##### 



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 10-Q
  (Mark One)þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    December 31, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF
    THE SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission file number 1-15681
      webMethods, Inc.
 (Exact name of Registrant as
    Specified in its Charter)
  Delaware

54-1807654(State or Other Jurisdiction
    of

(I.R.S. EmployerIncorporation or
    Organization)

Identification No.)3877 Fairfax Ridge
    Road,

22030South Tower, Fairfax,
    Virginia

(Zip Code)(Address of Principal Executive
    Offices)   (703) 460-2500
 (Registrants telephone
    number, including area code)
  Securities registered pursuant to Section 12(b) of the
    Act:
 Common Stock, $0.01 par value, together with related
    Preferred Stock Purchase Rights
  Securities registered pursuant to Section 12(g) of the
    Act:
 None
  þ o
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ




---



##### 



WEBMETHODS,
    INC.
  QUARTERLY
    REPORT ON
    FORM 10-Q
  TABLE OF
    CONTENTS
  PART I  FINANCIAL
    INFORMATIONItem 1.


Financial Statements

3Condensed Consolidated Balance
    Sheets (unaudited) as of December 31, 2006 and
    March 31, 2006

3Condensed Consolidated Statements
    of Operations and Comprehensive Income (Loss) (unaudited) for
    the three and nine months ended December 31, 2006 and 2005

4Condensed Consolidated Statements
    of Cash Flows (unaudited) for the nine months ended
    December 31, 2006 and 2005

5Notes to Condensed Consolidated
    Financial Statements (unaudited)

6Item 2.


Managements Discussion and
    Analysis of Financial Condition and Results of Operations

23Item 3.


Quantitative and Qualitative
    Disclosures About Market Risk

36Item 4.


Controls and Procedures

36PART II  OTHER
    INFORMATIONItem 1.


Legal Proceedings

38Item 1A.


Risk Factors

38Item 6.


Exhibits

38  2




---



##### 



PART I 
    FINANCIAL INFORMATION  ITEM 1:
    FINANCIAL
    STATEMENTS  WEBMETHODS,
    INC.
  CONDENSED
    CONSOLIDATED BALANCE SHEETS
 (In thousands, except share data)
  December 31,


March 31,2006


2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
81,050


$
82,371Marketable securities available
    for sale


47,157



79,943Accounts receivable, net of
    allowance of $1,678 and $652


48,850



64,298Deferred income tax assets, net


93



138Prepaid expenses and other current
    assets


5,744



6,830Total current assets


182,894



233,580Marketable securities available
    for sale


1,993



Property and equipment, net


14,463



10,274Goodwill


76,293



46,704Intangible assets, net


17,249



5,993Long-term deferred income tax
    assets, net


2,169



1,961Other assets


3,073



4,299Total assets

$
298,134


$
302,811LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
8,923


$
7,323Accrued expenses


15,368



10,866Accrued salaries and commissions


10,935



12,694Deferred revenue


42,956



59,168Current portion of capital lease
    obligations


51



259Total current liabilities


78,233



90,310Capital lease obligations, net of
    current portion






10Other long-term liabilities


6,057



3,941Long-term deferred revenue


1,740



1,772Total liabilities


86,030



96,033Commitments and contingenciesStockholders equity:Common stock, $0.01 par
    value; 500,000 shares authorized; 56,270 and
    54,479 shares issued and outstanding


563



545Additional paid-in capital


549,263



529,972Deferred stock compensation






(357
)Accumulated deficit


(337,746
)


(322,202
)Accumulated other comprehensive
    loss


24



(1,180
)Total stockholders equity


212,104



206,778Total liabilities and
    stockholders equity

$
298,134


$
302,811    3




---



##### 



WEBMETHODS,
    INC.
  CONDENSED
    CONSOLIDATED STATEMENTS OF OPERATIONS
 AND
    COMPREHENSIVE INCOME (LOSS)
 (In thousands, except per share data)
  Three Months Ended


Nine Months EndedDecember 31,


December 31,2006


2005


2006


2005(Unaudited)Revenue:License

$
19,662


$
21,964


$
48,840


$
59,821Maintenance


20,637



18,908



61,817



54,945Professional services


12,784



11,627



39,222



34,636Total revenue


53,083



52,499



149,879



149,402Cost of revenue:Amortization of intangibles


1,384



599



2,719



1,797License


340



218



1,123



703Maintenance


3,306



2,864



9,742



9,592Professional services


11,753



10,368



36,585



30,675Total cost of revenue


16,783



14,049



50,169



42,767Gross profit


36,300



38,450



99,710



106,635Operating expenses:Sales and marketing


22,658



19,549



61,173



53,875Research and development


11,944



8,980



34,443



30,224General and administrative


7,984



5,927



22,522



17,542In-process research and development










1,170



Restructuring costs


1,284



(117
)


1,284



602Total operating expenses


43,870



34,339



120,592



102,243Operating (loss) income


(7,570
)


4,111



(20,882
)


4,392Interest income


1,403



1,137



5,045



3,116Interest expense


(5
)


(14
)


(35
)


(77
)Other income


702



346



970



578(Loss) income before income taxes


(5,470
)


5,580



(14,902
)


8,009Provision for income taxes


218



70



642



455Net (loss) income

$
(5,688
)

$
5,510


$
(15,544
)

$
7,554Basic and diluted net (loss)
    income per common share

$
(0.10
)

$
0.10


$
(0.28
)

$
0.14Shares used in computing basic net
    (loss) income per share


55,931



53,773



55,508



53,587Shares used in computing diluted
    net (loss) income per share


55,931



55,778



55,508



54,592Comprehensive loss:Net (loss) income

$
(5,688
)

$
5,510


$
(15,544
)

$
7,554Other comprehensive (loss) income:Unrealized gain on securities
    available for sale


3



17



159



153Foreign currency cumulative
    translation adjustment


518



(1,014
)


1,045



(3,579
)Total comprehensive (loss) income

$
(5,167
)

$
4,513


$
(14,340
)

$
4,128    4




---



##### 



WEBMETHODS,
    INC.
  CONDENSED
    CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
  Nine Months EndedDecember 31,2006


2005(Unaudited)Cash flows from operating
    activities:Net (loss) income

$
(15,544
)

$
7,554Adjustments to reconcile net
    (loss) income to net cash provided by operating activities:Depreciation and amortization


3,952



4,045Provision for (recovery of)
    doubtful accounts and revenue allowance


1,161



(249
)Deferred tax asset


(14
)


Stock-based compensation for
    employees and directors


8,709



72In-process research and development


1,170



Amortization of deferred warrant
    charge






1,984Amortization of acquired
    intangibles


2,719



1,798Amortization of deferred rent


(343
)


(343
)Increase (decrease) in cash
    resulting from changes in assets and liabilities:Accounts receivable


16,644



(1,999
)Prepaid expenses and other current
    assets


1,186



513Other non-current assets


(1,082
)


1,879Accounts payable


(386
)


(1,456
)Accrued expenses and other
    liabilities


6,313



(5,146
)Accrued salaries and commissions


(2,524
)


(2,554
)Deferred revenue


(17,623
)


(2,025
)Long-term deferred revenue and
    other non-current liabilities


(55
)


210Net cash provided by operating
    activities


4,283



4,283Cash flows from investing
    activities:Business acquisition and
    technology purchase, net of cash acquired


(42,555
)


Purchases of property and equipment


(5,028
)


(3,921
)Changes in restricted cash


273



Proceeds from maturities of
    marketable securities available for sale


82,311



77,688Purchases of marketable securities
    available for sale


(51,360
)


(64,514
)Net cash (used in) provided by
    investing activities


(16,359
)


9,253Cash flows from financing
    activities:Payments on capital leases


(219
)


(466
)Proceeds from exercise of stock
    options


7,767



1,760Proceeds from ESPP common stock
    issuances


2,354



1,336Net cash provided by financing
    activities


9,902



2,630Effect of exchange rate on cash
    and cash equivalents


853



(4,328
)Net (decrease) increase in cash
    and cash equivalents


(1,321
)


11,838Cash and cash equivalents at
    beginning of period


82,371



57,209Cash and cash equivalents at end
    of period

$
81,050


$
69,047    5




---



##### 



WEBMETHODS,
    INC.   NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)
  1.
    ORGANIZATION
    AND BASIS OF PRESENTATION  Form 10-Q
    Form 10-Q Form 10-K
  2.
    SUMMARY
    OF SIGNIFICANT ACCOUNTING POLICIES  Adoption
    of New Accounting Standards
  Stock-Based
    Compensation
         6




---



##### 



WEBMETHODS,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Recently
    Issued Accounting Pronouncements
  Fair
    Value Measurements
    Considering
    the Effects of Prior Year Misstatements When Quantifying
    Misstatements in Current Year Financial Statements
   7




---



##### 



WEBMETHODS,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Transition
    Election Related to Accounting for the Tax Effects of
    Share-Based Payment Awards
  No. FAS 123R-3,
  Accounting
    for Uncertainty in Income Taxes
    Income
    Statement Classification of Taxes Collected from
    Customers
  No. 06-03, 06-03). 06-03 06-03 06-03
  3.
    MARKETABLE
    SECURITIES    Purchase/


Gross


Gross





Cash andAmortized


Unrealized


Unrealized


Aggregate


Cash


Short-Term


Long-TermAs of December 31, 2006

Cost


Gains


Losses


Fair Value


Equivalents


Investments


Investments(In thousands)Commercial paper

$
7,830


$



$
(7
)

$
7,823


$
1,316


$
6,507


$
Corporate bonds


48,801



15







48,816



7,672



40,650



494Treasury coupons


1,499











1,499











1,499Money market funds


25,119











25,119



25,119







Total

$
83,249


$
15


$
(7
)

$
83,257


$
34,107


$
47,157


$
1,993    8




---



##### 



WEBMETHODS,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   other-than-temporary, other-than-temporary,
  Nos. FAS 115-1 FAS 124-1, Other-Than-Temporary available-for-sale
  Less than 12 Months


Greater than 12 Months


TotalGross





Gross





GrossUnrealized





Unrealized





UnrealizedFair Value


Losses


Fair Value


Losses


Fair Value


Losses(In thousands)Commercial paper

$
6,507


$
(7
)

$



$



$
6,507


$
(7
)   other-than-temporarily
    4.
    STOCK-BASED
    COMPENSATION  Stock
    Incentive Plans
       9




---



##### 



WEBMETHODS,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   out-of-the-money
    Weighted AverageWeighted


RemainingNumber of


Average


Contractual Life


AggregateShares


Exercise Price


(Years)


Intrinsic ValueOutstanding, March 31, 2006


18,198,486


$
10.56Granted


3,266,989



7.60Exercised


(1,319,144
)


5.82Forfeited


(1,525,373
)


6.74Expired


(915,831
)


13.37Outstanding, December 31, 2006


17,705,127


$
10.55



7.1


$
10,649,550Options exercisable


11,157,344


$
12.69



6.3


$
5,655,956   (in-the-money
      OutstandingWeighted Average





Options ExercisableRemaining


Weighted





WeightedNumber of


Contractual Life


Average





AverageRange of Exercise Price

Shares


(Years)


Exercise Price


Number of Shares


Exercise Price$ 0.11 to $  4.50


718,602



6.4


$
3.33



605,986


$
3.194.60
    to    5.89


3,697,549



8.4



5.66



1,454,395



5.675.93
    to    7.70


3,670,480



8.0



7.00



1,325,029



6.897.71
    to    9.54


3,768,822



7.2



8.50



2,176,490



8.799.62
    to  14.36


5,039,293



6.0



12.10



4,785,063



12.2216.07 to 115.75


810,381



4.0



55.15



810,381



55.15$ 0.11 to $115.75


17,705,127



7.1


$
10.55



11,157,344


$
12.69  10




---



##### 



WEBMETHODS,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  in-the-money.
  Employee
    Stock Purchase Plan
         11




---



##### 



WEBMETHODS,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Valuation
    and Expense Information under SFAS 123R
    Three Months Ended


Nine Months EndedDecember 31,


December 31,Employee Stock-Based Compensation Included in:

2006


2005


2006


2005(In thousands)Cost of revenue:Maintenance

$
102


$
3


$
306


$
4Professional services


383



6



1,044



11Stock-based compensation expense
    included in cost of revenue


485



9



1,350



15Operating expenses:Sales and marketing


998



13



2,721



22Research and development


719



14



2,099



24General and administrative


956



6



2,521



11Stock-based compensation expense
    included in operating expenses


2,673



33



7,341



57Total stock-based compensation
    expense related to stock-based equity awards

$
3,158


$
42


$
8,691


$
72    12




---



##### 



WEBMETHODS,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
           Three Months Ended


Nine Months EndedDecember 31,


December 31,2006


2005


2006


2005Stock option grants:Risk free interest rate


4.57
%


4.35
%


4.84
%


4.02
%Expected lives in years


4.69



4



4.69



4Expected volatility


66.96
%


69.65
%


68.90
%


74.48
%Dividend yield


0
%


0
%


0
%


0
%ESPP:Risk free interest rate










4.66
%


4.01
%Expected lives in years










1.3



1.3Expected volatility










38.37
%


54.65
%Dividend yield










0
%


0
%     Three Months Ended


Nine Months EndedDecember 31,


December 31,2006


2005


2006


2005Weighted-average grant date fair
    value of options granted

$
4.34


$
4.14


$
4.65


$
3.47Weighted-average fair value of
    employee stock purchase rights









$
3.32


$
2.22   catch-up
 13




---



##### 



WEBMETHODS,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Three Months Ended


Nine Months EndedDecember 31,


December 31,2005


2005(In thousands except per share data)Net income, as reported

$
5,510


$
7,554Add: Stock-based compensation
    expense determined under the intrinsic value method


42



72Less: Stock-based compensation
    expense determined under fair value method


(17,224
)


(26,012
)Net loss, pro forma

$
(11,672
)

$
(18,386
)Basic and diluted net income per
    common share, as reported

$
0.10


$
0.14Basic and diluted net loss per
    common share, pro forma

$
(0.22
)

$
(0.34
)     5.
    EMPLOYEE
    BENEFIT PLAN    6.
    COMPUTATION
    OF NET (LOSS) INCOME PER SHARE   14




---



##### 



WEBMETHODS,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Three Months Ended


Nine Months EndedDecember 31,


December 31,2006


2005


2006


2005(In thousands, except per share amounts)Net (loss) income

$
(5,688
)

$
5,510


$
(15,544
)

$
7,554Weighted-average common stock
    shares used to compute basic net (loss) income per share


55,931



53,773



55,508



53,587Effect of dilutive common stock
    equivalents






2,005







1,005Weighted-average common stock
    shares used in computing diluted net income per common share


55,931



55,778



55,508



54,592Basic and diluted net (loss)
    income per share

$
(0.10
)

$
0.10


$
(0.28
)

$
0.14     Nine MonthsThree Months Ended


EndedDecember 31,


December 31,2006


2005


2006


2005(In thousands)Anti-dilutive weighted-average
    common stock shares


15,929



11,421



15,024



13,430   7.
    SUPPLEMENTAL
    DISCLOSURES OF CASH FLOW INFORMATION  Nine Months EndedDecember 31,2006


2005(In thousands)Non-cash investing and financing
    activities:Equipment purchased under capital
    lease

$



$
270Leasehold improvement from
    landlord incentive

$
2,843


$
Change in net unrealized gain on
    marketable securities

$
159


$
153       (In thousands)Fair value of assets acquired

$
44,500In process research and development


1,170Cash paid, net of cash acquired


(42,555
)Cash hold back included in
    accounts payable


(1,235
)Liabilities incurred in connection
    with direct acquisition costs


(93
)Stock option plan assumed


(866
)Liabilities assumed

$
921  15




---



##### 



WEBMETHODS,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  8.
    SEGMENT
    INFORMATION      Three Months Ended


Nine Months EndedDecember 31,


December 31,Revenue

2006


2005


2006


2005(In thousands)Americas

$
32,293


$
31,713


$
94,540


$
92,743EMEA


14,995



15,193



37,768



38,112Japan


1,863



1,843



6,040



7,159Asia Pacific


3,932



3,750



11,531



11,388Total

$
53,083


$
52,499


$
149,879


$
149,402   As of


As ofDecember 31,


March 31,Long Lived Assets

2006


2006(In thousands)Americas

$
13,836


$
10,981EMEA


1,332



1,393Japan


640



1,132Asia Pacific


1,593



843Total

$
17,401


$
14,349   9.
    RESTRUCTURING
    COSTS       16




---



##### 



WEBMETHODS,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
         ExcessFacilitiesSanta Clara,


Excess


Excess


ExcessCA and


Facilities


Facilities


FacilitiesFairfax, VA


Berkeley, CA


Fairfax, VA


Sunnyvale, CA


Total(In thousands)Balance at March 31, 2006

$
166


$
747


$
1,250


$



$
2,163Cash payments during fiscal year
    2007:First quarter


(55
)


(91
)


(225
)






(371
)Second quarter


(33
)


(94
)


(170
)






(297
)Third quarter


(7
)


(90
)


(159
)


(586
)


(842
)Third quarter fiscal 2007 charges














1,284



1,284Balance at December 31, 2006

$
71


$
472


$
696


$
698


$
1,937   10.
    BORROWINGS        11.
    BUSINESS
    COMBINATION AND PURCHASE OF TECHNOLOGY  Business
    Acquisition
   17




---



##### 



WEBMETHODS,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Infravio(In thousands)Cash and cash equivalents

$
368Accounts receivable


384Other current assets


257Property and equipment


114Accounts payable


(281
)Accrued expenses


(479
)Deferred revenue


(73
)In-process research and development


1,170Developed technology


7,670Tradename


490Customer relationships


80Non-compete agreements


810Goodwill


29,590Total purchase price

$
40,100      18




---



##### 



WEBMETHODS,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Three Months Ended


Nine Months EndedDecember 31,


December 31,2006


2005


2006


2005(Unaudited)(In thousands, except per share data)Pro forma revenue

$
53,083


$
52,623


$
150,831


$
149,759Pro forma net loss

$
(5,688
)

$
4,562


$
(17,262
)

$
4,740Pro forma net loss per
    share  basic and diluted

$
(0.10
)

$
0.08


$
(0.31
)

$
0.09   Acquisition
    of Technology
     19




---



##### 



WEBMETHODS,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Goodwill
    and Intangible Assets
    Form 8-K/A
        As of December 31, 2006


As of March 31, 2006Gross








GrossCarrying


Accumulated





Carrying


AccumulatedAmount


Amortization


Net Amount


Amount


Amortization


Net Amount(In thousands)Developed technology

$
23,552


$
(8,045
)

$
15,507


$
11,152


$
(5,572
)

$
5,580Tradename


490



(25
)


465











Customer relationships


938



(562
)


376



833



(420
)


413Non-compete agreements


810



(66
)


744











Assembled workforce


170



(13
)


157











$
25,960


$
(8,711
)

$
17,249


$
11,985


$
(5,992
)

$
5,993   20




---



##### 



WEBMETHODS,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Weighted-averageAmortizationPeriod(in years)Developed technology


5Tradename


5Customer relationships


5Non-compete agreements


3Assembled workforce


54.9     Amortization ofAs of December 31, 2006:

Intangibles(In thousands)2007

$
1,3482008


5,3712009


4,1472010


2,7922011


3,591$
17,249   12.
    COMMITMENTS
    AND CONTINGENCIES   21




---



##### 



WEBMETHODS,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     13.
    RELATED-PARTY
    TRANSACTIONS   22




---



##### 



ITEM 2.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  FORWARD-LOOKING
    STATEMENTS
  Form 10-Q
  
    projections of revenue, costs or expense, margins, income or
    loss, earnings or loss per share, capital expenditures, cash
    requirements or other financial items, effective tax rate,
    sufficiency of working capital and projections regarding the
    market for our software and services;
    statements of our plans, objectives or expectations, including
    the development or enhancement of software, development and
    continuation of strategic partnerships and alliances,
    contributions to revenue by our business partners,
    implementation and effect of sales and marketing initiatives,
    future financial results, future financial results within
    geographic or specific markets and the allocation of resources
    to those markets, predictions of the timing and type of customer
    or market reaction to sales and marketing initiatives, the
    ability to control expenses, anticipated cost savings or expense
    reduction strategies, future hiring, business strategy and the
    execution on it and actions by customers and competitors;
    statements of future economic performance or economic
    conditions, the continuation of patterns identified as trends or
    seasonal occurrences or the impact of recent or anticipated
    changes in accounting standards;
    statements of our plans for remediation of a material weakness,
    or other changes, in our internal controls over financial
    reporting; and
    assumptions underlying any of the foregoing.  Form 10-K.
  INTRODUCTION
  Form 10-Q
  
    Overview.  This section provides a general
    description of our business and the performance indicators that
    management uses in assessing our financial condition and results
    of operations.
    Results of Operations.  This section provides
    an analysis of our results of operations for the three and nine
    months ended December 31, 2006 and 2005.
    Liquidity and Capital Resources.  This section
    provides an analysis of our cash flows for the nine months ended
    December 31, 2006, and a discussion of our capital
    requirements and the resources available to us to meet those
    requirements. 23




---



##### 




    Critical Accounting Policies.  This section
    discusses accounting policies that are considered important to
    our financial condition and results of operations, require
    significant judgment and require estimates on the part of
    management in application.  OVERVIEW
    Third
    Quarter Fiscal 2007 Review
               24




---



##### 



Recent
    Developments
      Stock-Based
    Compensation
    Three Months Ended


Nine Months EndedDecember 31,


December 31,Employee Stock-Based Compensation Included in:

2006


2005


2006


2005(Dollars are in thousands)Cost of revenue:Maintenance

$
102


$
3


$
306


$
4Professional services


383



6



1,044



11Stock-based compensation expense
    included in cost of revenue


485



9



1,350



15Operating expenses:Sales and marketing


998



13



2,721



22Research and development


719



14



2,099



24General and administrative


956



6



2,521



11Stock-based compensation expense
    included in operating expenses


2,673



33



7,341



57Total stock-based compensation
    expense related to stock-based equity awards

$
3,158


$
42


$
8,691


$
72  25




---



##### 



RESULTS
    OF OPERATIONS
    Three Months Ended December 31,


Nine Months Ended December 31,2006


2005


% Change


2006


2005


% Change(Dollars are in thousands)Total revenue

$
53,083


$
52,499



1
%

$
149,879


$
149,402



0
%Total cost of revenue


16,783



14,049



19
%


50,169



42,767



17
%% of total revenue


32
%


27
%






33
%


29
%Gross profit


36,300



38,450



(6
)%


99,710



106,635



(6
)%% of total revenue


68
%


73
%






67
%


71
%Total operating expenses


43,870



34,339



28
%


120,592



102,243



18
%% of total revenue


83
%


65
%






80
%


68
%Operating (loss) income


(7,570
)


4,111



N/A



(20,882
)


4,392



N/A% of total revenue


(14
)%


8
%






(14
)%


3
%Net (loss) income


(5,688
)


5,510



N/A



(15,544
)


7,554



N/A% of total revenue


(11
)%


10
%






(10
)%


5
%        26




---



##### 



Revenue
    Three Months Ended December 31,


Nine Months Ended December 31,2006


2005


% Change


2006


2005


% Change(Dollars are in thousands)License

$
19,662


$
21,964



(10
)%

$
48,840


$
59,821



(18
)%Maintenance


20,637



18,908



9
%


61,817



54,945



13
%Professional services


12,784



11,627



10
%


39,222



34,636



13
%Total revenue

$
53,083


$
52,499



1
%

$
149,879


$
149,402



0
%       Geographic
    Revenue
    Three Months Ended December 31,


Nine Months Ended December 31,2006


2005


% Change


2006


2005


% Change(Dollars are in thousands)Americas

$
32,293


$
31,713



2
%

$
94,540


$
92,743



2
%EMEA


14,995



15,193



(1
)%


37,768



38,112



(1
)%Japan


1,863



1,843



1
%


6,040



7,159



(16
)%Asia Pacific


3,932



3,750



5
%


11,531



11,388



1
%Total revenue

$
53,083


$
52,499



1
%

$
149,879


$
149,402



0
%       License
    Revenue
   27




---



##### 



Maintenance
    Revenue
    Professional
    Services Revenue
    Cost
    of Revenue
    Three Months Ended December 31,


Nine Months Ended December 31,2006


2005


% Change


2006


2005


% Change(Dollars are in thousands)Amortization of Intangibles

$
1,384


$
599



131
%

$
2,719


$
1,797



51
%% of License Revenue


7
%


3
%






6
%


3
%Cost of License Revenue


340



218



56
%


1,123



703



60
%% of License Revenue


2
%


1
%






2
%


1
%Cost of Maintenance Revenue


3,306



2,864



15
%


9,742



9,592



2
%% of Maintenance Revenue


16
%


15
%






16
%


17
%Cost of Professional Services
    Revenue


11,753



10,368



13
%


36,585



30,675



19
%% of Professional Services Revenue


92
%


89
%






93
%


89
%Total cost of revenue


16,783



14,049



19
%


50,169



42,767



17
%% of Total revenue


32
%


27
%






33
%


29
%      28




---



##### 



Cost of
    License Revenue
    Cost of
    Maintenance Revenue
      Cost of
    Professional Services Revenue
     29




---



##### 



Operating
    Expenses
    Three Months Ended December 31,


Nine Months Ended December 31,2006


2005


% Change


2006


2005


% Change(Dollars are in thousands)Operating Expenses:Sales and marketing

$
22,658


$
19,549



16
%

$
61,173


$
53,875



14
%% of total revenue


43
%


37
%






41
%


36
%Research and development


11,944



8,980



33
%


34,443



30,224



14
%% of total revenue


23
%


17
%






23
%


20
%General and administrative


7,984



5,927



35
%


22,522



17,542



28
%% of total revenue


15
%


11
%






15
%


12
%In-process research and development










N/A



1,170







N/A% of total revenue


0
%


0
%






1
%


0
%Restructuring costs


1,284



(117
)


(1,197
)%


1,284



602



113
%% of total revenue


2
%


0
%






1
%


0
%Total operating expenses


43,870



34,339



28
%


120,592



102,243



18
%% of total revenue


83
%


65
%






80
%


68
%         Sales and
    Marketing
   30




---



##### 



Research
    and Development Expenses
      General
    and Administrative Expenses
      Other
    Operating Cost
   31




---



##### 



Interest
    income
    Interest
    expense
    Other
    income, net
    Income
    taxes
      LIQUIDITY
    AND CAPITAL RESOURCES
  Cash
    Flows
   32




---



##### 



Liquidity
    Requirements
  Debt
    financing
        Liquidity
    Outlook
    Off
    Balance Sheet Arrangements
   33




---



##### 



CRITICAL
    ACCOUNTING POLICIES AND ESTIMATES
      Form 10-K
  Adoption
    of New Accounting Standards
  Stock-Based
    Compensation
         34




---



##### 



Recently
    Issued Accounting Pronouncements
  Fair
    Value Measurements
    Considering
    the Effects of Prior Year Misstatements When Quantifying
    Misstatements in Current Year Financial Statements
    Transition
    Election Related to Accounting for the Tax Effects of
    Share-Based Payment Awards
  No. FAS 123R-3,
 35




---



##### 



Accounting
    for Uncertainty in Income Taxes
    Income
    Statement Classification of Taxes Collected from
    Customers
  No. 06-03, 06-03). 06-03 06-03 06-03
  ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Form 10-K
  ITEM 4.
    CONTROLS
    AND PROCEDURES  Evaluation of Disclosure Controls and
    Procedures. Rule 13a-15(e)
  Rule 13a-15 Form 10-Q.
 36




---



##### 



Form 10-Q Form 10-Q
  Material Weakness in Internal Control Over Financial
    Reporting. Form 10-K
    Material Weakness Remediation Plans.
  
    Implementing formal procedures to evaluate the continued
    profitability of each of our subsidiaries on a quarterly basis
    in order to determine the income tax benefit of reducing the
    valuation allowances on net operating loss carryforwards and
    other deferred tax assets.
    Implementing formal procedures to monitor net deferred tax
    assets relating to goodwill and intangible assets of companies
    that we acquire.
    Evaluating the implementation of a new tax accounting and
    reporting system and improve our procedures with respect to
    communicating, documenting, and reconciling the detailed
    components of income tax assets and liabilities of each of our
    subsidiaries.
    Expanding staffing and resources, including the continued use of
    external consultants, and provide training on income tax
    accounting and reporting.  Changes in Internal Control Over Financial
    Reporting.
 37




---



##### 



PART II  OTHER
    INFORMATION
  ITEM 1.
    LEGAL
    PROCEEDINGS    ITEM 1A.
    RISK
    FACTORS  Form 10-K
  ITEM 6.
    EXHIBITS   38




---



##### 



SIGNATURES
    WEBMETHODS, INC.
  /s/  DAVID
    MITCHELL       KEN
    SEXTON
       MICHAEL
    KRONE
      39




---



##### 



EXHIBIT INDEX
  ExhibitNumber

Description2
.1

Agreement and Plan of Merger,
    dated as of September 8, 2006, by and among webMethods,
    Inc., Iowa Acquisition Corp., Infravio, Inc., certain holders of
    capital stock of Infravio with respect to certain provisions
    only, and Mary Coleman in her capacity as Shareholders
    Representative (filed as Exhibit 2.1 to the
    Registrants Current Report on
    Form 8-K
    filed November 3, 2006 and incorporated herein by this
    reference)3
.1

Fifth Amended and Restated
    Certificate of Incorporation of webMethods, Inc., as amended
    (filed as Exhibit 3.1 to the Registrants Annual
    Report on
    Form 10-K
    for year ended March 31, 2001 and incorporated herein by
    this reference)3
.2

Second Amended and Restated Bylaws
    of webMethods, Inc. (filed as Exhibit 3.2 to the
    Registrants Quarterly Report on
    Form 10-Q
    for the three months ended December 31, 2004 and
    incorporated herein by this reference)4
.1

Specimen certificate for shares of
    webMethods, Inc. Common Stock (Filed as Exhibit 4.2 to
    Registrants Registration Statement on
    Form S-1,
    as amended (File
    No. 333-91309)
    and incorporated herein by this reference)4
.2

Rights Agreement dated as of
    October 18, 2001 between webMethods, Inc. and American
    Stock Transfer & Trust Company (filed as
    Exhibit 4.1 to the Registrants Registration Statement
    on
    Form 8-A
    (File
    No. 000-33329)
    and incorporated herein by this reference)10
.1

Form of Restricted Stock Agreement
    for restricted stock awards under the webMethods, Inc. 2006
    Omnibus Stock Incentive Plan to employees or officers (filed
    herewith)10
.2

Executive Agreement dated
    January 2, 2007 between webMethods, Inc. and Ken Sexton
    (filed herewith)10
.3

Stock Option Agreement dated
    January 2, 2007 between webMethods, Inc. and Ken Sexton
    (filed herewith)10
.4

Restricted Stock Agreement dated
    January 2, 2007 between webMethods, Inc. and Ken Sexton
    (filed herewith)10
.5

Amended and Restated Executive
    Agreement dated December 21, 2006 between webMethods, Inc.
    and David Mitchell (filed herewith)31
.1

Certification of Chief Executive
    Officer pursuant to Rule 13a  14(a) as adopted
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    (filed herewith)31
.2

Certification of Chief Financial
    Officer pursuant to Rule 13a  14(a) as adopted
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    (filed herewith)31
.3

Certification of Chief Accounting
    Officer pursuant to Rule 13a  14(a) as adopted
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    (filed herewith)32
.1

Certification of Chief Executive
    Officer pursuant to 18 U.S.C. Section 1350 as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    (filed herewith)32
.2

Certification of Chief Financial
    Officer pursuant to 18 U.S.C. Section 1350 as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    (filed herewith)32
.3

Certification of Chief Accounting
    Officer pursuant to 18 U.S.C. Section 1350 as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    (filed herewith)