred tax assets actually realized could vary if there are differences in the timing or amount of future reversals of existing deferred tax liabilities or changes in the actual amounts of future taxable income. If we do not generate our forecasted taxable income, we may be required to establish a valuation allowance against all or part of our net deferred tax assets based upon applicable accounting criteria. To the extent we establish a valuation allowance, an expense will be recorded within the provision for income taxes line in our Statement of Operations. As of September 30, 2004, management has determined that it is more likely than not that our net deferred tax assets will be realized based on forecasted taxable income.

Results of Operations

Three Months Ended September 30, 2004 and 2003

Revenues

Total revenues increased 3% in the three months ended September 30, 2004 to $15.0 million from $14.5 million in the three months ended September 30, 2003.

Our software revenues decreased 7% in the three months ended September 30, 2004 to $6.6 million from $7.1 million in the three months ended September 30, 2003. As a percentage of total revenues, software revenues

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accounted for 44% in the three months ended September 30, 2004 and 49% in the three months ended September 30, 2003. The decrease in software revenues in absolute terms was attributable to longer than anticipated sales cycles, particularly in the United States, which resulted in more delayed orders at the end of the third quarter of 2004 compared to the end of the third quarter of 2003. The decrease in software revenues as a percentage of total revenues was primarily attributable to the increase in services revenues in absolute terms and as a percentage of total revenues in the three months ended September 30, 2004 compared to the three months ended September 30, 2003.

Our service revenues increased 26% in the three months ended September 30, 2004 to $7.0 million from $5.6 million in the three months ended September 30, 2003. As a percentage of total revenues, services accounted for 47% in the three months ended September 30, 2004 and 38% in the three months ended September 30, 2003. The increase in service revenues in absolute terms reflects both a growing installed base of customers, most of which purchase ongoing software maintenance support, and a growth in professional services revenues in the three months ended September 30, 2004 compared to the three months ended September 30, 2003. The increase in service revenues as a percentage of total revenues was primarily attributable to the increase in service revenues in absolute terms and the decrease in software and hardware and other revenues in absolute terms and as a percentage of total revenues in the three months ended September 30, 2004.

Our hardware and other revenues decreased 21% in the three months ended September 30, 2004 to $1.5 million from $1.9 million in the three months ended September 30, 2003. As a percentage of total revenues, hardware and other revenues accounted for 10% in the three months ended September 30, 2004 and 13% in the three months ended September 30, 2003. The decrease in hardware and other revenues in absolute terms and as a percentage of total revenues reflects a decrease in sales of digital scanners.

Gross Profit

Gross profit increased 5% in the three months ended September 30, 2004 to $9.7 million from $9.3 million in the three months ended September 30, 2003. Gross profit as a percentage of total revenues increased to 65% in the three months ended September 30, 2004 from 64% in the three months ended September 30, 2003. The increase in gross profit as a percentage of total revenues was due to a combination of the decrease in hardware and other revenues, which have lower gross margins than software and service revenues, and a leveraging of our existing professional services and maintenance support services infrastructure which kept services cost of revenues for the three months ended September 30, 2004 consistent with the three months ended September 30, 2003, while services revenues increased 26% in the three months ended September 30, 2004 compared to the three months ended September 30, 2003. This increase was offset by a decrease in software revenues which have higher gross margins than service and hardware and other revenues.

Research and Development

Research and development expenses remained consistent at $2.2 million in both the three months ended September 30, 2004 and the three months ended September 30, 2003. As a percentage of total revenues, research and development expenses were 15% in both the three months ended September 30, 2004 and 2003. The consistency in research and development expenses in absolute terms and as a percentage of total revenues was due to the acquisition of Context which resulted in increases in headcount and related labor costs, offset by cost savings in the three months ended September 30, 2004 compared to the three months ended September 30, 2003. We expect research and development expenses to increase in absolute terms in the fourth quarter of 2004 as we continue to expand our research and development staff to support the development of new products and enhancements to current products.

Sales and Marketing

Sales and marketing expenses increased 13% in the three months ended September 30, 2004 to $4.9 million from $4.3 million in the three months ended September 30, 2003. As a percentage of total revenues, sales and marketing expenses were 32% in the three months ended September 30, 2004 and 30% in the three months ended

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September 30, 2003. The increase in sales and marketing expenses in absolute terms was due to an expansion of our sales force offset by a reduction in commissions on software sales in the three months ended September 30, 2004 compared to the three months ended September 30, 2003. The expansion of our sales force includes the addition of the Context sales force in the first quarter of 2004. The increase in sales and marketing expenses as a percentage of total revenues was due to the increase in absolute terms more than offsetting the increase in total revenues in the three months ended September 30, 2004 compared to the three months ended September 30, 2003. We expect sales expenses to continue to increase in absolute terms in the fourth quarter of 2004 as we continue to add to our sales force and experience continued revenue growth.

General and Administrative

General and administrative expenses increased 19% in the three months ended September 30, 2004 to $1.9 million from $1.6 million in September 30, 2003. As a percentage of total revenues, general and administrative expenses were 13% in the three months ended September 30, 2004 and 11% in the three months ended September 30, 2003. The increase in general and administrative expenses in absolute terms was due to the acquisition of Context, which resulted in increases in headcount and related labor costs, and an increase in professional fees related to Sarbanes-Oxley Act compliance in the three months ended September 30, 2004 compared to the three months ended September 30, 2003. The increase in general and administrative expenses as a percentage of total revenues was due to the increase in absolute terms more than offsetting the increase in total revenues in the three months ended September 30, 2004 compared to the three months ended September 30, 2003.

Merger Costs

Merger costs relate to the merger of ActionPoint, Inc. and Old Captiva. In the three months ended September 30, 2004 and September 30, 2003, we recorded sublease receipts in excess of estimated receipts of $181,000 and $10,000, respectively, related to an excess lease obligation recorded upon the merger.

Provision for Income Taxes

In the three months ended September 30, 2004, we recorded a tax provision of $0.4 million, which represented an effective tax rate of 39%. In the three months ended September 30, 2003, we recorded a tax provision of $0.5 million, which represented an effective tax rate of 40%.

Nine Months Ended September 30, 2004 and 2003

Revenues

Total revenues increased 16% in the nine months ended September 30, 2004 to $47.7 million from $41.0 million in the nine months ended September 30, 2003.

Our software revenues increased 11% in the nine months ended September 30, 2004 to $21.7 million from $19.5 million in the nine months ended September 30, 2003. As a percentage of total revenues, software revenues accounted for 45% in the nine months ended September 30, 2004 and 47% in the nine months ended September 30, 2003. The increase in software revenues in absolute terms was attributable to the acquisition of Context. The decrease in software revenues as a percentage of total revenues was primarily attributable to the increase in service revenues as a percentage of total revenues in the nine months ended September 30, 2004.

Our service revenues increased 26% in the nine months ended September 30, 2004 to $20.8 million from $16.5 million in the nine months ended September 30, 2003. As a percentage of total revenues, services accounted for 44% in the nine months ended September 30, 2004 and 40% in the nine months ended September 30, 2003. The increase in service revenues in absolute terms and as a percentage of total revenues reflects both a growing installed base of customers, most of which purchase ongoing software maintenance support, and a growth in professional services revenues in the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.

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Our hardware and other revenues increased 2% in the nine months ended September 30, 2004 to $5.2 million from $5.1 million in the nine months ended September 30, 2003. As a percentage of total revenues, hardware and other revenues accounted for 11% in the nine months ended September 30, 2004 and 12% in the nine months ended September 30, 2003. The increase in hardware and other revenues in absolute terms reflects an increase in sales of digital scanners. The decrease in hardware and other revenues as a percentage of total revenues is due to the higher software and services revenues in the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.

Gross Profit

Gross profit increased 19% in the nine months ended September 30, 2004 to $30.9 million from $25.9 million in the nine months ended September 30, 2003. Gross profit as a percentage of total revenues increased to 65% in the nine months ended September 30, 2004 from 63% in the nine months ended September 30, 2003. The increase in gross profit as a percentage of total revenues was due to a leveraging of our existing professional services and maintenance support services infrastructure which kept services cost of revenues for the nine months ended September 30, 2004 consistent with the nine months ended September 30, 2003, while services revenues increased 26% in the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. This increase was partially offset by both an increase in hardware and other revenues, which have lower gross margins than software and service revenues, and an increase in intangibles amortization of approximately $0.3 million in the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 related to the Context acquisition.

Research and Development

Research and development expenses increased 16% in the nine months ended September 30, 2004 to $7.4 million from $6.4 million in the nine months ended September 30, 2003. As a percentage of total revenues, research and development expenses were 16% in both the nine months ended September 30, 2004 and 2003. The increase in research and development expenses in absolute terms was primarily attributable to the acquisition of Context which resulted in increases in headcount and related labor costs and was also attributable to an increase of approximately $0.3 million related to localizing products for international markets. The consistency in research and development expenses as a percentage of total revenues was due to the increase in absolute terms being offset by the increase in total revenues in the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. We expect research and development expenses to continue to increase in absolute terms in 2004 as we continue to expand our research and development staff to support the development of new products and enhancements to current products.

Sales and Marketing

Sales and marketing expenses increased 18% in the nine months ended September 30, 2004 to $15.5 million from $13.2 million in the nine months ended September 30, 2003. As a percentage of total revenues, sales and marketing expenses were 33% in the nine months ended September 30, 2004 and 32% in the nine months ended September 30, 2003. The increase in sales and marketing expenses in absolute terms was due to an expansion of our sales force. The expansion of our sales force includes the addition of the Context sales force in the first quarter of 2004. The increase in sales and marketing expenses as a percentage of total revenues was due to the increase in absolute terms more than offsetting the increase in total revenues in the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. We expect sales expenses to continue to increase in absolute terms in the fourth quarter of 2004 as we continue to expand our sales force and experience continued revenue growth.

General and Administrative

General and administrative expenses increased 8% in the nine months ended September 30, 2004 to $4.9 million from $4.5 million in the nine months ended September 30, 2003. As a percentage of total revenues,

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general and administrative expenses decreased to 10% in the nine months ended September 30, 2004 from 11% in the nine months ended September 30, 2003. The increase in general and administrative expenses in absolute terms includes the acquisition of Context which resulted in increases in headcount and related labor costs in the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. The decrease in general and administrative expenses as a percentage of total revenues was due to the increase in absolute terms being more than offset by the increase in total revenues in the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.

Merger Costs

Merger costs relate to the merger of ActionPoint, Inc. and Old Captiva. In the nine months ended September 30, 2004 and September 30, 2003, we recorded sublease receipts in excess of estimated receipts of $181,000 and $54,000, respectively, related to an excess lease obligation recorded upon the merger.

Write-off of Withdrawn Stock Offering Costs

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

Provision for Income Taxes

In the nine months ended September 30, 2004, we recorded a tax provision of $1.2 million, which represented an effective tax rate of 39%. In the nine months ended September 30, 2003, we recorded a tax provision of $0.7 million, which represented an effective tax rate of 40%.

Liquidity and Capital Resources

At September 30, 2004, we had cash and cash equivalents of $23.0 million, compared to $16.0 million at December 31, 2003. In the nine months ended September 30, 2004 we completed the acquisition of all of the issued and outstanding capital of Context for $5.5 million in cash derived from our existing cash and cash equivalents. The $5.5 million included $0.1 million of direct costs of the Context acquisition.

Net cash provided by operating activities was $8.8 million in the nine months ended September 30, 2004 and $3.3 million in the nine months ended September 30, 2003. The net cash provided by operating activities in the nine months ended September 30, 2004 was attributable to net income of $1.9 million, depreciation and amortization of $2.4 million, a decrease in accounts receivable of $3.8 million and a write-off of in-process research and development of $0.1 million, offset by a net decrease in other operating assets and liabilities of $0.7 million and an increase in deferred income taxes of $1.9 million. In addition, the tax benefit of $3.2 million related to stock option deductions had a positive effect on our net cash provided by operating activities and could continue to have a positive effect if stock options continue to be exercised.

Net cash used in investing activities was $6.1 million in the nine months ended September 30, 2004 and $0.3 million in the nine months ended September 30, 2003. The increase in net cash used in investing activities in the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 was primarily attributable to the $5.5 million used in the acquisition of Context.

Net cash provided by financing activities was $4.4 million in the nine months ended September 30, 2004 compared to net cash provided by financing activities of $1.8 million in the nine months ended September 30, 2003. The increase in net cash provided by financing activities in the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 was attributable to the $1.4 million increase in proceeds from the exercise of common stock options and the sale of common stock under our employee stock purchase

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plan period over period and no payments on our line of credit which had no outstanding principal balance in the nine months ended September 30, 2004, compared to $1.1 million of payments on our line of credit in the nine months ended September 30, 2003. In the future, we expect to generate further net cash from financing activities from the sale of common stock under our employee stock purchase plan and the exercise of stock options.

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

Our principal sources of liquidity are cash and cash equivalents, as well as expected cash flows from operations and the line of credit. We may also continue to receive and use proceeds from the sale of common stock under our employee stock purchase plan and the exercise of stock options. We believe that our cash, cash equivalents and cash flows from operations will be sufficient to meet our liquidity and capital requirements for at least the next 12 months. We may, however, seek additional equity or debt financing to fund further expansion. There can be no assurance that additional financing will be available on terms favorable to us or at all.

Risk Factors

You should carefully consider the following risk factors and all other information contained in this Quarterly Report on Form 10-Q. Investing in our common stock involves a high degree of risk. In addition to those we describe below, risks and uncertainties that are not presently known to us or that we currently believe are immaterial may also impair our business operations. See “Forward-Looking Statements” above. If any of the following risks occur, our business could be harmed, the price of our common stock could decline and you may lose all or part of your investment.

Because of the unpredictability and variability of revenues from our products, we may not accurately forecast revenues or match expenses to revenues, which could harm our quarterly operating results and cause volatility or declines in our stock price.

Our quarterly revenues, expenses and operating results have varied significantly in the past, and our quarterly revenues, expenses and operating results may fluctuate significantly from period to period in the future due to a variety of factors, including:

• fluctuations in the size and timing of significant orders;

• possible delays in recognizing software licensing revenues;

• the fact that a large portion of our orders are generally booked late in each quarter, increasing the risk that orders anticipated to close in the quarter might not close;

• uncertainty in the budgeting cycles of customers;

• the timing of introduction of new or enhanced products; and

• general economic and political conditions.

We believe that comparisons of quarterly operating results will not necessarily be meaningful and should not be relied upon as the sole measure of our future performance. In addition, we may from time to time provide estimates of our future performance. For example, we typically estimate that the first quarter of each year is our weakest quarter and the fourth quarter of each year is our strongest quarter. Estimates are inherently uncertain, and actual results are likely to deviate, perhaps substantially, from our estimates as a result of the many risks and uncertainties in our business, including, but not limited to, those set forth in these risk factors. We do not

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undertake any duty to update estimates if given. Our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors. If this occurs, the trading price of our stock is likely to decline significantly.

If we fail to reduce expenses rapidly in the event our revenues unexpectedly decline, our results may be harmed.

We currently operate with virtually no software order backlog because our software products are shipped shortly after orders are received. This fact makes software revenues in any quarter substantially dependent on orders booked and shipped throughout that quarter. In addition, a large portion of our orders tend to be booked late in each quarter and we obtain a significant portion of our revenues from indirect sales channels over which we have little control. The combination of these factors makes our revenues difficult to predict from period to period. Expense levels are based to a significant extent on expectations of future revenues and are relatively fixed in the short term. If revenue levels are below expectations, our operating results could be harmed.

Our future success depends on our key management, sales and marketing, professional services, technical support and research and development personnel, whose knowledge of our business and technical expertise would be difficult to replace.

Our products and technologies are complex, and we are substantially dependent upon the continued service of existing key management, sales and marketing, professional services, technical support and research and development personnel. All of these key employees are employees “at will” and can resign at any time. The loss of the services of one or more of these key employees could slow product development processes or sales and marketing efforts or otherwise harm our business.

A significant aspect of our ability to attract and retain highly qualified employees is the equity compensation that we offer, typically in the form of stock options. Bills are currently pending before Congress, and the Financial Accounting Standards Board has issued an Exposure Draft, that would require companies to include in their statements of operations compensation expense relating to the issuance of employee stock options. As a result, we may decide to issue fewer stock options and may be impaired in our efforts to attract and retain necessary personnel.

If we fail to recruit and retain a significant number of qualified technical personnel, we may not be able to develop, introduce or enhance products on a timely basis.

We require the services of a substantial number of qualified professional services, technical support and research and development personnel. The market for these highly skilled employees is characterized by intense competition, which is heightened by their high level of mobility. These factors make it particularly difficult to attract and retain the qualified technical personnel we require. We have experienced, and may continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate technical qualifications.

If we are unable to recruit and retain a sufficient number of technical personnel with the skills required for existing and future products, we may not be able to complete development of, or upgrade or enhance, our products in a timely manner. Even if we are able to expand our staff of qualified technical personnel, they may require greater than expected compensation packages that would increase operating expenses.

We have a long sales cycle, and our products and services require a sophisticated sales effort.

Given the high average selling price and the cost and time required to implement our products and services, a customer’s decision to license our products typically involves a significant commitment of resources and is influenced by the customer’s budget cycles and internal approval procedures for IT purchases. In addition, selling our products and services requires us to educate potential customers on the uses and benefits of our products and services. As a result, our products and services have a long sales cycle, which can take three to six months or more. Consequently, we have difficulty predicting the quarter in which sales to expected customers

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may occur. The sales of our products and services are also subject to delays from the lengthy budgeting, approval and competitive evaluation processes of our customers, which typically accompany significant capital expenditures.

Our products and services require a sophisticated sales effort targeted at senior management of our prospective customers. New employees in our sales department require extensive training and typically take at least six months to achieve full productivity. There is no assurance that new sales representatives will ultimately become productive. If we were to lose qualified and productive sales personnel, our revenues could be adversely impacted.

We may not be able to compete successfully against current and potential competitors.

The input management software industry is currently fragmented and extremely competitive, with no one company having a significant market share. We expect that competition in this industry will intensify in the future. The market for forms processing and document capture solutions is very competitive and subject to rapid change. In addition, because there are relatively low barriers to entry into the software market, we may encounter additional competition from both established and emerging companies. Our current competitors could be acquired by larger companies and could become more formidable competitors. Many potential competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than we do, in addition to significantly greater name recognition and a larger installed base of customers. As a result, these potential competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of competitive products than we can. There is also a substantial risk that announcements of competing products by current or potential competitors could result in the delay or postponement of customer orders in anticipation of the introduction of the competitors’ new products.

In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address customer needs. These cooperative relationships may limit our ability to sell our products through particular reseller partners. Accordingly, new competitors or competitive cooperative relationships may emerge and rapidly gain significant market share. Contributing to these challenges, our industry is subject to consolidation, which could subject us to competition with larger companies offering integrated solutions and a greater breadth of products. Potential competitors may bundle their products or incorporate additional components into existing products in a manner that discourages users from purchasing our products.

Increased competition as a result of any combination of the above factors is likely to result in price reductions, fewer customer orders, reduced margins and loss of market share, any of which could harm our revenues, business and operating results.

If the market for input management software does not grow, our revenues are unlikely to grow.

The market for input management software has had limited growth in recent years. In addition, the concept of input management software is not widely understood in the marketplace. We have spent, and intend to continue to spend, considerable resources educating potential customers about our software products and the input management market in general. These expenditures may fail to achieve any broadening of the market or additional degree of market acceptance for our products. The rate at which organizations have adopted our products has varied significantly in the past, and we expect to continue to experience variations in the future. If the market for input management products grows more slowly than we anticipate or not at all, our revenues are unlikely to grow and our operating results will suffer.

We currently depend on repeat business for a substantial portion of our revenues and need to increase our customer base to grow in the future.

Currently, a significant portion of our revenues is generated from existing customers. Many of our customers initially make a limited purchase of our products and services on a departmental basis or for limited

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form or document types. These customers may not choose to purchase additional licenses to expand their use of our products. If this occurs, or if existing customers fail to renew services or maintenance contracts, then our revenues from new customers may not be sufficient to offset this and enable us to sustain our current revenue levels.

Conversely, a significant factor in our ability to grow our revenues in the future will be our ability to expand our customer base. We believe our ability to grow depends in part on our ability to expand into the “mid-market” segment of the input management market. Some of our competitors are more established in this segment of the market, and price is a more significant factor in the mid-market segment than the ability of our products to handle large volumes of documents. We have recently released products that address this market segment, and it is uncertain whether and to what extent these products will be successful and to what extent price-driven competition will erode our margins. If we are unsuccessful in expanding into the mid-market segment, or otherwise fail to increase our customer base, our business and operating results will be harmed.

If we are unable to respond in an effective and timely manner to technological change and new products in our industry, our revenues and operating results will suffer.

We currently expect to release a number of new products and enhancements to existing products in 2004 and anticipate that a portion of our product revenue growth will come from these new releases. If we experience material delays in introducing new products or product enhancements, our customers may forego the use of our products and use those of our competitors. The market for input management is characterized by rapid technological change, frequent new product introductions and enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. Our future success will depend upon our ability to continue to enhance our current products while developing and introducing new products on a timely basis that keep pace with technological developments and satisfy increasingly sophisticated customer requirements. As a result of the complexities inherent in our software, new products and product enhancements can require long development and testing periods. Significant delays in the general availability of these new releases or significant problems in the installation or implementation of these new releases could harm our operating results and financial condition. We have experienced delays in the past in the release of new products and product enhancements. We may fail to develop and market on a timely and cost-effective basis new products or product enhancements that respond to technological change, evolving industry standards or customer requirements. We may also experience difficulties that could delay or prevent the successful development, introduction or marketing of our products or reduce the likelihood that our new products and product enhancements will achieve market acceptance. Any such failures or difficulties would harm our business and operating results.

We may not be successful in expanding into new markets.

One element of our strategy involves applying our technology in new applications for additional markets. To be successful in expanding our sales in new markets, we will need to develop additional expertise in these markets. We may be required to hire new employees with expertise in new target markets in order to compete effectively in those markets. If we are not successful in growing our sales in additional markets, we may not achieve desired sales growth.

We have incurred losses in the past and we may incur losses in the future.

We have only recently become profitable, with net income of $1.9 million for the nine months ended September 30, 2004 and $2.6 million for the year ended December 31, 2003. We incurred a net loss of $0.5 million in 2002 and $1.9 million in 2001. Given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability on a quarterly or annual basis, which would likely cause our stock price to decline.

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We could be subject to potential product liability claims and third-party litigation related to our products and services, and as a result our operating results might suffer.

Our products are used in connection with critical business functions and may result in significant liability claims if they do not work properly. Limitation of liability provisions included in our license agreements may not sufficiently protect us from product liability claims because of limitations in existing or future laws or unfavorable judicial decisions. The sale and support of our products may give rise to claims in the future that may be substantial in light of the use of those products in business-critical applications. Liability claims could require expenditure of significant time and money in litigation or payment of significant damages.

Software defects could also damage our reputation, causing a loss of customers and resulting in significant costs.

Our software products are complex and may contain errors or defects, particularly when first introduced or when new versions or enhancements are released. In the past, we have discovered software errors in certain products after they were released to the market. In addition, our products are combined with complex products developed by other vendors. As a result, should problems occur, it may be difficult to identify the source or sources of the problems. Defects and errors, or end-user perception of defects and errors, found in current versions, new versions or enhancements of these products after commencement of commercial shipments may result in:

• loss of customers;

• warranty claims;

• damage to brand reputation;

• delay in market acceptance of current and future products; and

• diversion of development and engineering resources.

The occurrence of any one or more of these factors could harm our operating results and financial condition.

If we cannot manage and expand international operations or respond to changing regulatory conditions in international markets, our revenues may not increase and our business and results of operations could be harmed.

We currently have international operations, including offices in the United Kingdom, Germany and Australia. For the nine months ended September 30, 2004 and 2003, international sales, excluding Canada, represented approximately 22% and 21% of our revenues, respectively. We anticipate that international sales will increase as a percentage of our revenues and that, for the foreseeable future, a significant portion of our revenues will be derived from sources outside the United States. We intend to continue to expand sales and support operations internationally. We could enter additional international markets, which would require significant management time and financial resources and which, in turn, could adversely affect our operating margins and earnings. To expand international sales, we may establish additional international operations, expand international sales channel management and support organizations, hire additional personnel, customize our products for local markets, recruit additional international resellers and attempt to increase the productivity of existing international resellers. If we are unable to do any of the foregoing in a timely and cost-effective manner, our international sales growth, if any, will be limited, and our business, operating results and financial condition may be harmed. Even if we are able to expand international operations successfully, we may not be able to maintain or increase international market demand for our products. Our international operations are generally subject to a number of risks, including:

• costs of and other difficulties in customizing products for foreign countries;

• costs and challenges of educating customers and developing brand awareness in new local markets;

• protectionist laws and business practices favoring local competition;

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• greater seasonal reductions in business activity;

• greater difficulty or delay in accounts receivable collection;

• difficulties in staffing and managing international operations and in establishing and managing sales channels;

• foreign and United States taxation issues;

• regulatory uncertainties in international countries;

• foreign currency exchange rate fluctuations; and

• political and economic instability.

The majority of our international revenues and costs are denominated in foreign currencies. Although we do not currently undertake foreign exchange hedging transactions to reduce foreign currency transaction exposure, we may do so in the future. However, we do not have any plans to eliminate all foreign currency transaction exposure. Foreign currency exchange rate fluctuations and other risks associated with international operations could increase our costs, which, in turn, could harm our business. If we are unable to expand and manage our international operations effectively, our business would be harmed.

Failure to further develop and sustain our indirect sales channels could limit or prevent future growth.

Our strategy for future growth depends in part on our ability to increase sales through our indirect sales channels. We have a limited number of distribution relationships for our products with distributors, systems integrators and other resellers, and we may not be able to maintain our existing relationships or form new or successful relationships. Competitors may have existing relationships with various distributors, systems integrators and other resellers that could make it difficult for us to form new relationships in some cases. If our indirect sales channels do not continue to grow, our ability to generate revenues may be harmed.

Our current agreements with our indirect sales channels typically do not prevent these companies from selling products of other companies, including products that may compete with our products, and they do not generally require these companies to purchase minimum quantities of our products. Some of these relationships are governed by agreements that can be terminated by either party with little or no prior notice. These indirect sales channels could give higher priority to the products of other companies or to their own products than they give to our products. The loss of, or significant reduction in, sales volume from any of our current or future indirect sales channels as a result of any of these or other factors could harm our revenues and operating results.

If we are unable to protect our intellectual property, our business may be harmed.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology, particularly in countries where the laws may not protect our proprietary rights as fully as in the United States. In particular, we are planning to begin performing significant research and development outside of the United States, where intellectual property protection is less stringent than in the United States. In addition, our competitors might independently develop similar technology, duplicate our products or circumvent any patents or other intellectual property rights that we may have. Due to rapid technological change in our market, we believe the various legal protections available for our intellectual property are of limited value. Instead, we seek to establish and maintain a technology leadership position by leveraging the technological and creative skills of our personnel to create new products and enhancements to existing products.

We depend upon software that we license from and products provided by third parties, the loss of which could harm our revenues.

We rely upon certain software licensed from third parties, including software that is integrated with our internally developed software and used in our products to perform key functions. There can be no assurance that

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these technology licenses will not infringe the proprietary rights of others or will continue to be available to us on commercially reasonable terms, if at all. The loss of or inability to maintain any of these software licenses could result in shipment delays or reductions until equivalent software could be developed, identified, licensed and integrated. Delays of this type could materially adversely affect our business, operating results and financial condition.

In addition, we have recently derived a significant portion of our revenues from reselling third-party products, primarily digital scanners. These third-party products may not continue to meet industry standards or be available to us on commercially reasonable terms or at all, in which case our operating results and financial condition would be harmed. In addition, we have little control over the quality of these third-party products other than our decisions as to which products to resell.

If we are subject to a claim that we infringe a third party’s intellectual property, our operating results could suffer.

Substantial litigation regarding intellectual property rights and brand names exists in the software industry. We expect that software product developers increasingly will be subject to infringement claims as the number of products and competitors in our industry grows and the functionality of products in related industries overlaps. Third parties, some with far greater financial resources than ours, may claim infringement of their intellectual property rights by our products, both those developed by us and those obtained through the acquisition of other businesses.

Any claim of this type, with or without merit, could:

• be time consuming to defend;

• result in costly litigation;

• divert management’s attention and resources;

• cause product shipment delays;

• require us to redesign products;

• require us to enter into royalty or licensing agreements; or

• cause others to seek indemnity from us.

If we are required to enter into royalty or licensing agreements to resolve an infringement claim, we may not be able to enter into those agreements on favorable terms. A successful claim of product infringement against us, or failure or inability either to license the infringed or similar technology or to develop alternative technology on a timely basis could harm our operating results, financial condition or liquidity.

If we are unable to continue to implement and improve financial and managerial controls and continue to improve our reporting systems and procedures, we may not be able to manage growth effectively and our operating results may be harmed.

Growth will place a significant strain on our management, information systems and resources. In order to manage this growth effectively, we will need to continue to improve our financial and managerial controls and our reporting systems and procedures. Any inability of our management to integrate employees, products, technology advances and customer service into our operations and to eliminate unnecessary duplication may have a materially adverse effect on our business, financial condition and results of operations.

If we are unable to build awareness of our brands, we may not be able to compete effectively against competitors with greater name recognition and our sales could be adversely affected.

If we are unable to economically achieve and maintain a leading position in input management software or to promote and maintain our brands; our business, results of operations and financial condition could suffer.

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Development and awareness of our brands will depend largely on our success in increasing our customer base. In order to attract and retain customers and to promote and maintain our brands in response to competitive pressures, we may be required to increase our marketing and advertising budget or increase our other sales expenses. There can be no assurance that our efforts will be sufficient or that we will be successful in attracting and retaining customers or promoting our brands. Failure in this regard could harm our business and results of operations.

Most of our revenues are currently derived from sales of and services associated with three software product lines. If demand for these product lines declines or fails to grow as expected, our revenues will be harmed.

Historically, we have derived substantially all of our revenues from the FormWare, InputAccel and PixTools product lines. Our future operating results will depend heavily upon continued and widespread market acceptance for the FormWare, InputAccel and PixTools product lines and enhancements to those products. A decline in the demand for any of these product lines as a result of competition, technological change or other factors may cause our revenues to decrease.

We may not be successful in our efforts to identify, execute or integrate acquisitions.

Our failure to manage risks associated with acquisitions could harm our business. A component of our business strategy is to expand our presence in new or existing markets by acquiring complementary technologies that allow us to expand our product offerings, augment our distribution channels, expand our market opportunities or broaden our customer base. For example, we acquired Context in February 2004. Acquisitions involve a number of risks, including:

• diversion of management’s attention;

• difficulty in integrating and absorbing the acquired business and its employees, corporate culture, managerial systems and processes, technology, products and services;

• failure to retain key personnel and employee turnover;

• challenges in retaining customers of the acquired business and customer dissatisfaction or performance problems with an acquired firm;

• assumption of unknown liabilities;

• dilutive issuances of securities or use of debt or limited cash;

• goodwill and potential impairment charges;

• write-offs and amortization expenses; and

• other unanticipated events or circumstances.

We may be unable to meet our future working capital requirements, which could harm our business.

We could experience negative cash flow from operations in the future and could require substantial working capital to fund our business. We cannot be certain that financing will be available to us on favorable terms if and when required, or at all.

In the past, we have depended heavily on service revenues to increase overall revenues, and we may not be able to sustain the existing levels of profitability of this part of our business.

Many of our customers enter into professional services and maintenance agreements, which together comprise a significant portion of our revenues. Service revenues represented 44% and 40% of our total revenues for the nine months ended September 30, 2004 and 2003, respectively. The level of service revenues in the future will depend largely upon growing our professional services group and ongoing renewals of customer maintenance contracts by our growing installed customer base. Our professional services revenues could decline

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if third-party organizations such as systems integrators compete for the installation or servicing of our products. In addition, our customer maintenance contracts might be reduced in size or scope or might not be renewed in the future.

We are subject to the effects of general economic and geopolitical conditions.

Our business is subject to the effects of general economic conditions and, in particular, market conditions in the industries that we serve. Recent political turmoil in many parts of the world, including terrorist and military actions, may put pressure on global economic conditions. Our customers’ decisions to purchase our products are discretionary and subject to their internal budget and purchasing processes, which may be affected by the above factors. If economic conditions deteriorate, our business and operating results are likely to be adversely impacted.

Accounting charges resulting from mergers and acquisitions will continue to have a negative effect on earnings over future quarters.

Our business resulted from the July 2002 merger of ActionPoint, Inc. and Old Captiva. This merger resulted in our recording approximately $13.0 million of goodwill and other intangible assets. In addition, we acquired Context in February 2004 that resulted in our recording approximately $6.2 million of goodwill and other intangible assets. We expect amortization of purchased intangibles, which is included as part of our cost of revenues, to be $2.6 million, $1.9 million, $0.7 million, $0.3 million and $0.2 million for the years ending December 31, 2004, 2005, 2006, 2007 and 2008 and thereafter, respectively. These non-cash charges will negatively affect earnings during these amortization periods, which could have a negative effect on our stock price.

Provisions in our charter documents, Delaware law and our stockholder rights plan may have anti-takeover effects that could discourage or prevent a change in control, which may depress our stock price.

Provisions in our certificate of incorporation and bylaws and our stockholder rights plan may discourage, delay or prevent a merger or acquisition of us that the majority of our stockholders may consider favorable. Provisions of our certificate of incorporation and bylaws:

• prohibit cumulative voting in the election of directors;

• eliminate the ability of stockholders to call special meetings; and

• establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

The terms of the rights plan are set forth in the rights agreement entered into by us and the rights agent. The rights granted pursuant to the rights agreement may cause substantial dilution to any party that attempts to acquire us or our stock on terms that our board of directors determines are not in the best interests of our stockholders and therefore may have anti-takeover effects. Certain provisions of Delaware law also may discourage, delay or prevent a party from acquiring or merging with us, which may cause the market price of our common stock to decline.

We may incur increased costs as a result of recently enacted and proposed changes in laws and regulations relating to corporate governance matters and public disclosure.

Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, rules adopted or proposed by the SEC and by the Nasdaq National Market and new accounting pronouncements will result in increased costs to us as we evaluate the implications of these laws, regulations and standards and respond to their requirements. To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonable necessary resources to comply with evolving standards. This investment may result in increased general and administrative expenses

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and a diversion of management time and attention from strategic revenue generating and cost management activities. In addition, these new laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on our board committees or as executive officers. We are presently evaluating and monitoring developments with respect to these laws and regulations and cannot predict or estimate the amount or timing of additional costs we may incur to respond to their requirements. Although we believe our existing disclosure controls and procedures are effective, there is no assurance that we will meet the certification requirements at the end of any reporting period, which could result in inclusion of a negative attestation report of our auditors in our subsequent annual or quarterly report and cause a decline in our stock price.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We maintain an investment policy that is intended to ensure the safety and preservation of our invested funds by limiting market risk, default risk and reinvestment risk. We do not currently use, nor have we historically used, derivative financial instruments to manage or reduce market risk. We mitigate default risk for our investments by investing in high credit quality securities such as debt instruments of the United States government and its agencies and high quality corporate issuers, as well as money market funds. Our investment portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity and maintains a prudent amount of diversification. As of September 30, 2004, we had approximately $23.0 million in cash and cash equivalents.

We have significant international operations and, as a result, are subject to various risks, including foreign currency risks. We have not entered into foreign currency contracts for purposes of hedging or speculation. To date, we have not realized any significant gain or loss from transactions denominated in foreign currencies. For the nine months ended September 30, 2004, approximately 22% of our sales and approximately 17% of our operating expenses were denominated in currencies other than our functional currency, the United States dollar. These foreign currencies were primarily British pounds, Euros and Australian dollars. Additionally, substantially all of the receivables and payables of our international subsidiaries are denominated in their respective local currencies.

Item 4 - Controls and Procedures

We maintain controls and procedures, which have been designed to ensure that material information related to Captiva Software Corporation, including its consolidated subsidiaries, is made known to management on a timely and consistent basis. In response to recent legislation and proposed regulations, we have been reviewing our internal control structure and have established a disclosure committee, which consists of certain members of our management. Although we believe our existing disclosure controls and procedures are effective and enable us to comply with our disclosure obligations, the review and documentation of our internal control structure is a process that will continue to evolve.

As of the end of the period covered by this report, the disclosure committee carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, Mr. Bish, and Chief Financial Officer, Mr. Russo, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, Mr. Bish and Mr. Russo concluded that our disclosure controls and procedures are effective in causing material information relating to us to be collected, communicated and analyzed by management on a timely basis and disclosed in a timely manner in compliance with SEC disclosure obligations.

Changes in Controls and Procedures

There were no changes in our internal controls that occurred during the period covered by this report that have materially affected, or are reasonably likely to affect, our internal controls over financial reporting.

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PART II – OTHER INFORMATION

Item 1.          Legal Proceedings

None.

Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.          Defaults Upon Senior Securities

None.

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

None.

Item 5.          Other Information

None.

Item 6.          Exhibits

Exhibit Number	Description
10.1	First Lease Amendment between Duke Realty Limited Partnership and the registrant for property at 601 Oakmont Lane, Westmont, Illinois.
10.2	Fifth Amendment to Amended and Restated Loan and Security Agreement between Comerica Bank and the registrant.
31.1	Certification by Chief Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a).
31.2	Certification by Chief Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a).
32.1	Certification by Chief Executive Officer and Chief Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(b), as amended, and 18 U.S.C. Section 1350.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CAPTIVA SOFTWARE CORPORATION
	/s/ REYNOLDS C. BISH
Date: November 9, 2004	Reynolds C. Bish Chief Executive Officer
	/s/ RICK E. RUSSO
	Rick E. Russo Chief Financial Officer

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EX-10.1

EXHIBIT 10.1

FIRST LEASE AMENDMENT

THIS FIRST LEASE AMENDMENT (the “Amendment”) is executed this 30^th day of JUNE, 2004, by and between DUKE REALTY LIMITED PARTNERSHIP, an Indiana limited partnership, formerly known as Duke-Weeks Realty Limited Partnership (“Landlord”), and CAPTIVA SOFTWARE CORPORATION, a Delaware corporation (“Tenant”).

W I T N E S S E T H :

WHEREAS, Landlord and ADP Context, Inc., an Illinois corporation, now known as Captiva Context, Inc. (“Original Tenant”) entered into a certain lease dated September 30, 1999 (the “Lease”), whereby Original Tenant leased from Landlord certain premises consisting of approximately 11,035 rentable square feet of space (the “Leased Premises”) in an office building commonly known as Oakmont Circle, located at 601 Oakmont Lane, Suite 200, Westmont, Illinois 60559; and

WHEREAS, Original Tenant assigned all of its right, title and interest in, to and under the Lease to Tenant pursuant to a certain Assignment and Assumption of Lease dated simultaneously herewith; and

WHEREAS, Tenant has assumed all of the obligations of Original Tenant under the Lease pursuant to such Assignment and Tenant hereby acknowledges that all provisions of the Lease remain in full force and effect; and

WHEREAS, Landlord and Tenant desire to extend the Lease Term; and

WHEREAS, Landlord and Tenant desire to amend certain provisions of the Lease to reflect such extension, changes and additions to the Lease;

NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants herein contained and each act performed hereunder by the parties, Landlord and Tenant hereby agree that the Lease is amended as follows:

1.    Incorporation of Recitals.  The above recitals are hereby incorporated into this Amendment as if fully set forth herein.

2.    Extension of Lease Term.  The Lease Term is hereby extended through March 31, 2012.

3.    Amendment of Section 1.01.  Basic Lease Provisions and Definitions.  Commencing on July 1, 2004, Section 1.01 of the Lease is hereby amended by deleting subsections C, D, E, F, I, L and M in their entirety and the following are substituted in lieu thereof:

“C.    Building Expense Percentage:

July 1, 2004 - March 31, 2005	0.00%
April 1, 2005 - March 31, 2012	9.57%;

D.    Minimum Annual Rent:

July 1, 2004 - March 31, 2005	$          0.00 (9 months)
April 1, 2005 - June 30, 2005	$ 31,035.93 (3 months)
July 1, 2005 - June 30, 2006	$127,895.64 per year
July 1, 2006 - June 30, 2007	$131,757.96 per year
July 1, 2007 - June 30, 2008	$135,730.56 per year
July 1, 2008 - June 30, 2009	$139,813.44 per year
July 1, 2009 - June 30, 2010	$144,006.72 per year
July 1, 2010 - June 30, 2011	$148,310.40 per year
July 1, 2011 - March 31, 2012	$114,543.27 (9 months);

E. Monthly Rental Installments:

July 1, 2004 - March 31, 2005	$          0.00 per month
April 1, 2005 - June 30, 2005	$ 10,345.31 per month
July 1, 2005 - June 30, 2006	$ 10,657.97 per month
July 1, 2006 - June 30, 2007	$ 10,979.83 per month
July 1, 2007 - June 30, 2008	$ 11,310.88 per month
July 1, 2008 - June 30, 2009	$ 11,651.12 per month
July 1, 2009 - June 30, 2010	$ 12,000.56 per month
July 1, 2010 - June 30, 2011	$ 12,359.20 per month
July 1, 2011 - March 31, 2012	$ 12,727.03 per month;

F. Term:  Through March 31, 2012;

I. Brokers:  Duke Services, Inc. and CB Richard Ellis, Inc. representing Landlord and Grubb & Ellis representing Tenant;

L. Addresses for payments and notices:

Landlord:	Duke Realty Limited Partnership
	Attn: Senior Property Manager
	4225 Naperville Road, Suite 150
	Lisle, IL 60532
With rental payments to:	Duke Realty Limited Partnership
	75 Remittance Drive, Suite 3205
	Chicago, IL 60675-3205
Tenant:	Captiva Software Corporation
	10145 Pacific Heights Boulevard #600
	San Diego, CA 92121

M. Guarantor:  None.”

4.    Amendment of Section 2.02.  Construction of Tenant Finish Improvements and Possession.  Section 2.02 of the Lease is hereby amended by incorporating the following:

“Tenant is currently occupying the Leased Premises and accepts the same “AS IS” without representation or warranty by Landlord of any kind and with the understanding that Landlord shall have no responsibility with respect thereto, except to construct in a good and workmanlike manner the improvements to be determined by Tenant and approved by Landlord, which approval will not be unreasonably withheld (the “Tenant Finish Improvements”). Landlord shall provide an allowance for the direct costs of the Tenant Finish Improvements to the Leased Premises in the amount of Eighty-two Thousand Seven Hundred Sixty-two Dollars and Fifty Cents ($82,762.50) (the “Allowance”) to be used by Tenant on or before September 30, 2005. The Allowance shall be used exclusively to construct and pay for the Tenant Finish Improvements that are directly related to the construction or refurbishment of the Leased Premises, except Tenant may use up to Forty-one Thousand Three Hundred Eighty-one Dollars and Twenty-five Cents ($41,381.25) of the Allowance (i) to pay for soft costs associated with the Tenant Finish Improvements; or (ii) to credit against the Minimum Annual Rent due hereunder. Tenant shall reimburse Landlord for any cost or expense attributable to the Tenant Finish Improvements which exceed the Allowance, no later than thirty (30) days after receipt of an invoice from Landlord for such costs or expenses. Any Allowance not used by Tenant on or before September 30, 2005, shall be forfeited by Tenant. Landlord shall contract with Duke Construction Limited Partnership, or a subsidiary or affiliate of Landlord (“Duke”), to complete the Tenant

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Finish Improvements who will competitively bid all major trades to achieve the best possible pricing. Duke shall receive five percent (5%) overhead and five percent (5%) fee as Landlord’s construction manager or general contractor, which amounts shall be deducted from the Allowance. Tenant shall have the right to request a specific subcontractor and provided such subcontractor meets with Landlord’s approval, such subcontractor shall have the right to enter a bid.”

5.    Amendment of Section 2.03.  Surrender of the Premises.  Section 2.03 of the Lease is hereby amended by deleting the second (2^nd) sentence thereof and by substituting the following in lieu thereof:

“Tenant shall remove its personal property and computer equipment in the Leased Premises, at its sole cost and expense; provided, however, Tenant shall not be required to remove the wiring and cabling (including above ceiling).”

6.    Amendment of Section 16.03.  Guaranty.  Section 16.03 of the Lease is hereby amended by incorporating the following:

“Landlord hereby acknowledges that the Unconditional Guaranty of Lease dated September 30, 1999, executed by Automatic Data Processing, Inc., a Delaware corporation, shall automatically and without the need for further action by any party, terminate upon the execution of this Amendment, and Guarantor shall be released from its obligations thereunder, but not for any period of time prior to such date.”

7.    Amendment of Section 16.06.  Indemnification for Leasing Commissions.  Section 16.06 of the Lease is hereby deleted in its entirety and the following is substituted in lieu thereof:

“Section 16.06. Indemnification for Leasing Commissions.

The parties hereby represent and warrant that the only real estate brokers involved in the negotiation and execution of this Amendment are the Brokers set forth in Section 1.01. Each party shall indemnify the other from any and all liability for the breach of this representation and warranty on its part and shall pay any compensation to any other broker or person who may be entitled thereto.”

8.    Deletion of Section 16.11.  Option to Extend.  Section 16.11 of the Lease is hereby deleted it its entirety and is of no further force or effect.

9.    Amendment of Section 16.12.  Right of First Refusal.  Section 16.12 of the Lease is hereby amended by incorporating the following:

“Notwithstanding anything contained herein to the contrary, in the event Tenant exercises its Refusal Option for the Refusal Space on or before June 30, 2005, the Refusal Space shall be offered to Tenant at the same rental rate and the same terms and conditions as the Leased Premises.”

10.    Amendment of Section 16.13.  Option to Terminate.  Section 16.13 of the Lease is hereby deleted in its entirety and the following is substituted in lieu thereof:

“Section 16.13. Options to Terminate.

Provided Tenant is not in Default hereunder, Tenant shall have the option to terminate this Lease effective as of March 31, 2008 (the “First Option to Terminate”), or effective as of March 31, 2010 (the “Second Option to Terminate”). Such option shall be exercised by (i) Tenant’s giving written notice to Landlord of its intention to terminate on or before June 30, 2007, with respect to the First Option to Terminate, or June 30, 2009, with respect to the Second Option to Terminate, and (ii) Tenant’s payment to Landlord of an amount equal to the sum of nine (9) months of the then-current gross rent with respect to the First Option to Terminate, or an amount equal to the sum of four (4) months of the then-current gross rent with respect to the Second Option to Terminate. Such payment shall be payable to Landlord fifty percent (50%) at the time

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Tenant provides written notice to Landlord of its intention to terminate and fifty percent (50%) on or before the effective date of termination. Such payment is made in consideration for Landlord’s grant of this option to terminate, to compensate Landlord for rental and other concessions given to Tenant, and for other good and valuable consideration. Such payment shall not in any manner affect Tenant’s obligations to pay Minimum Annual Rent and Additional Rent or to perform its obligations under the Lease up to and including the effective date of termination. If such option is validly exercised, then upon such termination, Tenant shall surrender the Leased Premises to Landlord in accordance with the terms of this Lease and each party shall be released from further liability hereunder; provided, however, that such termination shall not affect any right or obligation arising prior to termination or which survives termination of this Lease.”

11.    Amendment of Section 16.15.  Parking.  Section 16.15 of the Lease is hereby amended by deleting “one (1) executive parking space” in the second line thereof and by inserting “two (2) executive parking spaces” in lieu thereof.

12.    Amendment of Article 16.  Miscellaneous.  Article 16 of the Lease is hereby amended by incorporating the following:

“Section 16.18. Expansion Needs.

Provided that (i) Tenant has not been in Default hereunder at any time during the Lease Term, (ii) the creditworthiness of Tenant is then acceptable to Landlord, (iii) Tenant originally named herein, or a permitted assignee, remains in possession of and has been continuously operating in the entire Leased Premises throughout the Lease Term, (iv) the current use of the Leased Premises is acceptable to Landlord, (v) subject to the availability of space, (vi) Tenant requires no less than 16,035 rentable square feet of space, and (vii) Tenant enters into a lease with Landlord for such expansion space for a minimum term of five (5) years, Landlord will use commercially reasonable efforts to accommodate Tenant’s expansion needs in another building owned by Landlord, although Landlord in no way guarantees such expansion accommodation. If Landlord and Tenant mutually agree and execute a new lease for such expansion space, upon the commencement date of such new lease, Tenant shall immediately surrender the Leased Premises to Landlord in accordance with the terms and provisions of this Lease and each party shall be released from further liability hereunder, including any termination fees; provided, however, that such termination shall not affect any right or obligation arising prior to termination or which specifically survives the termination of this Lease.”

13.    Tenant’s Representations and Warranties.  The undersigned represents and warrants to Landlord that (i) Tenant is duly organized, validly existing and in good standing in accordance with the laws of the state under which it was organized; (ii) all action necessary to authorize the execution of this Amendment has been taken by Tenant; and (iii) the individual executing and delivering this Amendment on behalf of Tenant has been authorized to do so, and such execution and delivery shall bind Tenant. Tenant, at Landlord’s request, shall provide Landlord with evidence of such authority.

14.    Examination of Amendment.  Submission of this instrument for examination or signature to Tenant does not constitute a reservation or option, and it is not effective until execution by and delivery to both Landlord and Tenant.

15.    Definitions.  Except as otherwise provided herein, the capitalized terms used in this Amendment shall have the definitions set forth in the Lease.

16.    Incorporation.  This Amendment shall be incorporated into and made a part of the Lease, and all provisions of the Lease not expressly modified or amended hereby shall remain in full force and effect.

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IN WITNESS WHEREOF, the parties have caused this Amendment to be executed on the day and year first written above.

LANDLORD:
DUKE REALTY LIMITED PARTNERSHIP, an Indiana limited partnership
By:	Duke Realty Corporation,
	an Indiana corporation, its general partner, d/b/a Duke Realty of Indiana Corporation
	By:	/s/  Steven W. Schnur
		Steven W. Schnur Senior Vice President
TENANT:
CAPTIVA SOFTWARE CORPORATION, a Delaware corporation
By:	/s/  Rick Russo
Printed:	Rick Russo
Title:	CFO

STATE OF California     )

                                 ) SS:

COUNTY OF San Diego)

Before me, a Notary Public in and for said County and State, personally appeared Rick Russo, by me known and by me known to be the CFO of Captiva Software Corporation, a Delaware corporation, who acknowledged the execution of the foregoing “First Lease Amendment” on behalf of said corporation.

WITNESS my hand and Notarial Seal this 7^th day of July, 2004.

[GRAPHIC APPEARS HERE]	June E. Burke Notary Public
	June E. Burke (Printed Signature)

My Commission Expires: 1-27-08

My County of Residence: San Diego

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ASSIGNMENT AND ASSUMPTION OF LEASE

FOR AND IN CONSIDERATION of receipt of One Dollar ($1.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, CAPTIVA CONTEXT, INC., an Illinois corporation, f/k/a ADP Context, Inc. (hereinafter referred to as “Assignor”), hereby assigns to CAPTIVA SOFTWARE CORPORATION, a Delaware corporation (hereinafter referred to as “Assignee”), all of its right, title and interest in and to a certain Lease dated September 30, 1999, by and between Assignor, as “Tenant,” and Duke Realty Limited Partnership, f/k/a Duke-Weeks Realty Limited Partnership as “Landlord,” for certain space described therein, commonly known as Oakmont Circle, located at 601 Oakmont Lane, Suite 200, Westmont, Illinois 60559 (collectively, the “Lease”).

Assignee hereby accepts this Assignment and Assumption of Lease and hereby agrees to be bound by all of the rights and obligations of Assignor as Tenant under the Lease and acknowledges that all provisions of the Lease remain in full force and effect.

Assignor hereby acknowledges that this Assignment and Assumption of Lease does not relieve it from its liability under the terms and obligations of the Lease.

This Assignment and Assumption of Lease shall not be construed to modify, waive, impair or affect any of the terms, provisions or conditions of the Lease.

This Assignment and Assumption of Lease shall not constitute a consent to any further assignment of the Lease or subletting of the premises demised thereby.

This Assignment and Assumption of Lease may be executed in two or more counterparts, each of which shall be deemed an original. All such counterparts shall together constitute one and the same instrument.

The effective date of this Assignment and Assumption of Lease shall be the date of execution hereof.

EXECUTED this 30^th day of June, 2004.

“ASSIGNOR”
CAPTIVA CONTEXT, INC., an Illinois corporation
By:	/s/  Rick Russo
Printed:	Rick Russo
Title:	Secretary/Treasurer
“ASSIGNEE”
CAPTIVA SOFTWARE CORPORATION, a Delaware corporation
By:	/s/  Rick Russo
Printed:	Rick Russo
Title:	CFO

STATE OF California     )

                                          ) SS:

COUNTY OF San Diego)

Before me, a Notary Public in and for said County and State, personally appeared Rick Russo, by me known and by me known to be the Secretary/Treasurer of Captiva Context, Inc., an Illinois corporation, who acknowledged the execution of the foregoing “Assignment and Assumption of Lease” on behalf of said corporation.

Witness my hand and Notarial Seal this 7^th day of July, 2004.

[GRAPHIC APPEARS HERE]	June E. Burke Notary Public
	June E. Burke (Printed Signature)

My Commission Expires: 1/27/08

My County of Residence: San Diego

STATE OF California     )

                                 ) SS:

COUNTY OF San Diego)

Before me, a Notary Public in and for said County and State, personally appeared Rick Russo, by me known and by me known to be the CFO of Captiva Software Corporation, a Delaware corporation, who acknowledged the execution of the foregoing “Assignment and Assumption of Lease” on behalf of said corporation.

Witness my hand and Notarial Seal this 7^th day of July, 2004.

[GRAPHIC APPEARS HERE]	June E. Burke Notary Public
	June E. Burke (Printed Signature)

My Commission Expires: 1/27/08

My County of Residence: San Diego

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CONSENT AND ACCEPTANCE

DUKE REALTY LIMITED PARTNERSHIP, as Landlord under the Lease, hereby consents to the assignment of the Lease as set forth above; provided, however, that such assignment does not affect or release any liability of Assignor under the terms and obligations of the Lease.

This Consent and Acceptance of the foregoing Assignment and Assumption of Lease shall not constitute a consent by Landlord to any further subletting or assignments or subletting of the entire or any portion of the Leased Premises.

“LANDLORD”
DUKE REALTY LIMITED PARTNERSHIP, an Indiana limited partnership
By:	Duke Realty Corporation, an Indiana corporation, its general partner, d/b/a Duke Realty of Indiana Corporation
	By:	/s/  Steven W. Schnur
		Steven W. Schnur
		Senior Vice President

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EX-10.2

EXHIBIT 10.2

FIFTH AMENDMENT

TO

AMENDED AND RESTATED

LOAN AND SECURITY AGREEMENT

This Fifth Amendment to the Amended and Restated Loan and Security Agreement (the “Amendment”) is entered into as of September 15, 2004, by and between COMERICA BANK (“Bank”) and CAPTIVA SOFTWARE CORPORATION (“Borrower”).

RECITALS

Borrower and Bank are parties to that certain Amended and Restated Loan and Security Agreement dated as of June 27, 2001 (as amended from time to time, including without limitation that certain Amendment to Amended and Restated Loan and Security Agreement dated as of October 16, 2001 and that certain Amendment to Amended and Restated Loan and Security Agreement dated as of June 26, 2002, that certain Amendment and Assumption of Loan and Security Agreement dated as of August 15, 2002, and that certain Fourth Amendment to Amended and Restated Loan and Security Agreement dated as of August 18, 2003, together with any related agreements, the “Agreement”). Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as the “Indebtedness.” The parties desire to amend the Agreement in accordance with the terms of this Amendment.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

AGREEMENT

I. Incorporation by Reference.  The Recitals and the documents referred to therein are incorporated herein by this reference. Except as otherwise noted, the terms not defined herein shall have the meaning set forth in the Agreement.

II. Amendment to the Agreement.  Subject to the satisfaction of the conditions precedent as set forth in Article IV hereof, the Agreement is hereby amended as set forth below.

A. The definition of “Revolving Maturity Date” in Section 1.1 of the Agreement is hereby amended and restated to read as follows:

“Revolving Maturity Date” means August 13, 2005.

B. Section 2.5(c) of the Agreement is hereby amended and restated to read as follows:

“(c)    Additional Fees.  If Borrower’s average deposit account balance with Bank falls below $4,000,000 in any calendar quarter, the Borrower will be charged an additional fee of $2,500. The maximum amount of additional fees in any one year will not exceed $10,000.”

C. The second, third, and fourth paragraph of Section 6.3 of the Agreement are hereby amended and restated in their entirety to read as follows:

“If there are no outstanding Obligations under the Agreement, then Borrower shall within thirty (30) days after the last day of each fiscal quarter, deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit B hereto, together with aged listings of accounts receivable and accounts payable. If there are outstanding Obligations under the Agreement, then Borrower shall within thirty (30) days after the last day of each month, deliver to Bank a

AMENDMENT

PAGE 1 OF 5

Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit B hereto, together with aged listings of accounts receivable and accounts payable.

Notwithstanding the above, if at the time of an Advance request, Borrower has not provided to Bank a Borrowing Base Certificate within the previous thirty (30) day period, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit B hereto, together with aged listings of accounts receivable and accounts payable.

If there are no outstanding Obligations under the Agreement, then Borrower shall deliver to Bank with the quarterly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto, If there are outstanding Obligations under the Agreement, then Borrower shall deliver to Bank on a monthly basis a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto.

Notwithstanding the above, if at the time of an Advance request, Borrower has not provided to Bank a Compliance Certificate within the previous thirty (30) day period, Borrower shall deliver to Bank a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto.

Bank shall have the right from time to time hereafter to audit Borrower’s Accounts and appraise Collateral at Borrower’s expense, provided that such audits will be conducted no more often than annually unless an Event of Default has occurred and is continuing.”

D. The primary address for Bank set forth in Section 10 of the Agreement is hereby amended and restated in its entirety to read as follows:

“If to Bank:	Comerica Bank
	2321 Rosecrans Ave., Suite 5000
	El Segundo, CA 90245
	Attn:  Manager
	FAX:  (310) 297-2290”

E. A new Section 13 is hereby added to the Agreement to read as follows:

“13.     Reference Provision.

The parties prefer that any dispute between them be resolved in litigation subject to a Jury Trial Waiver as set forth in the Loan Documents (defined below), but the availability of that process is in doubt because of the opinion of the California Court of Appeal in Grafton Partners LP v. Superior Court, 9 Cal.Rptr.3d 511. This Reference Provision will be applicable until the California Supreme Court completes its review of that case, and will continue to be applicable if either that court or a California Court of Appeal publishes a decision holding that a pre-dispute Jury Trial Waiver provision similar to that contained in the Loan Documents is invalid or unenforceable. Delay in requesting appointment of a referee pending review of any such decision, or participation in litigation pending review, will not be deemed a waiver of this Reference Provision.

Other than (i) nonjudicial foreclosure of security interests in real or personal property, (ii) the appointment of a receiver or (iii) the exercise of other provisional remedies (any of which may be initiated pursuant to applicable law), any controversy, dispute or claim (each, a “Claim”) between the parties arising out of or relating to this Agreement or any other document, instrument or agreement between the Bank and the undersigned (collectively in this Section, the “Loan Documents”), will be resolved by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure (“CCP”), or their successor sections, which shall

AMENDMENT

PAGE 2 OF 5

constitute the exclusive remedy for the resolution of any Claim, including whether the Claim is subject to the reference proceeding. Except as otherwise provided in the Loan Documents, venue for the reference proceeding will be in the Superior Court or Federal District Court in the County or District where venue is otherwise appropriate under applicable law (the “Court”).

The referee shall be a retired Judge or Justice selected by mutual written agreement of the parties. If the parties do not agree, the referee shall be selected by the Presiding Judge of the Court (or his or her representative). A request for appointment of a referee may be heard on an ex parte or expedited basis, and the parties agree that irreparable harm would result if ex parte relief is not granted. The referee shall be appointed to sit with all the powers provided by law. Each party shall have one peremptory challenge pursuant to CCP §170.6. Pending appointment of the referee, the Court has power to issue temporary or provisional remedies.

The parties agree that time is of the essence in conducting the reference proceedings. Accordingly, the referee shall be requested to (a) set the matter for a status and trial-setting conference within fifteen (15) days after the date of selection of the referee, (b) if practicable, try all issues of law or fact within ninety (90) days after the date of the conference and (c) report a statement of decision within twenty (20) days after the matter has been submitted for decision. Any decision rendered by the referee will be final, binding and conclusive, and judgment shall be entered pursuant to CCP §644.

The referee will have power to expand or limit the amount and duration of discovery. The referee may set or extend discovery deadlines or cutoffs for good cause, including a party’s failure to provide requested discovery for any reason whatsoever. Unless otherwise ordered, no party shall be entitled to “priority” in conducting discovery, depositions may be taken by either party upon seven (7) days written notice, and all other discovery shall be responded to within fifteen (15) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding.

Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee, and the referee will be provided a courtesy copy of the transcript. The party making such a request shall have the obligation to arrange for and pay the court reporter. Subject to the referee’s power to award costs to the prevailing party, the parties will equally share the cost of the referee and the court reporter at trial.

The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, provide all temporary or provisional remedies, enter equitable orders that will be binding on the parties and rule on any motion which would be authorized in a trial, including without limitation motions for summary judgment or summary adjudication. The referee shall issue a decision at the close of the reference proceeding which disposes of all claims of the parties that are the subject of the reference. The referee’s decision shall be entered by the Court as a judgment or an order in the same manner as if the action had been tried by the Court. The parties reserve the right to appeal from the final judgment or order or from any appealable decision or order entered by the referee. The parties reserve the right to findings of fact, conclusions of laws, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision.

AMENDMENT

PAGE 3 OF 5

If the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by reference procedure will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge or Justice, in accordance with the California Arbitration Act §1280 through §1294.2 of the CCP as amended from time to time. The limitations with respect to discovery set forth above shall apply to any such arbitration proceeding.

THE PARTIES RECOGNIZE AND AGREE THAT ALL DISPUTES RESOLVED UNDER THIS REFERENCE PROVISION WILL BE DECIDED BY A REFEREE AND NOT BY A JURY, AND THAT THEY ARE IN EFFECT WAIVING THEIR RIGHT TO TRIAL BY JURY IN AGREEING TO THIS REFERENCE PROVISION. AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR OWN CHOICE, EACH PARTY KNOWINGLY AND VOLUNTARILY AND FOR THEIR MUTUAL BENEFIT AGREES THAT THIS REFERENCE PROVISION WILL APPLY TO ANY DISPUTE BETWEEN THEM WHICH ARISES OUT OF OR IS RELATED TO THIS AGREEMENT OR THE LOAN DOCUMENTS.”

III. Legal Effect.

A. The Agreement is hereby amended wherever necessary to reflect the changes described above.

B. Borrower agrees that it has no defenses against the obligations to pay any amounts under the Indebtedness.

C. Borrower understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrower’s representations, warranties, and agreements, as set forth in the Agreement. Except as expressly modified pursuant to this Amendment, the terms of the Agreement remain unchanged, and in full force and effect. Bank’s agreement to modifications to the existing Indebtedness pursuant to this Amendment in no way shall obligate Bank to make any future modifications to the Indebtedness. Nothing in this Amendment shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties, all makers and endorsers of Agreement, unless the party is expressly released by Bank in writing. No maker, endorser, or guarantor will be released by virtue of this Amendment. The terms of this paragraph apply not only to this Amendment, but also to all subsequent loan modification requests.

D. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument.

E. This is an integrated Amendment and supersedes all prior negotiations and agreements regarding the subject matter hereof. All modifications hereto must be in writing and signed by the parties.

IV. Conditions Precedent.     Except as specifically set forth in this Amendment, all of the terms and conditions of the Agreement remain in full force and effect. The effectiveness of this Agreement is conditioned upon receipt by Bank of this Amendment, and any other documents which Bank may require to carry out the terms hereof, including but not limited to the following:

A. This Amendment, duly executed by Borrower;

B. Corporation Resolutions and Incumbency Certification;

C. A documentation fee from the Borrower in the amount of $250; and

D. Such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

AMENDMENT

PAGE 4 OF 5

IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first date above written.

CAPTIVA SOFTWARE CORPORATION
By:	/s/  Rick Russo
Title:	CFO
CAPTIVA SOFTWARE CORPORATION
By:	/s/  Reynolds C. Bish
Title:	CEO
COMERICA BANK
By:	/s/  Steven J. Stuckey
Title:	Vice President

AMENDMENT

PAGE 5 OF 5

EX-31.1

Exhibit 31.1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)

I, Reynolds C. Bish, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Captiva Software Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:    November 9, 2004

/s/  REYNOLDS C. BISH

Reynolds C. Bish

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)

I, Rick Russo, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Captiva Software Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:    November 9, 2004

/s/ RICK E. RUSSO

Rick E. Russo

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION¹

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. § 1350), Reynolds C. Bish, the Chief Executive Officer, and Rick E. Russo, the Chief Financial Officer, of Captiva Software Corporation (the “Company”), each hereby certifies that, to the best of his knowledge:

1.          The Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2004, to which this Certification is attached as Exhibit 32.1 (the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

2.          The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Periodic Report and results of operations of the Company for the period covered by the Periodic Report.

Date:            November 9, 2004

/s/ REYNOLDS C. BISH

Reynolds C. Bish

Chief Executive Officer

/s/ RICK E. RUSSO

Rick E. Russo

Chief Financial Officer

¹ This Certification accompanies the Form 10Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.