**U.S.SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-K**

**(Mark One)**
| **x** | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** | ** ** |
|-------|------------|-----------------------------------------------------------------------------------------------------|------------|

 

**For the fiscal yearended February 28, 2006**

**OR**
| **o** | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** | ** ** |
|-------|------------|---------------------------------------------------------------------------------------------------------|------------|

 

**For the transitionperiod from                       to**

**Commission File Number 0-22154**

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**MANUGISTICSGROUP, INC.**

(Exact name of Registrant as specified in its charter)

| **Delaware**                     | **52-1469385**         |
|----------------------------------|------------------------|
| (State or other  jurisdiction of | (I.R.S. Employer       |
| incorporation or  organization)  | Identification Number) |

 

**9715 Key West Avenue, Rockville, Maryland 20850**

(Address of principal executive offices) (Zip code)

**(301) 255-5000**

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) ofthe Act: **None**

Name of each exchange on which registered: **None**

Securitiesregistered pursuant to Section 12(g) of the Act:

**Common Stock, $.002 par value per share**

(Title of Class)

Indicate by check mark if the Registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o   No  x

Indicate by check mark if the Registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes  o   No  x

Indicate by check mark whether the Registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days. Yes  x   No  o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein and willnot be contained, to the best of the Registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. o

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the SecuritiesExchange Act of 1934. (Check one):

| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

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

As of August 31, 2005,the aggregate market value of the voting stock held by non-affiliates of theRegistrant was approximately $124.7 million based on the closing price reportedon the Nasdaq National Market. As of April 30, 2006, the number of sharesoutstanding of the Registrant’s common stock was approximately84.1 million, based on information provided by the Registrant’s transferagent.

 

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**PART I**

**Item 1.   BUSINESS.**

The disclosures set forthin this Annual Report on Form 10-K are qualified by the sectionscaptioned “Risk Factors” in Item 1A of this Annual Report on Form 10-Kand “Forward-Looking Statements” in Item 7—“Management’s Discussion andAnalysis of Financial Condition and Results of Operations” of this AnnualReport on Form 10-K, and other cautionary statements set forthelsewhere in this Annual Report on Form 10-K.

**Overview:**

We are a leading global provider of supply chainmanagement and demand and revenue management software products and services. Wecombine these products and services to deliver solutions that address specificbusiness needs of our clients. Our approach to client delivery is to adviseclients on how best to use our solutions and other technologies across theirentire demand and supply chains and in their revenue management practices toenable informed, responsive, rapid, and cost and price effectivedecision-making throughout their own enterprise and across their extendedtrading network by creating a fully synchronized supply chain.

We offer thefollowing solution sets:

·       DemandManagement and Pricing;

·       SupplyManagement;

·       Transportationand Logistics;

·       Collaborationand Visibility;

·       ContractMaterials Resource Planning (MRP) & Maintenance, Repair and Overhaul (MRO);

·       PerformanceManagement; and

·       RevenueManagement.

These solutions include the products described under “Solutions”below.

Our solutions are designed to increase revenue andprofits for our clients by enabling them to improve customer service, reducestock-outs, lower costs, source more efficiently, reduce inventory, optimizeprice, collaborate with suppliers and customers, coordinate supply and demand,manage transportation and logistics operations and improve revenue managementpractices. A key element of our market strategy is to offer implementation,consulting, training and support services to our clients and prospects as anintegral part of our solutions.

Our solutions are built and reliant on our internalWebWORKSTM platform. WebWORKSTM is based on the Java 2TM Platform and J2EETMindustry standards.

We have organized our sales and marketing operationsunder four primary strategic business units (“SBUs”): Retail, Consumer Goods(CG), Government, Aerospace & Defense and Revenue Management (Travel,Transportation & Hospitality). We believe this operational structureallows us to use our capabilities and resources more effectively and realizeopportunities in our markets.

We market our solutions to companies primarilythroughout North, South and Central America, Europe and the Asia-Pacificregion. Among others, our clients include many of the world’s leading ConsumerGoods, Retail and Travel, Transportation & Hospitality organizations,and the U.S. Government, including Limited Brands, Coca Cola Bottling Co.,Kraft Foods, Caesars Entertainment, 

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Great North EasternRailway, DHL and the Defense Logistics Agency (DLA). No individual clientaccounted for more than 10% of annual revenue for the three years ended February 28,2006.

The Company was incorporated in Delaware in 1986. Ourfiscal year end is February 28th or 29th. We completed our initial publicoffering of common stock in 1993, a secondary public offering of common stockin 1997 and a private placement of convertible subordinated notes in 2000. Wesubsequently registered the convertible subordinated notes for resale early infiscal 2002. We have invested significant resources to develop new software, toenhance existing software and to acquire additional software products andsolutions through acquisitions.

Asummary of our acquisitions over the past five fiscal years, all of which havebeen asset acquisitions, is as follows:

| **Company**                                     | ** ** | ** **      | ** ** | **Date**                                                     | ** ** | **Description** | ** ** |
|-------------------------------------------------|------------|-----------------|------------|--------------------------------------------------------------|------------|-----------------|------------|
| Digital Freight  Exchange, Inc. (DFE)      |       | May 2002   |       | Collaborative  transportation  logistics services            |       |
| Western Data Systems of Nevada, Inc. (WDS) |       | April 2002 |       | Maintenance, repair and overhaul  and make-to-order software |       |
| SpaceWorks Inc. (acquired technology only)      |       | July 2001  |       | Order management software                                    |       |
| PartMiner CSD, Inc.                        |       | May 2001   |       | Product design and sourcing software                         |       |
| One Release, LLC                                |       | May 2001   |       | Software  development services                               |       |

 

**Merger Agreementand Voting Agreements:**

On April 24, 2006, we entered into a definitiveAgreement and Plan of Merger (the “Merger Agreement”) with JDA Software Group, Inc.,a Delaware corporation (“JDA”), and Stanley Acquisition Corp., a Delawarecorporation and a wholly-owned subsidiary of JDA (the “Merger Sub”). Under theMerger Agreement, the Merger Sub will be merged with and into the Company (the “Merger”),with the Company continuing after the Merger as a wholly-owned subsidiary ofJDA. At the effective time of the Merger, each issued and outstanding share ofthe Company’s Common Stock, par value $0.002 per share (the “Company CommonStock”), will be converted into the right to receive $2.50 in cash.

The Merger Agreement has been approved by the Board ofDirectors (the “Board”) of the Company. The Board has received an opinion from LehmanBrothers, Inc. that the consideration to be offered to the Company’sstockholders in the Merger is fair from a financial point of view to suchstockholders. The transactions contemplated by the Merger Agreement are subjectto approval by the holders of a majority of the issued and outstanding sharesof Company Common Stock. The transactions contemplated by the Merger Agreementalso are subject to the expiration or termination of the applicable waitingperiod under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, asamended, and certain other closing conditions. The Merger Agreement providesfor a termination fee of up to $9.75 million, which is payable by theCompany under certain circumstances.

The Merger Agreement contains representations andwarranties made by us to JDA and the Merger Sub and representations andwarranties made by JDA and the Merger Sub to us. The statements embodied inthose representations and warranties were made solely for purposes of theMerger Agreement between JDA and the Merger Sub, on the one hand, and us, onthe other hand. Moreover, some of those representations and warranties weremade as of a specified date or may have been used for the purpose of allocatingrisk between the parties to the Merger Agreement.

The foregoing description of the Merger Agreement isnot complete and is qualified in its entirety by reference to the MergerAgreement, which is filed as Exhibit 2.1 to the Company’s Current Reporton Form 8-K dated April 25, 2006 and is incorporated herein byreference.

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In connection with theexecution of the Merger Agreement, the Company and certain stockholders,officers and directors of the Company entered into voting agreements (the “VotingAgreements”) with JDA dated April 24, 2006, whereby such stockholders willvote (or cause to be voted) in person or by proxy all shares of Company CommonStock held by them (i) in favor of the adoption of the Merger Agreementand approval of the transactions contemplated thereby, (ii) against anyproposal made in opposition to or competition with the consummation of theMerger and the Merger Agreement, (iii) against any proposal that wouldreasonably lead to or result in the conditions of JDA’s or Merger Sub’sobligations under the Merger Agreement not being fulfilled, (iv) againstany takeover proposal from any party other than JDA or an affiliate of JDA, and(v) against the election of a group of individuals to replace a majorityor more of the individuals presently on the Company’s Board. The stockholdersthat signed the Voting Agreements beneficially own approximately 24% of ouroutstanding shares of common stock as of April 24, 2006 and includecertain of our officers and directors and entities affiliated with them. If theMerger Agreement is terminated for any reason, the Voting Agreements will alsoterminate. The foregoing description of the Voting Agreements is not completeand is qualified in its entirety by reference to the form of Voting Agreement,which is filed as Exhibit 99.3 to the Company’s Current Report on Form 8-Kdated April 25, 2006 and is incorporated herein by reference.

**IndustryBackground:**

Increasing global competition, shorter product lifecycles, more demanding customers and higher standards are forcing businesses tobe more responsive to customer demand, bring their products to market morequickly and efficiently, provide improved levels of customer service, andimprove margins by lowering costs to market and improving pricing decisions. Tomeet these challenges, companies are demanding greater visibility of operationsthroughout their own organization and their extended trading networks and thecapability to make and execute decisions in response to rapidly changingconditions of demand and supply.

Effective demand and supply chain management solutionsallow companies to share information throughout their own organizations andextended trading networks and to monitor, measure and improve their businessprocesses over time. They also enable informed, responsive and rapiddecision-making that is cost and price effective.

We believe that traditional enterprise applicationsystems, such as enterprise resource planning (ERP) systems, do not provide thevisibility, flexibility, responsiveness or efficiencies required to meeteffectively the demands of today’s competitive environment. We believe thatcompanies need to pursue the integration of the supply-side and demand-side oftheir businesses to lower operational costs and increase the value derived fromtheir processes and technology systems.

To meet these challenges, many companies are seekinginformation technology solutions based on open standards that operate in afast, effective and secure environment and can be integrated with theirexisting systems, as well as those of the companies in their trading networks.They require that these solutions provide quick realization of benefits andrapid return on their systems investments.

Competition in these markets includes enterpriseapplication software companies, such as traditional ERP companies and othertransaction-based application software companies, supply chain managementcompanies, pricing and revenue management companies and other informationtechnology services companies, in addition to software solutions custom developedwithin the user company.

Information technologycompanies are engaging offshore (global) workforces on an increasing basis totake advantage of technical expertise and lower personnel costs in countriessuch as India and China. Companies may utilize their own or out-sourcedoperations to provide development, consulting and implementation services.

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**Strategy:**

Our objective is toenhance our position as a leading global provider of supply chain managementand demand and revenue management solutions. Our strategy to achieve ourobjective includes the following elements:

FOCUS ON KEY MARKETS—We have organized our sales andmarketing operations under four strategic business units: Retail, ConsumerGoods (CG), Government, Aerospace & Defense and Revenue Management(Travel, Transportation & Hospitality). We believe our operationalstructure allows us to efficiently use our capabilities and resources torealize opportunities in our markets.

FOCUS AND DIFFERENTIATE OUR SOLUTIONS—We have narrowedthe scope of our solution offerings to our core products and will continue toenhance the capabilities of these solutions through additional industry andclient-specific functionality, to help our clients solve a broader range ofevolving business challenges and to improve operational and business processeswithin and among companies. We believe there is an increasing market forsolutions that integrate supply chain management with demand and revenuemanagement solutions, and that our ability to provide these integratedsolutions differentiates us from our competitors. We also intend to make oursolutions easier to implement and integrate.

PROVIDE ADVANCED TECHNOLOGICAL INNOVATION—We haveextensive experience and domain expertise and have committed substantialresources for research and development, which we use to develop advancedtechnological software solutions to offer our clients and prospects. We openedour own development center in Hyderabad, India during the fourth quarter offiscal 2005 to expand our product development capabilities and take advantageof lower personnel costs. Our development center has worked closely with ourcore product development group at our headquarters in Rockville, MD. See “ProductDevelopment.”

PROVIDE COMPREHENSIVE SERVICES—As a key element of ourmarket strategy, we offer implementation, consulting, training and supportservices to our clients and prospects, directly and through third parties.

DEVELOP STRATEGICALLIANCES AND NEW BUSINESS RELATIONSHIPS—We combine our solutions with the competenciesof third parties which complement ours, such as leading consulting firms andtechnology providers. This strategy permits us to offer our clients solutionsthat can better meet their needs. We also intend to provide more focused salesand marketing efforts to small and medium-sized businesses in Europe and theAsia-Pacific region through third-party marketing and reseller agreements.

**Solutions:**

Manugistics solutions are configured sets of oursoftware products that address the specific demand and supply chain businessprocesses and revenue management practices that our clients want to improve.These solutions may also include consulting, implementation, training andclient support services. Our solutions are designed to meet the demand andsupply chain and revenue management needs of our clients helping them toincrease revenue and profits by enabling them to improve customer service,reduce stock outs, lower costs, source more efficiently, reduce inventory,optimize price, collaborate with suppliers and customers, coordinate supply anddemand, manage transportation and logistics operations and improve revenuemanagement practices. Our solutions are built on and rely on our internalWebWORKSTM platform. WebWORKSTM is based on the Java 2TM Platform and J2EEindustry standards.

**Demand Management and Pricing—****Our**Demand Management and Pricing solutions are designedto provide integrated price optimization and demand planning capabilities thatenable clients to create business strategies such as consensus demand planning,optimal pricing strategies, targeted promotion 

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**campaignsand markdown planning to efficiently predict, respond to and shape demand.Demand Management and Pricing solutions include: NetWORKS DemandTM, NetWORKSPrecision PricingTM, NetWORKS PromotionsTM, NetWORKS MarkdownsTM and NetWORKSTarget PricingTM.**

**SupplyManagement—****Our** Supply Management solutionsare designed to create an optimal supply network and set sourcing policies togenerate synchronized inventory, distribution, production and material plansfor our clients and their supply chain partners. Our clients use our SupplyManagement solutions to manage, optimize and synchronize the many facets oftheir supply chains—from collaboration with trading partners on productionplans, purchasing, logistics and fill rates to alignment and execution of asales and operations planning process to meet corporate objectives—and to meetcustomer demand while reducing inventory and cost. Supply Management solutionsinclude: NetWORKS FulfillmentTM, NetWORKS StrategyTM, NetWORKS SupplyTM, NetWORKSMaster PlanningTM, NetWORKS Order PromisingTM, NetWORKS SequencingTM and NetWORKSInventory Policy OptimizationTM.

**Transportationand Logistics Management—****Our******Transportation and Logistics Management solutions aredesigned to help global and other shippers, consignees, carriers, tradingpartners and logistics service providers effectively manage the complexities oftransportation and logistics, including multiple modes of transport such as byair, rail, sea and road. Our capabilities cover the entire spectrum of thelogistics process—from strategic logistics sourcing, planning and optimization,execution and shipment tracking, capacity management to payment and performanceanalysis. Fleet management capabilities include finding the optimal use of aclient’s fleet based upon or measured against shipment requirements andconstraints such as locations, carriers, rates, capacities and hours ofoperation and generating detailed work plans that help manage the fleet.Transportation and Logistics solutions include: NetWORKS TransportTM, NetWORKSDelivery ManagementTM, NetWORKS RoutingTM, NetWORKS CarrierTM, NetWORKS FreightPaymentTM, NetWORKS Fleet Capacity PlannerTM, NetWORKS RFQTM, offered in twooptions - a product or service, and NetWORKS RFQ OptimizerTM, which is aservice.

**Collaborationand Visibility—****Our** Collaboration solutions aredesigned to enable collaboration among trading partners by allowing them toview and make decisions using the same information. These solutions areintended to help clients facilitate processes such as collaborative planning,forecasting and replenishment and collaborative supply planning across extendedtrading networks. Our Visibility solutions provide event-based views intocritical supply chain information such as inventory balances and order andshipment status, within the trading network. Multiple trading partners are ableto simultaneously review past performance and current data on sales forecasts,booked orders, direct materials procurement, manufacturing plans anddistribution and shipping capacity in order to make and execute decisions onwhat to produce and when and how to deliver finished goods, to best meet theclient’s business objectives. Our Collaboration and Visibility solutionsinclude: NetWORKS CollaborateTM, NetWORKS Market ManagerTM, NetWORKS MonitorTM,NetWORKS CarrierTM and NetWORKS Delivery ManagementTM.

**ContractMaterials Resource Planning (MRP) & Maintenance, Repair and Overhaul (MRO)—****Our** Contract MRPsolutions provide comprehensive enterprise resource planning (ERP) capabilitiesfor Aerospace & Defense and other complex enterprises engaged incontract-oriented, order-centric manufacturing and re-manufacturing. OurContract MRO solutions are designed to provide comprehensive support, fromasset receipt to delivery back into service, for heavy maintenance, repair,overhaul, upgrade or modification services for complex equipment such asaircraft, engines, vehicles or ships, related sub-systems and components. Thesesolutions include service and parts management capabilities that help companiesoptimize and manage their service and parts operations by effectively planningand scheduling maintenance programs, parts, materials, tools, manpower andrepair facilities to provide efficiently the high levels of customer service ona cost effective basis. Our Contract MRP and MRO solutions reduce overhead andenhance cash flow and productivity through advanced cost collection andearned-value management processes. Contract MRP and MRO solutions include:NetWORKS 

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Make-to-OrderTM,NetWORKS Component ManagementTM, NetWORKS Maintenance, Repair and OverhaulTM  and NetWORKS ProcurementTM.

**PerformanceManagement—****Our** Performance Managementsolutions provide clients with a means to measure and predict their supplychain performance. Our solutions are designed to enable the definition andmonitoring of key performance indicators (KPIs), such as forecast accuracy,customer service levels, inventory turns and adherence to the financial plan.Performance Management solutions include: NetWORKS ReportingTM, NetWORKSAnalyticsTM and NetWORKS MonitorTM.

**Revenue Management—****Our** RevenueManagement solutions for the travel, transportation, hospitality and mediaindustries are designed to help companies meet the unique challenges ofindustries where products and services are perishable and optimizing capacityutilization is critical. Passenger travel companies, cargo carriers, hotel andresort companies, media networks, broadcast groups and cable companies use oursolutions to more accurately forecast future demand, optimally allocatecapacity, maximize revenue and increase profits and customer satisfaction. OurRevenue Management solutions include: NetWORKS Airline Revenue OptimizerTM,NetWORKS Cargo Revenue OptimizerTM, NetWORKS Hotel Revenue OptimizerTM andNetWORKS Rental Car OptimizerTM.

**Manugistics’ SupplyChain Technology Platform**

Manugistics’ Solutions aremodular and support phased implementations. Our solutions are used to design,optimize and synchronize a company’s extended demand and supply chain processesand improve revenue management practices. The architecture is based on anindustry standard - Java 2 platform,Enterprise Edition**(J2EE),which defines the programming model and architecture for implementing webservices that allow organizations to communicate data without intimateknowledge of each other’s information technology systems. These open standardsof J2EE help facilitate application development, application-to-applicationintegration, portal connectivity, and business process management. Built on anarchitecture that provides rapid implementation and interoperability with otherinformation technology assets, our solutions are designed to deliverindustry-specific functionality and provide low total cost of ownership as wellas the flexibility and scalability needed to adapt effectively to futurebusiness and technology shifts.

**ProductDevelopment:**

We direct ourefforts in product development to:

·       developingnew products;

·       enhancingexisting products;

·       enhancingour products for use in different languages and different measurements andstandards;

·       increasingthe breadth and depth of our product functionality to address increasinglycomplex customer challenges quickly;

·       increasingthe performance of our software and its ability to address increasinglylarge-scale problems; and

·       developingproducts tailored to the specific requirements of particular industries.

To date, our solutions, including solution documentation,have been developed by our internal staff and third-party contractors and havebeen supplemented by acquisitions and complementary business relationships.

In developing new solutions, products or enhancements,we work closely with current and prospective clients, as well as with otherindustry leaders, to make sure that our products and solutions address the 

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needs of the markets weserve. We believe that this collaboration will lead to improved software andwill result in superior products that are likely to be in greater demand in themarket. We maintain committees of users, developers and marketers of ourproducts, who, among other things, define and rank issues associated withproducts and discuss priorities and directions for their enhancement.

For new applications and major enhancements, we alsoconduct a launch program, which allows clients to review design specificationsand prototypes and to participate in product testing. We have establishedchannels for client feedback, which include periodic surveys and focus groups.In addition, our product development staff works closely with our marketing,sales, support and services groups to develop products that meet the needs ofour current and prospective clients.

As of February 28, 2006, our product developmentresources included 270 employees, 174 of which were located in India and 26third-party contractors. Gross product development costs were $31.0 million,$42.0 million and $46.1 million in fiscal 2006, 2005 and 2004,respectively.

We have made substantialinvestments in product development, and we will continue to make theexpenditures for product development that we believe are necessary fordelivering new products, features and functions rapidly. We believe thatgetting products to market quickly, without compromising quality, is criticalto the success of our business.

**ImplementationServices:**

A key element of our business strategy is to provideclients with comprehensive solutions for their internal and external demand andsupply chains and revenue management practices by offering implementationservices for our products. When implementing our software, clients typicallymake changes to their business processes and overall operations, includingtheir planning and pricing functions. To assist clients in making thesechanges, we offer a wide range of implementation services. Our implementationservices also include business operations consulting, change managementconsulting and end-user and system administrator education and training. Theseservices help clients redesign their operations to take full advantage of oursoftware. Additionally, third-party service providers implement our solutions.

Our implementationservices are priced and sold separately from our software products and areprovided primarily on a time and materials basis. Our consulting services groupconsisted of 219 employees as of February 28, 2006.

**Client Support andApplication Hosting Service:**

Our comprehensive solutions include global support toclients. Most of our clients enter into annual solution support agreements forpost-contract customer support and the right to unspecified software upgradesand enhancements. Support includes in-depth support services, productmaintenance and a web-based knowledge management tool for tips and techniquesand online support. Upgrades include new features and functionality, as well ascore technology enhancements. Our client support personnel also collectinformation that we use to assist us in developing new products, enhancingexisting products and in identifying market demand.

Our application hosting service offers clients theoption of letting Manugistics administer and run the client’s solutions at ourdata center helping clients to move quickly to realize the benefits of ourproducts by reducing internal resource requirements such as costs of hardware,infrastructure, security, training and technology and by operating in proventechnical environments. As of February 28, 2006, our client support andapplication hosting service group consisted of 56 employees.

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**Sales andMarketing:**

Our sales operation for North, South and CentralAmerica is headquartered at our office in Rockville, Maryland and includesfield offices in Atlanta, GA; Calabasas, CA; Chicago, IL and Sao Paulo, Brazil.Our direct sales organization focuses on licensing supply chain and demand andrevenue management solutions to large, multi-national enterprises, as well asto mid-sized enterprises with a variety of demand and supply chain, revenuemanagement and extended trading network issues. We operate in Canada, Mexicoand South America through subsidiaries established in those countries.

We license our solutions in regions outside of theAmericas primarily through foreign subsidiaries. Our British and French  subsidiaries, located in Bracknell, UnitedKingdom and Paris, France, respectively, provide direct sales, services andsupport primarily to clients located in continental Europe and the UnitedKingdom. We have established subsidiaries and maintain offices in Tokyo, Japan;Singapore; Shanghai and Hong Kong, The People’s Republic of China; KualaLumpur, Malaysia; Sydney, Australia and Hyderabad, India. We also maintain anoffice in Taipei, Taiwan. We adapt our solutions for use in certaininternational markets by addressing different languages, different standards ofweights and measures and other operational considerations. In fiscal 2006,approximately 35.5% of our total revenue came from sales made to clientsoutside the U.S. Details of our geographic revenue are in Note 15—“SegmentInformation” in the Notes to Consolidated Financial Statements includedelsewhere in this Annual Report on Form 10-K. We also use indirectsales channels to market our software in certain markets. See “Alliances.”Using these channels, we seek to increase the market penetration of oursoftware. These relationships enhance our sales resources in target markets andexpand our expertise in bringing our solutions to prospects and clients.

We support our sales activities by conducting avariety of marketing programs. We maintain client steering committees toinvolve our clients in the ongoing development of our solutions. We alsoparticipate in industry conferences such as those organized by the AmericanProduction and Inventory Control Specialists (APICS) organization, VoluntaryInterindustry Commerce Solutions Association (VICS), the National RetailFederation’s Annual Show, Retail Systems, Logicon, Association of the UnitedStates Army(AUSA) and in numerous pricing and revenue optimization conferences,such as Hospitality Financial and Technology Professionals Conference calledHITEC (HITEC) and PPS (Professional Pricing Society). In addition, weparticipate in solution demonstration seminars and client conferences hosted bycomplementary software vendors. We also conduct Manugistics brand awareness andlead-generation programs including advertising, direct mail, public relations,seminars, telemarketing and ongoing client communication programs.

As of February 28,2006, we had 111 employees engaged in sales and marketing activities.

**Alliances:**

Our alliance program is based on improving andincreasing the value we deliver to our clients and prospects. We ally ourselveswith leading companies that provide technologies, products and/or services thatcomplement our solutions.

We work with leading systemsintegrators and business strategy and management consulting firms that providea wide range of consulting expertise such as implementation of softwaresolutions, process and change management and strategic business services. We maintainclose relationships with major consulting firms worldwide to extend ourdelivery and solution capability for our clients. We have also developedstrategic alliances pursuant to written agreements with consulting and systemsintegration partners such as IBM, Accenture, Cap Gemini Ernst & Young,Thales, AT Kearney, Bearing Point, Unisys and other leading consulting firms toprovide implementation and business process assistance to our clients. Weaugmented this with several geographic and regional alliances and cooperatewith other professional services firms on a client-by-client basis.

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We have relationships pursuant to written agreementswith the following software and technology providers: BEA; Business Objects;Cognos; DataDirect; IBM; ILOG; Kewill; MapInfo; Oracle; Quovadx; Rainmaker;TIBCO Software; Vignette; and Workplace plc.

Manugistics has entered into Reseller/Agent agreementswith the right to resell specific Manugistics products with various companieslocated or doing business in North America, Asia, Europe and South America.

In addition, Manugisticsmaintains agreements with a number of technology providers whose products areembedded and shipped with one or more Manugistics products. These includeActiveState; Actuate; DataDirect Technologies; HCL Technologies; ILOG; IONATechnologies; MapInfo; Microfocus; Numerical Algorithms Group (NAG); ProgressSoftware; Quest Software; Recursion Software; and Rogue Wave Software.

**Clients:**

Various combinations ofour supply chain and demand and revenue management software have been licensedby organizations worldwide in such industries as: retail; consumer goods(including life sciences); Government, Aerospace & Defense; andTravel, Transportation & Hospitality. We include below a sample ofcompanies that have either licensed software products from us or ourdistributors, or purchased support, consulting, or other services or activelyused our software during fiscal 2006. See “Sales and Marketing.”

**Retail**

Ahold USA, Canadian TireCorp, Ltd., Circuit City, Circle K, CompUSA, CVS Pharmacy, DSG Retail Group(Dixon’s), Dollar General, Federated Department Stores, Gordon Food Service,H-E-B Grocery Company LP, IKEA, Kohl’s Department Stores, Limited Brands, Lowe’sCorporation, McDonalds Europe, OfficeMax, RadioShack Corporation, Ross Stores,Safeway, Sears Holding plc, Roebuck & Co., Schwan’s Shared Services,Staples, Inc., Starbucks, Target Corporation, The Great Atlantic &Pacific Tea Co., TJX Companies, Inc., Toys “R” Us, Wickes BuildingSupplies, Walmart.com and Winn-Dixie Stores.

**Consumer Goods**

Airgas, Inc., Avon,BIC, Black & Decker, Campbell Soup Company, Church & Dwight,Coca-Cola Bottling Co., Cott Beverage, Coty Inc., Deere & Co., Diageo,Elemica, Fosters Group, Frito-Lay Trading Company GmbH, Georgia-Pacific,Harley-Davidson, Inc., H.J. Heinz Company, The Hershey Company, KraftFoods, Inc., Merial, McCormick & Company, Inc., Nestle,Ocean Spray Cranberries, Inc., O2, Pfizer, Perdue Farms Inc., Pepsico,Remy Cointreau, Rohm & Haas, Smith & Nephew Orthopaedics, TheScott’s Company, Tyson Foods Inc., Unilever and Yves Saint Laurent Parfums.

**Government,Aerospace & Defense**

BAE Systems, Boeing Co.,General Services Administration, Defense Logistics Agency and L-3Communications.

**Revenue Management(Travel, Transportation & Hospitality)**

British Airways, CanadianPacific Logistics Solutions, Continental Airlines Cargo, DHL Aviation, EurostarRailway, Great North Eastern Railway (GNER), Harrah’s-Caesars Entertainment, Inc.,Marriott International, Midland Mainline, Omni Hotels, Princess Cruise Linesand TUI UK.

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**Competition:**

The markets for our solutions are very competitive.Other application software vendors offer products that compete directly withsome of our products. These include, but are not limited to, such vendors as,Aspen Technology, DemandTec, Global Logistics Technologies (acquired byOracle), i2 Technologies, JDA Software (recently agreed to acquire us, See “MergerAgreement and Voting Agreements”), Khimetrics (acquired by SAP), Logility,Manhattan Associates, ProfitLogic (acquired by Oracle), PROS RevenueManagement, Rapt, Retek (acquired by Oracle), Sabre, SAP and Teradata (adivision of NCR). Certain enterprise resource planning vendors, in addition toSAP, have acquired or developed demand and supply chain management software,products, or functionality or have announced intentions to develop and selldemand and supply chain management solutions. Such vendors include Oracle(which recently acquired Global Logistics Technologies, PeopleSoft, Profitlogicand Retek), and SSA Global Technologies.

The principalcompetitive factors in the markets in which we compete include productfunctionality and quality, domain expertise, integration technologies, productsuite integration, breadth of products and related services such as customersupport and implementation services. Other factors important to clients andprospects include:

·       customerservice and satisfaction;

·       theability to provide client references;

·       compliancewith industry standards and requirements;

·       theability of the solution to generate business benefits;

·       rapidpaybacks and large returns on investment;

·       softwareavailability in foreign languages;

·       vendorfinancial stability and reputation; and

·       price.

We believe that ourprincipal competitive advantages are our comprehensive, integrated solutions,our list of referenceable clients, the ability of our solutions to generatebusiness benefits for clients, our substantial investment in productdevelopment, our domain expertise in our markets, our quick implementations,rapid paybacks and large returns on investment for our clients, our clientsupport services and our extensive knowledge of supply chain management anddemand and revenue management solutions.

**Software License,Support and Implementation Service Agreements and Pricing:**

Software revenue consists principally of feesgenerated from licensing our software products. In consideration of the paymentof license fees, we generally grant nonexclusive, nontransferable, perpetuallicenses, which are primarily business unit, user-specific and geographicallyrestricted. Software license fee arrangements vary depending upon the type ofsoftware product(s) being licensed and the customer’s computerenvironment. Software license fees are based primarily on which products arelicensed, the size and complexity of the customer problem being addressed, thesize of the client’s business and the number of users and locations. The amountof software license fees may reach millions of dollars for initiatives that arelarge in scope and complexity.

Clients may obtainsolution support for an annual fee. Our clients may select from three levels ofsupport to accommodate their needs: Standard, Premium and Signature. Supportfees are calculated on an escalated scale, based on the level of service chosenand the size of the related software license fees. 

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Supportfees are generally billed annually and are subject to changes in support listprices. We also provide implementation services, training and hosting of oursoftware applications and other related services, generally on a time andmaterials basis. This allows our clients to determine the level of support orservices appropriate for their needs.

**Proprietary Rightsand Licenses:**

We regard our software as proprietary. We rely on a combination of trade secret, patent, copyright andtrademark laws, confidentialityprocedures and agreements and provisions to help protect proprietaryrights in our software. We distribute our software under software licenseagreements, which typically grant clients nonexclusive, nontransferablelicenses to our software and have perpetual terms unless the term is limited orthe license is terminated for breach. Under such typical license agreements, weretain all rights to market our products,which affords limited protection.

Manugistics owns five issued U.S. patents and numerouspending patent applications (including a number of allowed claims) in both theU.S. and in various foreign countries or regions. The latest of these issuedU.S. patents will endure until 2019 - with the earliest enduring until 2016.Any patent issued may be invalidated, circumvented or challenged. Any of ourpending or future patent applications, whether or not challenged, may not beissued with the scope of claims we seek, if at all.

Manugistics also owns a number of active trademarkregistrations (including those for the mark MANUGISTICS among others) andpending trademark applications in the U.S. and in various foreign countries orregions. Each trademark registration of Manugistics will endure until therespective mark ceases to be used or the corresponding registration isotherwise not renewed. Trademark applications are subject to review by theissuing authority, may be opposed by private parties, and may not issue.Likewise, once issued, trademark registrations remain subject to challengeand/or cancellation.

We also seek to protect the source code of oursoftware as a trade secret and as an unpublished, copyrighted work.

Use of our software is usually restricted to theinternal operations of our clients and to designated users. In sales tologistics or service providers, the licensed software is usually restricted touse by the logistics or service provider for the benefit of its clients. Use is subject to terms andconditions that prohibit unauthorized reproduction or transfer of the software.

We also rely, in part, ontechnology that we license from third parties, including software that isintegrated with internally developed software and used in our software productsto perform key functions. For example, we license reporting software fromCognos, Inc., application integration software from Business Objects,application integration software from Vignette, Inc. and an applicationplatform suite of software from BEA Systems, Inc., on terms we believe tobe commercially reasonable. We also license software for non-key functions fromone or more technology vendors that we embed and ship with our software onterms we believe to be commercially reasonable. Typically, these licenses areworldwide, non-exclusive and royalty-based. The license agreements typicallyhave terms of two to five years, and automatically renew for one-year termsunless terminated in accordance with their terms. If we are unable to continue tolicense certain of this software on commercially reasonable terms, includingthe reporting software from Cognos and the application platform suite from BEASystems, we may face delays in releases of certain of our software solutionsuntil equivalent technology can be identified, licensed or developed, andintegrated into our current product. These delays, if they occur, may seriouslyharm our business. The royalties paid under these licenses were, in aggregate,less than 5 % of our total revenue in each of our 2006, 2005 and 2004 fiscalyears.

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**Employees:**

As of February 28,2006, we had 761 full-time regular employees and 114 full-time and part-timethird-party contractors. None of our employees are represented by a laborunion. We have experienced no work stoppages and believe that our employeerelations are generally good.

**AvailableInformation:**

Our fiscal year ends on February 28th or 29th. Wefurnish our stockholders with annual reports containing audited financialstatements. In addition, we file annual, quarterly and current reports, proxystatements and other information with the Securities and Exchange Commission.

You may read and copy any reports, statements or otherinformation that we file with the Securities and Exchange Commission at theSecurities and Exchange Commission’s Public Reference Room at 100 FStreet, N.E., Room 1580, Washington, D.C. 20549. You can request copies ofthese documents, upon payment of a duplicating fee, by writing to theSecurities and Exchange Commission. Please call the Securities and ExchangeCommission at 1-800-SEC-0330 for further information on theoperation of the Public Reference Room.

We file our reports withthe Securities and Exchange Commission electronically via the Securities andExchange Commission’s Electronic Data Gathering, Analysis and Retrieval system(“EDGAR”). The Securities and Exchange Commission maintains an Internet sitethat contains reports, proxy and information statements, and other informationregarding companies that file electronically with the Securities and ExchangeCommission via EDGAR. The address of this Internet site is http://www.sec.gov.We also make available free of charge through our website atwww.manugistics.com our Annual Report on Form 10-K, QuarterlyReports on Form 10-Q, current reports on Form 8-K, andamendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”) as soon as reasonably practicable after we electronically file such materialwith, or furnish it to, the Securities and Exchange Commission.

**Item 1A.   RISKFACTORS.**

In addition to the otherinformation in this Annual Report on Form 10-K, the followingfactors should be considered in evaluating us and our business. The risks anduncertainties described below are not the only ones facing us. Additional risksand uncertainties that we do not presently know or that we currently deemimmaterial, may also impair our business, results of operations and financialcondition.

***RISKS RELATED TO THE MERGER***

**IF OUR PROPOSED MERGER WITH JDA SOFTWARE GROUP, INC.IS NOT CONSUMMATED,OUR STOCK PRICE, BUSINESSAND OPERATIONS COULD BE HARMED.**

On April 24, 2006, we entered into a definitiveAgreement and Plan of Merger with JDA and the Merger Sub. Under the MergerAgreement, the Merger Sub will be merged with and into the Company, with theCompany continuing after the Merger as a wholly-owned subsidiary of JDA. At theeffective time of the Merger, each issued and outstanding share of CompanyCommon Stock will be converted into the right to receive $2.50 in cash.

The obligations ofthe Company and JDA to effect the Merger are subject to a number of conditions,including approval of the Merger by our stockholders, and the Merger may notoccur. If the Merger is not consummated for any reason, we will be subject to anumber of material risks, including the following:

·       wemay not realize any of the potential benefits of the Merger, including anypotential synergies that could result from combining the resources of ourCompany and JDA;

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·       wemay be required to pay JDA a termination fee of up to $9.75 million undercertain circumstances;

·       theprice of our common stock may decline to the extent that the current marketprice of our common stock reflects an assumption that the merger will becompleted; and

·       wemust pay our accrued costs related to the merger, such as legal, accounting andcertain financial advisory fees, even if the merger is not completed.

In addition, our customers may, in response to theannouncement of the merger, delay or defer purchasing decisions. Any delay ordeferral in purchasing decisions by our customers would have a material adverseeffect on our business, regardless of whether the Merger is ultimatelycompleted.

Similarly, our current andprospective employees may experience uncertainty about their future role withJDA until JDA’s strategies with regard to us are announced or executed. Thisuncertainty may adversely affect our ability to attract and retain keymanagement, marketing, technical, manufacturing, administrative, sales andother personnel. In addition, the attention of our management and our employeesmay be diverted from day-to-day operations.

**PROVISIONS OF THE MERGER AGREEMENT MAY DETERALTERNATIVE BUSINESS COMBINATIONS.**

Restrictions in the MergerAgreement on solicitation generally prohibit us from soliciting any acquisitionproposal or offer for a merger or business combination with any other party,including a proposal or offer that might be more advantageous to ourstockholders when compared to the terms and conditions of the proposed Merger.If the Merger is not completed, we may not be able to conclude another merger,sale or combination on as favorable terms, in a timely manner, or at all. Ifthe Merger Agreement is terminated, we may be required, in certaincircumstances, to pay a termination fee of $9.75 million to JDA.

**THE RESTRICTIVE COVENANTS IN THE MERGER AGREEMENTIMPOSE SIGNIFICANTRESTRICTIONS ON OURBUSINESS OPERATIONS UNTIL THE COMPLETION OF THE MERGER.**

Pursuant to theMerger Agreement, until the completion of the Merger, we are required tooperate our business in the ordinary course consistent with our past practiceand cannot do any of the following, among other things, without the priorwritten consent of JDA:

·       issueor sell any shares of our capital stock or any options, warrants or otherrights to acquire any shares of our capital stock, other than the issuance ofshares of our common stock upon exercise of those options or warrantsoutstanding as of April 24, 2006; or

·     sell, license or otherwise dispose of anyof our properties or assets or incur any capital expenditures above certainthreshold amounts, except in the ordinary course of business consistent withour past practice.

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***RISKS RELATED TO OUR INDEBTEDNESS AND FINANCIALCONDITION***

**OUR INDEBTEDNESS COULD HAVE A MATERIAL ADVERSE EFFECTON OUR FINANCIALCONDITION.**

In November 2000,we completed an offering of $250.0 million of 5% Convertible Subordinated Notes(the “Notes”) that are due November 2007. During fiscal 2004, the balanceof the Notes was reduced to $175.5 million as a result of $74.5 million ofNotes being exchanged for shares of our common stock. Pursuant to the MergerAgreement, we will conduct a cash tender offer for all of the outstandingNotes. Closing of that tender offer will be conditioned on the closing of theMerger. While the Notes remain outstanding, our indebtedness could haveimportant consequences for investors. For example, it could:

·       increaseour vulnerability to general adverse economic and industry conditions;

·       placeus at a competitive disadvantage relative to our competitors;

·       limitour ability to obtain additional financing;

·       requirethe dedication of a substantial portion of our cash flows from operations tothe payment of principal of, and interest on, our indebtedness, therebyreducing the availability of capital to fund our operations, working capital,capital expenditures, acquisitions and other general corporate purposes;

·       limitour flexibility in planning for, or reacting to, changes in our business andthe industry; and

·       influenceour customers and potential customers in doing business with the Company.

We may incur additionaldebt in the future. While the terms of our credit facility impose certainlimits on our ability to incur additional debt, we are permitted to incuradditional debt subject to compliance with the terms and conditions set forthin the credit facility. The terms of the Notes set forth no limits on ourability to incur additional debt. If a significant amount of new debt is addedto our current levels, the related risks described above could intensify.

**WE MAY HAVE INSUFFICIENT CASH FLOW TO MEET OURDEBT SERVICE OBLIGATIONS,WHICH COULD NEGATIVELYAFFECT OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS.**

We will be required togenerate sufficient cash to pay all amounts due on the Notes and to conduct ourbusiness operations. The Notes require interest payments of $8.8 millionannually with $175.5 million of principal due in November 2007. As of February 28,2006, the remaining principal and interest payments due under the Notes were$193.8 million. Our cash, cash equivalents and marketable securities totaled$140.7 million as of February 28, 2006. Assuming our cash, cash equivalentsand marketable securities remain constant from our February 28, 2006levels, and we do not consummate the Merger and related tender offer, we willhave to generate a minimum of $53.1 million of net cash flow through anycombination of normal operations of our Company, raising of debt and equitycapital or asset sales by November 2007 to meet our remaining principaland interest payments under the Notes. We have incurred net losses in the past,and we may not be able to cover our anticipated debt service obligations. Thismay materially hinder our ability to make principal and interest payments onthe Notes. Concerns about our ability to meet our debt service obligationscould negatively affect our ability to attract and retain customers. Ourability to meet our future debt service obligations will be dependent upon ourfuture performance, which will be subject to financial, business and otherfactors affecting our operations, many of which are beyond our control.

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**IF THE MERGER IS NOT CONSUMMATED, WE MAY CHOOSETO EXCHANGE THE NOTES FORSHARES OF OUR COMMON STOCK IN THE OPEN MARKET OR PURCHASE A PORTION OF THENOTES FOR CASH, WHICH COULD MATERIALLY DILUTE EXISTING STOCKHOLDERS OR COULDHAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION.**

During fiscal 2004, weissued 9,725,750 shares of our common stock in exchange for the Notes inprivately negotiated transactions under Section 3(a)(9) of theSecurities Act of 1933 as amended (the “Securities Act”). If the Merger is notconsummated, we may choose to exchange the Notes for shares of our common stockin the open market or purchase a portion of the Notes for cash, which couldmaterially dilute existing stockholders or could have a material adverse affecton our financial condition. If we choose to enter into privately negotiatedtransactions to exchange some of our outstanding Notes for shares of our commonstock, it could materially dilute the ownership percentage of our existingshareholders and result in non-cash charges to earnings. In addition, to theextent we are able to do so on terms favorable to us, we may choose to purchasea portion of the Notes outstanding from time to time in the open market withcash or, alternatively, refinance the Notes. While the terms of our creditfacility impose certain limits on our ability to repurchase our debt securitieswith cash, we are permitted to do so subject to compliance with the terms andconditions set forth in the credit facility. If purchases of the Notes in theopen market were funded from available cash and cash equivalents, it could havea material adverse effect on our liquidity and financial condition.

**WE MAY VIOLATE FINANCIAL COVENANTS UNDER OURCREDIT FACILITY, WHICH COULDHAVE A MATERIAL ADVERSE EFFECT ON OUR LIQUIDITY AND FINANCIAL CONDITION.**

We have an unsecuredcredit facility with Silicon Valley Bank (“SVB”) with borrowing capacity of$15.0 million. As of February 28, 2006, approximately $10.0 million ofletters of credit were outstanding with SVB. The terms of the credit facilityrequire us to comply with the following financial covenants: (i) minimumtangible net worth (defined as stockholders’ equity plus convertible debt lessgoodwill, capitalized software costs and other intangible assets) must be atleast $90.0 million plus 50% of consolidated net income generated cumulativelycommencing with the first quarter of fiscal 2006 and (ii) our ratio of (a) unrestrictedcash, cash equivalents, marketable securities and long-term investmentsdeposited with SVB and its affiliates plus net accounts receivable to (b) currentliabilities plus long-term indebtedness to SVB and outstanding letters ofcredit minus deferred revenue, must be at least 2.0 to 1.0. The credit facilityrequires us to maintain $50.0 million in funds with SVB Asset Management andits affiliates. Pursuant to the Merger Agreement, we will cooperate with JDA toreplace, at the closing of the Merger, the letters of credit that areoutstanding with SVB with newly issued letters of credit. If the Merger is notconsummated, the letters of credit with SVB will remain outstanding and we willremain obligated to comply with the financial covenants contained in thoseletters of credit. If our future financial performance results in a violationof these financial covenants under our credit facility, or with our previousequipment financing credit line, we could be required to provide cashcollateral for letters of credit or repay outstanding borrowings, which wouldhave a material adverse effect on our liquidity and financial condition.

***RISKS RELATED TO OUR BUSINESS***

**ADVERSE ECONOMIC AND POLITICAL CONDITIONS CONTRIBUTEDTO THE DETERIORATION OFDEMAND IN THE MARKETS FOR OUR PRODUCTS AND SERVICES AND HAVE ADVERSELY AFFECTEDAND COULD FURTHER ADVERSELY AFFECT OUR OPERATING PERFORMANCE AND FINANCIAL CONDITION.**

Our revenue and operating results depend on theoverall demand for our enterprise application software and related services.Regional and global adverse changes in the economy and political upheaval andunrest contributed to a deterioration of the markets for our products andservices in recent years. 

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Recent improvements ineconomic conditions have not yet resulted in improvements in the markets forsupply chain management software. These factors resulted in reductions, delaysand postponements of customer purchases, which materially and adverselyaffected our financial performance during the last four fiscal years. Demandfor our solutions designed to optimize pricing and revenue management, acomponent of our demand management solutions, was more severely affected thanour other solutions for which there are more mature markets. If these adverseconditions continue or worsen, we would likely experience further reductions,delays, and postponements of customer purchases further adversely affecting ouroperating performance and financial condition.

National and globalresponses to future hostilities and terrorist attacks may materially andadversely affect demand for our software and services because of the economicand political effects on our markets and by interrupting the ability of ourcustomers to do business in the ordinary course, as a result of a variety offactors, including, among others, changes or disruptions in movement andsourcing of materials, goods and components or possible interruptions in theflows of information or monies.

**WE BELIEVE OUR RECENT PERFORMANCE WAS ADVERSELYAFFECTED BY CAUTIOUS CAPITAL SPENDING, CONCERNS ABOUT OUR FINANCIAL VIABILITYAND A HIGHLY COMPETITIVE ENVIRONMENT. IF WE CANNOT OVERCOME THESE DIFFICULTIESOUR OPERATING PERFORMANCE AND FINANCIAL CONDITION COULD BE MATERIALLY ANDADVERSELY AFFECTED.**

We incurred significant losses during the past fourfiscal years. Although we have been able to reduce operating costs, we believeour recent financial performance was adversely affected by cautious capitalspending, concerns about our financial viability and a highly competitiveenvironment.

Over the past two fiscalyears, we have made substantial changes in our Company, including reorganizingand downsizing our executive management team and our sales organization,narrowing our market focus, narrowing our product focus, our ongoing move ofproduct development to India, increasing our focus on transportation andpricing optimization markets and increasing our focus on the Asia-Pacificregion. Although we believe that these changes have enabled us to improve ourfinancial performance and cash flows from operations in our most recentquarters, we have continued to report significant losses in our annualfinancial statements and experience declines in both software license revenueand total revenue. If we do not successfully align our cost structure with ourrevenue without hindering our ability to grow revenue, or if we do notsuccessfully overcome the factors that have hindered our performance, ouroperating performance and financial condition could be harmed, and we couldcontinue to incur significant losses.

**IF OUR STOCK PRICE DECREASES TO LEVELS SUCH THAT THEIMPLIED FAIR VALUE OF OURCOMPANY IS SIGNIFICANTLY LESS THAN STOCKHOLDERS’ EQUITY FOR A SUSTAINED PERIODOF TIME, WE MAY BE REQUIRED TO RECORD ADDITIONAL SIGNIFICANT NON-CASHCHARGES ASSOCIATED WITH GOODWILL IMPAIRMENT.**

On March 1, 2002, we adopted Statement ofFinancial Accounting Standards No.142 “*Goodwill and OtherIntangible Assets*” (“SFAS 142”), which changed the accounting forgoodwill from an amortization method to an impairment-only method. As requiredby SFAS 142, we test goodwill for impairment on an annual basis coinciding withour fiscal year-end, or on an interim basis if circumstances change that wouldmore likely than not reduce our implied fair value below our carrying value. Wehave recorded a non-cash goodwill impairment charge in the past as a result ofadverse changes in our stock price. We performed our annual fiscal 2006 andfiscal 2005 goodwill impairment review on February 28, 2006 and 2005,respectively, and interim testing at August 31, 2004,  May 31, 2005 and November 30, 2005,respectively, due to volatility in our stock price and the departure of ourChief Financial Officer and determined our implied fair value (which includesfactors such as, but not limited to, our market capitalization, a controlpremium and our 

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recent stock pricevolatility) exceeded our carrying value. Accordingly, no goodwill impairmentcharge was recorded.

We will continue to testfor impairment on an annual basis, coinciding with our fiscal year-end, or onan interim basis if circumstances change that would more likely than not reducethe fair value of our reporting unit below its carrying value. If our stockprice is significantly lower than recent levels such that the implied fairvalue of our Company is significantly less than stockholders’ equity for asustained period of time, among other factors, we may be required to recordadditional impairment losses related to goodwill.

**OUR FUTURE RESULTS COULD BE ADVERSELY AFFECTED BYVARIOUS SIGNIFICANT NON-CASHCHARGES, WHICH COULD IMPAIR OUR ABILITY TO ACHIEVE OR MAINTAIN PROFITABILITY INTHE FUTURE.**

We have recordedsignificant non-cash charges in the past and will incur significant non-cashcharges in the future related to the amortization of acquired technology andintangible assets from past acquisitions. We may also incur non-cash charges infuture periods related to impairments of long-lived assets and future exchangesof Notes for shares of our common stock, if any. To achieve profitability, wemust grow our revenue sufficiently to cover these charges. Our failure toachieve profitability could cause our stock price to decline.

**IF OUR EXIT AND DISPOSAL PLANS AND OUR COSTCONTAINMENT AND COST REDUCTIONMEASURES FAIL TO ACHIEVE THE DESIRED RESULTS OR RESULT IN UNANTICIPATEDNEGATIVE CONSEQUENCES, WE MAY SUFFER MATERIAL HARM TO OUR OPERATINGPERFORMANCE AND FINANCIAL CONDITION.**

Since fiscal 2002, we have implemented a number ofexit and disposal plans and cost containment and cost reduction measures and wecontinue to implement cost containment and cost reduction measures to align ourcost structure with our revenue. These actions have included, among otherthings, reductions in workforce and consolidations of our operationalfacilities. During the past two fiscal years, we abandoned additional idlespace in our Rockville, Maryland; Tokyo, Japan; San Carlos and Calabasas,California; and Bracknell, United Kingdom facilities and closed four offices inEurope and one in the Philippines. Our exit and disposal activities are setforth in greater detail in Note 14 in the Notes to Consolidated FinancialStatements included elsewhere in this Annual Report on Form 10-K.

As part of the consolidation of our facilities, wenegotiate lease termination agreements and lease modifications, or both andsubleases for certain of our facilities. We cannot predict when or if we willbe successful in negotiating lease termination agreements or subleases on termsacceptable to us. Should we be unsuccessful in such negotiations or if thenegotiated terms are less favorable than currently anticipated, we may berequired to materially increase our exit and disposal related expenses infuture periods. Further, if we consolidate additional facilities in the future,we may incur additional exit and disposal related expenses, which could have amaterial adverse effect on our business, financial condition or results ofoperations.

There can be no assurancethat we will not reduce or otherwise adjust our workforce again in the future orthat related transition issues associated with such a reduction will not occuragain. If we fail to achieve the desired results of our exit and disposal plansand our cost containment and cost reduction measures, we may suffer materialharm to our operating performance and financial condition.

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**IF WE FAIL TO ATTRACT AND RETAIN A QUALIFIEDWORKFORCE, OUR OPERATINGPERFORMANCE ANDFINANCIAL CONDITION COULD BE MATERIALLY ADVERSELY AFFECTED. FURTHER, OUR COSTCONTAINMENT AND COST REDUCTION INITIATIVES MAY HINDER OR IMPAIR OURABILITY TO TAKE ADVANTAGE OF IMPROVEMENTS IN MARKET CONDITIONS.**

We believe that our success depends on our ability tomotivate, hire and retain highly skilled technical, managerial, sales,marketing and services personnel. Competition for skilled personnel can beintense, and there is no assurance that we will be successful in attracting,motivating and retaining the personnel we need to improve our financialperformance and grow. As part of our cost containment and cost reduction initiatives,we have recently reduced our workforce and experienced voluntary attrition.However, headcount increased to 761 at February 28, 2006 compared to 695employees at February 28, 2005, primarily as a result of continuedstaffing at our product development center in Hyderabad, India.

Continuity of personnel is a very important factor inour success. We consider stock options, restricted stock and retention programsto be critically important in attracting and retaining employees. In addition,in light of the Merger, we have implemented cash bonuses in an effort to retaincertain of our employees. The decline in our stock trading price over the pastyear has decreased the value of stock options and restricted stock grantedpreviously to our employees under our stock option plans. In addition, underthe terms of the Merger Agreement, we are prohibited from issuing equity grantsand cash bonuses to current and prospective employees as incentives. Ourcurrent and prospective employees may experience uncertainty about their futurerole with the Company or, if the Merger is consummated, with JDA. Thisuncertainty may adversely affect our ability to attract and retain keymanagement, marketing, technical, manufacturing, administrative, sales andother personnel.

Despite our efforts toretain our employees, our existing employees may seek employment elsewhere.Failure to attract, motivate and retain highly skilled personnel couldmaterially and adversely affect our business. Further, our cost containment andcost reduction initiatives may yield further unintended consequences, such asreduced employee morale, decreased productivity, difficulty attractingqualified personnel due to a perceived risk of future workforce reductions, andour inability to take advantage of improvements in market conditions.

**WE HAVE EXPERIENCED SIGNIFICANT CHANGES IN SENIORMANAGEMENT IN THE LASTFEW YEARS. THE SUCCESS ANDGROWTH OF OUR BUSINESS MAY SUFFER IF WE EXPERIENCE TOO MANY CHANGES IN KEYPERSONNEL IN TOO SHORT A PERIOD OF TIME.**

We have undergonesignificant changes in our senior management during the past few years. In July 2004,Gregory J. Owens resigned as our Chief Executive Officer and was replaced byJoseph L. Cowan. In August of 2004, our President, Jeremy P. Cooteresigned and the position of President was eliminated. In September 2004,Jeffrey L. Kissling was hired as our Chief Technology Officer, and two othersenior management personnel were promoted to new positions. In April 2005,Mr. Owens resigned as Chairman of the Board. In addition, two other seniormanagement personnel left the Company during our third quarter of fiscal 2005and one, whose position was eliminated, left the Company at the end of ourfourth quarter of fiscal 2005. Most recently, in October 2005, Raghavan Rajaji,our Executive Vice President and Chief Financial Officer, resigned to accept aposition with another company. During fiscal year 2005, we reorganized oursales and marketing organization, which resulted in further management changeswithin the organizational structure.

Our success dependssignificantly on the continued service of our executive officers and theirability to work together effectively as a management team. We do not havefixed-term employment agreements with any executive officers, other than withJoseph L. Cowan, who has a two-year employment agreement with our Company thatcommenced in July 2004, and we do not maintain key person life insuranceon our executive officers. The loss of services of any of our senior managementfor any reason or their inability to 

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manageour Company effectively could have a material adverse effect on our operatingperformance and financial condition.

**WE HAVE RESTRUCTURED, AND MAY IN THE FUTURERESTRUCTURE, OUR SALES FORCE,WHICH CAN BE DISRUPTIVE. WE HAVE ALSO REDUCED OUR SALES FORCE AND CONSOLIDATEDOUR SALES OFFICES AS PART OF OUR COST CONTAINMENT AND COST REDUCTIONINITIATIVES. OUR FAILURE TO FIELD AN EFFECTIVE SALES ORGANIZATION COULD HAVE AMATERIAL ADVERSE EFFECT ON OUR OPERATING PERFORMANCE AND FINANCIAL CONDITION.**

We continue to relyheavily on our direct sales force. In recent years, we reorganized our salesforce in response to management changes and other internal considerations, mostrecently in August 2005. Since fiscal 2003, we have reduced our salesforce as a result of the deterioration in our markets and restructuring of ouroperations. Decreased software license revenue has resulted in reducedcompensation earned overall by members of our sales force; it also hasresulted, and may continue to result, in voluntary attrition of our sales forceover time. In order to stabilize and then grow our revenue, we will have tofield an effective sales force. Changes in the structure of the sales force andsales force management have generally resulted in a temporary lack of focus andreduced productivity. Further, we cannot assure you that we will be able tofield a more productive sales force or successfully attract and retainqualified sales people at levels sufficient to support growth. We cannot assureyou that we will not continue to restructure our sales force or that thetransition issues associated with restructuring the sales force will not recur.Such restructuring or associated transition issues can be disruptive andadversely impact our operating performance and financial condition.

**SALES CYCLES FOR OUR PRODUCTS AND SERVICES CAN BE LONGAND UNPREDICTABLE.VARIATIONS IN THE TIME IT TAKES US TO LICENSE OUR SOFTWARE MAY CAUSEFLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS.**

Each client’s decision tolicense and implement our products and services is discretionary, involves asignificant commitment of resources and is subject to the client’s budgetcycles. The time it takes to license our software to prospective clients variessubstantially, but historically has ranged between three and twelve months.Prior sales and implementation cycles should not be relied upon as anyindication of future cycles. As a result of current economic conditions, recentchanges in our organization and sales force and increased competition, oursales cycle has recently become longer than historical sales cycles.

Variations in the lengthof our sales cycles will cause our revenue to fluctuate widely from period toperiod. We base our operating expenses on anticipated revenue trends. Because ahigh percentage of our expenses are relatively fixed in the short-term and wetypically recognize a substantial portion of our software license revenue inthe last month of a quarter, any delay in the licensing of our products couldcause significant variations in our revenue from quarter to quarter. Thesedelays have occurred on a number of occasions in the past and have materiallyand adversely affected our financial performance.

Thelength of our sales cycle depends on a number of factors, many of which arebeyond our control, including the following:

·       thecomplexities of client challenges our solutions address;

·       thebreadth of the solution required by the client, including the technical,organizational and geographic scope of the license;

·       thesize, timing and complexity of contractual terms of licenses and sales of ourproducts and services;

·       widevariations in contractual terms, which may defer recognition of revenue;

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·       customerfinancial constraints and credit-worthiness;

·       theevaluation and approval processes employed by the clients and prospects, whichhas become more complex and lengthy and now includes an assessment of ourfinancial viability;

·       economic,political and market conditions; and

·       anyother delays arising from factors beyond our control.

As a result of these andother factors, revenue for any quarter is subject to significant variation. Youshould not rely on period to period comparisons as indications of futureperformance. Our future quarterly operating results from time to time may notmeet the expectations of market analysts or investors, which would likely havean adverse effect on the price of our common stock.

**AN INCREASE IN SALES OF SOFTWARE PRODUCTS THAT REQUIRECUSTOMIZATION WOULD RESULT IN REVENUE BEING RECOGNIZED OVER THE TERM OF THECONTRACT FOR THOSE PRODUCTS AND COULD HAVE A MATERIAL ADVERSE EFFECT ON OUROPERATING RESULTS AND FINANCIAL CONDITION.**

Historically, we have beenable to recognize software license revenue upon delivery of our solutions andcontract execution. Recently, more of our clients and prospects have beenasking for unique capabilities in addition to our core capabilities to givethem a competitive edge in the market place. These instances could cause us torecognize more of our software license revenue on a contract accounting basisover the course of the delivery of the solution rather than upon delivery andcontract execution. The period between initial contact and the completion ofthe implementation of our products can be lengthy and is subject to a number offactors (over many of which we have little or no control) that may causesignificant delays. These factors include the size and complexity of theoverall project. As a result, a shift toward a higher proportion of softwarelicense contracts requiring contract accounting could have a material adverseeffect on our operating results and financial condition and cause our operatingresults to vary significantly from quarter to quarter.

**FAILURE TO MAINTAIN OUR MARGINS AND SERVICE RATES FORIMPLEMENTATION SERVICES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATINGPERFORMANCE AND FINANCIAL CONDITION.**

A significantportion of our revenue is derived from implementation services. If we fail toscope our implementation projects correctly, our service margins may suffer.Implementation services are predominately billed on an hourly or daily basis(time and materials) and sometimes under fixed price contracts. Implementationservices billed on an hourly or daily basis are generally recognized as work isperformed. If we are not able to maintain the current service rates for ourtime and materials implementation services, without corresponding costreductions, or if the percentage of fixed price contracts increases and weunderestimate the costs of our fixed price contracts, our operating performancemay suffer. The rates we charge for our implementation services depend on anumber of factors, including the following:

·       perceptionsof our ability to add value through our implementation services;

·       complexityof services performed;

·       competition;

·       pricingpolicies of our competitors and systems integrators;

·       theuse of globally sourced, lower-cost service delivery capabilities within ourindustry; and

·       economic, political andmarket conditions.

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**CHANGES IN THE SIZE OR NUMBER OF OUR SOFTWARETRANSACTIONS MAY CAUSE MATERIAL FLUCTUATIONS IN OUR QUARTERLY OPERATINGRESULTS.**

The size and number of oursoftware license transactions fluctuate. Fluctuations in the size and number ofour software transactions have occurred, and may in the future occur, as aresult of changes in demand for our software and services. Losses of, or delaysin concluding, larger software transactions (which typically are more complex,take longer to negotiate and are subject to more delays) have had, and couldcontinue to have, a proportionately greater effect on our revenue and financialperformance for a particular period. We have experienced declines in the numberof software transactions of $1.0 million or greater since fiscal 2002.Specifically, we recognized 38 such software transactions in fiscal 2002, 19such software transactions in fiscal 2003, 18 such software transactions infiscal 2004, 7 such software transactions in fiscal 2005, and 5 such softwaretransactions in fiscal 2006. During the three months ended May 31, 2005,one transaction accounted for more than 10% of our consolidated revenue on aquarterly basis. As a result of these changes in the size and number of oursoftware transactions, our quarterly revenue and financial performance havefluctuated significantly and may fluctuate significantly in the future.

**OUR ANNUAL SOFTWARE LICENSE REVENUE HAS DECLINED SINCEFISCAL 2003. LOWER SOFTWARE LICENSE REVENUE HAS RESULTED AND MAY CONTINUETO RESULT IN REDUCED SERVICES AND SUPPORT REVENUE.**

Our ability to maintain orincrease services and support revenue depends on our ability to maintain orincrease the amount of software we license to customers. Since fiscal 2003, weexperienced declines in services revenue primarily as a result of decliningsoftware license revenue in prior periods. Additional decreases of softwarelicense revenue or slowdowns in licensing may have a material adverse effect onour services and support revenue in future periods.

**FURTHER DECLINES IN SOFTWARE LICENSE REVENUE, AREDUCTION IN THE RENEWAL RATE OF ANNUAL SUPPORT CONTRACTS, OR BOTH, COULDRESULT IN A MATERIAL ADVERSE EFFECT ON OUR OPERATING PERFORMANCE AND FINANCIALCONDITION.**

In multiple quartersduring fiscal years 2003 through 2006, we experienced sequential quarterlydeclines in support revenue resulting from both the decline in software licenserevenue and clients not renewing or partially renewing existing support contracts.Our support revenue includes post-contract support and the rights tounspecified software upgrades and enhancements. Support contracts are generallyrenewable annually at the option of our customers. Although we havehistorically experienced high rates of renewed annual support contracts fromour customers, if our software license revenue does not grow and if ourcustomers fail to renew or to fully renew their support contracts at historicalrates, our support revenue could materially decline.

**OUR MARKETS ARE VERY COMPETITIVE, AND WE MAY NOTBE ABLE TO COMPETE EFFECTIVELY.**

The markets for our solutions are very competitive.The intensity of competition in our markets has significantly increased in partas a result of the deterioration in our markets. We expect this intensity ofcompetition to increase in the future.

In addition, many leading companies in the business ofproviding enterprise application software have been the subject of mergers andacquisitions during the last several years. This industry consolidation mayresult in stronger competitors that are better able to compete as sole-sourcevendors for customers. The pace of consolidation has significantly increasedover the last year and may continue. If there is significant consolidation amongenterprise application software companies, we may be at a competitivedisadvantage as an independent best-of-breed enterprise application softwarevendor.

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Some competitors areoffering software that competes with ours at little or no charge as componentsof bundled products or on a stand-alone basis. To counter this increasedcompetition, we may need to make further adjustments to our business, includingreorganizing or reducing our workforce, altering our pricing and narrowing ourmarket focus and our product focus. Smaller niche software companies havedeveloped, and will likely continue to develop, unique offerings that competeeffectively with some of our solutions. Further, our current or prospectiveclients and partners may become competitors in the future.

**INCREASED COMPETITION HAS RESULTED IN, AND IN THEFUTURE COULD RESULT IN, PRICE REDUCTIONS, LOWER GROSS MARGINS, LONGER SALESCYCLES AND THE LOSS OF MARKET SHARE. EACH OF THESE DEVELOPMENTS COULD HAVE AMATERIAL ADVERSE EFFECT ON OUR OPERATING PERFORMANCE AND FINANCIAL CONDITION.MANY OF OUR CURRENT AND POTENTIAL COMPETITORS HAVE SIGNIFICANTLY GREATERRESOURCES THAN WE DO, AND THEREFORE, WE MAY BE AT A DISADVANTAGE INCOMPETING WITH THEM.**

We directly compete withother enterprise application software vendors including: Aspen Technology,DemandTec, Global Logistics Technologies (acquired by Oracle), i2 Technologies,JDA Software (recently agreed to acquire us), Logility, Manhattan Associates,ProfitLogic (acquired by Oracle), PROS Revenue Management, Rapt, Retek(acquired by Oracle), Sabre, SAP and Teradata (a division of NCR). Certain ERPvendors, in addition to SAP, all of which are substantially larger than us,have acquired or developed demand-driven and supply chain management softwarecompanies, products, or functionality or have announced intentions to developand sell demand and supply chain management solutions. Such vendors includeOracle, SAP (which recently acquired Khimetrics) and SSA Global Technologies.Some of our current and potential competitors, particularly the ERP vendors,have significantly greater financial, marketing, technical and other resourcesthan we do, as well as greater name recognition and larger installed bases ofclients. Five of our competitors, Oracle, PeopleSoft, ProfitLogic, GlobalLogistics Technologies and Retek, have combined and other of our current andpotential competitors may combine and may subsequently utilize enhancedfinancial and human resources to develop and sell more competitivedemand-driven supply chain products. These larger enterprise applicationsoftware vendors have increasingly raised concerns about our financialviability with our clients and prospects, which has contributed to delays insuccessfully closing software transactions. In addition, many of ourcompetitors have well-established relationships with our current and potentialclients and have extensive knowledge of our industry. As a result, they may beable to adapt more quickly to new or emerging technologies and changes inclient requirements or to devote greater resources to the development,promotion and sale of their products than we can. Any of these factors couldmaterially impair our ability to compete and have a material adverse effect onour operating performance and financial condition.

**IF THE DEVELOPMENT OF OUR PRODUCTS AND SERVICES FAILSTO KEEP PACE WITH OUR INDUSTRY’S RAPIDLY EVOLVING TECHNOLOGY, OUR ABILITY TOCOMPETE IN OUR MARKETS AND OUR FUTURE RESULTS MAY BE MATERIALLY ANDADVERSELY AFFECTED.**

The markets for oursolutions are subject to rapid technological change, changing client needs,frequent new product introductions and evolving industry standards. If we failto keep pace with these changes, our products and services may be rendered lesscompetitive or obsolete. Our product development and testing efforts haverequired, and are expected to continue to require, substantial investments. Wemay not possess sufficient resources in the future to continue to make furthernecessary investments in technology. If we are unable, for technological orother reasons, to develop and introduce new and enhanced software in a timelymanner, we may lose existing clients and fail to attract new clients, which mayhave a material adverse effect on our operating performance and financial condition.

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**OUR BUSINESS IS SUBJECT TO CHANGING REGULATION OFCORPORATE GOVERNANCE AND PUBLIC DISCLOSURE THAT HAS INCREASED BOTH OUR COSTSAND THE RISK OF NONCOMPLIANCE.**

Because our common stock is publicly traded, we aresubject to certain rules and regulations of federal, state and financialmarket exchange entities charged with the protection of investors and theoversight of companies whose securities are publicly traded. These entities,including the Public Company Accounting Oversight Board, the Securities andExchange Commission and The Nasdaq Stock Market, continue to develop and issueregulations and requirements in response to market concerns and laws enacted byCongress, most notably the Sarbanes-Oxley Act of 2002. Our efforts to complywith these regulations have resulted in, and are likely to continue to resultin, increased general and administrative expenses and a diversion of managementtime and attention from revenue-generating activities to compliance activities.

In particular, our effortsto comply with Section 404 of the Sarbanes-Oxley Act of 2002 and therelated regulations regarding our required assessment of our internal controlsover financial reporting and our external auditor’s audit of that assessmenthave required, and continue to require, the commitment of significant financialand managerial resources. Moreover, because these laws, regulations andstandards are subject to varying interpretations, their application in practicemay evolve over time as new guidance becomes available. This evolution mayresult in continuing uncertainty regarding compliance matters and additionalcosts necessitated by ongoing revisions to our disclosure and governancepractices.

**IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNALCONTROL OVER FINANCIAL REPORTING AND DISCLOSURE CONTROLS, WE MAY NOT BEABLE TO REPORT OUR FINANCIAL RESULTS ACCURATELY OR PREVENT FRAUD. AS A RESULT,OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE HARMED ANDINVESTORS COULD LOSE CONFIDENCE IN OUR FINANCIAL REPORTING, WHICH COULD CAUSEOUR STOCK PRICE TO DECLINE.**

Effective internalcontrols are necessary to provide reliable financial reports and effectivelyprevent fraud. We have in the past discovered, and may in the future discover,areas of our system of internal control over financial reporting and disclosurecontrols that need improvement. Any system of controls, however well designedand operated, is based in part on certain assumptions and can provide onlyreasonable, and not absolute, assurances that the objectives of the system aremet. Any failure of our system of internal control over financial reporting ordisclosure controls could have a material adverse effect on our business,results of operations and financial condition. Inadequate internal controlsover financial reporting or disclosure controls could also cause investors tolose confidence in our reported financial information, which could cause ourstock price to decline.

**OUR CONTINUED SHIFT OF OUR PRODUCT DEVELOPMENTOPERATIONS TO INDIA POSES SIGNIFICANT RISKS.**

Just over one year ago, weopened our own product development facility in Hyderabad, India. We continue tomove a substantial portion of our product development to India. In addition, wemaintain relationships with third parties in India to which we outsource aportion of our product development effort. We are increasing the proportion ofour product development work being performed at our facility in India in orderto increase product development resources and to take advantage of cost efficienciesassociated with India’s lower wage scale. We may not achieve the cost savingsand other benefits we anticipate from this program. We may not be able to findsufficient numbers of developers with the necessary skill sets in India to meetour needs. Further, we have a heightened risk exposure to changes in theeconomic, security and political conditions of India as we invest greaterresources in our India facility. Economic and political instability, militaryactions and other unforeseen occurrences in India could impair 

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ourability to develop and introduce new software applications and functionality ina timely manner, which could put our products at a competitive disadvantagewhereby we lose existing customers and fail to attract new customers.

**DEFECTS IN OUR SOFTWARE, THE IMPROPER SCOPING OF APROJECT, OR PROBLEMS IN THE IMPLEMENTATION OF OUR SOFTWARE COULD LEAD TO CLAIMSFOR DAMAGES BY OUR CLIENTS, LOSS OF REVENUE OR DELAYS IN THE MARKET ACCEPTANCEOF OUR SOLUTIONS.**

Our software is complexand must be implemented to perform within the often sophisticated and complexbusiness processes of our clients, which can make it difficult to scope theinitial project or detect errors in our software prior to implementation. Wemay not discover the existence of these problems until our customers installand use a given product or until the volume of services that a product providesincreases. In addition, when our software is installed, the technicalenvironment into which it is installed is frequently complex and typicallycontains a wide variety of systems and third-party software, with which oursoftware must be integrated. This can make the process of implementation itselfdifficult and lengthy. As a result of these factors, some customers may havedifficulty implementing our products successfully within anticipated timeframesor otherwise achieving the expected benefits. These problems may result inclaims for damages suffered by our clients, a loss of, or delays in, the marketacceptance of our solutions, client dissatisfaction and lost revenue andcollection difficulties during the period required to correct these errors.

**WE UTILIZE THIRD-PARTY SOFTWARE THAT WE INCORPORATEINTO AND INCLUDE WITH OUR PRODUCTS AND SOLUTIONS. IMPAIRED RELATIONS WITH THESETHIRD PARTIES, DEFECTS IN THIRD-PARTY SOFTWARE OR THEIR INABILITY OR FAILURE TOENHANCE THEIR SOFTWARE OVER TIME COULD HAVE A MATERIAL ADVERSE EFFECT ON OUROPERATING PERFORMANCE AND FINANCIAL CONDITION.**

We incorporate and includethird-party software into and with our products and solutions. If our relationswith any of these third parties are impaired, and if we are unable to obtain ordevelop a replacement for the software, our business could be harmed. Theoperation of our products would be impaired if errors occur in the third-partysoftware that we utilize. It may be more difficult for us to correct anydefects in third-party software because the software is not within our control.Accordingly, our business could be adversely affected in the event of anyerrors in this software. There can be no assurance that these third partieswill continue to invest the appropriate levels of resources in their productsand services to maintain and enhance the capabilities of their software.

**WE UTILIZE THIRD PARTIES TO INTEGRATE OUR SOFTWAREWITH OTHER SOFTWARE PRODUCTS AND PLATFORMS. IF ANY OF THESE THIRD PARTIESSHOULD CEASE TO PROVIDE INTEGRATION SERVICES TO US, OUR OPERATING PERFORMANCEAND FINANCIAL CONDITION COULD BE MATERIALLY ADVERSELY AFFECTED.**

We depend on companiessuch as Business Objects, Inovus, Tibco Software, Vignette, and webMethods tointegrate our software with software and platforms developed by third parties.If relations with any of these third parties are impaired, and if we are unableto secure a replacement on a timely basis, our operating performance andfinancial condition could be harmed. If these companies are unable to developor maintain software that effectively integrates with our software and is freefrom defects, our ability to license our products and provide solutions couldbe impaired and our operating performance and financial condition could beharmed. There can be no assurance that these third parties will continue toinvest the appropriate levels of resources in their products and services tomaintain and enhance their software’s capabilities. If we are unable tocontinue to license certain of this software on commercially reasonable terms,including the reporting software from Cognos and the application platform suitefrom 

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BEASystems, we may face delays in releases of certain of our software solutionsuntil equivalent technology can be identified, licensed or developed, andintegrated into our current product. These delays, if they occur, may seriouslyharm our business.

**OUR INABILITY TO DEVELOP AND SUSTAIN RELATIONSHIPSWITH VENDORS SUCH AS SOFTWARE COMPANIES, CONSULTING FIRMS, RESELLERS AND OTHERSTO MARKET AND IMPLEMENT OUR SOFTWARE PRODUCTS COULD HAVE A MATERIAL ADVERSEEFFECT ON OUR OPERATING PERFORMANCE AND FINANCIAL CONDITION.**

We are developing,maintaining and enhancing significant working relationships with complementaryvendors, such as software companies, consulting firms, resellers and othersthat we believe can play important roles in marketing our products andsolutions. We are currently investing, and intend to continue to invest,significant resources to develop and enhance these relationships, which could adverselyaffect our operating margins. We may be unable to develop relationships withorganizations that will be able to market our products effectively. Ourarrangements with these organizations are not exclusive and, in many cases, maybe terminated by either party without cause. Many of the organizations withwhich we are developing or maintaining marketing relationships have commercialrelationships with our competitors. There can be no assurance that anyorganization will continue its involvement with us and our products. The lossof relationships with such organizations could materially and adversely affectour operating performance and financial condition.

**GOVERNMENT CONTRACTS ARE SUBJECT TO COST AND OTHERAUDITS BY THE GOVERNMENT AND TERMINATIONS FOR THE CONVENIENCE OF THEGOVERNMENT. GOVERNMENT PROCUREMENT IS HIGHLY REGULATED, AND CONTRACTORS ARESUBJECT TO THE RISKS OF PROTESTS, CLAIMS, PENALTIES, FINES, DEFAULTTERMINATION, AND RESCISSION, AMONG OTHER ACTIONS. THE ADVERSE RESULT OF AGOVERNMENT AUDIT OR ACTION AGAINST ANY OF OUR CONTRACTS WITH THE GOVERNMENTCOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING PERFORMANCE AND FINANCIALCONDITION.**

***Governmentcontracts face special risks due to potential audits by government agencies.***

A significant percentage of our revenue is from timeto time derived from contracts with the Federal Government. Governmentcontractors are commonly subject to various audits and investigations byGovernment agencies. One agency that oversees or enforces contract performanceis the Defense Contract Audit Agency (“DCAA”). The DCAA generally performs areview of a contractor’s performance on its contracts, its pricing practices,costs and compliance with applicable laws, regulations and standards and toverify that costs have been properly charged to the Government. Although theDCAA completed an initial review of our accounting practices and proceduresallowing us to invoice the Government, it has yet to exercise its option toperform an audit of our actual invoicing of Government contracts. These auditsmay occur several years after completion of the contract. If an audit were toidentify significant unallowable costs, we could have a material charge to ourearnings or reduction to our cash position as a result of the audit and thiscould have a material adverse effect on our operating performance and financialcondition.

If a government audituncovers improper or illegal activities, we may be subject to civil andcriminal penalties and administrative sanctions, including termination ofcontracts, forfeiture of profits, suspension of payments, fines, and suspensionor debarment from doing business with U.S. federal government agencies. Inaddition, we could suffer serious harm to our reputation if allegations ofimpropriety were made against us, whether or not true.

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***Governmentcontracts are subject to unique risks of early termination.***

In addition, Governmentcontracts may be subject to termination by the Government for its convenience,as well as termination, reduction or modification in the event of budgetaryconstraints or any change in the Government’s requirements. If any of ourtime-and-materials or fixed-priced contracts were to be terminated for theGovernment’s convenience, we would probably receive only the purchase price foritems delivered prior to termination, reimbursement for allowable costs forwork-in-progress and an allowance for profit on the contract, or an adjustmentfor loss if completion of performance would have resulted in a loss. Governmentcontracts are also conditioned upon the continuing availability ofCongressional appropriations. Congress usually appropriates funds on afiscal-year basis, even though the contract performance may extend over manyyears. Consequently, at the outset of a program, the contract is usually onlypartially funded, and Congress must annually determine if additional funds willbe appropriated to the program. As a result, long-term contracts are subject tocancellation if appropriations for future periods become unavailable. We havenot historically experienced any significant material adverse effects as aresult of the Government’s failure to fund programs awarded to us. If theGovernment were to terminate some or all of our contracts or reduceappropriations for a program under which we have a contract, cancelappropriations, or both, our operating performance and financial conditioncould be materially and adversely affected.

***Competitivebidding, a cornerstone to government contracting, imposes risks and costs.***

From time to time wederive significant revenue from federal contracts awarded through a competitivebidding process, which can impose substantial costs upon us. We will loserevenue if we or our contracting partners (typically, prime contractors withwhom we subcontract) fail to compete effectively. Competitive bidding imposessubstantial costs and presents a number of risks, including: the need to bidbefore design is complete, bid and proposal costs, risks in estimation ofprospective needs, and bid protests that may delay or derail awards.

***Our work with othercontractors poses risks, including risks to our reputation.***

As a prime contractor, wemay rely upon other companies as subcontractors to perform work we areobligated to deliver to our government clients. A failure by one or more of oursubcontractors to perform the agreed-upon services on a timely and satisfactorybasis may compromise our ability to perform our obligations as a primecontractor. In some cases, we have limited involvement in the work performed bythe subcontractor and may have exposure as a result of problems caused by thesubcontractor. In extreme cases, performance deficiencies on the part of oursubcontractors could result in a government client terminating our contract fordefault. A default termination could expose us to liability for the agency’scosts of re-procurement, damage our reputation, and hurt our ability to competefor future contracts. Additionally, we may have disputes with oursubcontractors that could impair our ability to execute our contracts asrequired.

***Despite carefulprecautions that we take, we are exposed to risk due to potential employeemisconduct in the highly regulated government marketplace.***

We are exposed to the riskthat employee fraud or other misconduct could occur. Misconduct by employeescould include intentional failures to comply with federal governmentprocurement regulations, engaging in unauthorized activities, or falsifyingtime records. Employee misconduct could also involve the improper use of ourclients’ sensitive or classified information, which could result in regulatorysanctions against us and serious harm to our reputation. It is not alwayspossible to deter employee misconduct, and the precautions we take to preventand detect this activity may be ineffective in controlling unknown or unmanagedrisks or losses, which could harm our business.

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***The governmentmarketplace has a unique risk: that appropriations to fund contracts will notbe made, or will be diverted or delayed.***

A decline in overall U.S.government expenditures could cause a decrease in our revenue and adverselyaffect our operating performance. Defense spending levels may not continue atpresent levels, and future levels of expenditures and authorizations forexisting programs may decline, remain constant, or shift to agencies orprograms in areas where we do not currently have contracts. A significantdecline in defense expenditures, or a shift in expenditures away from agenciesor programs that we support, could cause a material decline in ourgovernment-related revenue.

***Federal contractsare subject to unique terms and risks, not commonly found in the commercialmarketplace.***

Federal governmentcontracts contain provisions and are subject to laws and regulations thatprovide government clients with rights and remedies not typically found incommercial contracts. These rights and remedies allow government clients, amongother things, to:

·       terminateexisting contracts for convenience, as well as default;

·       reduceor modify contracts or subcontracts, often unilaterally;

·       terminatesecurity clearances and thereby prevent classified contracting;

·       cancelmulti-year contracts and related orders if funds for contract performance forany subsequent years become unavailable;

·       declineto exercise options to renew multi-year contracts;

·       claimrights in certain products, systems, and technology produced by us;

·       prohibitfuture awards based on a finding of an organizational conflict of interest;subject contract awards to protest; and

·       suspend or debarcontractors.

***Our federalcontracts pose unique pricing risks.***

Much of our federalcontracting is done through a type of special contract, sponsored by the U.S.General Services Administration (GSA), known as the “Multiple Award Schedules”(or simply “Schedules”) contract. Our GSA Schedules contract, like all others,includes a clause known as the “Price Reductions” clause; the terms of thatclause are analogous to a “most favored customer” clause in commercialcontracts. Under that clause, we have agreed that the prices to the governmentunder the GSA Schedules contract will maintain a constant relationship to theprices charged to certain commercial customers, i.e., when prices to thosebenchmark customers drop, so too must our prices on our GSA Schedules contract.Although we have undertaken extensive efforts to comply with the PriceReductions clause, it is possible that we, through, for example, an unreporteddiscount offered to a “benchmark” customer, might fail to honor the obligationsof the Price Reductions clause. If that occurred, we could, under certaincircumstances, be subject to an audit, an action in fraud, or other adversegovernment actions or penalties.

**THE LIMITED ABILITY OF LEGAL PROTECTIONS TO SAFEGUARDOUR INTELLECTUAL PROPERTY RIGHTS COULD IMPAIR OUR ABILITY TO COMPETEEFFECTIVELY.**

Our success and ability tocompete are substantially dependent on our internally developed technologiesand trademarks, which we protect through a combination of confidentialityprocedures and agreements, contractual provisions, patent, copyright, trademarkand trade secret laws. Despite our efforts to protect our proprietary rights,unauthorized parties may copy aspects of our products or obtain and use 

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informationthat we regard as proprietary. The shift of an increasing amount of our productdevelopment work to India may increase this risk. Policing unauthorized use ofour products is difficult, particularly in certain foreign countries,including, among others, India and The People’s Republic of China. We areunable to determine the extent to which piracy of our software products exists.In addition, the laws of some foreign countries do not protect our proprietaryrights to the same extent as the laws of the U.S. In addition, our competitorsmay independently develop technology similar to ours.

**OUR PRODUCTS MAY INFRINGE UPON THE INTELLECTUALPROPERTY RIGHTS OF OTHERS, WHICH MAY CAUSE US TO INCUR UNEXPECTED COSTS ORPREVENT US FROM SELLING OUR PRODUCTS.**

The number of intellectual property claims in ourindustry may increase as the number of competing products grows and thefunctionality of products in different industry segments overlaps. In recentyears, there has been a tendency by software companies to file substantiallyincreasing numbers of patent applications, including those for business methodsand processes. We have no way of knowing what patent applications third partieshave filed until the application is published or until a patent is issued.Patent applications are often published within 18 months of filing, but it cantake as long as three years or more for a patent to be granted after anapplication has been filed. In addition, we license our software to ourcustomers under software license agreements, which generally provide thecustomer with limited indemnifications against damages, judgments, andreasonable costs and expenses incurred by the customer for any claim or suitbased on infringement of a trademark or copyright as a result of the customer’suse of the software.

Although we are not awarethat any of our products infringe upon the proprietary rights of any thirdparties, there can be no assurance that third parties will not claiminfringement by us with respect to current or future products. Any intellectualproperty claims, with or without merit, could be time-consuming to address,result in costly litigation, cause product shipment delays or may require us toenter into royalty or license agreements which may not be available on termsacceptable to us or at all. Accordingly, any claims of this nature may have amaterial adverse effect on the Company’s business, operating performance,financial condition or cash flows.

**OUR INTERNATIONAL OPERATIONS POSE RISKS FOR OURBUSINESS AND FINANCIAL CONDITION.**

We currentlyconduct international operations primarily in Europe and the Asia-Pacificregion. We also have operations in Brazil, Canada and Mexico. More recently, weopened a product development center in India, where we also have relationshipswith third parties to outsource a portion of our implementation serviceseffort. We intend to expand our international operations and to increase theproportion of our revenue from outside the U.S. These operations requiresignificant management attention and financial resources and additionallysubject us to risks inherent in doing business internationally, such as:

·       failureto properly comply with foreign laws and regulations applicable to our foreignactivities;

·       failureto properly comply with U.S. laws and regulations relating to the export of ourproducts and services;

·       difficultiesin managing foreign operations and appropriate levels of staffing;

·       foreigncurrency exposure;

·       longercollection cycles;

·       tariffsand other trade barriers;

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·       seasonalreductions in business activities, particularly throughout Europe;

·       propercompliance with local tax laws which can be complex and may result inunintended adverse tax consequences;

·       anti-Americansentiment due to the war with Iraq and other American policies that may beunpopular in certain countries; and

·       increasingpolitical instability, adverse economic conditions and the potential for war orother hostilities in many of these countries.

Our failure to properlycomply with or address any of the above factors could adversely affect thesuccess of our international operations and could have a material adverseeffect on our operating performance and financial condition.

**CHANGES IN THE VALUE OF THE U.S. DOLLAR, IN RELATIONTO THE CURRENCIES OF FOREIGN COUNTRIES WHERE WE TRANSACT BUSINESS, COULD HARMOUR OPERATING PERFORMANCE AND FINANCIAL CONDITION.**

For the fiscal years endedFebruary 28th or 29th, 2006, 2005 and 2004, approximately 35.5%, 33.8% and34.0% of our total revenue was derived from outside the U.S, respectively. Ourinternational revenue and expenses are denominated in foreign currencies,typically the local currency of the selling business unit. Therefore, changesin the value of the U.S. Dollar as compared to these other currencies mayadversely affect our operating results. We generally do not implement hedgingprograms to mitigate our exposure to currency fluctuations affecting internationalaccounts receivable, cash balances and intercompany accounts, and we do nothedge our exposure to currency fluctuations affecting future internationalrevenue and expenses and other commitments. For the foregoing reasons, currencyexchange rate fluctuations have caused, and likely will continue to cause,variability in our foreign currency denominated revenue streams and costs andour cost to settle foreign currency denominated liabilities, which could have amaterial adverse effect on our operating performance and financial condition.

**WE MAY BE SUBJECT TO FUTURE LIABILITY CLAIMS, ANDTHE REPUTATIONS OF OUR COMPANY AND PRODUCTS MAY SUFFER.**

Many of ourimplementations involve projects that are critical to the business operationsof our clients and provide benefits to the client which may be difficult toquantify. Any failure in a client’s system could result in a claim forsubstantial damages against us, regardless of our responsibility for thefailure. We have entered into and plan to continue to enter into agreementswith software vendors, consulting firms, resellers and others whereby theymarket and implement our solutions. If these vendors fail to meet theirclients’ expectations or cause failures in their clients’ systems, ourreputation and that of our products could be materially and adversely affectedeven if our software products perform in accordance with their functionalspecifications.

**WE MAY CHOOSE TO CHANGE OUR BUSINESS PRACTICES OROUR EARNINGS MAY BE AFFECTED AS A RESULT OF CHANGES IN THE REQUIREMENTSRELATING TO THE ACCOUNTING TREATMENT OF EMPLOYEE STOCK OPTIONS.**

Generally accepted accounting principles in the U.S.are subject to interpretation by the Financial Accounting Standards Board, orFASB, the American Institute of Certified Public Accountants, the PublicCompany Accounting Oversight Board, the Securities and Exchange Commission, andvarious bodies formed to promulgate and interpret appropriate accountingprinciples. A change in these principles or interpretations could have asignificant effect on our reported financial results, and could affect thereporting of transactions completed before the implementation of a newaccounting principle.

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We currently account for stock options in accordancewith Accounting Principles Board Opinion No. 25 “*Accountingfor Stock Issued to Employees*” (“APB 25”) and, accordingly, we onlyrecord compensation expense related to stock options if the current marketprice of the underlying stock exceeds the exercise price of the stock option onthe date of grant. On December 16, 2004, the FASB published FASB StatementNo. 123 (R) “*Share-Based Payment*”(“SFAS 123(R)”), which was to be effective for public companies in periodsbeginning after June 15, 2005. On April 14, 2005, The Securities andExchange Commission announced the adoption of a new rule that amends thecompliance dates for SFAS 123(R). The new rule allows companies toimplement SFAS 123(R) at the beginning of their next fiscal year insteadof their next reporting period beginning after June 15, 2005. We will berequired to implement SFAS 123(R) beginning in the first quarter offiscal 2007. Our earnings in fiscal 2007 could be significantly reduced as aresult of changing our accounting policy in accordance with SFAS 123(R). As a result,we could decide to reduce the number of stock options granted to employees orto grant options to fewer employees. This could affect our ability to retainexisting employees or attract qualified candidates, and increase the need toextend additional cash compensation we pay to employees. Such a change couldhave a material effect on our operating performance.

In 2003, our Board ofDirectors and shareholders approved an amendment to our 1998 stock option planto allow for the issuance of restricted shares of our common stock to itsemployees. The Company recorded $1.7 million, $1.2 million and $0.3 million innet compensation expense related to restricted shares outstanding during fiscal2006, 2005 and 2004, respectively.

**IT MAY BECOME INCREASINGLY EXPENSIVE TO OBTAINAND MAINTAIN INSURANCE.**

We obtain insurance tocover a variety of potential risks and liabilities. In the current market,insurance coverage has become more restrictive, and when insurance coverage isoffered, the deductible for which we are responsible is larger and premiumshave increased substantially. As a result, it may become more difficult tomaintain insurance coverage at historical levels, or if such coverage isavailable, the cost to obtain or maintain it may increase substantially. Thismay result in our being forced to bear the burden of an increased portion ofrisks for which we have traditionally been covered by insurance, which couldhave a material effect on our operating performance and financial condition.

***RISKS RELATED TO OUR COMMON STOCK***

**OUR STOCK PRICE HAS BEEN AND IS LIKELY TO CONTINUE TOBE VOLATILE. SIGNIFICANT DECLINES IN OUR STOCK PRICE MAY RESULT FORVARIOUS REASONS, INCLUDING POOR FINANCIAL PERFORMANCE.**

The trading priceof our common stock has been and is likely to be volatile. Our stock price hasbeen and could continue to be subject to wide fluctuations in response to avariety of factors, including the following:

·       actualor anticipated variations in quarterly revenue and operating results andcontinuing losses;

·       corporateand consumer confidence in the economy, evidenced in part, by stock marketlevels;

·       changesin the size or number of our software transactions;

·       announcementsof technological innovations;

·       newproducts or services offered by us or our competitors;

·       changesin financial estimates and ratings by securities analysts;

·       changesin the performance, market valuations, or both, of our current and potentialcompetitors and the software industry in general;

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·       ourannouncement or a competitor’s announcement of significant acquisitions,strategic partnerships, joint ventures or capital commitments;

·       adoptionof industry standards and the inclusion of our technology in, or compatibilityof our technology with, such standards;

·       adverseor unfavorable publicity about us, or our products, services orimplementations;

·       adverseor unfavorable publicity regarding our competitors, including their productsand implementations;

·       additionsor departures of key personnel;

·       salesor anticipated sales of additional debt or equity securities; and

·       otherevents or factors that may be beyond our control.

In addition, the stock markets in general, The NasdaqNational Market and the equity markets for software companies in particular,have experienced extraordinary price and volume volatility in recent years.Such volatility has adversely affected the stock prices for many companiesirrespective of, or disproportionately to, the operating performance of thesecompanies. These broad market and industry factors may materially and adverselyfurther affect the market price of our common stock, regardless of our actualoperating performance.

On April 24, 2006, weentered into a definitive Agreement and Plan of Merger with JDA and the MergerSub. Under the Merger Agreement, the Merger Sub will be merged with and intothe Company, with the Company continuing after the Merger as a wholly-ownedsubsidiary of JDA. From April 24, 2006 through May 8, 2006, the pershare closing prices for our common stock as reported by Nasdaq were between $2.36and $2.45. If the Merger is not consummated, our stock price may decline to theextent that the current market price reflects an assumption that the mergerwill be completed.

**OUR CHARTER, BYLAWS AND SHAREHOLDER RIGHTS PLAN,DELAWARE LAW AND THE INDENTURE FOR THE NOTES CONTAIN PROVISIONS THAT COULDDISCOURAGE A TAKEOVER EVEN IF BENEFICIAL TO SHAREHOLDERS. IN ADDITION, CERTAINOF OUR CURRENT OFFICERS, DIRECTORS, AND AN ENTITY AFFILIATED WITH A DIRECTORTOGETHER MAY BE ABLE TO EXERCISE SUBSTANTIAL INFLUENCE OVER MATTERSREQUIRING SHAREHOLDER APPROVAL.**

Our charter and our bylaws, in conjunction withDelaware law, contain provisions that could make it more difficult for a thirdparty to obtain control of our Company even if doing so would be beneficial toshareholders. For example, our bylaws provide for a classified board ofdirectors and allow our board of directors to expand its size and fill anyvacancies without shareholder approval. Furthermore, our board has theauthority to issue preferred stock and to designate the voting rights, dividendrate and privileges of the preferred stock, all of which may be greater thanthe rights of common shareholders. Additionally, upon a change of control ofour Company, the holders of the Notes would have the right to require us or oursuccessor to repurchase the Notes at a purchase price equal to 100% of theprincipal amount, plus accrued and unpaid interest to the date of repurchase incash. This could make it more difficult for a third party to obtain control ofus even if doing so would be beneficial to shareholders.

On October 28, 2004, we adopted a shareholderrights plan that entitles our shareholders to rights to acquire shares of our Series AJunior Participating Preferred Stock generally when a third party acquirestwenty percent or more of the outstanding shares of our common stock orcommences a tender offer or exchange offer for twenty percent or more of theoutstanding shares of our common stock. The shareholder rights plan coulddelay, deter or prevent an investor from acquiring us in a transaction thatshareholders may consider favorable, including transactions in whichshareholders might otherwise receive 

32

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a premium over theirshares. In connection with the Merger Agreement, on April 24, 2006, theCompany entered into an amendment to the Rights Agreement between the Companyand Computershare Trust Company, N.A. (formerly Equiserve Trust Company N.A.)As a result of the amendment, the preferred stock purchase rights issued underthe Rights Agreement will be inapplicable to the Merger, the Merger Agreement,the Voting Agreements and the transactions contemplated by the Merger Agreementand the Voting Agreements. The execution, delivery, consummation or performanceof the Merger Agreement, the Voting Agreements and the transactionscontemplated thereby will not cause the rights to separate from shares ofCompany Common Stock or permit the Company’s stockholders to exercise therights. In addition, the rights will expire immediately upon the effective timeof the Merger.

In addition, our current officers, directors, andWarburg Pincus Private Equity VIII, L.P. (“WP VIII”) an entity affiliated withWilliam H. Janeway, one of our directors, together beneficially ownedapproximately 23.8% of the outstanding shares of our common stock at February 28,2006. While these shareholders do not hold a majority of our outstanding commonstock, if they were to vote together, they may be able to exercise significantinfluence over matters requiring shareholder approval, including the electionof directors and the approval of mergers, consolidations and sales of ourassets. This factor may prevent or discourage tender offers for our commonstock.

In order to facilitate theconsummation of the transactions contemplated by the Merger Agreement, JDAentered into the Voting Agreements, pursuant to which certain of ourstockholders will vote (or cause to be voted) in person or by proxy all sharesof our common stock held by them (i) in favor of the adoption of theMerger Agreement and approval of the transactions contemplated thereby, (ii) againstany proposal made in opposition to or competition with the consummation of theMerger and the Merger Agreement, (iii) against any proposal that wouldreasonably lead to or result in the conditions of JDA’s or Merger Sub’sobligations under the Merger Agreement not being fulfilled, (iv) againstany takeover proposal from any party other than JDA or an affiliate of JDA, and(v) against the election of a group of individuals to replace a majorityor more of the individuals presently on the Company’s Board. The stockholdersthat signed the Voting Agreements beneficially own approximately 24% of ouroutstanding shares of common stock as of April 24, 2006 and includecertain of our officers and directors and entities affiliated with them. If theMerger Agreement is terminated for any reason, the Voting Agreements will alsoterminate. The foregoing description of the Voting Agreements is not completeand is qualified in its entirety by reference to the form of Voting Agreement,which is filed as Exhibit 99.3 to the Company’s Current Report on Form 8-Kdated April 25, 2006 and is incorporated herein by reference.

**FUTURE SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMONSTOCK COULD CAUSE OUR STOCK PRICE TO DECLINE.**

Sales of substantialamounts of our common stock in the public market, or the perception that suchsales may occur, could cause the market price of our common stock to decline.Our current officers, directors, and WP VIII, together beneficially owned approximately23.8% of the outstanding shares of our common stock at February 28, 2006.Pursuant to the Voting Agreements, our current officers, directors and WP VIIIagreed not to directly or indirectly sell, assign, transfer, pledge, encumberor otherwise dispose of their shares of our common stock or enter into anyarrangement or understanding with respect to such a sale, assignment, transfer,pledge, encumbrance or disposition. These restrictions in the Voting Agreementsterminate if the Merger Agreement is terminated.

**Item 1B.   UNRESOLVEDSTAFF COMMENTS.**

None.

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**Item 2.   PROPERTIES.**

Our principal sales, marketing, product development,support and administrative facilities are located in Rockville, MD, where welease approximately 280,000 square feet of office space under a lease agreementwhich expires on June 30, 2012. Approximately 38% of this office space hasbeen abandoned through our exit and disposal plans (See Note 14 to theConsolidated Financial Statements included elsewhere in this Annual Report on Form 10-K).Approximately 26% of our corporate headquarters space is subleased.

In addition, we leaseoffice space for our 16 sales, service and product development offices locatedin North America, South America, Europe and Asia-Pacific, pursuant to leases thatexpire between calendar 2006 and calendar 2018. We believe that our currentfacilities are adequate for our current needs and suitable additional orsubstitute space will be available as needed to accommodate any futureexpansion of our operations. We continue to market office space that has beenabandoned in conjunction with exit and disposal plans implemented by theCompany. Please refer to Note 8 and Note 14 in the Notes to ConsolidatedFinancial Statements included elsewhere in this Annual Report on Form 10-Kfor information regarding our lease obligations and exit and disposal plans.

**Item 3.   LEGALPROCEEDINGS.**

We are involved from timeto time in disputes and other litigation in the ordinary course of business. Wehave established accruals related to such matters that are probable andreasonably estimable. We do not believe that the outcome of any pendingdisputes or litigation will have a material adverse effect on our business,operating results, financial condition and cash flows. However, the ultimateoutcome of these matters, as with dispute resolution and litigation generally,is inherently uncertain, and it is possible that some of these matters may beresolved adversely to us. The adverse resolution of any one or more of thesematters could have a material adverse effect on our business, operatingresults, financial condition and cash flows.

**Item 4.    SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.**

None.

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**PART II**

**Item 5.**                        MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES.

Our common stock, $.002****par value per share, trades on The NASDAQ National Marketunder the symbol “MANU”. The following table sets forth the high and low salesprices in dollars per share for the respective quarterly periods over the lasttwo fiscal years, as reported in published financial sources. These pricesreflect inter-dealer prices, without retail markup, markdown or commission andmay not necessarily represent actual transactions.

| **Fiscal 2006**                           | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter  (ended May 31, 2005)       |       | $          | 2.20       |     | $          | 1.38    |       |
| Second Quarter  (ended August 31, 2005)   |       | $          | 2.38       |     | $          | 1.61    |       |
| Third Quarter  (ended November 30, 2005)  |       | $          | 2.30       |     | $          | 1.66    |       |
| Fourth Quarter  (ended February 28, 2006) |       | $          | 2.14       |     | $          | 1.63    |       |

 

| **Fiscal 2005**                           | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter  (ended May 31, 2004)       |       | $          | 7.34       |     | $          | 4.25    |       |
| Second Quarter  (ended August 31, 2004)   |       | $          | 4.20       |     | $          | 2.21    |       |
| Third Quarter  (ended November 30, 2004)  |       | $          | 2.88       |     | $          | 2.20    |       |
| Fourth Quarter  (ended February 28, 2005) |       | $          | 3.07       |     | $          | 1.80    |       |

 

As of April 30, 2006, there were approximately399 stockholders of record of our common stock, according to informationprovided by our transfer agent.

We have never declared or paid any cash dividends onour common stock and do not intend to do so in the foreseeable future. It isour present intention to retain any future earnings to provide funds for theoperation, and expansion of our business and to retire debt. In addition, wehave a two-year unsecured revolving credit facility with SVB that is scheduledto expire on March 29, 2007. If the Merger is not consummated prior to theexpiration date of this credit facility, we intend to renew this creditfacility before it expires. During the term of the credit facility, we aresubject to a covenant not to declare or pay cash dividends to holders of ourcommon stock under certain conditions. Future payment of cash dividends, ifany, will be at the discretion of the Board and will depend upon our financialcondition, results of operations, capital requirements and such other factorsas the Board may deem relevant and will be subject to the covenants containedin any outstanding credit facility. The Merger Agreement also prohibits us fromdeclaring or paying any cash dividends without JDA’s consent. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources” and Note 7 in the Notes to ConsolidatedFinancial Statements included elsewhere in this Annual Report on Form 10-K.

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The following tableprovides information regarding our current equity compensation plans as ofFebruary 28, 2006. Share amounts are in thousands.

**Equity CompensationPlan Information**

| **Plan Category**                                      | ** ** | ** ** | ** ** | **Number of securities to be  issued upon exercise of  outstanding options** | ** ** | **Weighted-average  exercise price of  outstanding options** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**    | ** ** | **(b)**                                                                                                              | ** ** | **(c)**                                                                     | ** ** |
| Equity  compensation plans approved by security holders     |       |       | 10,739     |                                                                                                                 |       |                                                                        | $          | 4.79                                                                                                                                                                                                             |       |   |   | 4,801 |   |   |
| Equity  compensation plans not approved by security holders |       |       | 196        |                                                                                                                 |       |                                                                        | 14.86      |                                                                                                                                                                                                             |       |   | — |   |   |
| Total                                                       |       |       | 10,935     |                                                                                                                 |       |                                                                        | $          | 5.84                                                                                                                                                                                                             |       |   |   | 4,801 |   |   |

 

Additional information regarding our equitycompensation plans can be found in Note 9 in the Notes to ConsolidatedFinancial Statements included elsewhere in this Annual Report on Form 10-K.

In fiscal 2004, theCompany issued 9,725,750 shares of its common stock in exchange for $74.5 millionof Notes in privately negotiated transactions with note holders in reliance onthe exemption from registration set forth in Section 3(a)(9) of theSecurities Act.

36

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**Item 6. SELECTEDFINANCIAL DATA.**

Our selected consolidatedfinancial data for each of the five fiscal years in the period endedFebruary 28, 2006 and each of our last eight fiscal quarters is set forthbelow. This data should be read in conjunction with our Consolidated FinancialStatements and related notes thereto and “Management’s Discussion and Analysisof Financial Condition and Results of Operations” included elsewhere in thisAnnual Report on Form 10-K. The selected financial data for each ofthe years in the three-year period ended February 28, 2006, and as ofFebruary 28, 2006 and February 28, 2005, are derived from theConsolidated Financial Statements that have been included in this Annual Reporton Form 10-K. The selected financial data as of February 28 or29, 2004, 2003 and 2002, the years ended February 28, 2003 and 2002, andin each of our last eight fiscal quarters are derived from the ConsolidatedFinancial Statements that have not been included in this Annual Report onForm 10-K.

| ** **                                            | ** ** | **Fiscal year ended February 28 or 29,**                                         | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                                                                                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                            | ** ** | **(in thousands, except per share and number of employees data)** | ** ** |
| STATEMENT OF  OPERATIONS DATA:                        |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Revenue:                                              |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Software license                                      |       | $                                                                                                              | 27,480     |   | 36,203 |   | $ | 73,766 |   | $ | 74,899 |   | $ | 129,772 |   |
| Support                                               |       | 86,493                                                                                                         |       | 84,050 |   | 86,593 |   | 84,075 |   | 73,852 |   |
| Services                                              |       | 56,121                                                                                                         |       | 64,933 |   | 73,254 |   | 102,144 |   | 106,522 |   |
| Reimbursed expenses                                   |       | 6,098                                                                                                          |       | 7,920 |   | 9,432 |   | 11,268 |   | 9,741 |   |
| Total revenue                                         |       | 176,192                                                                                                        |       | 193,106 |   | 243,045 |   | 272,386 |   | 319,887 |   |
| Operating expenses:                                   |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Cost of revenue:                                      |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Cost of software license                              |       | 14,900                                                                                                         |       | 14,213 |   | 15,851 |   | 19,127 |   | 21,144 |   |
| Amortization of acquired technology                   |       | 5,678                                                                                                          |       | 13,207 |   | 14,210 |   | 13,623 |   | 9,168 |   |
| Cost of services and support                          |       | 60,846                                                                                                         |       | 73,694 |   | 80,306 |   | 98,055 |   | 92,083 |   |
| Cost of reimbursed expenses                           |       | 6,098                                                                                                          |       | 7,920 |   | 9,432 |   | 11,268 |   | 9,741 |   |
| Sales and  marketing                                  |       | 38,556                                                                                                         |       | 52,662 |   | 66,061 |   | 95,627 |   | 120,437 |   |
| Product  development                                  |       | 27,517                                                                                                         |       | 32,404 |   | 36,233 |   | 63,055 |   | 70,477 |   |
| General and  administrative                           |       | 19,876                                                                                                         |       | 22,110 |   | 25,060 |   | 27,885 |   | 28,522 |   |
| Amortization of  intangibles                          |       | 5,753                                                                                                          |       | 6,648 |   | 4,674 |   | 3,866 |   | 86,279 |   |
| Goodwill impairment  charge                           |       | —                                                                                                         |       | — |   | — |   | 96,349 |   | — |   |
| Asset impairment  charge                              |       | 3,733                                                                                                          |       | — |   | — |   | — |   | — |   |
| Purchased  research and development                   |       | —                                                                                                         |       | — |   | — |   | 3,800 |   | — |   |
| Exit and disposal  activities                         |       | 3,299                                                                                                          |       | 17,312 |   | 18,627 |   | 19,184 |   | 6,612 |   |
| Non-cash stock  option compensation expense (benefit) |       | —                                                                                                         |       | 168 |   | 1,799 |   | 3,426 |   | (3,111 | ) |
| IRI settlement                                        |       | —                                                                                                         |       | — |   | — |   | — |   | 3,115 |   |
| Total operating expenses                              |       | 186,256                                                                                                        |       | 240,338 |   | 272,253 |   | 455,265 |   | 444,467 |   |
| Loss from operations                                  |       | (10,064                                                                                                        | )          | (47,232 | ) | (29,208 | ) | (182,879 | ) | (124,580 | ) |
| Debt conversion  expense                              |       | —                                                                                                         |       | — |   | (59,823 | ) | — |   | — |   |
| Other expense,  net                                   |       | (5,789                                                                                                         | )          | (7,314 | ) | (13,455 | ) | (7,942 | ) | (14,638 | ) |
| Loss before  income taxes                             |       | (15,853                                                                                                        | )          | (54,546 | ) | (102,486 | ) | (190,821 | ) | (139,218 | ) |
| (Benefit from)  provision for income taxes            |       | (3,610                                                                                                         | )          | 725 |   | 1,314 |   | 21,418 |   | (24,060 | ) |
| Net loss                                              |       | $                                                                                                              | (12,243    | ) | $ | (55,271 | ) | $ | (103,800 | ) | $ | (212,239 | ) | $ | (115,158 | ) |
| Basic and diluted loss  per share                     |       | $                                                                                                              | (0.15      | ) | $ | (0.67 | ) | $ | (1.43 | ) | $ | (3.04 | ) | $ | (1.69 | ) |

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| BALANCE SHEET AND  OTHER DATA:                                                   |   |    |    |    |   |    |   |    |    |    |   |
|----------------------------------------------------------------------------------|--------|---------|---------|---------|--------|---------|--------|---------|---------|---------|--------|
| Cash, cash  equivalents and marketable securities                                |   | $       | 140,727 |    | $      | 129,978 |   | $       | 146,300 |    | $      | 137,735 |   | $ | 233,060 |   |
| Working capital                                                                  |   | 120,773 |    | 105,533 |   | 128,090 |   | 122,791 |    | 237,751 |   |
| Long-term  investments                                                           |   | —  |    | 5,911   |   | 8,999   |   | —  |    | —  |   |
| Goodwill                                                                         |   | 185,818 |    | 185,658 |   | 185,501 |   | 187,438 |    | 269,998 |   |
| Acquired  technology and customer relationships, net of accumulated amortization |   | 7,987   |    | 23,151  |   | 43,007  |   | 61,889  |    | 54,206  |   |
| Total assets                                                                     |   | 413,311 |    | 440,280 |   | 498,081 |   | 529,373 |    | 722,640 |   |
| Convertible debt                                                                 |   | 175,500 |    | 175,500 |   | 175,500 |   | 250,000 |    | 250,000 |   |
| Total  stockholders’ equity                                                 |   | 153,923 |    | 164,746 |   | 216,860 |   | 172,082 |    | 372,807 |   |
| Cash flows from  operating activities                                            |   | 14,524  |    | (5,505  | )      | 6,825   |   | (30,675 | )       | (15,899 | )      |
|                                                                                  |        |         |         |         |        |         |        |         |         |         |        |  |  |  |  |  |

 

| **Fiscal 2006**                                               | ** ** | ** **                                                         | ** ** | **1st Quarter** | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                         | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenue:                                                           |       |                                                               |       |                 |       |                 |       |                 |       |                 |       |   |   |   |   |   |   |
| Software license                                                   |       |                                                               | $          | 8,391                |       |                 |       | $                    | 5,068      |                 |       |   | $ | 4,093 |   |   |   | $ | 9,928 |   |   |
| Support                                                            |       |                                                               | 21,815     |                 |       |                 | 21,755     |                 |       |                 | 21,099     |   |   |   | 21,824 |   |   |
| Services                                                           |       |                                                               | 14,681     |                 |       |                 | 15,259     |                 |       |                 | 13,184     |   |   |   | 12,997 |   |   |
| Reimbursed expenses                                                |       |                                                               | 1,770      |                 |       |                 | 1,567      |                 |       |                 | 1,548      |   |   |   | 1,213 |   |   |
| Total revenue                                                      |       |                                                               | 46,657     |                 |       |                 | 43,649     |                 |       |                 | 39,924     |   |   |   | 45,962 |   |   |
| Cost of software license                                           |       |                                                               | 4,468      |                 |       |                 | 3,114      |                 |       |                 | 3,599      |   |   |   | 3,719 |   |   |
| Cost of services  and support                                      |       |                                                               | 15,388     |                 |       |                 | 16,244     |                 |       |                 | 14,526     |   |   |   | 14,688 |   |   |
| Cost of  reimbursed expenses                                       |       |                                                               | 1,770      |                 |       |                 | 1,567      |                 |       |                 | 1,548      |   |   |   | 1,213 |   |   |
| Sales and  marketing                                               |       |                                                               | 11,208     |                 |       |                 | 8,313      |                 |       |                 | 9,321      |   |   |   | 9,714 |   |   |
| Product  development                                               |       |                                                               | 7,498      |                 |       |                 | 7,956      |                 |       |                 | 6,523      |   |   |   | 5,540 |   |   |
| General and  administrative                                        |       |                                                               | 5,268      |                 |       |                 | 5,054      |                 |       |                 | 4,173      |   |   |   | 5,381 |   |   |
| Exit and disposal  activities, and acquisition-related expenses(1) |       |                                                               | 4,081      |                 |       |                 | 8,514      |                 |       |                 | 3,856      |   |   |   | 2,012 |   |   |
| Operating (loss) income                                            |       |                                                               | (3,024     | )                    |       |                 | (7,113     | )                    |       |                 | (3,622     | ) |   |   | 3,695 |   |   |
| Net (loss) income                                                  |       |                                                               | (4,916     | )                    |       |                 | (6,118     | )                    |       |                 | (4,644     | ) |   |   | 3,435 |   |   |
| Basic (loss) earnings per share                                    |       |                                                               | $          | (0.06                | )          |                 |       | $                    | (0.07      | )                    |       |   | $ | (0.06 | ) |   |   | $ | 0.04 |   |   |
| Diluted (loss) earnings  per share                                 |       |                                                               | $          | (0.06                | )          |                 |       | $                    | (0.07      | )                    |       |   | $ | (0.06 | ) |   |   | $ | 0.04 |   |   |

 

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| **Fiscal 2005**                                               | ** ** | ** **                                                         | ** ** | **1st Quarter** | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                         | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenue:                                                           |       |                                                               |       |                 |       |                 |       |                 |       |                 |       |   |   |   |   |   |   |
| Software license                                                   |       |                                                               | $          | 10,368               |       |                 |       | $                    | 11,111     |                 |       |   | $ | 6,664 |   |   |   | $ | 8,060 |   |   |
| Support                                                            |       |                                                               | 21,421     |                 |       |                 | 21,296     |                 |       |                 | 20,666     |   |   |   | 20,667 |   |   |
| Services                                                           |       |                                                               | 17,558     |                 |       |                 | 16,374     |                 |       |                 | 16,159     |   |   |   | 14,842 |   |   |
| Reimbursed expenses                                                |       |                                                               | 2,236      |                 |       |                 | 2,481      |                 |       |                 | 1,556      |   |   |   | 1,647 |   |   |
| Total revenue                                                      |       |                                                               | 51,583     |                 |       |                 | 51,262     |                 |       |                 | 45,045     |   |   |   | 45,216 |   |   |
| Cost of software license                                           |       |                                                               | 3,914      |                 |       |                 | 3,422      |                 |       |                 | 3,525      |   |   |   | 3,352 |   |   |
| Cost of support  and services                                      |       |                                                               | 18,190     |                 |       |                 | 19,040     |                 |       |                 | 18,391     |   |   |   | 18,073 |   |   |
| Cost of  reimbursed expenses                                       |       |                                                               | 2,236      |                 |       |                 | 2,481      |                 |       |                 | 1,556      |   |   |   | 1,647 |   |   |
| Sales and  marketing                                               |       |                                                               | 15,240     |                 |       |                 | 15,225     |                 |       |                 | 11,387     |   |   |   | 10,810 |   |   |
| Product  development                                               |       |                                                               | 8,328      |                 |       |                 | 8,566      |                 |       |                 | 8,257      |   |   |   | 7,253 |   |   |
| General and  administrative                                        |       |                                                               | 6,014      |                 |       |                 | 6,006      |                 |       |                 | 5,250      |   |   |   | 4,840 |   |   |
| Exit and disposal  activities, and acquisition-related expenses(1) |       |                                                               | 2,811      |                 |       |                 | 11,478     |                 |       |                 | 8,139      |   |   |   | 14,907 |   |   |
| Operating loss                                                     |       |                                                               | (5,150     | )                    |       |                 | (14,956    | )                    |       |                 | (11,460    | ) |   |   | (15,666 | ) |   |
| Net loss                                                           |       |                                                               | (7,733     | )                    |       |                 | (17,114    | )                    |       |                 | (13,268    | ) |   |   | (17,156 | ) |   |
| Basic and diluted  loss per share                                  |       |                                                               | $          | (0.09                | )          |                 |       | $                    | (0.21      | )                    |       |   | $ | (0.16 | ) |   |   | $ | (0.21 | ) |   |

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(1)          Exitand disposal activities and acquisition-related expenses includes amortizationof intangibles and acquired technology, non-cash stock-option compensationexpense and exit and disposal activities.

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**Item 7.**                        MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS.

**Forward-LookingStatements**

***The followingdiscussion and analysis of our financial condition and results of operationsshould be read in conjunction with the Consolidated Financial Statements andthe related notes and other financial information included elsewhere in thisAnnual Report on Form 10-K. The discussion and analysis containsforward-looking statements which are made in reliance upon safe harborprovisions of the Private Securities Litigation Reform Act of 1995. Our actualresults may differ materially from those anticipated in these forward-lookingstatements and other forward-looking statements made elsewhere in this AnnualReport on Form 10-K as a result of specified factors, includingthose set forth in Item 1A-Risk Factors.***

**Executive Summary**

Our Consolidated FinancialStatements are included in Item 15 of this Annual Report on Form 10-K.The following discussion is provided to allow the reader to have a betterunderstanding of our operating results for the year ended February 28,2006, including (i) a brief discussion of our business and products,(ii) a summary of the merger agreement signed with JDA software(iii) the business environment and factors that affected our financialperformance, (iv) our focus on future improvements in our financialperformance and (v) a summary of our fiscal 2006 operating results andfinancial metrics. This executive summary should be read in conjunction with themore detailed discussion and analysis of our financial condition and results ofoperations included in this Item 7, with Risk Factors in Item 1A of this AnnualReport on Form 10-K and our Consolidated Financial Statements, whichare included in Item 15 of this Annual Report on Form 10-K.

**Overview—Businessand Products**

We are a leading global provider of supply chainmanagement and demand and revenue management software products and services. Wecombine these products and services to deliver solutions that address specificbusiness needs of our clients. We focus primarily on the Consumer Goods,Retail, and Government, Aerospace & Defense markets. We providerevenue management solutions for the Travel, Transportation &Hospitality markets.

Our solutions enable our clients to reduce operatingcosts, improve customer service and increase their top-line revenue by allowingthem to plan, optimize and synchronize their demand and supply chain and toimprove their revenue management practices. These benefits create efficienciesin how goods and services are brought to market, how they are priced and soldand how they are serviced and maintained. Our software solutions enable clientsto optimize cost and revenue simultaneously on an enterprise-wide basis byintegrating pricing, forecasting and operational planning and execution toenhance margins across the client’s enterprise and extended trading networks.In addition, our software solutions help our clients derive more benefits fromtheir existing IT investments with other software vendors, such as legacy ERPand other transaction-based systems, and help ensure the security and integrityof their global supply chains.

Our approach to clientdelivery is to advise our clients on how best to use our solutions and othertechnologies across their demand and supply chain to integrate pricing,forecasting, operational planning and execution in a manner that will allowthem to enhance margins across their enterprise and extended trading networksand to improve their revenue management practices. We deliver our solutionsusing commercially available products and will provide additional functionalityaddressed through product extensions for industry-specific capabilities.Certain of our clients and prospects ask for unique capabilities in addition toour core capabilities to give them a competitive edge in the marketplace, whichwe may provide on a case-by-case basis. We expect this will lead to an increasein software license revenue being 

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recognizedon a contract accounting basis over the course of the delivery of the solutionrather than upon initial delivery of the software and contract execution.

**Summary of MergerAgreement Signed with JDA Software Group, Inc.**

On April 24, 2006, we entered into a definitiveAgreement and Plan of Merger (the “Merger Agreement”) with JDA SoftwareGroup, Inc., a Delaware corporation (“JDA”), and Stanley AcquisitionCorp., a Delaware corporation and a wholly-owned subsidiary of JDA (the “MergerSub”). Under the Merger Agreement, the Merger Sub will be merged with and intothe Company (the “Merger”), with the Company continuing after the Merger as awholly-owned subsidiary of JDA. At the effective time of the Merger, eachissued and outstanding share of the Company’s Common Stock, par value $0.002per share (the “Company Common Stock”), will be converted into the right toreceive $2.50 in cash.

The Merger Agreement hasbeen approved by the Board of Directors (the “Board”) of the Company. The Boardhas received an opinion from Lehman Brothers, Inc. that the consideration to beoffered to the Company’s stockholders in the Merger is fair from a financialpoint of view to such stockholders. The transactions contemplated by the MergerAgreement are subject to approval by the holders of a majority of the issuedand outstanding shares of Company Common Stock. The transactions contemplatedby the Merger Agreement also are subject to the expiration or termination ofthe applicable waiting period under the Hart-Scott-Rodino AntitrustImprovements Act of 1976, as amended, and certain other closing conditions. TheMerger Agreement provides for a termination fee of up to $9.75 million, whichis payable by the Company under certain circumstances.

**BusinessEnvironment and Factors That Affected our Fiscal Year Ended February 28,2006 Results**

Our operating results for the year endedFebruary 28, 2006 were affected by several broad-based factors includingcautious capital spending by corporations for enterprise application software.We believe changing conditions over the last three fiscal years caused changesin the behavior patterns in our markets as our clients and prospectsintensified their efforts to reduce costs. Many shifted their focus from largerlonger-term strategic initiatives to smaller short-term tactical initiativeswith more rapid paybacks. We also believe that many of our clients andprospects are focused on realizing benefits from earlier investments ininformation technology rather than committing to new initiatives. These changesin our markets have led to fewer opportunities for us to win business. Webelieve that these changes in the markets for enterprise application softwarewill continue.

We continue to see a growing number of our clients andprospects wanting to structure deals to reduce their overall perceived risks.These deal structures include, but are not limited to, phased projects, delayedpayments for software, and tying payments for software to performance. Certainof our clients and prospects want us to structure deals where we can earnadditional revenue based on performance. During the year endedFebruary 28, 2006, we closed one such transaction.

We believe that the size of enterprise applicationsoftware license transactions has declined in general. We experienced declinesin the numbers and size of our software transactions, including the number ofsoftware transactions of $1 million or greater, in the year endedFebruary 28, 2006, which has also resulted in a decrease in our averageselling price (“ASP”).

We believe our financial results in the fiscal yearended February 28, 2006 were also adversely affected by the ongoingconsolidation in our industry, the pace of which has significantly increasedover the past year and may continue. This consolidation has increaseduncertainty about the abilities of smaller enterprise application softwarevendors to remain independent and thrive, which has negatively affected and maycontinue to negatively affect our ability to grow our revenue and improve ourperformance. In addition, some of our larger competitors increasingly haveraised concerns about our financial viability with our clients and prospects,which have affected our ability to close software transactions successfully.

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Over the past two fiscal years, we have madesubstantial changes in our Company, including reorganizing and downsizing ourexecutive management team and our sales organization, moving a portion of ourproduct development function to India , narrowing our market focus, narrowingour product focus, increasing our emphasis on transportation and retail marketsand pricing optimization capabilities and increasing our emphasis on theAsia-Pacific region. Although we believe these changes were necessary and thecorrect actions to take, we have not yet been able to increase our revenue,particularly our software license revenue. However, these changes have enabledus to reduce our ongoing operating expense and to improve our financialperformance in our most recent quarters.

**Focus on FutureImprovements in Our Financial Performance**

Forthe year ended February 28, 2006, we continued to develop a more focusedproduct and market strategy, and we continued the strategic restructuring ofthe organization in an effort to reduce our operating expenses to a level thatwould better position us to become profitable. During fiscal 2005, we organizedour sales and marketing efforts to address the Consumer Goods, Retail,Government, Aerospace & Defense and Revenue Management markets. InEurope where we currently do not have a critical mass of resources, weeliminated certain offices, which are now being serviced from other locationsin the region. We intend to provide more focused sales and marketing efforts tosmall and medium-sized businesses in Europe and the Asia-Pacific region throughthird-party reseller and agency agreements.

Weintend to increase our focus and investments for the future in our Asia-Pacificregion, in our Transportation and Retail industries and in our Pricing area. Aspart of this focus, we hired a President of our Asia-Pacific region inOctober 2005 and more recently hired a President of our Japan office. Weare implementing specific Retail marketing programs and recruiting for salesemployees with Retail experience. We intend to make strategic investments toround out the solutions and add sales and marketing people for our Pricing andTransportation solutions. In addition, we intend to start a servicesorganization in India to reduce the number of contractors we currently use inan effort to improve the margins in our services business.

Asof February 28, 2006, we had achieved quarterly cost savings ofapproximately $7.5 million, compared to the three months endedNovember 30, 2004, as a result of our exit and disposal plans enacted infiscal 2005 (the “FY05 Q2 Plans”). These exit and disposal plans included theabandonment of certain office space and related asset write-offs and theinvoluntary termination of employees. We have completed most of the planned initiativesapproved in our FY05 Q2 Plans and expect to complete the remainder of theinitiatives in fiscal 2007.

Duringthe fourth quarter of fiscal 2005, we commenced operations at our productdevelopment center in Hyderabad, India. We continue to move a substantialportion of our product development capabilities to our new facility whilekeeping our core product development capabilities at our headquarters inRockville, Maryland. We believe this will allow us to both increase our productdevelopment resources and to lower our product development costs. As ofFebruary 28, 2006, we had approximately 178 employees at our Hyderabad,India development center and expect that number to increase through the firstquarter of fiscal 2007. For the year ended February 28, 2006, amortizationof previously capitalized software exceeded capitalization of softwaredevelopment costs by approximately $6.1 million. We expect amortization ofpreviously capitalized software to continue to exceed capitalization ofsoftware development costs as we continue to shift development operations toHyderabad, India. Once we have completed transitioning the development processto India, we believe that we will no longer capitalize software developmentcosts due to the change in the developmental life cycle of our products that isdue to the expected shortening of time between reaching technologicalfeasibility and introduction of our products into the market.

If market conditions for our products and services donot improve, we may need to make further adjustments to our cost structure tofurther improve performance.

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**Summary of Fiscal2006 Operating Results and Financial Metrics**

As we entered fiscal 2006, difficult market conditionscontinued. Certain industries have been more or less likely to invest inenterprise application software depending on the condition of their businessand industry. Our customers generally licensed fewer software modules in fiscal2006 than in past years. We have not lost any of our largest support customersin recent quarters that had a negative material impact on revenue.

Our cost containment andcost reduction measures enacted in fiscal 2005 and fiscal 2006 have lessenedthe adverse impact on our financial performance of our declining revenue.During fiscal 2006, our total operating expenses decreased by 22.5%, whiletotal revenue declined 8.8% compared to the same period.

*Key FinancialMetrics—Fiscal 2006*

Ourfiscal 2006 results and key financial metrics were negatively affected bydecreased revenue; however, we have made progress in decreasing our operatingcosts, particularly in the second half of fiscal 2006. The following is asummary of our performance relative to certain key financial metrics duringfiscal 2006 compared to fiscal 2005, as well as a summary of our quarterlyperformance in fiscal 2006.

| ** **                                                               | ** ** | **Year Ended February 28,**                                                | ** ** | **Year Ended February 28, 2006** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                                                                                  | ** ** | **2006**                                             | ** ** | **Q1** | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| ** **                                                               | ** ** | **(in thousands, except number of employees and DSO)** | ** ** |
| **Revenue:**                                                             | ** ** | ** **                                                                                | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Software License                                                         |       | $                                                                                         | 36,203     |                                                 | $          | 27,480 |   | $ | 8,391 |   | $ | 5,068 |   | $ | 4,093 |   | $ | 9,928 |   |
| Support                                                                  |       | 84,050                                                                                    |       | 86,493                                               |       | 21,815 |   | 21,755 |   | 21,099 |   | 21,824 |   |
| Services &  reimbursed expenses                                 |       | 72,853                                                                                    |       | 62,219                                               |       | 16,451 |   | 16,826 |   | 14,732 |   | 14,210 |   |
| Total revenue                                                            |       | 193,106                                                                                   |       | 176,192                                              |       | 46,657 |   | 43,649 |   | 39,924 |   | 45,962 |   |
| **Operating expenses and employee  headcount:**                          | ** ** | ** **                                                                                | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Exit and disposal  activities and acquisition-related expenses(1)        |       | 37,335                                                                                    |       | 18,463                                               |       | 4,081 |   | 8,514 |   | 3,856 |   | 2,012 |   |
| All other operating  expenses(2)                                         |       | 203,003                                                                                   |       | 167,793                                              |       | 45,600 |   | 42,248 |   | 39,690 |   | 40,255 |   |
| Total operating expenses                                                 |       | 240,338                                                                                   |       | 186,256                                              |       | 49,681 |   | 50,762 |   | 43,546 |   | 42,267 |   |
| Total employees (period  end)                                            |       | 695                                                                                       |       | 761                                                  |       | 722 |   | 765 |   | 766 |   | 761 |   |
| Total average employees                                                  |       | 800                                                                                       |       | 742                                                  |       | 703 |   | 748 |   | 762 |   | 763 |   |
| Total revenue per average  employee                                      |       | $                                                                                         | 241        |                                                 | $          | 237 |   | $ | 66 |   | $ | 58 |   | $ | 52 |   | $ | 60 |   |
| **Financial  condition, liquidity and capital structure**                | ** ** | ** **                                                                                | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash, cash equivalents,  marketable securities and long-term investments |       | $                                                                                         | 135,889    |                                                 | $          | 140,727 |   | $ | 133,297 |   | $ | 136,109 |   | $ | 126,508 |   | $ | 140,727 |   |
| Days sales outstanding  (DSO)                                            |       | 86                                                                                        |       | 85                                                   |       | 80 |   | 78 |   | 84 |   | 80 |   |
| Convertible debt                                                         |       | 175,500                                                                                   |       | 175,500                                              |       | 175,500 |   | 175,500 |   | 175,500 |   | 175,500 |   |
| Total stockholders’  equity                                         |       | 164,746                                                                                   |       | 153,923                                              |       | 159,279 |   | 154,005 |   | 149,164 |   | 153,923 |   |
| Common shares outstanding  (period end)                             |       | 83,869                                                                                    |       | 84,161                                               |       | 83,819 |   | 83,780 |   | 84,133 |   | 84,161 |   |
| Cash flows from operating activities                                     |       | (5,505                                                                                    | )          | 14,524                                               |       | 427 |   | 5,256 |   | (6,837 | ) | 15,678 |   |

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(1)          Includes exit and disposal activities plusacquisition related expenses such as amortization of acquired technology andintangibles, intangible asset impairment charge and non-cash stock optioncompensation expense.

(2)          Includes cost of software license, cost ofsupport and services, cost of reimbursed expenses, sales and marketing, productdevelopment and general and administrative costs.

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Thefollowing is a brief discussion of the above financial metrics and analysis ofthe reasons for the changes between fiscal 2005 and fiscal 2006 and recenttrends.

**Software licenserevenue**

Oursoftware license revenue decreased during fiscal 2006 by 24.1% to $27.5****million. The following table highlights some of thesignificant trends impacting our software revenue:

| ** **             | ** ** | ** **                | ** ** | ** **             | ** ** | **Software**          | ** ** |
|------------------------|------------|---------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **Significant**           | ** ** | **Average**            | ** ** | **Transactions**      | ** ** |
| ** **             | ** ** | **Software License** | ** ** | **Selling Price** | ** ** | **$1.0 Million** | ** ** |
| **Quarter Ended** | ** ** | ** **                | ** ** | **Transactions(1)**    | ** ** | **(in 000s)**    | ** ** | **or Greater** | ** ** |
| May 31, 2004      |       |                      | 13         |                   |       |                  | 695        |   |   |   | 1 |   |   |
| August 31, 2004   |       |                      | 18         |                   |       |                  | 533        |   |   |   | 3 |   |   |
| November 30, 2004 |       |                      | 11         |                   |       |                  | 491        |   |   |   | 1 |   |   |
| February 28, 2005 |       |                      | 12         |                   |       |                  | 559        |   |   |   | 2 |   |   |
| May 31, 2005      |       |                      | 7          |                   |       |                  | 976        |   |   |   | 2 |   |   |
| August 31, 2005   |       |                      | 13         |                   |       |                  | 264        |   |   |   | — |   |   |
| November 30, 2005 |       |                      | 10         |                   |       |                  | 288        |   |   |   | — |   |   |
| February 28, 2006 |       |                      | 21         |                   |       |                  | 448        |   |   |   | 3 |   |   |
| Fiscal 2005—Total |       |                      | 54         |                   |       |                  | 570        |   |   |   | 7 |   |   |
| Fiscal 2006—Total |       |                      | 51         |                   |       |                  | 442        |   |   |   | 5 |   |   |
|                        |            |                           |            |                        |            |                       |            |  |  |  |  |  |  |  |  |

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(1)          Significant softwarelicense transactions are those with a value of $100,000 or greater (excludingthose recognized on a percentage-of-completion or ratable basis) recognizedwithin the fiscal year or fiscal quarter.

Softwarelicense revenue by industry for fiscal 2006, fiscal 2005 and fiscal 2004 is asfollows (in thousands):

| ** **                                | ** ** | **Fiscal year ended February 28 or 29,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Government,  Aerospace & Defense |       | $                                                                      | 580        |   | $ | 2,789 |   | $ | 22,629 |   |
| Consumer Goods                            |       | 17,717                                                                 |       | 15,161 |   | 29,273 |   |
| Revenue Management                        |       | 2,950                                                                  |       | 2,453 |   | 477 |   |
| Retail                                    |       | 4,594                                                                  |       | 12,227 |   | 10,938 |   |
| Other                                     |       | 1,639                                                                  |       | 3,573 |   | 10,449 |   |
| Total                                     |       | $                                                                      | 27,480     |   | $ | 36,203 |   | $ | 73,766 |   |

 

The previous tablesindicate the following trends affecting our software license revenue over thepast two fiscal years:

·       Wereported fewer significant software license transactions, including those witha value of $1.0 million or greater, during fiscal 2006 compared to fiscal 2005.

·       Theaverage selling price of software has fluctuated the past eight quarters,ranging from $264,000 to $976,000. The ASP for the quarter ended May 31,2005 included one software license transaction which accounted for more than10% of total revenue for that quarter. The ASP for the quarter endedMay 31, 2004 included software license revenue from installments under alarge multi-year government contract.

·       Softwarelicense revenue declined for all industries with the exception of the RevenueManagement and Consumer Goods industry during fiscal 2006 compared to fiscal2005. We believe the increase in revenue in the Revenue Management industry(other than airlines) reflects a recovery in travel, 

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transportation andhospitality, following a few years of decreased spending in these areasfollowing the September 11, 2001 terrorist attack.

·       Softwarelicense revenue in the Government, Aerospace & Defense industrydecreased in fiscal 2006 and 2005 compared to fiscal 2005 and 2004, respectively.We believe the decline in our Government, Aerospace & Defense softwarerevenue resulted from the Federal Government shifting monies (especially withinthe Department of Defense) to the war on terror.

·       Software license revenue inthe Consumer Goods industry decreased in fiscal 2005 compared to the fiscal2004. We believe that the decrease in consumer goods spending was due to lackof capital spending by these customers who were largely focused on realizingbenefits from earlier investments in information technology rather thaninvesting in new capabilities. In addition, we believe that some consumer goodsprospects had delayed purchasing decisions due to budget constraints andchallenges in complying with the requirements of the Sarbanes-Oxley Act of 2002and other regulatory requirements.

**Support revenue**

Our support revenue was$86.5****million in fiscal 2006 compared to$84.1****million in fiscal 2005. Our percentageof annual support renewals by our clients remains over 90%.

**Services andreimbursed expense revenue**

Our services andreimbursed expense revenue decreased 14.6% in fiscal 2006 to $62.2 million.Services revenue tends to track software revenue in prior periods. We primarilyattribute the decrease in services and reimbursed expense revenue to thedecrease in the number and size of completed software license transactions infiscal 2006 compared to fiscal 2005 and due to the deferral of services revenuerelated to a transaction for which the criteria for revenue recognition has notyet been met. Additionally, we experienced competitive rate pressures onconsulting engagements and lower demand for our consulting services in fiscal2006.

**Total revenue peraverage employee**

Our total revenue peraverage employee decreased by 1.7% to $237 for fiscal 2006 (calculated as totalrevenue for the year divided by average employees for the year). This decreasewas due to lower software and services revenue in fiscal 2006 partially offsetby a 7.3% decrease in average employee headcount in fiscal 2006. Although averageheadcount was lower in fiscal 2006 compared to fiscal 2005, total headcountincreased during fiscal 2006 to 761 as of February 28, 2006 as a result ofthe continued staffing of our product development facility in Hyderabad, India.

**Total operating expenses**

Our total operating expenses declined by 22.5% duringfiscal 2006 to $186.3 million. Exit and disposal activities andacquisition-related expenses declined 50.5% during fiscal 2006 to $18.5million. This decrease was the result of lower exit and disposal charges infiscal 2006 as compared to fiscal 2005 and lower acquisition-related expensesas a result of the completed amortization of the customer relationship assetfrom our Talus Solutions, Inc. (“Talus”) acquisition and completedamortization of the acquired technology assets from the STG Holdings, Inc.(“STG”), Talus Solutions, Inc. and Spaceworks, Inc. acquisitions. Thedecrease in acquisition-related expenses was partially offset by a $3.7 millionimpairment charge recognized in fiscal 2006 related to acquired technology fromthe Partminer CSD, Inc. acquisition.

All other operatingexpenses declined 17.3% during fiscal 2006 to $167.9 million. This decrease wasprimarily related to lower professional and consulting fees, reduced office,travel and salary expenses as a result of the decrease in average employeeheadcount during fiscal 2006 related to our exit and disposal 

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plansexecuted during fiscal 2006 and the second half of fiscal 2005. Additionally,we recorded a $1.5 million benefit related to the reversal of a previouslyrecorded provision for anticipated loss on a contract for which our obligationto perform services expired during fiscal 2006. We also recorded lower bad debtexpense during fiscal 2006 which included the reversal of approximately $1.6million of bad debt expense related to payment received for an outstandingreceivable for which we had previously established a reserve. These decreaseswere partially offset by an increase in amortization of capitalized softwaredevelopment costs in excess of capitalized software development costs primarilyas a result of changes in the product development life cycle of our products aswe shift product development operations to our development center in Hyderabad,India.

**Financialcondition, liquidity and capital structure**

During fiscal 2006,we experienced changes in our financial condition, liquidity and capitalstructure, including the following:

·       Cash, cash equivalents,marketable securities and long-term investments increased by $4.8 million to$140.7 million primarily as a result of an increase in cash flows provided byoperations of approximately $20.0 million partially offset by a higher cashusage in investing and financing activities as compared to the prior year.

**Use of Estimatesand Critical Accounting Policies**

The accompanying discussion and analysis of ourfinancial condition and results of operations are based upon our auditedconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the U.S. The preparation of thesefinancial statements requires that we make estimates and judgments that affectthe reported amounts of assets, liabilities, revenue and expenses, and relateddisclosure of contingent assets and liabilities. We base our estimates onhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results could differ from theestimates made by management with respect to these and other items that requiremanagement’s estimates.

We have identified theaccounting policies that are critical to understanding our historical andfuture performance, as these policies affect the reported amounts of revenueand the more significant areas involving management’s judgments and estimates.These critical accounting policies relate to revenue recognition and deferred revenue,allowance for doubtful accounts, capitalized software development costs,valuation of long-lived assets, including intangible assets and impairmentreview of goodwill, income taxes, exit and disposal related expenses and stockoption-based compensation plans. These policies, and our procedures related tothese policies, are described in detail below. In addition, please refer to theConsolidated Financial Statements and Notes to Consolidated FinancialStatements included elsewhere in this Annual Report on Form 10-K forfurther discussion of our accounting policies.

**Revenue Recognitionand Deferred Revenue**

Our revenue consists of(i) fees from licenses of our software; (ii) fees from technicalsupport and product updates; (iii) fees from professional services,including implementation, training and hosting and (iv) reimbursedexpenses. While the basis for software license revenue recognition issubstantially governed by the requirements of the American Institute ofCertified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2,“*Software Revenue Recognition*,” asmodified by SOP 98-9, “*Modification of SOP 97-2,Software Revenue Recognition with Respect to Certain Transactions*(“SOP 98-9”),”as well as Technical Practice Aids issued from time to time by the AmericanInstitute of Certified Public Accountants, and Securities and ExchangeCommission (“SEC”) Staff Accounting Bulletin 104, “*RevenueRecognition*” (“SAB 104”), we exercise judgment and use estimates inconnection 

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withthe determination of the amount of software license, support and professionalservices revenue to be recognized each accounting period.

Software license revenue is generally recognized using the residualmethod described below when:

·       *Persuasive evidence of an arrangement exists*:   We consider a non-cancelable agreementsigned by us and the customer to be evidence of an arrangement. 

·       *Delivery has occurred or services have been rendered:*   Delivery occurs when media containing thelicensed program is provided to a common carrier, typically FOB shipping pointor, in the case of electronic delivery, the customer is given access to thelicensed programs. 

·       *Fixed or determinable fee:*   We consider the license fee to be fixed or determinable if the feeis not subject to refund or adjustment and is payable within twelve months ofthe agreement date, based upon our successful collection history on sucharrangements. If the arrangement fee is not fixed or determinable, we recognizethe revenue as amounts become due and payable. 

·       *Collection is probable:*   Weperform a credit review for all significant transactions at the time thearrangement is executed to determine the credit-worthiness of the customer.Collection is deemed probable if we expect that the customer will be able topay amounts under the arrangement as they become due. If we determine thatcollection is not probable, we defer recognition of the revenue untilcollection.

If a software license containscustomer acceptance criteria or a cancellation right, recognition of thesoftware revenue is deferred until the earlier of customer acceptance or theexpiration of the acceptance period or cancellation right. Typically, paymentsfor software licenses are due within twelve months of the agreement date. Whensoftware license agreements call for payment terms of twelve months or morefrom the agreement date, software revenue is recognized as payments become dueand all other conditions for revenue recognition have been satisfied. Under theresidual method, we defer revenue for the fair value of any undeliveredelements based on vendor specific objective evidence (“VSOE”) of fair value,and the remaining portion of the arrangement fee is allocated to the deliveredelements and recognized as revenue when the basic criteria in SOP 97-2and SAB 104 have been met.

Our customer arrangementstypically contain multiple elements that may include software, options forfuture purchases of software products not previously licensed to the customer,support, consulting, training, hosting and reimbursed expenses. Fees areallocated to the various elements of software license agreements using theresidual method, based on VSOE. Each software license arrangement requirescareful review to identify each individual element and to determine the properamount of software revenue to be allocated among the various elements based onVSOE. Under the residual method, if an arrangement contains one or moreundelivered elements, the VSOE of the undelivered elements are deferred and therevenue is recognized once the elements are delivered. If VSOE for one or moreof the undelivered elements in an arrangement does not exist, we recognize theentire arrangement fee over the period the undelivered elements are delivered.

In addition to evaluating theVSOE of fair value of each element of an arrangement, we also consider whethersuch elements can be separated into separate units of accounting in accordancewith SOP 97-2. When making this determination, we consider the nature ofservices provided when purchased with a software license (i.e., considerationof whether services are essential to the functionality of software productslicensed), degree of risk, availability of services from other vendors andtiming of payments, among other things. When we provide services deemed to beessential to the functionality of the software products licensed or thelicensed software requires significant production, modification orcustomization, we recognize revenue on a percentage-of-completion basis inaccordance with SOP 81-1. In these cases, software revenue is recognizedbased on labor hours or costs incurred to date compared to total estimatedlabor hours or costs for the contract.

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Implementation services areseparately priced and sold, are generally available from a number of suppliersand typically are not essential to the functionality of our software products.Implementation services, which include project management, systems planning,design and implementation, customer configurations and training are billed onan hourly basis (time and materials) or under fixed price contracts.Implementation services are recognized as the work is performed. On fixed pricecontracts, services revenue is recognized using the percentage-of-completionmethod of accounting by relating labor hours or costs incurred to date to totalestimated labor hours or costs. In the event services are billed in advance ofwork being performed, the billed amount is initially recorded as deferredservices revenue and recognized as services revenue when the work is performed.When total cost estimates exceed revenue, we accrue for the estimated lossesimmediately using cost estimates that are based upon an average fully burdeneddaily rate applicable to the consulting organization delivering the services.VSOE of fair value for implementation services is based upon separate sales ofservices at stated hourly rates.

The process of estimation inherent in the applicationof the percentage-of-completion method of accounting for revenue is subject tojudgments and uncertainties and may affect the amounts of software and servicesrevenue under certain contracts and related expenses reported in ourconsolidated financial statements. A number of internal and external factorscan affect our estimates to complete client engagements, including skill leveland experience of project managers, staff assigned to engagements andcontinuity and attrition level of implementation consulting staff. Changes inthe estimated stage of completion of a particular project could createvariability in our revenue and results of operations if we are required toincrease or decrease previously recognized revenue related to a particularproject or if we expect to incur a loss on the project.

Supportrevenue includes post-contract customer support and the rights to unspecifiedsoftware upgrades and enhancements. Support services are separately priced andstated in our arrangements. Customer support is generally billed annually,initially recorded as deferred revenue and recognized as support revenueratably over the support period. VSOE of fair value for support services istypically provided by renewal rates.

**Allowance forDoubtful Accounts**

We initially record our provision for doubtfulaccounts based on our historical experience and then adjust this provision atthe end of each reporting period based on a detailed assessment of our accountsreceivable and allowance for doubtful accounts. In estimating the allowance fordoubtful accounts, management considers, among other factors, (i) theaging of the accounts receivable; (ii) trends within and ratios involvingthe age of the accounts receivable; (iii) the customer mix in each of theaging categories and the nature of the receivable (e.g., license, consulting,maintenance, etc.); (iv) our historical write-offs and recoveries; (v) thecredit worthiness of each customer; (vi) the economic conditions of thecustomer’s industry; and (vii) general economic conditions. In cases wherewe are aware of circumstances that may impair a specific customer’s ability tomeet their financial obligations to us, we record a specific allowance againstamounts due from the customer.

If the assumptions we usedto calculate these estimates do not properly reflect future collections, therecould be an impact on future reported results of operations. Based on our totalrevenue reported for fiscal 2006, our provision for doubtful accounts wouldchange by approximately $1.8 million annually for a 1% change in proportion tototal revenue. The provision for doubtful accounts is included in sales andmarketing expense (for software license receivables) and cost of services andsupport (for services and support fees receivables), in the ConsolidatedStatement of Operations.

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**CapitalizedSoftware Development Costs**

We capitalize the development cost of software, otherthan internal use software, in accordance with Statement of FinancialAccounting Standards No. 86 (“SFAS 86”), “*Accountingfor the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.*”Software development costs are expensed as incurred until technologicalfeasibility has been established, at which time such costs are capitalizeduntil the product is available for general release to clients. Softwaredevelopment costs are amortized using the straight-line method over theestimated economic life of the product, commencing with the date the product isfirst available for general release. Generally, an economic life of two yearsis used to amortize capitalized software development costs.

In future periods, if wedetermine that technological feasibility occurs at a later date, such ascoincident with general product release to clients, we may not capitalize anysoftware development costs. This would increase our reported operating expensesin the short term by the amounts we do not capitalize. The amounts of softwaredevelopment costs that we have capitalized have ranged between $3.5 million and$9.9 million per year during our last three fiscal years. The estimatedeconomic life of our capitalized software development costs is subject tochange in future periods based on our experience with the length of time ourproducts or enhancements are being or are expected to be used. The amortizationof software development costs have ranged between $9.0 million and $9.6 millionper year during our last three fiscal years. A change in the expected economiclife of our capitalized software development costs of six months would decreaseour annual operating expenses by approximately $0.9 million if we increased theexpected economic life by six months and would increase our annual operatingexpenses by approximately $1.4 million if we decreased the expected economiclife by six months.

**Valuation andImpairment Review of Long-Lived Assets**

We account for our purchases of acquired companies inaccordance with Statement of Financial Accounting Standards No. 141 “*Business Combinations*” (“SFAS 141”) and account for therelated acquired intangible assets in accordance with Statement of FinancialAccounting Standards No. 142 “*Goodwill and OtherIntangible Assets*” (“SFAS 142”). In accordance with SFAS 141, weallocate the cost of the acquired companies to the identifiable tangible andintangible assets and liabilities acquired, with the remaining amount beingclassified as goodwill. Certain intangible assets, such as acquired technology,are amortized to expense over time, while in-process research and development,if any, is recorded as an expense at the acquisition date.

The majority of the entities acquired by us do nothave significant tangible assets and, as a result, a significant portion of thepurchase price is typically allocated to intangible assets and goodwill. Asrequired by SFAS 142, in lieu of amortizing goodwill, we test goodwill forimpairment periodically and record any necessary impairment in accordance withSFAS 142. We are amortizing our intangible assets as follows: (i) acquiredtechnology-related intangible assets are currently being amortized over their estimateduseful life using the straight-line method and (ii) customerrelationship-related intangible assets are currently being amortized over theirestimated useful life based on the greater of the straight-line method or theestimated customer attrition rates.

We evaluate all of our long-lived assets (primarilyproperty and equipment and intangible assets other than goodwill) forimpairment in accordance with the provisions of SFAS 144, “*Accountingfor the Impairment or Disposal of Long-Lived Assets*” (“SFAS 144”).SFAS 144 requires that long-lived assets and intangible assets other thangoodwill be evaluated for impairment whenever events or changes incircumstances indicate that the carrying value of an asset may not berecoverable based on expected undiscounted cash flows attributable to thatasset. In accordance with SFAS 144, when a long-lived asset or intangible assetis abandoned, the carrying value is charged to expense in the period ofabandonment.

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During fiscal 2006, 2005 and 2004, we recorded impairmentcharges of $0.2 million, $2.7 million and $4.2 million, respectively,associated with certain furniture, fixtures and leasehold improvements that weabandoned in connection with exit and disposal plans. These assets were locatedin facilities that we ceased to use. Based on our evaluation of these assets wedetermined that the assets were not marketable for resale and oftentimes couldnot be removed from the premises (e.g., the asset consisted of a dividing wallor other permanent fixture). Additionally during fiscal 2006, we recorded animpairment charge of approximately $3.7 million related to acquired technologyfrom the Partminer CSD, Inc. acquisition. Although we continue to sell theproducts acquired in that acquisition, based on our impairment analysis, we didnot believe the future operating cash flows would be sufficient to support therelated asset balance.

As ofFebruary 28, 2006 and February 28, 2005, our net book value oflong-lived assets, consisted of the following (in thousands):

| ** **                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Property and equipment               |       | $        | 13,682     |     | $          | 15,795 |   |
| Software development  costs          |       | 8,311    |       | 14,390   |       |
| Software developed for  internal use |       | 1,041    |       | 1,951    |       |
| Goodwill                             |       | 185,818  |       | 185,658  |       |
| Acquired technology                  |       | 3,582    |       | 13,816   |       |
| Customer relationships               |       | 4,405    |       | 9,335    |       |
| Other                                |       | 6,088    |       | 6,897    |       |
| Total                                |       | $        | 222,927    |     | $          | 247,842 |   |

 

While we do not currently believe any of ourlong-lived assets are impaired, and we do not anticipate an impairment in thenear term, if a change in circumstances were to occur requiring an assessmentof impairment, we would be required to evaluate whether the future cash flowsrelated to the asset will be greater than its carrying value at the time of theimpairment test. While our cash flow assumptions are consistent with the plansand estimates we are using to manage our operations, there is significantjudgment in determining the cash flows attributable to our intangible assetsover their respective estimated useful lives. If such an evaluation resulted inan impairment of any of our long-lived assets, such impairment would berecorded in the period we make the impairment determination.

We test goodwill for impairment on an annual basis,coinciding with our fiscal year end, or on an interim basis if circumstanceschange that would more likely than not reduce our implied fair value (whichincludes factors such as, but not limited to, our market capitalization,control premium and recent stock price volatility) below our carrying value.Please see Item 1A “Risk Factors”—Risks Related to Our Business. During the sixmonths ended August 31, 2004, we experienced adverse changes in our stockprice resulting from its poor financial performance. As a result, we performeda test for goodwill impairment at August 31, 2004 and determined that basedupon the implied fair value (which includes factors such as, but not limitedto, the Company’s market capitalization, control premium and recent stock pricevolatility) of the Company as of August 31, 2004 there was no impairmentof goodwill.

During the three months ended November 30, 2005,our Chief Financial Officer left to take a position at another company. As aresult, we performed a test for goodwill impairment as of November 30,2005. We determined that based upon the implied fair value (which includesfactors such as, but not limited to, the Company’s market capitalization,control premium and recent stock price volatility) of the Company as ofNovember 30, 2005, there was no impairment of goodwill

We performed goodwill impairment reviews onFebruary 28, 2006 and February 28, 2005, our annual dates forgoodwill impairment review, and determined that the implied fair value of theCompany exceeded the carrying value. Accordingly, no goodwill impairment chargewas recorded during fiscal 2006 or fiscal 2005.

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Determining the impliedfair value of goodwill involves judgments as to when an impairment may exist,as well as estimates used to compute the implied fair value. If the estimatesused to calculate the implied fair value of goodwill were to change such that thefair value dropped below stockholders’ equity, this could result in animpairment charge for some or all of our goodwill balance in future periods.

**Income Taxes**

We account for income taxes in accordance withStatement of Financial Accounting Standards No. 109, “*Accountingfor Income Taxes*.” We assess the likelihood that our deferred taxassets will be recovered from our future taxable income, and to the extent webelieve that recovery is not likely, we establish a valuation allowance. Weconsider historical taxable income, estimates of future taxable income andongoing prudent and feasible tax planning strategies in assessing the amount ofthe valuation allowance. Adjustments could be required in the future if wedetermine that the amount to be realized is greater or less than the valuationallowance we have recorded. Management performed an analysis, based on variousfactors, including our current year financial results, our cumulative lossesfor the three year period ended February 28, 2006, and estimates of futureprofitability, as of February 28, 2006 and February 28, 2005, andconcluded that future taxable income will, more likely than not, beinsufficient to recover our net deferred tax assets as of February 28,2006 and February 28, 2005. Therefore, we have maintained a valuationallowance for the full amount of our net deferred tax assets. Management willcontinue to monitor its estimates of future profitability and the likelihood ofrealizing our net deferred tax assets based on evolving business conditions.

Also, as part of theprocess of preparing our consolidated financial statements, we are required toestimate our full-year income on a quarterly basis and the related income taxexpense, including the impact, if any, of additional taxes resulting from taxexaminations, in each jurisdiction in which we operate. Additionally, we makejudgments regarding the recoverability of deferred tax assets for eachjurisdiction. Tax liabilities can involve complex issues and may require anextended period to resolve. Changes in the geographical mix or estimated levelof annual pretax income can impact our overall income tax expense. This processinvolves estimating our current tax liabilities in each jurisdiction in whichwe operate.

**Exit and DisposalActivities**

During fiscal 2004, 2005 and 2006 we initiated andcompleted a series of exit and disposal plans (the “Exit Plans”). We haveaccounted for the Exit Plans in accordance with SEC Staff Accounting BulletinNo. 100 *“Restructuring and Impairment Charges”*and other applicable accounting standards as discussed below.

In June 2002, the Financial Accounting StandardsBoard (the “FASB”) issued SFAS No. 146 *“Accounting for CostsAssociated with Exit or Disposal Activities”*(“SFAS 146”). SFAS 146superseded Emerging Issues Task Force Issue No. 94-3 *“Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (Including Certain Costs Associated with aRestructuring)”* (“EITF 94-3”) and EITF Issue No. 88-10*“Costs Associated with Lease Modification orTermination”* (“EITF 88-10”). We adopted SFAS 146 effectiveJanuary 1, 2003; therefore, exit and disposal charges subsequent toDecember 31, 2002 were accounted for in accordance with SFAS 146. Theadoption of SFAS 146 did not impact our exit and disposal obligationsrecognized prior to January 1, 2003, as these obligations must continue tobe accounted for in accordance with EITF 94-3 and EITF 88-10 andother applicable pre-existing guidance.

The expenses incurred in connection with the ExitPlans are composed primarily of (i) severance and associated employeetermination costs related to the reduction of our workforce, (ii) leasetermination costs and/or costs associated with ceasing to use certainfacilities and (iii) impairment costs related to certain long-lived assetsabandoned.

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SFAS 146 requires that a liability for costsassociated with an exit or disposal activity be recognized when the liabilityis incurred, as opposed to when management commits to an exit plan. SFAS 146also requires that (i) liabilities associated with exit and disposalactivities be measured at fair value; (ii) one-time termination benefitsbe expensed at the date the entity notifies the employee, unless the employeemust provide future service, in which case the benefits are expensed ratablyover the future service period; (iii) liabilities related to an operatinglease or contract be measured at fair value and recorded when the contract doesnot have any future economic benefit to the entity (i.e., the entity ceases toutilize the rights conveyed by the contract); and (iv) all other costsrelated to an exit or disposal activity be expensed as incurred. For thoseemployees with pre-existing employment contracts which specified benefits upontermination, we accounted for severance and related benefits in accordance withSFAS No. 88, *“Employers’ Accounting for Settlements andCurtailments of Defined Benefit Pension Plans and for Termination Benefits”*(“SFAS 88”) as the amounts were both probable and estimable.

We accounted for costs related to the assets abandonedin connection with the Exit Plans in accordance with SFAS 144 and, accordingly,charged to expense the net carrying value of the long-lived assets when weabandoned the assets, primarily leasehold improvements and furniture andfixtures. Please refer to “Valuation and Impairment Review of Long-LivedAssets” described above for a further discussion of our accounting policy andrelated accounting estimates involved related to assessing whether an asset isimpaired.

Inherent in the estimationof the costs related to the Exit Plans are assessments related to the mostlikely expected outcome of the significant actions to accomplish the exitactivities. In determining the charges related to the Exit Plans, we were requiredto make significant estimates related to the expenses associated with ourexcess facilities. For example, in determining the charge for excessfacilities, we were required to estimate future sublease income (including bothtiming and amount of the potential sublease income), future net operatingexpenses of the facilities (e.g., maintenance, utilities, property managementfees, etc.), and potential brokerage commissions, among other expenses. Webased our estimates of sublease income, operating costs and brokeragecommissions, in part, on the opinions of third-party real estate advisors,current market conditions and rental rates, the status of negotiations withpotential subtenants, and the location of the respective facility, among otherfactors. These estimates, along with other estimates made by management inconnection with the Exit Plans may vary significantly depending, in part, uponfactors that may be beyond our control. Specifically, these estimates willdepend on our success in negotiating with lessors, the time periods required tolocate and contract suitable subleases and the market rates at the time of suchsubleases. Changing business and real estate market conditions may affect theassumptions related to the timing and extent of our ability to sublease vacatedspace. We periodically review the status of exit and disposal liabilities and,if appropriate, we record changes to our exit and disposal liabilities based onmanagement’s most current estimates.

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**Stock Option-BasedCompensation Plans**

Weaccount for our stock option-based compensation plans in accordance with APB 25and related interpretations using the intrinsic value based method ofaccounting. If we accounted for our stock option-based compensation plan usingthe fair value based method of accounting in accordance with the provisions asrequired by Statement of Financial Accounting Standards No. 123 (“SFAS123”), “*Accounting for Stock-Based Compensation*,”as amended by Statement of Financial Accounting Standards No. 148 (“SFAS148”), “*Accounting for Stock-Based Compensation—Transitionand Disclosure,”* our net loss and loss per basic and diluted shareamounts would have been as follows, in thousands except per share amounts:

| ** **                                                                              | ** ** | **February 28 or 29,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                              | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss, as reported                                                                   |       | $                                     | (12,243    | ) | $ | (55,271 | ) | $ | (103,800 | ) |
| Add: Stock  option-based compensation expense included in reported net loss, net of tax |       | —                                |       | 168 |   | 1,799 |   |
| Less: Stock  option-based compensation, net of tax                                      |       | (729                                  | )          | (6,301 | ) | (2,611 | ) |
| Pro forma net  loss                                                                     |       | $                                     | (12,972    | ) | $ | (61,404 | ) | $ | (104,612 | ) |
| Basic and diluted loss per share, as reported                                           |       | $                                     | (0.15      | ) | $ | (0.67 | ) | $ | (1.43 | ) |
| Basic and diluted loss  per share, pro forma                                            |       | $                                     | (0.16      | ) | $ | (0.75 | ) | $ | (1.44 | ) |

 

Consistent with our accounting for deferred tax assetsresulting from the exercise of employee stock options in the accompanyingaudited consolidated financial statements, we have not provided a tax benefitor expense on the pro forma expense in the above table.

Stock options granted had weighted average fair valuesof $0.62, $1.62 and $3.28 per share for fiscal 2006, 2005 and 2004,respectively, as calculated using the Black-Scholes option valuation model. Theweighted average estimated fair value of the common stock purchase rightsgranted under our employee stock purchase plan was $0.37, $0.52 and $2.23 pershare for fiscal 2006, 2005 and 2004, respectively.

Wedetermined the assumptions used in computing the fair value of stock optionsand stock purchase plan shares by estimating the expected useful lives, givingconsideration to the vesting and purchase periods, contractual lives, actualemployee forfeitures, and the relationship between the exercise price and thefair market value of our common stock, among other factors. The risk-freeinterest rate is the U.S. Treasury bill rate for the relevant expected life.The fair value of stock options and stock purchase plan shares was estimated onthe date of grant using the Black-Scholes option-pricing model with thefollowing weighted average assumptions:

| ** **                | ** ** | **OPTIONS** | ** ** | **ESPP**    | ** ** |
|---------------------------|------------|-------------|------------|-------------|------------|
| ** **                | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free  interest rates |       | 4.02%       |       | 3.12%       |       | 2.51% |   | 3.64% |   | 2.01% |   | 1.36% |   |
| Expected term             |       | 2.62  years |       | 4.37  years |       | 4.53  years |   | 3  months |   | 3  months |   | 6  months |   |
| Volatility                |       | .5322       |       | .7399       |       | .9423 |   | .4780 |   | .5498 |   | .8492 |   |

 

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**Results ofOperations**

Thefollowing table includes the consolidated statements of operations data foreach of the years in the three-year period ended February 28, 2006expressed as a percentage of revenue: 

| ** **                                 | ** ** | **Fiscal Year Ended  February 28 or 29,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue:                                   |       |                                                               |       |   |   |   |   |
| Software license                           |       | 15.6                                                               | %          | 18.7 | % | 30.4 | % |
| Support                                    |       | 49.1                                                               | %          | 43.5 | % | 35.6 | % |
| Services                                   |       | 31.9                                                               | %          | 33.6 | % | 30.1 | % |
| Reimbursed expenses                        |       | 3.5                                                                | %          | 4.2 | % | 3.9 | % |
| Total revenue                              |       | 100.0                                                              | %          | 100.0 | % | 100.0 | % |
| Operating  expenses:                       |       |                                                               |       |   |   |   |   |
| Cost of software license                   |       | 8.5                                                                | %          | 7.4 | % | 6.5 | % |
| Amortization of acquired technology        |       | 3.2                                                                | %          | 6.8 | % | 5.9 | % |
| Cost of services and support               |       | 34.5                                                               | %          | 38.2 | % | 33.0 | % |
| Cost of reimbursed expenses                |       | 3.5                                                                | %          | 4.2 | % | 3.9 | % |
| Sales and marketing                        |       | 21.9                                                               | %          | 27.3 | % | 27.2 | % |
| Product development                        |       | 15.6                                                               | %          | 16.8 | % | 14.9 | % |
| General and administrative                 |       | 11.3                                                               | %          | 11.4 | % | 10.3 | % |
| Amortization of intangibles                |       | 3.3                                                                | %          | 3.4 | % | 1.9 | % |
| Asset impairment charge                    |       | 2.1                                                                | %          | — |   | — |   |
| Exit and disposal activities               |       | 1.9                                                                | %          | 9.0 | % | 7.7 | % |
| Non-cash stock-option compensation expense |       | —                                                             |       | 0.1 | % | 0.7 | % |
| Total operating expenses                   |       | 105.7                                                              | %          | 124.6 | % | 112.0 | % |
| Loss from operations                       |       | (5.7                                                               | )%         | (24.6 | )% | (12.0 | )% |
| Debt conversion  expense                   |       | —                                                             |       | — |   | (24.6 | )% |
| Other expense—net                     |       | (3.3                                                               | )%         | (3.8 | )% | (5.5 | )% |
| Loss before income taxes                   |       | (9.0                                                               | )%         | (28.4 | )% | (42.1 | )% |
| (Benefit from)  provision for income taxes |       | (2.0                                                               | )%         | 0.4 | % | 0.5 | % |
| Net loss                                   |       | (7.0                                                               | )%         | (28.8 | )% | (42.6 | )% |

 

Thepercentages shown above for cost of services and support, sales and marketing,product development and general and administrative expenses have beencalculated excluding non-cash stock-option compensation expense as follows (inthousands): 

| ** **                    | ** ** | **Fiscal Year Ended  February 28 or 29,** | ** ** |
|-------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cost of services  and support |       |                                                               | $          | — |   |   | $ | 75 |   | $ | 865 |   |
| Sales and  marketing          |       |                                                               | —     |   |   | 26 |   | 456 |   |
| Product development           |       |                                                               | —     |   |   | 15 |   | 140 |   |
| General and  administrative   |       |                                                               | —     |   |   | 52 |   | 338 |   |
|                          |       |                                                               | $          | — |   |   | $ | 168 |   | $ | 1,799 |   |

 

See Operating Expenses:“Non-Cash Stock-Option Compensation Expense” for further detail.

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**Revenue**

Software License Revenue. Software license revenuedecreased 24.1%, or $8.7 million, in fiscal 2006 and decreased 50.9%, or $37.6million, in fiscal 2005. We believe the decrease in software license revenue infiscal 2006 and fiscal 2005 was due to cautious capital spending for supplychain software purchases, effects resulting from changes in our workforce,including our executive management and sales organization, difficulties insales execution and a highly competitive environment. Additionally, we believethe decrease in software license revenue during fiscal 2006 was also due inpart to concerns about consolidation in our industry and about our financialviability. We experienced lengthening sales cycles and reductions in the sizeof customer orders during both fiscal 2006 and 2005. These factors resulted ina decrease in the number of significant software license transactions with avalue of $100,000 or greater, the number of transactions greater than $1.0million and our ASP.

We attribute much of the caution of our clients andprospects to their concerns regarding the sustainability of the currenteconomic recovery and the current geopolitical environment in which we operate.We saw no driving force to overcome the negative market factors that areholding back companies from supply chain initiatives. Further, we believe theeffort by companies to comply with the Sarbanes-Oxley Act of 2002 and otherregulatory requirements consumed the internal resources of our clients andprospects in fiscal 2005 and slowed the decision making process for othersoftware purchases.

Thefollowing table summarizes significant software license transactionsconsummated during fiscal 2006, 2005 and 2004: 

| ** **                                        | ** ** | **Fiscal Year Ended  February 28 or 29,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Significant  Software License Transactions(1)** | ** ** | ** **                                                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Number of  transactions $100,000 to $999,999      |       | 46                                                                 |       | 47 |   | 81 |   |
| Number of  transactions $1.0 million or greater   |       | 5                                                                  |       | 7 |   | 18 |   |
| Total number of  transactions                     |       | 51                                                                 |       | 54 |   | 99 |   |
| Average selling price  (in thousands)             |       | $                                                                  | 442        |   | $ | 570 |   | $ | 672 |   |
|                                                   |            |                                                                    |            |  |  |  |  |  |  |  |  |  |

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(1)          Significant softwarelicense transactions are those with a value of $100,000 or greater (excludingthose recognized on a percentage-of-completion or ratable basis) recognizedwithin the fiscal year.

Support Revenue. Support revenue increased 2.9%, or$2.4 million, in fiscal 2006 and decreased 2.9%, or $2.5 million, in fiscal2005. The increase in support revenue during fiscal 2006 was due to newsoftware sales and collections from certain customers for outstanding supportfor which the related revenue did not previously meet the criteria forrecognition. During fiscal 2005, decreases in support revenue from non-renewalswere not fully offset by increases in support revenue from new software sales.Our percentage of annual support renewals by our clients remains over 90% andwe have not lost any of our largest support customers in the past year that hada material negative effect on revenue. There can be no assurance that ourhistorical renewal rate will continue.

Services Revenue. Services revenue decreased 13.6%, or$8.8 million, in fiscal 2006 and decreased 11.4%, or $8.3 million, in fiscal2005. The decrease in services revenue in fiscal 2006 and fiscal 2005 was theresult of the decrease in the number and size of completed software licensetransactions in fiscal 2006, fiscal 2005 and fiscal 2004, respectively, lowerdemand for implementation services and competitive rate pressures on consultingengagements. Additionally, the decrease in services revenue in fiscal 2006 wasalso due in part to the deferral of services revenue related to a closedtransaction for which the criteria for revenue recognition has not yet beenmet. We have experienced a decrease in the number of services employees fromboth voluntary and involuntary terminations. Services revenue tends to tracksoftware license revenue in prior periods. There can be no assurance that therates we charge for consulting and implementation services will improve, oreven remain at current levels. The market for information 

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technology consultingservices is highly competitive and we are affected by these market conditions.Accordingly, services revenue may continue to decline unless and until weexperience a sustained increase in our software license sales and maintainadequate resource capacity and capabilities. We also expect that servicesrevenue will continue to fluctuate on a quarter-to-quarter basis, as revenuefrom the implementation of software is not generally recognized in the sameperiod as the related license revenue.

Reimbursed Expenses. Reimbursed expenses decreased23.0%, or $1.8 million, in fiscal 2006 and decreased 16.0%, or $1.5 million, infiscal 2005. The decrease in reimbursed expenses is consistent with decreasesin services revenue in these periods.

International Revenue. We market and sell our softwareand services internationally, primarily in Europe, Asia, Canada, CentralAmerica and South America. Revenue outside of the U.S. decreased $2.6 million,or 4.0%, to $62.6 million, in fiscal 2006 and decreased $17.4 million, or21.1%, to $65.2 million in fiscal 2005. Revenue by geographic area isdetermined on the basis of the geographic area in which transactions areconsummated. Revenue outside of the U.S. as a percentage of total revenue was35.5%, 33.8% and 34.0% in fiscal 2006, 2005 and 2004, respectively. Theincrease in the percentage of international revenue to total revenue in fiscal2006 compared to fiscal 2005 is due to a software license transaction in Europein our first quarter of fiscal 2006 which accounted for more than 10% of thetotal revenue for that quarter.

Customer Concentration. Noindividual customer accounted for more than 10% of annual revenue during fiscal2006, fiscal 2005 or fiscal 2004.

**Operating Expenses**

***Cost of Software License.***   Costof software license consists primarily of amortization of capitalized softwaredevelopment costs and royalty fees associated with third-party software eitherembedded in our software or resold by us. The following table sets forthamortization of capitalized software development costs and other costs ofsoftware for the three fiscal years ended February 28 or 29, 2006, 2005and 2004 (in thousands):

| ** **                            | ** ** | **Fiscal Year Ended February 28 or 29,** | ** ** |
|---------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Amortization of  capitalized software |       | $                                                                      | 9,579      |   | $ | 9,407 |   | $ | 8,987 |   |
| Percentage of software revenue        |       | 34.9                                                                   | %          | 26.0 | % | 12.2 | % |
| Other costs of  software license      |       | 5,321                                                                  |       | 4,806 |   | 6,864 |   |
| Percentage of software revenue        |       | 19.4                                                                   | %          | 13.3 | % | 9.3 | % |
| Total cost of  software license       |       | $                                                                      | 14,900     |   | $ | 14,213 |   | $ | 15,851 |   |
| Percentage of  software revenue       |       | 54.2                                                                   | %          | 39.3 | % | 21.5 | % |

 

The increase in the total cost of software in fiscal2006 as compared to fiscal 2005 was a result of increased amortization ofcapitalized software in fiscal 2006 and increased amortization of prepaid royaltyfees paid to certain alliance partners over the remaining period of benefit.The decrease in the total cost of software in fiscal 2005 as compared to fiscal2004 was a result of decreased royalties paid to third parties as a result of adecrease in software revenue, partially offset by an increase in amortizationof capitalized software due to the product release of version 7.2 in February 2004and the write-off of one of our capitalized products for which the anticipatedfuture gross revenue was less than the estimated future costs of completing anddisposing of the product. Amortization of capitalized software developmentcosts does not vary with software revenue while royalty fees do.

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***Amortization of Acquired Technology.***   Inconnection with acquisitions in fiscal 2003, 2002 and 2001, we acquireddeveloped technology that we offer as part of our integrated solutions.Acquired technology is amortized over periods ranging from four to six years.We expect annual amortization of acquired technology to be approximately $3.7million in fiscal 2007.

***Cost of Servicesand Support.***   Cost of services and supportprimarily includes personnel and third-party contractor costs. Cost of servicesand support, excluding the cost of reimbursed expenses and non-cashstock-option compensation expense, decreased $12.8 million, or 17.4%, to $60.8million in fiscal 2006 compared to fiscal 2005 and decreased $6.6 million, or8.2%, to $73.7 million in fiscal 2005 compared to fiscal 2004. Cost of servicesand support, excluding the cost of reimbursed expenses and non-cashstock-option compensation expense, as a percentage of related revenue was42.7%, 49.5% and 50.2% in fiscal 2006, 2005 and 2004, respectively. Thedecrease in cost of services and support in fiscal 2006 and 2005 wasattributable to an overall decrease in the average number of services andsupport employees to 279, 304 and 366 in fiscal 2006, 2005 and 2004,respectively. This was a result of the implementation of our cost containmentand cost reduction initiatives during fiscal 2006, fiscal 2005 and fiscal 2004,as well as from voluntary attrition. The decrease in cost of services andsupport as a percentage of related revenue in fiscal 2006 as compared to fiscal2005 was primarily the result of lower outside contractor costs and a $1.5million benefit recorded in fiscal 2006 related to the reversal of a recordedprovision for anticipated loss on a contract for which our obligation toprovide services expired during fiscal 2006. The decrease in cost of servicesand support as a percentage of related revenue in fiscal 2005 as compared tofiscal 2004 reflected a slight increase in the proportion of the revenuederived from support services during fiscal 2005, which historically havehigher margins than implementation services.

***Sales and Marketing.***   Salesand marketing expense consists primarily of personnel costs, sales commissions,promotional events such as user conferences, trade shows and technicalconferences, advertising and public relations programs. Sales and marketingexpense decreased $14.1 million, or 26.8%, to $38.6 million in fiscal 2006 ascompared to fiscal 2005 and decreased $13.4 million, or 20.3%, to $52.7 millionin fiscal 2005 as compared to fiscal 2004. The decrease in fiscal 2006 andfiscal 2005 was due to:

·        anoverall decrease in the average number of sales, marketing and businessdevelopment employees to 120 for fiscal 2006 compared to 170 for fiscal 2005and 216 for fiscal 2004, which was primarily a result of the implementation ofour exit and disposal plans in fiscal 2006, fiscal 2005 and fiscal 2004;

·        adecrease in travel, advertising and public relations spending resulting fromcost containment and cost reduction measures implemented in fiscal 2006 andfiscal 2005; and

·        adecrease in sales commissions due to lower software revenue in fiscal 2005 ascompared to fiscal 2004.

Offset by:

·        anincrease in sales commissions and incentives in fiscal 2006 as compared tofiscal 2005; and

·        anincrease in bad debt expense in fiscal 2005 as compared to fiscal 2004.

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***Product Development.***   Productdevelopment costs include expenses associated with the development of newsoftware products, enhancements of existing products and quality assuranceactivities and are reported net of capitalized software development costs. Suchcosts are primarily from employees and third-party contractors. The followingtable sets forth product development costs for the three fiscal years endedFebruary 28 or 29, 2006, 2005 and 2004 (in thousands):

| ** **                                    | ** ** | **Fiscal Year Ended February 28 or 29,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Gross product  development costs              |       | $                                                                      | 31,018     |   | $ | 41,977 |   | $ | 46,121 |   |
| Percentage of total revenue                   |       | 17.4                                                                   | %          | 21.7 | % | 19.0 | % |
| Less: Capitalized  software development costs |       | 3,501                                                                  |       | 9,573 |   | 9,888 |   |
| Percentage of total revenue                   |       | 2.0                                                                    | %          | 5.0 | % | 4.1 | % |
| Product  development costs, as reported       |       | $                                                                      | 27,517     |   | $ | 32,404 |   | $ | 36,233 |   |
| Percentage of  total revenue                  |       | 15.4                                                                   | %          | 16.8 | % | 14.9 | % |

 

Gross productdevelopment costs decreased $11.0 million, or 26.1%, in fiscal 2006 as comparedto fiscal 2005 and decreased $4.1 million, or 9.0%, in fiscal 2005 as comparedto fiscal 2004. The decrease in fiscal 2006 and 2005 was due to:

·        adecrease in the average number of product development contractors in the U.S.in fiscal 2006 and fiscal 2005;

·        adecrease in personnel costs as we continue to migrate more of our productdevelopment efforts to our product development center in Hyderabad, India andtake advantage of the lower wage resources located in that region;

·        anoverall decrease in the average number of product development employees to 218in fiscal 2005, compared to 275 in fiscal 2004. This was primarily a result ofthe implementation of our exit and disposal plans in fiscal 2005; and

·        furtherconsolidation of our U.S. product development function to our corporateheadquarters in Rockville, Maryland in fiscal 2005.

***General andAdministrative.***   General and administrativeexpenses include personnel and other costs of our legal, finance, accounting,human resources, facilities and information systems functions. General andadministrative expenses decreased $2.2 million, or 10.1%, to $19.9 million infiscal 2006 as compared to fiscal 2005 and decreased $2.9 million, or 11.8%, to$22.1 million in fiscal 2005 as compared to fiscal 2004. The decrease in fiscal2006 as compared to fiscal 2005 was the result of a decrease in the averagenumber of general and administrative employees and facility expenses resultingfrom the implementation of our exit and disposal plans during fiscal 2006 andfiscal 2005 and decreased outside professional fees incurred in fiscal 2006.The decrease in fiscal 2005 as compared to fiscal 2004 was the result of adecrease in the average number of general and administrative employeesresulting from the implementation of our exit and disposal plans during fiscal2005 and fiscal 2004, in addition to a decrease in property tax expense relatedto a settlement with the State of Maryland. The decrease was partially offsetby an increase in accounting professional fees primarily related to compliancewith the Sarbanes-Oxley Act of 2002.

***Amortization ofIntangibles.******  ***Ourpast acquisitions were accounted for under the purchase method of accounting.As a result, we recorded goodwill and other intangible assets that representthe excess of the purchase price paid over the fair value of the net tangibleassets and identifiable intangible assets acquired. Other intangible assets areamortized over periods ranging from four to seven years. Amortization ofintangibles decreased $0.9 million, or 13.5%, to $5.8 million in fiscal 2006 comparedto fiscal 2005 and increased $2.0 million, or 42.2%, to $6.6 million in fiscal2005 compared to fiscal 2004. The decrease in amortization of intangibles infiscal 2006 was due to the completed amortization in fiscal 2006 of the 

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customer relationshipasset related to the Talus acquisition, an acquired technology asset related tothe Spaceworks acquisition and the completed amortization in fiscal 2005 ofacquired technology related to the STG and Talus acquisitions. Additionally,the decrease in fiscal 2006 was due in part to the absence of amortization fora full year of acquisition-related intangible assets related to the PartminerCSD, Inc. asset acquisition due to the impairment charge recorded for theremaining net book value of those assets during fiscal 2006 (See Note 6 in theNotes to Consolidated Financial Statements included elsewhere in this AnnualReport on Form 10-K). The increase in amortization of intangibles infiscal 2005 was due to a change in the Talus customer relationships amortizationfrom seven years to five years in late fiscal 2004, partially offset by thecompletion of amortization in fiscal 2005 of acquired technology related to theSTG and Talus acquisitions.

***GoodwillImpairment.***   We test goodwill for impairmenton an annual basis, coinciding with our fiscal year end, or on an interim basisif circumstances change that would more likely than not reduce our implied fairvalue (which includes factors such as, but not limited to, the Company’s marketcapitalization, control premium and recent stock price volatility) below ourcarrying value. Please see Item 1A—“Risk Factors—Risks Related to OurBusiness.” During the three months ended May 31, 2005 and the six monthsended August 31, 2004, we experienced adverse changes in our stock priceresulting from our poor financial performance. As a result, we performed a testfor goodwill impairment at May 31, 2005 and August 31, 2004 anddetermined that based upon our implied fair value (which includes factors suchas, but not limited to, our market capitalization, control premium and recentstock price volatility) as of May 31, 2005 and August 31, 2004, therewas no impairment of goodwill. During the three months ended November 30,2005, our Chief Financial Officer left to take a position at another company.As a result, we performed a test for goodwill impairment as ofNovember 30, 2005. We determined that based upon the implied fair value(which includes factors such as, but not limited to, our market capitalization,control premium and recent stock price volatility) as of November 30,2005, there was no impairment of goodwill.

We performed our annual goodwill impairment reviews onFebruary 28, 2006 and February 28, 2005 and determined that our impliedfair value exceeded our carrying value. Accordingly, no goodwill impairmentcharge was recorded during fiscal 2006 or fiscal 2005. Details of ouramortization of intangibles and goodwill impairment are included in Note 6in the Notes to Consolidated Financial Statements included elsewhere in thisAnnual Report on Form 10-K.

***Exit and DisposalActivities.***   In order to adjust our coststructure and resource allocation to increase efficiencies and reduce excessoffice space, we adopted exit and disposal plans in the second quarter offiscal 2005, the first and fourth quarters of fiscal 2004 and in the second,third and fourth quarters of fiscal 2003. In connection with our decision toimplement these plans, we incurred related exit and disposal charges of $3.3 million,$17.3 million and $18.6 million in fiscal 2006, fiscal 2005 andfiscal 2004, respectively.

Thefollowing table sets forth a summary of exit and disposal activity charges, netof adjustments, for fiscal 2006, fiscal 2005 and fiscal 2004 (in thousands):

| ** **                          | ** ** | **Fiscal Year Ended February 28 or 29,** | ** ** |
|-------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Lease obligations  and terminations |       | $                                                                      | 1,955      |   | $ | 8,119 |   | $ | 12,917 |   |
| Severance and  related benefits     |       | 1,163                                                                  |       | 6,064 |   | 855 |   |
| Impairment  charges                 |       | 206                                                                    |       | 2,742 |   | 4,241 |   |
| Other                               |       | (25                                                                    | )          | 387 |   | 614 |   |
| Total exit and disposal  activities |       | $                                                                      | 3,299      |   | $ | 17,312 |   | $ | 18,627 |   |

 

The impact to reported basic and diluted loss pershare as a result of the exit and disposal charges was $(0.04), $(0.21) and$(0.26) for fiscal 2006, fiscal 2005 and fiscal 2004, respectively.

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In response to thedifficulties we faced in our ability to stabilize revenue and operatingperformance, we enacted a number of cost containment and cost reductionmeasures over the past three fiscal years to better align our cost structurewith expected revenue. Specifically, we took the following actions:

1.                We reduced ourworkforce by 173 and 79 employees through involuntary terminations with thefiscal 2005 and 2004 exit and disposal plans, respectively.

2.                We furtherconsolidated our product development function in the U.S. to the corporateheadquarters in Rockville, Maryland as part of the exit and disposal plans infiscal 2005 and fiscal 2004. This included the relocation of certain employeesfrom Wayne, Pennsylvania; San Carlos, California; Atlanta, Georgia; Denver,Colorado and Ottawa, Canada to Rockville, Maryland.

3.                As a result of theworkforce reductions, product development consolidation and employee attrition,certain of our facilities were under-utilized. Accordingly, we consolidated ourremaining workforce in the under-utilized facilities and abandoned thethen-vacated office space. The facilities permanently removed from ouroperations during fiscal 2006, 2005, 2004 and 2003 were located in Brussels,Belgium, Wayne, Pennsylvania; Irving, Texas; Detroit, Michigan; Denver,Colorado; Ottawa, Canada; Itasca, Illinois; Milan, Italy; Munich and Ratingen,Germany, Stockholm, Sweden and the Philippines. A portion of the office spacewas permanently vacated in certain facilities located in Rockville, Maryland;Atlanta, Georgia; Calabasas and San Carlos, California; Bracknell, UnitedKingdom and Tokyo, Japan.

4.                As part of theconsolidation of our facilities, certain leasehold improvements and furnitureand fixtures were abandoned. As a result, we recorded non-cash charges equal tothe net book value of these abandoned assets in exit and disposal activitycharges.

As a result of our exit and disposal activities andcost containment initiatives during the past four fiscal years, we have reduced“all other operating expenses” (as shown in the table under “Key FinancialMetrics—Fiscal 2006”) to $167.8 million in fiscal 2006 and $203.0 millionin fiscal 2005. Details of our exit and disposal charges are included in Note 14in the Notes to Consolidated Financial Statements included elsewhere in thisAnnual Report on Form 10-K.

Substantially all of the cost savings from our exitand disposal activities and cost containment initiatives implemented in fiscal2004 were reflected in our operating results by the first quarter of fiscal2005. As of February 28, 2006, we had achieved quarterly cost savings ofapproximately $7.5 million, compared to the third quarter of fiscal 2005as a result of implementing our exit and disposal plans during fiscal 2006 and2005. We have completed most of the planned initiatives approved in our secondquarter fiscal 2005 exit and disposal plans and will complete the remainder ofthe initiatives in fiscal 2007. The total exit and disposal charges reflectedin the financial statements are based on management’s current estimates, whichmay change materially if actual lease-related expenditures or sublease incomediffer from current estimates.

***Non-CashStock-Option Compensation Expense.***   Werecognized non-cash stock-option compensation expense of $0.0 million, $0.2million and $1.8 million in fiscal 2006, fiscal 2005 and fiscal 2004,respectively, related to unvested stock options assumed in the acquisition ofTalus. As part of the Talus acquisition, we assumed all outstanding Talus stockoptions, which were converted into our stock options. Options to purchaseapproximately 631,000 shares of our common stock were unvested at theacquisition date. FASB Interpretation No. 44 (“FIN 44”) “*Accounting for Certain Transactions Involving Stock Compensation*”requires the acquiring company to measure the intrinsic value of unvested stockoptions assumed at the acquisition date in a purchase business combination andrecord a compensation charge over the remaining vesting period of those optionsto the extent those options remain outstanding. The unamortized value of thesestock awards is included as a separate component of stockholders’ equity. Allof these outstanding options are fully vested and all compensation expense hasbeen recognized as of February 28, 2006.

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***Repriced Options.******  ***In January 1999, the Companyrepriced certain employee stock options, other than those held by executiveofficers or directors. This resulted in approximately 3.0 million optionsbeing repriced and the four-year vesting period starting over. Under FIN 44,repriced options are subject to variable plan accounting, which requirescompensation cost or benefit to be recorded each period based on changes in ourstock price until the repriced options are exercised, forfeited or expire. Theinitial fair value used to measure the ongoing stock option compensation chargeor benefit was $22.19 based on the closing price of our common stock onJune 30, 2000. Since our stock price at the beginning and end of fiscal2006, 2005 and 2004 was below $22.19, no charge or benefit was recorded duringfiscal 2006, 2005 and 2004. As of February 28, 2006, approximately 283,550repriced options were still outstanding, all of which are fully vested. Infuture periods, we will record additional charges or benefits related to therepriced stock options still outstanding based on the change in our commonstock price compared to the last reporting period. If our stock price at thebeginning and end of any reporting period is less than $22.19, no charge orbenefit will be recorded.

**Other Expense, Net**

OtherExpense, Net, includes interest income from cash and cash equivalents,marketable securities and long-term investments, interest expense fromborrowings and payments on our capital lease obligations, foreign currencyexchange gains or losses and other gains or losses. Other expense, net,decreased $1.5 million, or 20.9%, to $5.8 million in fiscal 2006 ascompared to fiscal 2005 and decreased $6.1 million, or 45.6%, to$7.3 million in fiscal 2005 as compared to fiscal 2004. The decrease inOther Expense, Net in fiscal 2006 as compared to fiscal 2005 relates primarilyto an increase in interest income of $1.6 million due to increasedinterest rates on our cash and investments. The decrease in Other Expense, Netin fiscal 2005 compared to fiscal 2004 relates to a decrease in interestexpense of approximately $3.6 million primarily related to a reduction ininterest expense on our outstanding convertible notes due to the conversion of$74.5 million of our Notes during fiscal 2004 (See Note 7 in theNotes to Consolidated Financial Statements included elsewhere in this AnnualReport on Form 10-K), an increase in interest income of$0.7 million in fiscal 2005 and a decrease of other expense of$0.1 million and a foreign currency exchange gain of $0.3 million infiscal 2005 compared to a $1.6 million foreign currency exchange loss infiscal 2004.

**Debt ConversionExpense**

During fiscal 2004, the Company exchanged $74.5 millionof its Notes for 9,725,750 shares of its common stock in privately negotiatedtransactions with note holders. The offer and issuance of the common stockunderlying these transactions were exempt from registration underSection 3(a) (9) of the Securities Act of 1933 and were freelytraded upon issuance.

At the conversion price of$44.06 per share, the $74.5 million of Notes exchanged would have beenconvertible into 1,690,780 shares of common stock. For accounting purposes, theadditional 8,034,970 shares of common stock that the Company issued in thesetransactions are considered an inducement for the holders to convert theirNotes, which required the Company to record a non-operating expense equal tothe fair value of the additional shares issued to the holders. Accordingly, theCompany recorded a non-cash debt conversion expense of approximately $59.8 millionduring the year ended February 29, 2004. These transactions resulted in a$74.5 million reduction of the Notes outstanding and increasedstockholders’ equity by $74.5 million. The 9,725,750 shares of commonstock issued in these transactions represented approximately 11.9% of theshares outstanding as of February 28, 2004.

**(Benefit from)Provision for Income Taxes**

We recorded an income tax(benefit) provision of $(3.6) million, $0.7 million and $1.3 million in fiscal2006, fiscal 2005 and fiscal 2004, respectively. In fiscal 2006, fiscal 2005and fiscal 2004, $(3.7) million, $0.6 million and $1.0 million of theincome tax (benefit) provision relates to foreign taxes, respectively. 

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Managementperformed an analysis, based on various factors, including our current yearfinancial results, our cumulative losses for the three year period endedFebruary 28, 2006, and estimates of future profitability, as ofFebruary 28, 2006 and February 28, 2005, and concluded that futuretaxable income will, more likely than not, be insufficient to recover our netdeferred tax assets as of February 28, 2006 and February 28, 2005.Therefore, we have maintained a valuation allowance for the full amount of ournet deferred tax assets. Management will continue to monitor its estimates offuture profitability and the likelihood of realizing our net deferred taxassets based on evolving business conditions.

**Loss Per CommonShare**

Loss per common share is computed in accordance withSFAS No. 128, “*Earnings Per Share*,”which requires dual presentation of basic and diluted earnings per common sharefor entities with complex capital structures. Basic loss per common share isbased on net loss divided by the weighted-average number of common sharesoutstanding during the period. Diluted earnings or loss per common shareincludes, when dilutive, (i) the effect of stock options, warrants andrestricted stock granted using the treasury stock method, (ii) the effectof contingently issuable shares earned during the period, and (iii) sharesissuable under the conversion feature of our Notes using the if-convertedmethod. Future weighted-average shares outstanding calculations will beimpacted by the following factors:

·       theongoing issuance of common stock associated with stock option and warrantexercises;

·       theissuance of common shares associated with our employee stock purchase plan andrestricted stock grants;

·       anyfluctuations in our stock price, which could cause changes in the number ofcommon stock equivalents included in the diluted earnings per common sharecalculations (to the extent that we have positive net income);

·       theissuance of common stock to raise capital or effect business combinationsshould we enter into such transactions; and

·       assumed or actualconversions of our convertible debt into common stock.

**Liquidity andCapital Resources**

Historically, we have financed our operations and metour capital expenditure requirements through cash flows provided fromoperations, long-term borrowings (including the sale of convertible notes) andsales of equity securities. The significant components of our working capitalare liquid assets such as cash and cash equivalents, marketable securities andtrade accounts receivable, reduced by accounts payable, accrued expenses,short-term restructuring obligations and deferred revenue. In fiscal 2006,working capital increased $15.2 million, to $120.7 million primarilyas a result of cash flows provided by operating activities.

Cash, cashequivalents and marketable securities increased $4.8 million during fiscal 2006to $140.7 million, as of February 28, 2006. The increase is due to changesin working capital items, including $9.7 million in payments for exit anddisposal obligations, as well as:

·        $0.5million in cash proceeds from employee stock purchase plan purchases.

Offset by:

·        $6.7million in expenditures on property, equipment and software, including $3.6million of capitalized software; and

·        $2.9million in principal payments on long-term debt and capital leases.

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We believe that the combination of cash, cashequivalents and marketable securities and anticipated cash flows fromoperations will be sufficient to fund expected capital expenditures, capitallease obligations and working capital needs for the next twelve months.

On April 24, 2006, weentered into a definitive Agreement and Plan of Merger with JDA and the MergerSub. Under the Merger Agreement, the Merger Sub will be merged with and intothe Company, with the Company continuing after the Merger as a wholly-ownedsubsidiary of JDA. At the effective time of the Merger, each issued andoutstanding share of Company Common Stock will be converted into the right toreceive $2.50 in cash. There can be no assurance the Merger will be consummatedas planned. In the event the transaction does not close, we will evaluatealternatives to address our outstanding Notes (See Note 7), which become due inNovember 2007, including, but not limited to, seeking additional debt or equityfinancing, exchanging existing Notes outstanding for equity, selling existingcompany assets and other potential solutions.

***Commitments***

As ofFebruary 28, 2006, our future fixed commitments and the effect thesecommitments are expected to have on our liquidity and cash flows in futureperiods are as follows (in thousands):

| ** **                                                             | ** ** | **Fiscal Year Ended February 28 or 29,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                             | ** ** | **2007**                                                               | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Capital lease  obligations(1)                                          |       | $                                                                      | 1,791      |       | $          | 820        |       | $ | 123 |   | — |   | $ | — |   |   | $ | — |   |   | $ | 2,734 |   |
| Operating lease  obligations not in exit and disposal activities  |       | 6,958                                                                  |       | 6,465      |       | 5,284      |       | 5,256 |   | 5,394 |   |   | 11,367 |   |   | 40,724 |   |
| Operating lease  obligations in exit and disposal activities           |       | 7,114                                                                  |       | 5,778      |       | 4,213      |       | 4,052 |   | 4,137 |   |   | 13,333 |   |   | 38,627 |   |
| Convertible  subordinated notes(1)                                     |       | 8,775                                                                  |       | 185,006    |       | —     |       | — |   | — |   |   | — |   |   | 193,781 |   |
| Total fixed  commitments                                               |       | $                                                                      | 24,638     |       | $          | 198,069    |       | $ | 9,620 |   | $ | 9,308 |   | $ | 9,531 |   |   | $ | 24,700 |   |   | $ | 275,866 |   |
|                                                                        |            |                                                                        |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Includesprincipal and interest payments

*Lease Commitments*

The lease commitments inthe above table designated as “Operating lease obligations in exit and disposalactivities” include only the non-cancelable portion of lease commitmentsincluded in past initiatives and, accordingly, have not been reduced byestimated sublease income. However, as required by EITF 88-10 andSFAS 146, we have reduced these lease commitments by estimated subleaseincome in determining the total exit and disposal obligations of $15.0 millionrecorded in the accompanying balance sheet as of February 28, 2006. Pleaserefer to Note 8 and Note 14 in the Notes to Consolidated FinancialStatements included elsewhere in this Annual Report on Form 10-K.

*ConvertibleSubordinated Notes*

The Company had $175.5million in Notes outstanding as of February 28, 2006. The Notes bear interestat 5.0% per annum which is payable semi-annually. The fair market value of theNotes in the hands of the holders was $164.5 million on February 28, 2006,based on market quotes. The Notes mature in November 2007 and areconvertible into approximately 4.0 million shares of the Company’s common stockat a conversion price of $44.06, subject to adjustment under certainconditions. The conversion price of the Notes will be adjusted in the eventthat we issue our common stock as a dividend or distribution with respect toour common stock, we subdivide, combine or reclassify our common stock, weissue rights to our common stockholders to purchase our common stock at lessthan market price, we make certain distributions of securities, cash or otherproperty to our common stockholders (other than ordinary cash 

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dividends),or we make certain repurchases of our common stock. Upon a change of control ofthe Company, the holders of the Notes would have the right to require us or oursuccessor to repurchase the Notes at a purchase price equal to 100% of theprincipal amount, plus accrued and unpaid interest to the date of repurchase incash. The Notes do not have any financial covenants. Since November 7,2003, we have had the right to redeem, from time to time, the Notes in whole orin part, at our option. Redemption can be made on at least 30 days’ notice ifthe trading price of our common stock for 20 trading days in a period of 30consecutive trading days ending on the day prior to the mailing of notice ofredemption exceeds 120% of the conversion price of the Notes. The redemptionprice, expressed as a percentage of the principal amount, is:

| **Redemption Period**                           | ** ** | ** ** | ** ** | **Redemption Price** | ** ** |
|------------------------------------------------------|------------|------------|------------|---------------------------|------------|
| November 1,  2005 through October 31, 2006 |       |       | 101        | %                         |       |
| November 1, 2006  through maturity              |       |       | 100        | %                         |       |

 

Pursuant to the MergerAgreement, we will conduct a cash tender offer for all of the outstandingNotes. Closing of that tender offer will be conditioned on the closing of theMerger. If the Merger is not consummated, we may choose to purchase a portionof the Notes in the open market from time to time with cash or enter intoalternative transactions to reduce the balance of the Notes, such as exchangingNotes for shares of our common stock, if we are able to do so on termsfavorable to us. Purchases of the Notes with cash would reduce our debtoutstanding and may result in a decrease to our liquidity and working capital.

*Credit Facility*

We had a one-year unsecured revolving credit facilitywith Silicon Valley Bank (“SVB”) for $15.0 million which expired onMarch 30, 2005. On April 8, 2005, we renewed the credit facility withSVB for $15.0 million and a two-year term, effective March 29, 2005 (the“Credit Facility”). Under the terms of the Credit Facility, we may request cashadvances, letters of credit, or both. Borrowings under the Credit Facilityaccrue interest at the prime rate plus 0.5%. The Credit Facility requires us tocomply with the following financial covenants: (i) minimum tangible networth (defined as stockholders’ equity plus convertible debt less goodwill,capitalized software costs and other intangible assets) must be at least $90.0million plus 50% of consolidated net income generated cumulatively commencingwith the first quarter of fiscal 2006 and (ii) our ratio of (a) unrestrictedcash, cash equivalents, marketable securities and long-term investmentsdeposited with SVB and its affiliates plus net accounts receivable to(b) current liabilities plus long-term indebtedness to SVB and outstandingletters of credit minus deferred revenue, must be at least 2.0 to 1.0. We werein compliance with all financial covenants as of February 28, 2006 andthere were no cash draws outstanding. As of February 28, 2006, we had$10.0 million in letters of credit outstanding under the Credit Facility, ofwhich $8.9 million is related to securing our lease obligations for certainoffice space and $1.1 million is related to securing an additional line ofcredit in China, which was never executed. The $1.1 million letter of creditexpires in May 2007 and cannot be drawn upon by the beneficiary becausethe line of credit for which it was issued to secure was never executed.Pursuant to the Merger Agreement, we will cooperate with JDA to replace, at theclosing of the Merger, the letters of credit that are outstanding with SVB withnewly issued letters of credit.

The Credit Facility requires us to maintain $50.0million in funds with SVB Asset Management and its affiliates. The CreditFacility also restricts the amount of additional debt we can incur and restrictsthe amount of cash that we can use for acquisitions and for the repurchase ofconvertible debt. Under the terms of the Credit Facility, we retain the rightto terminate the facility at any time upon repayment of any advances and theposting of cash collateral for any outstanding letters of credit. Under theCredit Facility, SVB has the right to obtain a lien on all of our assets, otherthan intellectual property, upon an occurrence 

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of default, unless weterminate the facility as provided above. The Credit Facility also providesthat, upon an event of default, we are prohibited from paying a cash dividendto our shareholders.

The Credit Facility includes a provision forsupplemental equipment advances, under which we may borrow up to an additional$5.0 million for the purchase of equipment, office furniture and other capitalexpenditures. Amounts could be borrowed for such capital expenditures through December 31,2005 and accrued interest at a fixed interest rate equal to 7.75% annually.Equipment advances would have been repaid monthly over a 36-month-period,beginning in the month following the advance. Our right to request supplementalequipment advances expired on December 31, 2005 and we made no draw downs.The financial covenants for the supplemental equipment advances were the sameas The Credit Facility and we were in compliance with all financial covenants.

We had an additionalcredit agreement (the “Equipment Line”) with SVB, as amended, which expired March 31,2003, under which we were permitted to borrow up to $5.0 million for thepurchase of equipment. Amounts borrowed under the Equipment Line accrueinterest at a rate equal to the greater of the three-year Treasury note rateplus 5%, or 8.25%, and are repaid monthly over a 36-month period. Duringfiscal 2003, we borrowed $2.9 million under the Equipment Line. As of February 28,2006, we have repaid all amounts borrowed and have no amounts outstanding. Thefinancial covenants for the Equipment Line are the same as the financialcovenants for the Credit Facility. We were in compliance with all financialcovenants as of February 28, 2006.

***Cash Flows***

Cash provided by (used in) operations was $14.5 million,$(5.5) million and $6.8 million in fiscal 2006, 2005 and 2004,respectively. The improvement in operating cash flows of $20.0 million infiscal 2006 compared to fiscal 2005 resulted from a lower net loss in fiscal2006, decreased payments made to vendors related to the timing of receivingvendor invoices, decreased payments made related to our exit and disposalactivities, decreased employee compensation payments related to the timing ofour payroll, partially offset by a lower contribution of accounts receivableand an increase in deferred revenue related to the timing and seasonality ofour support renewals. The decline in operating cash flows of $12.3 millionin fiscal 2005 compared to fiscal 2004 resulted from a decrease in contribution of accounts receivable due to lowerrevenue, increased payments related to exit and disposal activities, increasedpayments made to vendors related to the timing of receiving vendor invoices,partially offset by a decrease in the payment of interest on our convertibledebt as a result of the decrease in our outstanding debt balance and a lowernet loss in fiscal 2005 compared to fiscal 2004.

Cash used in investing activities was $11.8 million,$10.8 million and $34.0 million in fiscal 2006, 2005 and 2004,respectively. Investing activities consist of the sales and purchases ofmarketable securities and long-term investments, changes in restricted cash,purchases and sales of property and equipment, purchases and capitalization ofsoftware, and acquisitions of businesses. Total purchases of property andequipment were $3.1 million in fiscal 2006, $4.1 million in fiscal2005 and $2.2 million in fiscal 2004. In fiscal 2004, approximately $13.0 millionwas provided by the elimination of cash restrictions upon the transfer of ourletters of credit from Bank of America to SVB. Approximately $3.3 millionof this $13.0 million was recorded as a deposit to secure an internationallease. Acquisitions of businesses, net of cash acquired of $2.0 millionduring fiscal 2004 relates to proceeds received that were held in escrow fromprior acquisitions. Sales of marketable securities, net of (purchases), were$(5.1) million in fiscal 2006, $20.1 million in fiscal 2005 and$(26.3) million in fiscal 2004. Sales of long-term investments, net of(purchases), were $(18.9) million in fiscal 2005 and $(9.0) millionin fiscal 2004.

Cash (used in) provided by financing activities was$(2.4) million, $(1.7) million and $5.5 million in fiscal 2006,2005 and 2004, respectively. Cash (used in) provided by financing activitiesconsisted of cash proceeds from the exercise of stock options and employeestock plan purchases, cash proceeds from 

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borrowings on our line ofcredit and cash payments for principal amounts on our SVB equipment line ofcredit and capital lease obligations.

Our cash position may decline in the future, primarilydue to cash outflows associated with our exit and disposal activities, ouroperations and our debt service obligations. We are obligated to payapproximately $8.8 million of interest annually on our $175.5 millionof Notes. Additionally, the Notes will mature and become due and payable in November 2007.

Although we expect thatexisting cash, cash equivalents and short-term investment balances will satisfyour working capital and capital expenditure requirements for the next twelvemonths, there can be no assurance that in the longer term we will be successfulin obtaining or maintaining an adequate level of cash resources. We may beforced to act more aggressively in the future in the area of expense reductionin order to conserve cash as we look for alternative liquidity solutions.

**Off-Balance SheetArrangements**

We do not use off-balancesheet arrangements with unconsolidated entities or related parties, nor do weuse other forms of off-balance sheet arrangements such as research anddevelopment arrangements. Accordingly, our liquidity and capital resources arenot subject to off-balance sheet risks from unconsolidated entities.

*Lease Arrangements.*

We have entered intooperating leases with unrelated third parties for our U.S. and internationalsales and support offices and certain equipment in the normal course ofbusiness. These arrangements are sometimes referred to as a form of off-balancesheet financing. Future minimum lease payments under our operating leases as February 28,2006 are detailed previously in “Liquidity and Capital Resources.” Under theterms of our Credit Facility, we may request cash advances, letters of credit,or both. As of February 28, 2006, $10.0 million in letters of creditwas outstanding under the Credit Facility, of which $8.9 million is relatedto securing our lease obligations for certain office space.

**Recently IssuedAccounting Pronouncements**

In May 2005, the FASB issued SFAS 154, “*Accounting Changes and Error Corrections—A replacement of APB Opinion No. 20and FASB Statement No. 3*” (“SFAS 154”). The FASB issuedSFAS 154 to provide guidance on the accounting for and reporting of errorcorrections. Unless otherwise impracticable, it establishes retrospectiveapplication as the required method for reporting a change in accountingprinciple in the absence of explicit transition requirements specific to thenewly adopted accounting principle. SFAS 154 also provides guidance fordetermining whether retrospective application is impracticable and forreporting an accounting change when retrospective application is impracticable.Furthermore, this statement addresses the reporting of a correction of an errorin previously issued financial statements by restating previously issuedfinancial statements. This Statement is effective for financial statements forfiscal years beginning after December 15, 2005. The adoption of thisstatement is not expected to have a material impact on our consolidatedfinancial statements.

SFAS No. 123(Revision 2004), “*Share-Based Payment*” (“SFAS 123(R)”) was issued in December 2004 and was to be effective for reporting periodsbeginning after June 15, 2005. The new statement requires all share-basedpayments to employees to be recognized in the financial statements based ontheir fair values. We currently account for our share-based payments toemployees under the intrinsic value method of accounting set forth inAccounting Principles Board Opinion No. 25, “*Accountingfor Stock Issues to Employees*.” Additionally, we comply with thestock-based employer compensation disclosure requirements of SFAS 148. On March 29,2005, the SEC issued Staff Accounting Bulletin Topic 14, “Share-BasedPayment” (“SAB 107”). SAB 107, which becomes effective for publiccompanies upon their 

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adoptionof SFAS No. 123(R), describes the SEC Staff’s views in determiningthe assumptions that underlie the fair value estimates and interaction ofSFAS No. 123(R) with certain existing SEC guidance. On April 14,2005, The Securities and Exchange Commission announced the adoption of a new rule thatamends the compliance dates for SFAS 123 (R). The new rule allowscompanies to implement SFAS 123 (R) at the beginning of their nextfiscal year, instead of their next reporting period beginning after June 15,2005. We plan to adopt the new statement beginning in the first quarter offiscal 2007. We believe the adoption of SFAS 123 (R ) will have amaterial impact on our financial position and results of operations.

**Item 7A.   QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.**

Foreign Currency Risk. We are subject to risk fromchanges in foreign exchange rates for our subsidiaries that use a foreigncurrency as their functional currency and are translated into U.S. dollars.Such changes could result in cumulative translation gains or losses that areincluded in shareholders’ equity. Revenue outside of the U.S. as a percentageof total revenue was 35.5%, 33.8% and 34.0% for fiscal 2006, 2005 and 2004,respectively. Revenue outside the U.S. is derived from operations in Australia,Belgium, Brazil, Canada, The People’s Republic of China, France, Hong Kong,Japan, Malaysia, Mexico, Singapore, Taiwan and the United Kingdom. Exchangerate fluctuations between the U.S. dollar and the currencies of these countriesresult in positive or negative fluctuations in the amounts relating to foreignoperations reported in our condensed consolidated financial statements. None ofthe components of our Statement of Operations were materially affected byexchange rate fluctuations during fiscal 2006, 2005 and 2004. We generally donot use foreign currency options and forward contracts to hedge against theearnings effects of such fluctuations. While we do not expect to incur materiallosses as a result of this currency risk, there can be no assurance that losseswill not result.

Interest Rate Risk. Our marketable securities andcertain cash equivalents are subject to interest rate risk. Fixed incomeinstruments are subject to interest rate risk and, accordingly, if marketinterest rates increase, these investments will decline in value. We managethis risk by maintaining an overall investment portfolio of available-for-saleinstruments with high credit quality and relatively short average maturities. Instrumentsin our entire portfolio include, but are not limited to, commercial paper,money-market instruments, bank time deposits and variable rate and fixed rateobligations of corporations and national, state and local governments andagencies, in accordance with an investment policy approved by our Board ofDirectors. These instruments are denominated in U.S. dollars. As of February 28,2006 and February 28, 2005, the fair market value of our long-terminvestments and marketable securities held was $61.2 million and $55.5 million,respectively. We also hold cash balances in accounts with commercial banks inthe U.S. and foreign countries. These cash balances represent operatingbalances only and are invested in short-term deposits of the local bank.

The U.S. Federal Reserve Board influences the generalmarket rates of interest. During fiscal 2006, the Federal Reserve Boardincreased the discount rate by 300 basis points from 2.5% to 5.5%. The FederalReserve Board subsequently raised the discount rate by 0.25 basis points. As ofMay 10, 2006, the discount rate was 5.75%.

The weighted average yield on interest-bearinginvestments held as of February 28, 2006 and February 28, 2005 wasapproximately 3.61% and 1.7%, respectively. Based on our investment holdings atFebruary 28, 2006, a 100 basis point decline in the average yield wouldreduce our annual interest income by $0.9 million.

Credit Risk. Financialinstruments that potentially subject us to concentrations of credit riskconsist primarily of cash and cash equivalents, investments in marketablesecurities, long-term investments and trade accounts receivable. We havepolicies that limit investments in investment grade securities and the amountof credit exposure to any one issuer. We perform ongoing credit evaluations ofour customers and 

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maintainan allowance for potential credit losses. We do not require collateral or othersecurity to support client receivables since most of our customers are large,well-established companies. Our credit risk is also mitigated because ourcustomer base is diversified both by geography and industry, and no singlecustomer has accounted for more than 10% of our consolidated revenue on anannual basis, although we have had customers which accounted for more than 10%of our consolidated revenue on a quarterly basis. We generally do not useforeign exchange contracts to hedge the risk in receivables denominated inforeign currencies. We do not hold or issue derivative financial instrumentsfor trading or speculative purposes.

**Item 8.   FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.**

Our Consolidated FinancialStatements and supplementary data, together with the reports of our independentregistered public accounting firm, are included in Part IV of this AnnualReport on Form 10-K.

**Item 9.   CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

None.

**Item 9A.   CONTROLSAND PROCEDURES.**

Our management, with theparticipation of our Chief Executive Officer and acting Principal FinancialOfficer, evaluated the effectiveness of our disclosure controls and proceduresas of the end of the period covered by this Annual Report on Form 10-K.The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the“Exchange Act”), means controls and other procedures of a company that aredesigned to ensure that information required to be disclosed by the company inthe reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theSEC’s rules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed by a company in the reports that it files or submitsunder the Securities Exchange Act is accumulated and communicated to thecompany’s management, including its principal executive and principal financialofficers, as appropriate to allow timely decisions regarding requireddisclosure. Our management recognizes that any controls and procedures, nomatter how well designed and operated, can provide only reasonable assurance ofachieving their objectives. Based on the evaluation of our disclosure controlsand procedures as of the end of the period covered by this Annual Report on Form 10-K,our Chief Executive Officer and acting Principal Financial Officer concludedthe Company’s disclosure controls and procedures were effective at a reasonableassurance level.

**MANAGEMENT’S REPORT ON INTERNAL CONTROLS OVERFINANCIAL REPORTING**

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in the Exchange Act Rules 13a-15(f) and15d-15(f). Those rules define internal control over financialreporting as a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples and includes those policies and procedures that:

·       pertainto the maintenance of records that in reasonable detail accurately and fairlyreflect the transactions and dispositions of the assets of the Company;

·       providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts 

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and expenditures of theCompany are being made only in accordance with authorizations of management anddirectors of the Company; and

·       providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the Company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

As part of our compliance efforts relative to Section 404of the Sarbanes-Oxley Act of 2002, our management assessed the effectiveness ofour internal controls over financial reporting as of February 28, 2006. Inmaking this assessment, management used the criteria set forth in the InternalControl—Integrated Framework by the Committee of Sponsoring Organizations ofthe Treadway Commission (“COSO”). Based on our evaluation under COSO, ourmanagement concluded that our internal control over financial reporting waseffective as of February 28, 2006.

The Company’s independentauditors have issued an audit report on our assessment of the Company’s internalcontrol over financial reporting. This report appears below.

**Changes in InternalControl over Financial Reporting**

Based on the evaluation conducted by management,including the Chief Executive Officer and the acting Principal FinancialOfficer, there were no changes in our internal controls during the fourthquarter ended February 28, 2006 that have materially affected, or arereasonably likely to materially affect our internal control over financialreporting.

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholders ofManugistics Group, Inc.Rockville, Maryland

We have audited management’sassessment, included in the accompanying Management’s Report on InternalControl Over Financial Reporting, that Manugistics Group, Inc. and subsidiaries(the “Company”) maintained effective internal control over financial reportingas of February 28, 2006, based on criteria established in*Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission. The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinions.

A company’s internalcontrol over financial reporting is a process designed by, or under thesupervision of, the Company’s principal executive and principal financialofficers, or persons performing similar functions, and effected by the company’sboard of directors, management, and other personnel to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherentlimitations of internal control over financial reporting, including the possibilityof collusion or improper management override of controls, materialmisstatements due to error or fraud may not be prevented or detected on atimely basis. Also, projections of any evaluation of the effectiveness of theinternal control over financial reporting to future periods are subject to therisk that the controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’sassessment that the Company maintained effective internal control overfinancial reporting as of February 28, 2006, is fairly stated, in allmaterial respects, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Also in our opinion, the Companymaintained, in all material respects, effective internal control over financialreporting as of February 28, 2006, based on the criteria 

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establishedin *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements as of and for the yearended February 28, 2006, of the Company and our report dated May 14,2006 expressed an unqualified opinion on those financial statements.

/s/ DELOITTE & TOUCHE LLP

McLean, VirginiaMay 14, 2006

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**Item 9B.   Otherinformation.**

**Special RecognitionCash Bonus Pool**

***During the first quarter of fiscal year2007, the Board and the Compensation Committee of the Board (the “CompensationCommittee”) considered on several occasions the appropriate level of specialrecognition bonuses for certain employees of the Company in light of the Merger,and approved an aggregate of up to $1.25 million of cash bonuses (the “SpecialRecognition Bonus Pool”) to be allocated among the applicable employees of theCompany, separate from and in addition to any other compensation owed them andcontingent upon the closing of the Merger. The Board and the CompensationCommittee (i) approved the allocation of $350,000 of the Special RecognitionBonus Pool to Joseph L. Cowan, Chief Executive Officer of the Company, and (ii)authorized Mr. Cowan to determine the allocation of the remaining $900,000 ofthe Special Recognition Bonus Pool to executive officers and key employees ofthe Company. An aggregate of $627,500 of the Special Recognition Bonus Pool  will be awarded to the Company’s remainingexecutive officers (with the balance of the pool allocated to other employees)including $104,500 to Edward R. Daihl, Senior Vice President, Revenue Management,$73,000 to Kelly Davis-Stoudt, Vice President, Controller and Chief AccountingOfficer, $195,000 to Jeffrey L. Kissling, Senior Vice President and ChiefTechnology Officer, $55,000 to Ronald P. Kubera, Senior Vice President ofConsumer Goods and European Operations, $45,000 to Lori Mitchell-Keller, SeniorVice President of Global Marketing & Solution Management and $155,000 toTimothy T. Smith, Senior Vice President & General Counsel. These bonuseswill be paid within thirty (30) days after closing of the Merger, subject tothe continued employment of each individual with the Company up to and throughthe closing of the Merger.***

**PART III**

**Item 10.   DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT.**

In light of the pendingMerger, the Company has not scheduled an annual meeting of stockholders for2006 and does not plan to file a definitive proxy statement involving theelection of directors unless the Company’s stockholders do not approve theMerger at the special meeting of stockholders.

**Directors andExecutive Officers**

The Third Amended and Restated By-Laws of the Company(the “By-Laws”) provide that the Company’s business shall be managed by a Boardof Directors of not fewer than six and not more than nine directors, with thenumber of directors to be fixed by the Board of Directors from time to time. Thenumber of directors is presently fixed at nine. The By-Laws also provide thatthe Company’s Board of Directors is divided into three classes: Class I, Class IIand Class III, each class being as nearly equal in number as possible. Thedirectors in each class serve terms of three years and until their respectivesuccessors have been elected and qualified. The term of office of one class ofdirectors expires each year in rotation so that one class is elected at eachannual meeting of stockholders for a three-year term.

There are presently three directors in Class I,two directors in Class II and three directors in Class III. There ispresently one vacancy on the Board. Based upon the recommendations to be madeby the Corporate Governance Committee, the Board of Directors will considersuitable candidates to fill the vacancy.

Executive officers of the Company are elected by theBoard of Directors on an annual basis and serve at the discretion of the Board.

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Set forth below is certaininformation concerning our directors as well as the executive officers of theCompany and Manugistics, Inc., our principal operating subsidiary. Thereare no family relationships among any of our executive officers or directors.

| **Name**             | ** ** | ** ** | ** ** | **Age** | ** ** | **Position**                                                               | ** ** | **Term as   Director Expires** | ** ** |
|----------------------|------------|------------|------------|---------|------------|----------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| Joseph L. Cowan      |       |       | 57         |    |       | Director and Chief  Executive Officer                                      |       | 2007 (Class III)                         |       |
| Lynn C. Fritz        |       |       | 63         |    |       | Director                                                                   |       | 2008 (Class I)                           |       |
| William H. Gibson    |       |       | 60         |    |       | Director                                                                   |       | 2008 (Class I)                           |       |
| Joseph H. Jacovini   |       |       | 65         |    |       | Director                                                                   |       | 2006 (Class II)                          |       |
| William H. Janeway   |       |       | 63         |    |       | Director                                                                   |       | 2007 (Class III)                         |       |
| Kevin C. Melia       |       |       | 58         |    |       | Chairman of the Board                                                      |       | 2008 (Class I)                           |       |
| William G. Nelson    |       |       | 72         |    |       | Director                                                                   |       | 2007 (Class III)                         |       |
| Thomas A. Skelton    |       |       | 58         |    |       | Director                                                                   |       | 2006 (Class II)                          |       |
| Lori Mitchell-Keller |       |       | 40         |    |       | Senior Vice President of  Global Marketing &  Solution Management |       |                                          |       |
| Jeffrey L. Kissling  |       |       | 51         |    |       | Senior Vice President  and Chief Technology  Officer                       |       |                                          |       |
| Ronald P. Kubera     |       |       | 41         |    |       | Senior Vice President of  Consumer Goods  and European Operations          |       |                                          |       |
| Timothy T. Smith     |       |       | 42         |    |       | Senior Vice President,  General Counsel  and Secretary                     |       |                                          |       |
| Edward R. Daihl      |       |       | 52         |    |       | Senior Vice President,  Revenue Management                                 |       |                                          |       |
| Kelly Davis-Stoudt   |       |       | 35         |    |       | Vice President, Controller and Chief  Accounting Officer                   |       |                                          |       |

 

Mr. Cowan has served as Chief Executive Officerof the Company since July 2004, and as a director of the Company since August 2004.From November 2002 to December 2003, Mr. Cowan served as President andChief Executive Officer of EXE Technologies, Inc., a provider of supplychain management and work management software and services. From April 2001 to November2002, he served as President and Chief Executive Officer of Invensys Automation &Information Systems, a business unit of Invensys plc and provider of enterpriseresource planning and supply chain management software. From July 2000 to April2001, Mr. Cowan served as President and Chief Executive Officer, and from April 1998to July 2000, as Senior Vice President, Sales and Marketing, of Wonderware, abusiness unit of Invensys plc and provider of industrial automation software.

Mr. Fritz has served as a director of the Companysince 1995. Mr. Fritz has been Director General of the Fritz Institute, adisaster relief management firm, since January 2001. From August 2000 tothe present, Mr. Fritz has served as Chairman of the Board and ChiefExecutive Officer of LynnCo Supply Chain Solutions, Inc., a provider ofsolutions that optimize and analyze logistics networks. From 1988 through May 2001,Mr. Fritz served as Chairman of the Board and Chief Executive Officer ofFritz Companies, Inc., a global freight forwarding and custom housebrokerage company.

Mr. Gibson rejoined the Board as a director ofthe Company in 2005. From its formation in 1986 to 2001, Mr. Gibson servedas Chairman of the Board of the Company. From 1986 until June 2000, 

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Mr. Gibson alsoserved as Chief Executive Officer and President of the Company. Mr. Gibsonhas been Managing Partner of The Albermarle Group, a private investmentcompany, since February 2001. Mr. Gibson is also a member of the Board ofDirectors of Venture Philanthropy Partners and the Board of Regents ofVillanova University.

Mr. Jacovini has served as a director of theCompany since 1986. He is a partner at Dilworth Paxson LLP, based inPhiladelphia, Pennsylvania, where he has practiced law since 1965. He hasserved as Chairman of that firm since January 1998, and as Co-Chairmanfrom 1992 through December 1997. Mr. Jacovini has served as Chairman ofthe Board of Trustees of Drexel University since May 2003 and as a Trustee ofDrexel University since 1990.

Mr. Janeway has served as a director of theCompany since October 2002. Mr. Janeway joined Warburg Pincus LLC, aprivate investment firm, in 1988 as a Managing Director and has served as ViceChairman of the firm since January 2001. Mr. Janeway serves on theBoard of Directors of BEA Systems, Inc., an application platform softwareprovider; and Nuance Communications, Inc., a provider of speech andimaging solutions.

Mr. Melia has served as Chairman of the Board ofthe Company since April 2005 and as a director of the Company since July 2003. Mr. Meliaserved as Chairman of the Board and Chief Executive Officer of Manufacturer’sService Ltd., a large electronic equipment production outsourcing company, fromJune 1994 to January 2002 and as Chairman of Manufacturer’s Service Ltd. from January2002 to January 2003. Mr. Melia serves as Chairman of the Board ofIona Technologies, plc, a provider of software products and services forcommunications providers, and Lightbridge, Inc., a provider of softwareproducts and services for communications providers. He also serves as adirector of Eircom Group, plc, a telecommunications company and Radisys Corp.,a provider of integration software.

Mr. Nelson has served as a director of theCompany since 1986. Since 1990, Mr. Nelson has served as Chairman of theBoard of HarrisData Services of Wisconsin, Inc., a provider of businessapplication software to mid-size organizations. Mr. Nelson was ChiefExecutive Officer of HarrisData Services from 1990 to June 2002. Since June 1999,Mr. Nelson has served as Chairman of the Board of Repository Technologies, Inc.,a provider of customer relationship management systems for the softwareindustry. From July 1996 until October 2000, Mr. Nelson servedas the Chairman of the Board, and, from September 1996 until April 1999,he served as Chief Executive Officer and President, of Geac ComputerCorporation Limited, a Canadian provider of enterprise software and systems. From1986 until its sale in March 2006, Mr. Nelson served on the Board ofDirectors of Geac Computer Corporation Limited (Canada). Mr. Nelson serveson the Board of Directors of HealthGate Data Corp., a provider of healthcareinformation and, from May 2002 until 2005, served on the Board of Directors ofCatalyst International, Inc., a provider of warehouse management software.

Mr. Skelton has served as a director of theCompany since April 1992. Since November 1999, Mr. Skelton hasbeen the principal of Skelton & Associates, LLC, through which heserves as an investor in and advisor to computer software and servicescompanies. He served as President of Cambar Software, Inc. from August 1997to November 1999. Mr. Skelton also serves on the Board of Directorsof Calian Technology Ltd. (Canada), a technology services provider.

Ms. Mitchell-Keller has served as Senior VicePresident of Global Marketing & Solution Management since September 2004.From February 2003 to September 2004, Ms. Mitchell-Keller served as SeniorVice President of Product Development & Strategy. From March 2001 to February2003, Ms. Mitchell-Keller served as Senior Vice President of Market andTechnology Strategy. From March 2000 to March 2001, she served as VicePresident of Technology Strategy, from October 1999 to March 2000, as VicePresident of Product & Solution Marketing and from March 1999 to September1999, as Vice President of Product Marketing.

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Mr. Kissling has served as Senior Vice Presidentand Chief Technology Officer since September 2004. From March 2002 to September2004, Mr. Kissling was an independent consultant. From June 2001 to March 2002,Mr. Kissling served as Chief Technology Officer of Baan Company, aprovider of enterprise resource planning systems and a provider of software andconsulting services (“Baan Company”). From June 1999 to June 2001, he served asthe Chief Technology Officer of Invensys Manufacturing and Process Systems, abusiness unit of Invensys plc and provider of enterprise industrial automationsystems.

Mr. Kubera has served as Senior Vice President ofConsumer Goods since March 2005. From October 2003 to February 2005, Mr. Kuberaserved as Senior Vice President of Northern European Operations, from March 2001to October 2003, as Senior Vice President of Global Services, and from March 1999to February 2001, as Vice President.

Mr. Smith has served as Senior Vice President,General Counsel and Secretary from January 2000 through February 2002 and sinceJuly 2002. From June 1998 to December 1999, he served as Vice President andGeneral Counsel for Land Rover North America, Inc., an automobile importerand distributor.

Mr. Daihl has served as Senior Vice President ofRevenue Management since November 2005. From September 2004 to October 2005, Mr. Daihlserved as Group Vice President of Revenue Management. From August 2003 to September2004, Mr. Daihl served as President of Dexec Consulting, a provider ofmanagement advisory services to the high tech industry. From July 2000 to August2003, he served as President of CAPS Logistics, a wholly-owned subsidiary ofBaan Company, and from July 1999 to July 2000 as the Vice President,Consulting, of Baan Company.

Ms. Davis-Stoudt has served as the Company’s VicePresident, Controller and Chief Accounting Officer since May 2004. From April 1999to May 2004, Ms. Davis-Stoudt served as Assistant Controller.

On October 24, 2002,William H. Janeway, a partner of Warburg Pincus & Co. and aVice-Chairman and member of Warburg Pincus LLC, a private equity investmentfirm, was nominated and appointed as a Class III director pursuant to therequest for representation on the Board from Warburg Pincus Private EquityVIII, L.P. (“WP VIII”) as a result of WP VIII’s significant ownership interestin the Company in 2002. In connection with Mr. Janeway’s appointment tothe Board, the Company entered into a standstill agreement with WP VIII. Underthe standstill agreement, the Company consented to the acquisition by WP VIIIand certain of its affiliates of up to 19.9% of the Common Stock and agreedthat, for as long as WP VIII and its affiliates beneficially own at least tenpercent (10%) of the outstanding shares of Common Stock, the Company wouldnominate and use its best efforts to have elected to the Board one persondesignated by WP VIII and reasonably acceptable to the Company. If WP VIIIbeneficially owns less than ten percent (10%) of the outstanding shares ofCommon Stock as a result of the sale, transfer or disposition of shares ofCommon Stock by WP VIII, then upon the request of the Company, WP VIII’sdesignated member of the Board would be required to resign from the Board. Mr. Janewayis indemnified by WP VIII in connection with his service on the Company’s Boardof Directors. The standstill agreement expired in October 2005.

**Audit Committee andAudit Committee Financial Expert**

The Audit Committee presently consists of William G.Nelson (Chairman), Kevin C. Melia and Thomas A. Skelton. The Board of Directorshas determined that all members of the Audit Committee are “independent” asthat term is defined in the applicable Nasdaq listing standards and regulationsof the Securities and Exchange Commission. In addition, the Board of Directorshas determined that Mr. Nelson, Mr. Melia and Mr. Skelton havethe financial experience required by the applicable Nasdaq listing standardsand each of Mr. Nelson and Mr. Melia is an “audit committee financialexpert” as defined by applicable regulations of the Securities and ExchangeCommission.

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The information containedin this Annual Report on Form 10-K with respect to the independenceof the members of the Audit Committee shall not be deemed to be “filed” withthe Securities and Exchange Commission, nor shall such information beincorporated by reference into any prior or subsequent filing under theSecurities Act or the Exchange Act, except to the extent that the Companyspecifically incorporates it by reference in such filing.

**Section 16(a)   BeneficialOwnership Reporting Compliance**

Section 16(a) ofthe Exchange Act requires the Company’s executive officers, directors andpersons who own more than ten percent (10%) of the Common Stock (collectively, “ReportingPersons”) to file initial reports of ownership and reports of changes ofownership of the Common Stock with the Securities and Exchange Commission (“SEC”)and the Nasdaq Stock Market. Reporting Persons are required to furnish theCompany with copies of all forms that they file under Section 16(a). Basedsolely upon a review of the copies of such forms received by the Company orwritten representations from Reporting Persons, the Company believes that, withrespect to fiscal year 2005, all Reporting Persons complied with all applicablefiling requirements under Section 16(a) with the exception of ThomasSkelton who failed to timely file three Form 4 Statements of Changes inBeneficial Ownership each reporting one transaction with respect to certaintransfers of shares among himself, his wife and a joint account held for thebenefit of himself and his wife and one Form 5 Annual Statement of Changes inBeneficial Ownership of Securities to report four transactions with respect togifts of shares from Mr. Skelton and his wife to their daughters.

**Code of Ethics:**

We have adopted a code of business conduct and ethicsfor all employees of our Finance department and those with financial oversightresponsibility, including our Chief Executive Officer, Chief Financial Officerand Chief Accounting Officer, known as the Code of Ethics pursuant to Section 406of the Sarbanes-Oxley Act of 2002. The Code of Ethics is available on ourwebsite at www.manugistics.com.

We intend to disclose anyamendment to, and any waiver from, a provision of the Code of Ethics thatapplies to the Chief Executive Officer, Chief Financial Officer, ChiefAccounting Officer or any other executive officer and that relates to anyelement of the Code of Ethics definition enumerated in Item 406(b) ofRegulation S-K, on Form 8-K, within five business days following thedate of such amendment or waiver.

**Code of Conduct:**

We have adopted a code of business conduct and ethicsfor all directors, officers and employees, known as the Code of Conductpursuant to applicable NASDAQ listing standards. The Code of Conduct isavailable on our website at www.manugistics.com.

We intend to disclose anyamendment to the Code of Conduct that relates to any element of the Code ofEthics definition enumerated in Item 406(b) of Regulation S-K, and anywaiver from a provision of the Code of Conduct granted to any director orexecutive officer, on Form 8-K, within five business days followingthe date of such amendment or waiver.

**Item 11.   EXECUTIVECOMPENSATION.**

**SummaryCompensation Table**

The following table setsforth summary information regarding compensation paid or accrued by the Companyfor services during fiscal years 2006, 2005 and 2004 to each person serving asthe Company’s Chief Executive Officer and each of the four most highlycompensated executive officers other than the 

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personsserving as Chief Executive Officer whose individual total salary and bonus onan annual basis exceeded $100,000 for fiscal 2006 (the “Named Executives”). Mr. Cowanand Mr. Kissling joined the Company during fiscal 2005; accordingly, theannual compensation reported for them in fiscal 2005 is for a partial year. Mr. Kuberawas not an executive officer at any time during fiscal 2004. Mr. Daihlbecame an executive officer in fiscal 2006. Mr Rajaji resigned as ExecutiveVice President and Chief Financial Officer on October 18, 2005, effective November 4,2005.

**SummaryCompensation Table**

|                                            | ** ** | ** ** | ** ** | ** **                   | ** ** | **Long-Term  Compensation Awards** | ** ** | ** **            | ** ** |
|--------------------------------------------|------------|------------|------------|------------------------------|------------|-----------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | ** **                   | ** ** | **Restricted**                          | ** ** | **Securities**        | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Stock**                               | ** ** | **Underlying**        | ** ** | ** ** | ** ** |
| **Name and**                          | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **                              | ** ** | **Other Annual** | ** ** | **Award(s)** | ** ** | **Options** | ** ** | **All Other** | ** ** |
| **Principal Position**                | ** ** | ** ** | ** ** | **Year**                     | ** ** | **Salary**                              | ** ** | **Bonus**             | ** ** | **Compensation** | ** ** | **(23)** | ** ** | **(24)** | ** ** | **Compensation** | ** ** |
| Joseph L. Cowan                            |       |       | 2006       |                         |       | $                                       | 400,000    |                  | —     | (1) |   | $  | 18,398 | (2) |   |   | — |   |   |   | — |   |   |   | $  | 45,882 | (3) |   |
| Chief Executive Officer                    |       |       | 2005       |                         |       | $                                       | 244,102    |                  | —     |   |   | $  | 17,867 | (4) |   |   | $  | 867,754 | (5) |   |   | 2,000,000 |   |   |   | $  | 27,994 | (6) |   |
| Jeffrey L. Kissling                        |       |       | 2006       |                         |       | $                                       | 225,000    |                  | —     | (1) |   | — |   |   |   | $ | 53,790 |   |   |   | 75,000 |   |   |   | $  | 2,063 | (7) |   |
| Senior Vice President                      |       |       | 2005       |                         |       | $                                       | 110,913    |                  | —     |   |   | — |   |   |   | — |   |   |   | 275,000 |   |   |   | $  | 271 | (8) |   |
| and  Chief Technology                      |       |       |       |                         |       |                                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Officer                                    |       |       |       |                         |       |                                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ronald P. Kubera                           |       |       | 2006       |                         |       | $                                       | 225,000    |                  | —     | (1) |   | $  | 130,075 | (9) |   |   | $ | 53,790 |   |   |   | 50,000 |   |   |   | $  | 3,841 | (10) |   |
| Senior Vice President,                     |       |       | 2005       |                         |       | $                                       | 201,667    |                  | $          | 34,355 |   |   | $  | 24,846 | (11) |   |   | $ | 63,700 |   |   |   | 175,000 |   |   |   | $  | 120,104 | (12) |   |
| Consumer Products                          |       |       |       |                         |       |                                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lori Mitchell-Keller                       |       |       | 2006       |                         |       | $                                       | 225,000    |                  | —     | (1) |   | — |   |   |   | $ | 44,825 |   |   |   | 50,000 |   |   |   | $  | 3,412 | (13) |   |
| Senior Vice President,                     |       |       | 2005       |                         |       | $                                       | 207,483    |                  | —     |   |   | $ | 200 | (14) |   |   | $ | 64,575 |   |   |   | — |   |   |   | $  | 3,192 | (15) |   |
| Global Marketing and                       |       |       | 2004       |                         |       | $                                       | 180,651    |                  | $          | 20,000 |   |   | — |   |   |   | $ | 98,145 |   |   |   | — |   |   |   | $  | 225 | (16) |   |
| Solution  Management                       |       |       |       |                         |       |                                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Edward R. Daihl                            |       |       | 2006       |                         |       | $                                       | 200,000    |                  | —     | (1) |   | — |   |   |   | — |   |   |   | 50,000 |   |   |   | $  | 1,500 | (17) |   |
| Senior Vice President,  Revenue Management |       |       |       |                         |       |                                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Raghavan Rajaji                            |       |       | 2006       |                         |       | $                                       | 219,173    |                  | —     |   |   | $  | 757 | (18) |   |   | $ | 47,206 |   |   |   | — |   |   |   | $  | 9,678 | (19) |   |
| Former Executive Vice                      |       |       | 2005       |                         |       | $                                       | 311,667    |                  | —     |   |   | — |   |   |   | $ | 89,180 |   |   |   | 205,000 |   |   |   | $  | 7,875 | (20) |   |
| President and Chief                        |       |       | 2004       |                         |       | $                                       | 264,458    |                  | $          | 25,000 |   |   | — |   |   |   | $ | 159,450 |   |   |   | 345,429 | (21) |   |   | $ | 11,439 | (22) |   |
| Financial Officer                          |       |       |       |                         |       |                                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                            |            |            |            |                              |            |                                         |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)             No bonuses were paid during fiscal 2006. Each ofMessrs. Cowan, Kissling, Kubera and Daihl and Ms. Mitchell-Keller received cashawards for achieving corporate performance or managerial targets and goals inthe fourth quarter of fiscal 2006 in the amounts of $100,000, $33,750, $56,250,$30,000 and $35,550, respectively, which cash awards were paid in the firstquarter of fiscal 2007.

(2)             Represents a car allowance of $16,200 and $2,198 intransportation and living expenses.

(3)             Represents $40,417 in housing expenses, $4,132 foradditional life insurance premiums, and a $1,333 employer contribution to theCompany’s 401(k) Plan.

(4)             Represents a car allowance of $9,885 and $7,982 intransportation and living expenses.

(5)             In connection with his employment with the Company, Mr. Cowanwas awarded a total of 333,000 restricted shares, 200,000 of which vested upongrant and the remainder of which vested on January 1, 2006 as a result ofhis employment through that date.

(6)             Represents $21,436 in housing expenses, $1,033 foradditional life insurance premiums and $5,525 for legal services.

(7)             Represents a $2,063 employer contribution to theCompany’s 401(k) Plan.

(8)             Represents $271 in housing expenses.

(9)             Includes $129,675 for tax equalization payments.

(10)       Represents a $3,191 employer contribution to theCompany’s 401(k) Plan and $650 for additional life insurance premiums.

(11)       Includes $24,646 for tax equalization payments.

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(12)       Represents $94,272 for housing and relocation expenses,$22,195 for cost of living expenses, $650 for additional life insurancepremiums and a $2,987 employer contribution to the Company’s 401(k) Plan.

(13)       Represents a $3,187 employer contribution to theCompany’s 401(k) Plan and $225 for additional life insurance premiums.

(14)       Represents a $200 good health subsidy.

(15)       Represents a $2,967 employer contribution to theCompany’s 401(k) Plan and $225 for additional life insurance premiums.

(16)       Represents $225 for additional life insurance premiums.

(17)       Represents a $1,500 employer contribution to theCompany’s 401(k) Plan.

(18)       Represents $757 in unpaid vacation pay.

(19)       Represents a $2,278 employer contribution to theCompany’s 401(k) Plan, $3,341 for additional life insurance premiums and$4,059 for professional tax services.

(20)       Represents $3,304 for additional life insurancepremiums, $1,733 for professional tax services and a $2,838 employercontribution to the Company’s 401(k) Plan.

(21)       Includes 245,429 options granted in connection with theCompany’s option exchange program commenced February 10, 2003 (“2003 OEP”).

(22)       Represents $6,609 for additional life insurancepremiums, $1,567 for professional tax services and a $3,263 employercontribution to the Company’s 401(k) Plan.

(23)       The number and value of the aggregate restricted stockholdings of Messrs. Kissling and Kubera, Ms. Mitchell-Keller and Messrs. Daihland Rajaji at the end of fiscal 2006 were 30,000 shares valued at $55,800,55,000 shares valued at $46,500, 65,000 shares valued at $120,900, 25,000shares valued at $46,500, and 60,000 shares valued at $111,600, respectively.Mr. Cowan had no restricted shares at the end of fiscal 2006. If the Merger isconsummated, any restricted stock will be cashed out in the Merger at a priceper share of $2.50, less any required tax withholdings.

(24)       If the Merger is consummated, any options that are notexercised in advance of the closing will be cashed out in connection with theMerger for the positive difference (if any) between $2.50 and the exerciseprice of the options, without regard to whether the options were alreadyvested, and with the result reduced by applicable tax withholdings.

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**Stock Options**

The following table setsforth certain information concerning the grant of options to the personsserving as Chief Executive Officer and other Named Executives in fiscal 2006. TheCompany has not granted any stock appreciation rights (“SARs”).

**OptionGrants in Last Fiscal Year**

| ** **                | ** ** | **Number of  Securities  Underlying  Options** | ** ** | **Percent of  Total Options  Granted to  Employees in** | ** ** | **Exercise  or Base  Price** | ** ** | **Expiration** | ** ** | **Potential Realizable  Value at Assumed  Annual Rates  of  Stock Price  Appreciation For  Option Term** | ** ** |
|---------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------|------------|----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Name**                  | ** ** | ** **                                          | ** ** | **Granted (#)**                                                        | ** ** | **Fiscal Year**              | ** ** | **($/share)*** | ** ** | **Date**                                                                                                                                              | ** ** | **5%** | ** ** | **10%** | ** ** |
| Joseph L. Cowan |       |                                                | —     |                                                                        |       |                              | —     |           |       |                                                                                                                                                  | —     |   |   | — |   | — |   | — |   |
| Jeffrey L.  Kissling      |       |                                                | 75,000     | (1)                                                                         |       |                              | 4.84       | %              |       |                                                                                                                                                  | $          | 1.795 |   |   | 11/01/2015 |   | 84,665 |   | 214,558 |   |
| Ronald P. Kubera          |       |                                                | 50,000     | (1)                                                                         |       |                              | 3.23       | %              |       |                                                                                                                                                  | $          | 1.795 |   |   | 11/01/2015 |   | 56,443 |   | 143,038 |   |
| Lori  Mitchell-Keller     |       |                                                | 50,000     | (1)                                                                         |       |                              | 3.23       | %              |       |                                                                                                                                                  | $          | 1.795 |   |   | 11/01/2015 |   | 56,443 |   | 143,038 |   |
| Edward R. Daihl           |       |                                                | 50,000     | (1)                                                                         |       |                              | 3.23       | %              |       |                                                                                                                                                  | $          | 1.795 |   |   | 11/01/2015 |   | 84,665 |   | 214,558 |   |
| Raghavan Rajaji(2)        |       |                                                | —     |                                                                        |       |                              | —     |           |       |                                                                                                                                                  | —     |   |   | — |   | — |   | — |   |
|                           |            |                                                     |            |                                                                             |            |                                   |            |                |            |                                                                                                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |

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*                    All optionshave an exercise price equal to the fair market value of the Common Stock onthe date of grant.

(1)          Vests on the earliest tooccur of: (i) the executive officer’s involuntary termination withoutcause or resignation for good reason; (ii) a change of control of theCompany; or (iii) 11/01/2006. If the Merger is consummated, any optionsthat are not exercised in advance of the closing will be cashed out inconnection with the Merger for the positive difference (if any) between $2.50and the exercise price of the options, without regard to whether the optionswere already vested, and with the result reduced by applicable taxwithholdings.

(2)          Mr Rajaji resigned asExecutive Vice President and Chief Financial Officer on October 18, 2005,effective November 4, 2005.

Neither the Chief Executive Officer nor any of theother Named Executive Officers exercised outstanding options during fiscal2006.

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Thefollowing table summarizes the value realized upon exercise of outstandingstock options during fiscal 2006 and the value of the outstanding options heldby the Chief Executive Officer and the other Named Executive Officers.

**AggregatedOption Exercises in Fiscal 2006 andFiscal Year-End Option Values**

| ** **            | ** ** | **Shares  Acquired on** | ** ** | **Value  Realized**   | ** ** | **Number of   Securities Underlying  Unexercised Options  at Fiscal Year-End** | ** ** | **Value of Unexercised  In-the-Money Options at  Fiscal Year-End ($)(2)** | ** ** |
|-----------------------|------------|------------------------------|------------|-----------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| **Name**              | ** ** | ** **                   | ** ** | **Exercise (#)** | ** ** | **($)(1)**                                                                                                   | ** ** | **Exercisable**                                                                                         | ** ** | **Unexercisable** | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Joseph L. Cowan       |       |                         | —     |                  |       |                                                                                                         | —     |                                                                                                    |       |   | 816,667 |   |   |   | 1,183,333 |   |   |   | $ | 0.00 |   |   |   | $ | 0.00 |   |   |
| Jeffrey L.  Kissing   |       |                         | —     |                  |       |                                                                                                         | —     |                                                                                                    |       |   | 56,667 |   |   |   | 293,333 |   |   |   | $ | 0.00 |   |   |   | $ | 4,875 |   |   |
| Ronald P Kubera       |       |                         | —     |                  |       |                                                                                                         | —     |                                                                                                    |       |   | 180,050 |   |   |   | 220,950 |   |   |   | $ | 0.00 |   |   |   | $ | 3,250 |   |   |
| Lori  Mitchell-Keller |       |                         | —     |                  |       |                                                                                                         | —     |                                                                                                    |       |   | 200,629 |   |   |   | 230,167 |   |   |   | $ | 0.00 |   |   |   | $ | 3,250 |   |   |
| Edward R. Daihl       |       |                         | —     |                  |       |                                                                                                         | —     |                                                                                                    |       |   | 25,000 |   |   |   | 192,000 |   |   |   | $ | 0.00 |   |   |   | $ | 3,250 |   |   |
| Raghavan Rajaji       |       |                         | —     |                  |       |                                                                                                         | —     |                                                                                                    |       |   | 430,096 |   |   |   | 250,333 |   |   |   | $ | 0.00 |   |   |   | $ | 0.00 |   |   |
|                       |            |                              |            |                       |            |                                                                                                              |            |                                                                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Computed by multiplyingthe number of shares of Common Stock acquired upon exercise of options by thedifference between (i) the per-share fair market value of the Common Stockon the date of exercise and (ii) the exercise price per share.

(2)          Computedby multiplying the number of options by the difference between (i) theper-share market value of the Common Stock on February 28, 2006 of $1.86and (ii) the exercise price per share.

**Compensation ofDirectors**

The Company pays all non-employee directors an annualretainer of $15,000, except for the Chairman of the Board, who receives anannual retainer of $80,000. Additionally, the Chairman of the Audit Committeereceives an annual retainer of $10,000, and each of the Chairmen of the Company’sother committees receives an annual retainer of $5,000. Non-employee directorsalso receive $1,000 for each Board and committee meeting attended. Directorswho are employees of the Company do not receive any compensation for theirservice on the Board. Directors are reimbursed for their reasonableout-of-pocket expenses incurred in connection with attendance at meetings ofthe Board of Directors and its committees.

In addition, under the Company’s Amended and Restated1998 Stock Option Plan (the “1998 SOP”), each non-employee director,including the Chairman of the Board, receives annually, commencing with thefirst annual meeting of shareholders following the date of appointment orelection to the Board, an option to purchase 10,000 shares of Common Stock. Anynon-employee director who is appointed or elected to the Board after March 1,2003 receives an option to purchase 35,000 shares on the date of appointment orelection, prorated based on the number of fiscal quarters ending from the dateof the appointment or election until the next annual meeting. All of theseoptions vest quarterly over a five-year period.  The 1998 SOP further provides thatdiscretionary grants of options may also be made to non-employee directors. In April 2005,Mr. Melia received a discretionary grant of an option to purchase 100,000shares of Common Stock in connection with his appointment as Chairman of the Board,which vests quarterly over five years. All stock option grants have beengranted with a per share exercise price equal to the market price of a share ofCommon Stock on the date of grant, as determined under the 1998 SOP. Ifthe Merger is consummated, any options that are not exercised in advance of theclosing will be cashed out in connection with the Merger for the positivedifference (if any) between $2.50 and the exercise price of the options,without regard to whether the options were already vested, and with the resultreduced by applicable tax withholdings.

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On October 10, 2005,the Board of Directors established a Special Committee, initially composed ofKevin Melia (Chairman of the Special Committee), Joseph Jacovini and WilliamJaneway to provide an efficient process for the evaluation of various strategicalternatives for the assets or businesses of the Company. On November 1,2005, Mr. Janeway resigned from the Special Committee and was replaced byThomas Skelton. On April 23, 2006,the Corporate Governance Committee approved meeting fees for the SpecialCommittee. The fees for meetings actually attended are $750 per meetingfor the Chairman of the Special Committee and $500 per meeting for theother members of the Special Committee.

**EmploymentAgreements**

The Company entered into a two-year employmentagreement with Mr. Cowan in fiscal 2005 in connection with thecommencement of his employment with the Company under which he receives aminimum annual base salary. Under his agreement, Mr. Cowan is eligible forbonuses of up to 100% of his annual base salary. The Company entered into offerletters with each of Mr. Kubera in 1993, Messrs. Kissling and Daihlin 2004, and Ms. Mitchell-Keller in 1997, in connection with thecommencement of their employment with the Company under which they receive aminimum annual base salary. Assuming the fiscal 2006 bonus arrangementscontinue without modification in fiscal 2007, Messrs. Kissling, Kubera andDaihl and Ms. Mitchell-Keller would be eligible for bonuses of up to 60%,100%, 60% and 63.2%, respectively, of their respective annual base salaries. TheCompany also provides to each of Messrs. Cowan, Kubera, Daihl and Kisslingand Ms. Mitchell-Keller certain benefits, including medical, life anddisability insurance, participation in the Company’s employee stock purchaseplan, and fringe benefits. In addition, Mr. Cowan receives a monthly carallowance of $1,350, receives a housing allowance (with the benefit extended inApril 2006 to run through the earliest of July 21, 2006, the date heobtains a residence within commuting distance from the Company, and 30 daysafter the date his employment with the Company ends) and is entitled to ahealth club membership subject to an annual cap of $3,000 and reimbursement upto $25,000 for financial or tax advice in the event of a change in control ofthe Company. Mr. Cowan’s agreement also includes a provision providing agross-up to make him whole for the imposition of certain parachute excise taxesin the event of a change in control that provides him compensation benefitsabove a certain threshold.

During fiscal 2006, the Company entered into letteragreements amending the terms of employment of each of Messrs. Cowan,Kissling, Kubera, Daihl, and Ms. Mitchell-Keller with respect to a changein control of the Company. Under the terms of these letter agreements, if,within one year of a change in control of the Company, the Company terminatesthe executive’s employment other than for cause or the executive officerterminates his or her employment for good reason, the Company will makeseverance payments to the executive in the amount of his/her base salary andbenefits during the twelve-month period, in the case of Messrs. Kissling,Kubera, and Daihl and Ms. Mitchell-Keller, and during a twenty-four-monthperiod, in the case of Mr. Cowan, commencing on the termination date. Theseverance payments to the executive will continue even if he or she obtainsalternative employment during the severance period. In addition, under theterms of their letter agreements, all options and shares of restricted stockgranted to each of Messrs. Cowan, Kissling, Kubera, Daihl and Ms. Mitchell-Kellershall continue to vest or be exercisable during the period severance paymentsare made, except as noted in the preceding paragraph regarding options and anyrestricted stock then held will be cashed out in the Merger at a price pershare of $2.50, less any required tax withholdings.

Pursuant to the terms of the Merger Agreement, theparties thereto agreed that for all benefit plans (including all severanceagreements, employment related agreements, stock option plans, restricted stockplans and any and all award or other agreements associated with any benefitplan), the Merger would be deemed a change in control, would vest fully anyoutstanding stock option and restricted stock awards, and would establish forspecified individuals, including Joseph L. Cowan, Ed Daihl, Timothy Smithand Kelly Davis-Stoudt among the executive officers, and excluding anyindividuals who waive such treatment in 

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writing before theClosing, the existence of a termination without cause or a resignation with orfor good reason, with the consequences, including, but not limited to, theright of each such person to continue, at no cost to the person, any medicalinsurance coverage that was in effect, for the person and his or her dependents(if any), immediately before the Closing Date until the earlier of theexpiration of such person’s continuation coverage under the ConsolidatedOmnibus Budget Reconciliation Act of 1985, as amended, and the date on whichthe replacement coverage begins with another employer.

**CompensationCommittee Interlocks and Insider Participation**

The current members of the Compensation Committee areThomas A. Skelton (Chairman), William G. Nelson and William H. Janeway. Noexecutive officer of the Company has served as a director or member of thecompensation committee (or other committee serving an equivalent function) ofany other entity, whose executive officers served as a director or member ofthe Compensation Committee of the Company during fiscal 2006.

*The information set forth in the following Report ofthe Compensation Committee of the Board of Directors and in the PerformanceGraph shall not be deemed incorporated by reference into any existing or futurefilings under the Securities Act or the Exchange Act, except to the extent thatthe Company specifically incorporates such information by reference.*

**Report of theCompensation Committee of the Board of Directors on Executive Compensation**

During fiscal 2006, Joseph L. Cowan served as ChiefExecutive Officer of the Company. The Compensation Committee of the Board ofDirectors was directly responsible for the approval and administration of thecompensation program for Mr. Cowan. For fiscal 2006, the Board ofDirectors approved the salary and cash incentive components of the compensationprogram of Mr. Cowan. The award targets and goals underlying the cashincentive component of Mr. Cowan’s Compensation Program were approved bythe Compensation Committee and ratified by the Board of Directors.

During fiscal 2006, the Chief Executive Officerimplemented the Company’s compensation program for the other executive officersof the Company, including those named in the Summary Compensation Table. Basedin part on the recommendations made by Mr. Cowan, the salary and cashincentive components of the fiscal 2006 compensation program for otherexecutive officers were approved by the Compensation Committee and werereviewed by the Board of Directors.

The Compensation Committee was responsible for theadministration of the Company’s equity compensation plans. The CompensationCommittee also approved the grant of options and restricted stock to executiveofficers other than the Chief Executive Officer under the Company’s variousstock option plans, although it delegated limited authority to the ChiefExecutive Officer with respect to the grant of stock options to employees whoare not executive officers. The Compensation Committee’s approval was based, inpart, on grant recommendations made by Mr. Cowan.

The Compensation Committeeconsisted of three non-employee directors of the Company: Thomas A.Skelton, Chairman of the Committee, William H. Janeway and William G. Nelson.

**Objectives andPolicies**

The objectives ofthe Company’s executive compensation programs are to:

·       Attractand retain highly qualified executives to lead and manage the Company byproviding competitive total compensation packages;

·       Rewardexecutives based on the business performance of the Company and upon individualperformance;

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·       Provideexecutives with incentives designed to maximize the long-term performance ofthe Company and to align further their interests with those of the shareholdersof the Company; and

·       Assure that consistentobjectives for corporate and individual performance are established andmeasured.

**Compensation ofExecutive Officers other than the Chief Executive Officer**

In fiscal 2006, the Company’s compensation program forexecutive officers other than Mr. Cowan consisted of cash compensation andthe award of stock options and restricted stock. Cash compensation consisted ofbase salary and cash bonuses awarded based upon the attainment of certaincorporate, managerial and personal award targets and goals.

*BaseSalary.*   Base salaries for executive officers ofthe Company (including the Chief Executive Officer) have historically beendetermined by evaluating the responsibilities associated with their respectivepositions, the experience of the officers, individual performance and byreference to salary surveys and other publicly available compensation data forexecutive officers with comparable ability and experience at similarly-sizedcompanies in the technology industry. Individual salary increases are reviewedannually and, in fiscal year 2006, the review was based primarily oncompetitive market forces affecting compensation for executive officers and theperiod of time since the executive officer’s last increase in base salary.  At the close of fiscal 2006, there were sevenexecutive officers, including the Chief Executive Officer.

In fiscal 2006, annual base salaries for the executiveofficers, other than the Chief Executive Officer, were approved by theCompensation Committee based, in part, on the recommendation of the ChiefExecutive Officer. Base salaries, including Mr. Cowan’s base salary, werenot increased in fiscal 2006.

*CashBonuses.*   During fiscal 2006, each of theexecutive officers, other than the Chief Executive Officer, was eligible toreceive an annual incentive cash bonus in an amount ranging up to 100% of theexecutive officer’s base salary, payable quarterly, based on corporateperformance, managerial and personal award targets or goals. The corporateperformance award targets consisted of specific revenue and operational goalsto be reached by the Company during the course of the fiscal year. Managerialawards were based on a subjective evaluation by the Chief Executive Officer ofthe overall performance of the executive officer for the quarter, and weresubject to the achievement of a specific operational goal of the Company.Personal award targets consisted of specific operational goals and revenuetargets to be achieved by the executive officer or the Company during thecourse of the fiscal year. The award targets and goals were recommended byMr. Cowan and approved by the Compensation Committee. In formulating theaward targets and goals, the Chief Executive Officer considered, among otherfactors, corporate and individual performance, growth in the economy asprojected by various economists and industry growth expectations as publishedby AMR Research and others.

The Company did not achieve its corporate performanceaward targets or the operational goal upon which the managerial award was basedfor fiscal 2006 for the overall fiscal year; however the seven executiveofficers received cash compensation for achieving corporate performance ormanagerial targets and goals for the fourth quarter of fiscal 2006.

*Stock-Option/RestrictedStock Awards.*   Each executive officer other thanthe Chief Executive Officer is also eligible to receive performance awards inthe form of stock-option grants and restricted stock awards which arerecommended by the Chief Executive Officer to the Compensation Committee forapproval. In fiscal 2006, Mr. Cowan based his recommendations primarily onhis evaluation of the performance of such executive officer, competitive marketforces affecting executive compensation, the size of previous option grants tosuch executive officer, together with the number of options held by suchexecutive officer at the beginning of fiscal 2006. These stock option grantsand restricted stock awards were 

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also intended to serve asa strong long-term retention incentive. The Compensation Committee approved andthe Board of Directors ratified the stock-option grants and restricted stockawards as recommended by Mr. Cowan. In making its decision, theCompensation Committee considered a report commissioned by the Company from anindependent compensation specialist presenting prevailing market practices forretention programs, certain constraints imposed by the terms of the Company’sequity plans, the number of outstanding equity awards, the likely potential formandatory option expensing in the near future and coordination of an equityretention program with the Company’s annual equity grant program.

In November 2005, theCompany established a supplemental retention program (the “SupplementalRetention Program”) for certain executive officers and employees. TheSupplemental Retention Program provides for the payment of a total of $130,000in cash to certain executive officers, and grants of a total of 300,000 sharesof restricted stock pursuant to the Amended and Restated 1998 Stock Option Planof the Company (the “1998 Plan”) and 915,000 stock options to certain executiveofficers and employees pursuant to the 1998 Plan. During the fourth quarter offiscal 2006, the Company entered into restricted stock bonus agreements andstock option grant agreements with certain employees and executive officerspursuant to the Supplemental Retention Program. The cash payments and grants ofrestricted stock and stock options to the executive officers under theSupplemental Retention Plan were as follows:

| **Name**              | ** ** | ** ** | ** ** | **Shares of  Restricted Stock** | ** ** | **Stock Options** | ** ** | **Cash Payment** | ** ** |
|-----------------------|------------|------------|------------|-------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| Edward Daihl          |       |       | 25,000     |                                      |       |                   | 50,000     |                  |       |   |   |   |   |
| Kelly  Davis-Stoudt   |       |       | 20,000     |                                      |       |                   | 75,000     |                  |       |   | $ | 50,000 |   |   |
| Jeffrey Kissling      |       |       | 30,000     |                                      |       |                   | 75,000     |                  |       |   |   |   |   |
| Ronald Kubera         |       |       | 30,000     |                                      |       |                   | 50,000     |                  |       |   |   |   |   |
| Lori  Mitchell-Keller |       |       | 25,000     |                                      |       |                   | 50,000     |                  |       |   |   |   |   |
| Timothy T. Smith      |       |       | 35,000     |                                      |       |                   | 100,000    |                  |       |   | $ | 80,000 |   |   |
| Total                 |       |       | 165,000    |                                      |       |                   | 300,000    |                  |       |   | $ | 130,000 |   |   |

 

**Compensation of theChief Executive Officer**

**Joseph L. Cowan**

Mr.  Cowan hasserved as the Company’s Chief Executive Officer since July 22, 2004. Hehas a two-year Employment Agreement with the Company. When determining theoverall compensation program for Mr. Cowan, the Board of Directors and theCompensation Committee considered competitive market conditions for chiefexecutive officers of similar companies with volatile stock prices.

*BaseSalary.*   Mr. Cowan’s annualized base salaryfor fiscal 2006 was $400,000. In setting Mr. Cowan’s base salary, theCompensation Committee considered the responsibilities associated with theposition, Mr. Cowan’s experience, reference to salary surveys and otherpublicly available compensation data for chief executive officers withcomparable ability and experience at similarly-sized companies in thetechnology industry.

*CashBonuses.*   In fiscal 2006, Mr. Cowan waseligible to receive an annual incentive cash bonus of up to $400,000, an amountequal to 100% of his annual base salary during fiscal 2006, based on thecorporate performance award targets referred to above and certain managerialand personal performance targets and goals approved by the Compensation Committeeand ratified by the Board of Directors. The Company did not achieve itscorporate performance award targets or the operational goal upon which themanagerial award was based for fiscal 2006 for the overall fiscal year;however, Mr. Cowan did receive an annual incentive cash bonus for achievingcorporate performance or managerial targets and goals for the fourth quarter offiscal 2006.

Stock-Option/RestrictedStock Awards.   Mr. Cowan did not receive any equity grants in fiscal2006.

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**Changes inCompensation After Fiscal 2006**

*Enhanced Bonus for Kelly Davis-Stoudt.  *InApril 2006, the Compensation Committee approved an additional discretionarybonus for Kelly Davis-Stoudt, the Company’s Vice President, Chief AccountingOfficer and Controller, with respect to her services in the fourth quarter offiscal 2006 (by treating her as though her bonus percentage for that quarterhad been 60% of base salary rather than 40% of base salary) and changed hertarget bonus percentage for the current fiscal year and forward from 40% ofbase salary to 60% of base salary.

*Special Recognition Cash BonusPool.  *In April 2006, JDA Software Group, Inc. (“JDA”)and the Company announced that they had entered into a definitive mergeragreement (the “Merger Agreement”) for JDA to acquire all of the issued andoutstanding shares of the Company (the “Merger”), subject to the approval ofthe Company’s stockholders and certain regulatory and customary conditions. Inlight of the Merger, the Board and the Compensation Committee considered onseveral occasions the appropriate level of special recognition bonuses forcertain employees of the Company, and in the first quarter of fiscal 2007,approved an aggregate of up to $1.25 million of cash bonuses (the “SpecialRecognition Bonus Pool”) to be allocated among the applicable employees of theCompany, separate from and in addition to any other compensation owed them andcontingent upon the consummation of the Merger. The Board and the CompensationCommittee (i) approved the allocation of $350,0000 of the Special RecognitionBonus Pool to Mr. Cowan, and (ii) authorized Mr. Cowan to determine theallocation of the remaining $900,000 of the Special Recognition Bonus Pool.These bonuses will be paid upon closing of the Merger, subject to the continuedemployment of each individual up to and through the closing of the Merger.

**Section 162(m)**

Section 162(m) ofthe Internal Revenue Code of 1986, as amended, generally disallows a taxdeduction to public companies for certain compensation in excess of $1 millionpaid to the Company’s Chief Executive Officer and the four other most highly compensatedexecutive officers. Certain compensation, including qualified performance-basedcompensation, will not be subject to the deduction limit if certainrequirements are met. The Compensation Committee reviews the potential effectof Section 162(m) periodically and uses its judgment to authorizecompensation payments that may be subject to the limit when the CompensationCommittee believes such payments are appropriate and in the best interests ofthe Company and its stockholders, after taking into consideration changingbusiness conditions and the performance of its employees.

**CompensationCommittee**ThomasA. Skelton, ChairmanWilliam H. JanewayWilliam G. Nelson

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**Stock PerformanceGraph**

The following graphcompares the cumulative total return to shareholders of the Common Stock withthe cumulative total return of the Nasdaq Stock Market (US) Index and of theNasdaq Computer and Data Processing Stocks Index from February 28, 2001 tothe end of the Company’s last fiscal year (February 28, 2006). The graphassumes that the value of the investment in the Common Stock and each index was$100 on February 28, 2001 and that all dividends were reinvested. TheCompany has not paid any cash dividends on its Common Stock and does not intendto do so in the foreseeable future. The performance graph is not necessarilyindicative of future performance.

**COMPARE 5-YEARCUMULATIVE TOTAL RETURNAMONG MANUGISTICS GROUP, INC.NASDAQ MARKET INDEX AND NASDAQ COMPUTER & DATA PROCESSING**

****

**ASSUMES $100 INVESTED ON FEB. 28, 2001ASSUMES DIVIDEND REINVESTEDFISCAL YEAR ENDING FEB. 28, 2006**

**Item 12.    SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS.**

The following tablesets forth certain information, as of April 30, 2006 unless otherwiseindicated in the footnotes to the table, with respect to the beneficialownership of shares of Common Stock by (i) each shareholder known by theCompany to be the beneficial owner of more than five percent (5%) of theoutstanding shares of Common Stock; (ii) each director of the Company; (iii) eachexecutive officer named in the Summary Compensation Table appearing above inItem 11—“Executive Compensation”; and (iv) all executive officers anddirectors as a group. Except as indicated in the footnotes to the table, thepersons and entities named in the table have sole voting and investment powerwith respect to all shares of Common Stock which they respectively ownbeneficially. Beneficial ownership is based on 84,142,830 outstanding shares ofCommon Stock as of April 30, 2006. Under applicable rules promulgatedunder the Exchange Act, a person is deemed to be the beneficial owner of sharesof Common Stock if, among other 

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things,he or she directly or indirectly has or shares voting power or investment powerwith respect to such shares. A person is also considered to beneficially ownshares of Common Stock which he or she does not actually own but has the rightto acquire presently or within sixty (60) days of April 30, 2006, byexercise of stock options or otherwise. Mr. Rajaji resigned as the Company’sExecutive Vice President, Treasurer and Chief Financial Officer on November 4,2005. Pursuant to the terms of a change in status agreement, Mr. Rajajiserved as a part-time employee of the Company from November 4, 2005 to March 5,2006.

Theaddress of each person who is an officer or director of the Company is 9715 KeyWest Avenue, Rockville, MD 20850.

| **Name and Address of Beneficial Owner** | ** ** | ** ** | ** ** | **Number of Shares   Beneficially Owned** | ** ** | ** ** | ** ** | **Percent   of Class** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|---------------------------------------------------------------|------------|------------|------------|----------------------------------|------------|
| Joseph L.  Cowan(1)                                               |       |       | 1,374,408  |                                                          |       | +          |       |                             | 1.6        | % |   |
| Lynn C. Fritz(2)                                                  |       |       | 183,000    |                                                          |       | +          |       |                             |       | * |   |
| William M.  Gibson(3)                                             |       |       | 8,600,525  |                                                          |       | +          |       |                             | 10.2       | % |   |
| Joseph H.  Jacovini(4)                                            |       |       | 243,172    |                                                          |       | +          |       |                             |       | * |   |
| William H.  Janeway(5)                                            |       |       | 7,647,100  |                                                          |       | +          |       |                             | 9.1        | % |   |
| Kevin C. Melia(6)                                                 |       |       | 69,250     |                                                          |       | +          |       |                             |       | * |   |
| William G.  Nelson(7)                                             |       |       | 360,500    |                                                          |       | +          |       |                             |       | * |   |
| Thomas A.  Skelton(8)                                             |       |       | 1,093,462  |                                                          |       | +          |       |                             | 1.3        | % |   |
| Ed Daihl(9)                                                       |       |       | 60,000     |                                                          |       | +          |       |                             |       | * |   |
| Jeff Kissling(10)                                                 |       |       | 100,000    |                                                          |       | +          |       |                             |       | * |   |
| Ronald P.  Kubera(11)                                             |       |       | 284,662    |                                                          |       | +          |       |                             |       | * |   |
| Lori  Mitchell-Keller(12)                                         |       |       | 282,842    |                                                          |       | +          |       |                             |       | * |   |
| Raghavan Rajaji                                                   |       |       | 5,000      |                                                          |       |       |       |                             |       | * |   |
| Warburg Pincus  Private Equity VIII, L.P.(13)                     |       |       | 7,619,800  |                                                          |       | +          |       |                             | 9.1        | % |   |
| J.P.Morgan  Chase & Co.(14)                              |       |       | 4,645,800  |                                                          |       |       |       |                             | 5.5        | % |   |
| Wentworth  Hauser & Violich, Inc.(15)               |       |       | 5,472,466  |                                                          |       |       |       |                             | 6.5        | % |   |
| Directors and executive  officers as a group (14 persons)(16)     |       |       | 20,682,832 |                                                          |       | +          |       |                             | 23.9       | % |   |

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*                    Less than 1%of the outstanding Common Stock.

*                    Shares subjectto Voting Agreement, the terms of which are described under the heading “MergerAgreement and Voting Agreement” under Item 13—“Certain Relationships andRelated Transactions” in this Annual Report on Form 10-K.

(1)          Includes 920,833 sharesissuable upon exercise of options and 333,333 shares of restricted stock issuedunder the Company’s stock option plan.

(2)          Includes 174,500 sharesissuable upon exercise of options.

(3)          Includes 20,625 sharesissuable upon exercise of options, 676,000 shares held by his wife, 510,000shares held in a non-profit corporation, with respect to which Mr. Gibsonshares voting and dispositive control, and 7,393,900 shares held in a familylimited partnership. Mr. Gibson serves as the sole general partner of thelimited partnership and, in such capacity, has sole voting and dispositivecontrol of the shares held in the partnership.

(4)          Includes 174,500 sharesissuable upon exercise of options, 2,672 shares held by his wife and 36,000shares held in an individual retirement plan.

(5)          Includes 27,300 sharesissuable upon exercise of options held by Mr. Janeway and a total of7,619,800 shares held by Warburg Pincus Private Equity VIII, L.P, including twoaffiliated partnerships (“WP VIII”). Warburg Pincus Partners, LLC, asubsidiary of Warburg Pincus & Co. (“WP”), is the sole general partnerof WP VIII. WP VIII is managed by Warburg Pincus LLC (“WPLLC”). The 

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address of the WarburgPincus entities is 466 Lexington Avenue, New York, NY 10017. Mr. Janewayis a Partner of WP and Vice Chairman and Member of WP LLC. Mr. Janewaydisclaims beneficial ownership of the shares held by WP VIII.

(6)          Includes 44,250 sharesissuable upon exercise of options and 25,000 shares held by the Kevin C. MeliaIrrevocable Trust II for the benefit of Mr. Melia’s wife and children.

(7)          Includes 144,500 sharesissuable upon exercise of options and 216,000 shares held jointly with hiswife.

(8)          Includes 174,500 sharesissuable upon exercise of options, 539,813 shares held jointly with his wife,170 shares held by his wife and 96,299 shares held in a family limitedpartnership.

(9)          Includes 35,000 sharesissuable upon exercise of options and 25,000 shares of restricted stock issuedunder the Company’s stock option plan.

(10)   Includes 70,000 shares issuableupon exercise of options and 30,000 shares of restricted stock issued under theCompany’s stock option plan.

(11)   Includes 188,967 sharesissuable upon exercise of options and 55,000 shares of restricted stock issuedunder the Company’s stock option plan.

(12)   Includes 212,630 sharesissuable upon exercise of options, 65,000 shares of restricted stock issuedunder the Company’s stock option plan and 839 shares held by her husband.

(13)   The shareholder is WP VIII.Mr. Janeway, a Director of the Company, a Partner of WP and Vice Chairmanand Member of WP LLC, disclaims beneficial ownership of all shares owned by theWarburg Pincus entities. Charles R. Kaye and Joseph P. Landy are ManagingGeneral Partners of WP and Managing Members and Co-Presidents of WP LLC and maybe deemed to control the Warburg Pincus entities. Messrs. Kaye and Landydisclaim beneficial ownership of all shares held by the Warburg Pincus entities.The address of the Warburg Pincus entities is 466 Lexington Avenue, New York,NY 10017.

(14)   Based on a Schedule 13Gfiled with the Securities and Exchange Commission on February 10, 2006, byJPMorgan Chase & Co. filed on behalf of JPMorgan Chase & Co.and its wholly owned subsidiary, J.P. Morgan Investment Management Inc. JPMorganChase & Co. has sole power to vote or direct the vote of 4,252,700shares and sole power to dispose or direct the disposition of 4,645,800 shares.The address of JPMorgan Chase & Co. is 270 Park Ave., New York,NY  10017.

(15)   Based on a Schedule 13Gfiled with the Securities and Exchange Commission on February 7, 2006, byWentworth Hauser & Violich, Inc. The address of Wentworth Hauser &Violich, Inc. is 353 Sacramento Street, Suite 600, San Francisco,CA  94111.

(16)   Includes 2,452,406 sharesissuable upon exercise of options and 618,333 shares of restricted stock issuedunder the Company’s stock option plan.

Please see Item 5 for a description of the securitiesauthorized for issuance under our equity compensation plans.

Please see the disclosureunder the heading “Merger Agreement and Voting Agreement” under Item 13—“CertainRelationships and Related Transactions” in this Annual Report on Form 10-Kfor a description of arrangements that may result in a change of control of theCompany.

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**Item 13.   CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS.**

**William M. Gibson**

Two family members of William M. Gibson, who owns morethan five percent (5%) of the outstanding shares of Common Stock and is adirector of the Company and who was formerly an executive officer of theCompany, are employees of the Company. Mr. Gibson’s brother, Sean Gibson,has been employed as a member of the Company’s sales force since 1985 andreceived $188,187 in compensation from the Company for the last fiscal year.Mr. Gibson’s brother, Patrick Gibson, has been an employee in the Company’ssolutions support group since 1985 and received $89,476 in compensation fromthe Company for the last fiscal year. In addition, since 2001 Mr. Gibsonhas served as a director of LynnCo Supply Chain Solutions, Inc., a companyfor which Lynn C. Fritz, a director of the Company, serves as Chairman andChief Executive Officer.

**Joseph H. Jacovini**

Joseph H. Jacovini, adirector of the Company, is a partner and Chairman of Dilworth Paxson LLP,which provides legal services to the Company.

**William H. Janeway**

William H. Janeway, adirector of the Company since October 2002, is a director of BEA Systems, Inc.Since 1998, the Company has licensed certain software from BEA Systems whichthe Company resells as part of its software solutions. Consistent with prioryears, total revenues paid by the Company to BEA Systems in fiscal 2006 weresignificantly less than 5% of the consolidated gross revenues of each companyfor its last full fiscal year.

**Kevin C. Melia**

Kevin C. Melia, Chairmanof the Board of the Company since April 2005 and a director of the Companysince July 2003, is Chairman of the Board of IONA Technologies plc. Since1995, the Company has licensed certain software from IONA Technologies which ituses in the production of Manugistics software. Consistent with prior years,total revenues paid by the Company to IONA Technologies in fiscal 2006 weresignificantly less than 5% of the consolidated gross revenues of each companyfor its last full fiscal year.

**Ronald P. Kubera**

Sherri Rogers-Kubera, thesister-in-law of Ronald P. Kubera, Senior Vice President of Consumer Goods ofthe Company, is employed by the Company in its Manugistics Consulting Servicesgroup. Ms. Rogers-Kubera received $55,322 in compensation from the Companyfor the last fiscal year.

**Merger Agreementand Voting Agreements**

As disclosed under the heading “Merger Agreement andVoting Agreements” in Item 1—“Business” and elsewhere in this Annual Report on Form 10-K,on April 24, 2006, the Company entered into the Merger Agreement pursuantto which the Merger Sub will be merged with and into the Company, with theCompany continuing after the Merger as a wholly-owned subsidiary of JDA. At theeffective time of the Merger, each issued and outstanding share of CompanyCommon Stock will be converted into the right to receive $2.50 in cash. TheMerger Agreement has been approved by the Board. The Board has received anopinion from Lehman Brothers, Inc. that the consideration to be offered to theCompany’s stockholders in the Merger is fair from a financial point of view tosuch stockholders. The transactions contemplated by the Merger Agreement aresubject to approval by the holders of a majority of the issued and outstandingshares of Company Common Stock. The transactions contemplated by the MergerAgreement also are 

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subject to the expirationor termination of the applicable waiting period under the Hart-Scott-RodinoAntitrust Improvements Act of 1976, as amended, and certain other closingconditions. The Merger Agreement provides for a termination fee of $9.75million, which is payable by the Company under certain circumstances. Theforegoing description of the Merger Agreement is not complete and is qualifiedin its entirety by reference to the Merger Agreement, which is filed as Exhibit 2.1to the Company’s Current Report on Form 8-K dated April 25,2006 and is incorporated herein by reference.

In connection with theexecution of the Merger Agreement, certain stockholders, officers and directorsof the Company entered into Voting Agreements, whereby such stockholders willvote (or cause to be voted) in person or by proxy all shares of our commonstock held by them (i) in favor of the adoption of the Merger Agreementand approval of the transactions contemplated thereby, (ii) against anyproposal made in opposition to or competition with the consummation of theMerger and the Merger Agreement, (iii) against any proposal that wouldreasonably lead to or result in the conditions of JDA’s or Merger Sub’sobligations under the Merger Agreement not being fulfilled, (iv) againstany takeover proposal from any party other than JDA or an affiliate of JDA, and(v) against the election of a group of individuals to replace a majorityor more of the individuals presently on the Company’s Board. The stockholdersthat signed the Voting Agreements beneficially own approximately 24% of ouroutstanding shares of common stock as of April 24, 2006 and includecertain of our officers and directors and entities affiliated with them. If theMerger Agreement is terminated for any reason, the Voting Agreements will alsoterminate. The foregoing description of the Voting Agreements is not completeand is qualified in its entirety by reference to the form of Voting Agreement,which is filed as Exhibit 99.3 to the Company’s Current Report on Form 8-Kdated April 25, 2006 and is incorporated herein by reference.

**Item 14.   PRINCIPALACCOUNTANT FEES AND SERVICES.**

Thefollowing table presents fees for professional services rendered by Deloitte &Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respectiveaffiliates (collectively, “Deloitte & Touche”), which includesDeloitte Consulting, for the audit of the Company’s annual financial statementsand review of interim financial statements for fiscal years 2005 and 2006, andfees for other services rendered by Deloitte & Touche for fiscal years2005 and 2006.

| ** **             | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Audit Fees(a)          |       | $        | 1,614,000  |     | $          | 1,306,000 |   |
| Audit-Related  Fees(b) |       | $        | 31,000     |     | $          | 24,000 |   |
| Tax Fees(c)            |       | $        | 477,000    |     | $          | 119,000 |   |
| All Other Fees         |       | $        | 0          |     | $          | 0 |   |
| Total Fees             |       | $        | 2,122,000  |     | $          | 1,449,000 |   |

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(a)           Audit Fees for thefiscal years 2005 and 2006 were for all services performed in connection withthe audits of the Company’s annual consolidated financial statements, quarterlyreviews and statutory audits.

(b)          Audit-Related Fees forthe fiscal years 2005 and 2006 were for employee benefit plan audits and otheraudit related services.

(c)           Tax Fees for the fiscalyears 2005 and 2006 were for tax compliance, tax planning and tax adviceprovided to the Company and its foreign subsidiaries.

In fiscal 2004, the Audit Committee established itscurrent policy regarding pre-approval of all audit and permissible non-auditservices provided by the Company’s independent auditor. This policy requires (i) thegeneral pre-approval of specified audit, audit-related and tax services on atwelve-month basis up to a specified amount, (ii) specific pre-approval ofservices not covered by the general pre-approval, including 

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pre-approved serviceswhich exceed the pre-approved amount, and prohibits the Company’s independentauditor from providing non-audit services prohibited pursuant to Section 201of the Sarbanes-Oxley Act of 2002, which includes services such as bookkeepingservices, financial systems consulting services and internal audit services.

Since the May 6, 2003 effective date of theExchange Act rules stating that an auditor is not independent of an auditclient if the services it provides to the client are not appropriatelyapproved, all services performed by the Company’s independent auditor underengagement were approved by the Audit Committee pursuant to its pre-approvalpolicy, and none was approved pursuant to the de minimis exception to the rules andregulations of the Securities and Exchange Commission on pre-approval.

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**PART IV**

**Item 15.**                 EXHIBITSAND FINANCIAL STATEMENT SCHEDULES.

(a)           Documents filed as apart of this Annual Report on Form 10-K:

(1)         Financial Statements

| Financial Statements:                                    | ** ** | ** ** | ** ** | **Page Number  In This Report** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------------------------------------------|------------|
| Report of Independent Registered Public Accounting  Firm      |       |       | F-1        |                                           |       |
| Consolidated Balance Sheets                                   |       |       | F-2        |                                           |       |
| Consolidated Statements of Operations and  Comprehensive Loss |       |       | F-3        |                                           |       |
| Consolidated Statements of Stockholders’ Equity          |       |       | F-4        |                                           |       |
| Consolidated Statements of Cash Flows                         |       |       | F-5        |                                           |       |
| Notes to Consolidated Financial Statements                    |       |       | F-6        |                                           |       |

 

The financialstatements listed above are filed as part of this Annual Report on Form 10-K.

(2)   FinancialStatement Schedules are omitted because they are not required, are notapplicable or the required information is shown in the Consolidated FinancialStatements or notes thereto contained in this Annual Report on Form 10-K.

(3)   Exhibits

The exhibits required by Item 601 of Regulation S-Kare listed below and are filed or incorporated by reference as part of thisAnnual Report on Form 10-K. Exhibits 10.2, 10.11, 10.13(b),10.14, 10.32 and 10.62 through 10.79 are management contracts or compensatoryplans or arrangements.
| Number | ** ** | ** ** | ** ** | **Notes**                                                                                                                                                                     | ** ** | **Description** |
|--------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 2.1    |       | (J)        |       | Agreement and Plan of  Merger dated June 1, 1998, among the Company, TYECIN Acquisition, Inc.,  TYECIN Systems, Inc. and certain other persons            |
| 2.2    |       | (M)        |       | Agreement Plan of  Merger by and among Manugistics Group, Inc., Talus Solutions, Inc.  and Manu Acquisition Corp. dated September 21, 2000                     |
| 2.3    |       | (KK)       |       | Agreement and  Plan of Merger, dated as of April 24, 2006, by and between Manugistics  Group, Inc., JDA Software Group, Inc. and Stanley Acquisition Corp.     |
| 3.1(a) |       | (A)        |       | Amended and  Restated Certificate of Incorporation of the Company                                                                                                             |
| 3.1(b) |       | (B)        |       | Certificate of  Retirement and Elimination (relating to the Series A and Series B  preferred stock of the Company)                                                  |
| 3.1(c) |       | (C)        |       | Certificate of  Amendment to Amended and Restated Certificate of Incorporation of the Company  (effective July 29, 1997)                                                 |
| 3.1(d) |       | (JJ)       |       | Certificate of  Amendment to the Amended and Restated Certificate of Incorporation of the  Company (effective August 9, 2001)                                            |
| 3.2    |       | (CC)       |       | Third Amended and  Restated By-Laws of the Company                                                                                                                            |
| 4.1    |       | (M)        |       | Purchase Agreement dated  October 16, 2000, between Deutsche Bank Securities, Inc., (as  representative of the initial purchasers) and Manugistics Group, Inc. |

 

92

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| Number   | ** ** | ** ** | ** ** | **Notes**                                                                                                                                                                   | ** ** | **Description** |
|----------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 4.2      |       | (M)        |       | Indenture dated as of  October 20, 2000, between Manugistics Group, Inc., and  State Street Bank and Trust Company                                           |
| 4.3      |       | (M)        |       | Registration  Rights Agreement dated as of October 20, 2000, and Deutsche Bank  Securities Inc., and Banc of America Securities LLC.                              |
| 4.4      |       | (O)        |       | Form of Note  for Manugistics Group, Inc.’s 5% Convertible Subordinated Notes due  November 1, 2007                                                     |
| 4.5      |       | (EE)       |       | Certificate of  Designations of Series A Junior Participating Preferred Stock                                                                                          |
| 4.6      |       | (KK)       |       | Amendment to  Rights Agreement, dated as of April 24, 2006, between Manugistics  Group, Inc. and Computershare Trust Company, N.A.                                |
| 4.7      |       | (EE)       |       | Rights Agreement,  dated as of October 28, 2004, between Manugistics Group, Inc. and Equiseav  Trust Company, N.A.                                                          |
| 10.2     |       | (F)        |       | Fifth Amended and  Restated Employee Stock Option Plan of the Company                                                                                                       |
| 10.11    |       | (D)        |       | 1994 Outside  Directors Non-Qualified Stock Option Plan                                                                                                                     |
| 10.13(b) |       | (Y)        |       | Amended and  Restated 1998 Stock Option Plan of Manugistics Group, Inc.                                                                                                |
| 10.14    |       | (E)        |       | Employee Stock  Purchase Plan of the Company                                                                                                                                |
| 10.28    |       | (BB)       |       | Amended and  Restated Promissory Note dated March 31, 2004 between the Company and Silicon  Valley Bank.                                                                    |
| 10.29(a) |       | (N)        |       | Lease Agreement  dated December 19, 2000, between the Company and DANAC Corporation.                                                                                   |
| 10.29(b) |       | (P)        |       | First amendment  dated June 2001 to lease agreement dated December 19, 2000, between  the Company and DANAC Corporation.                                          |
| 10.29(c) |       | (Y)        |       | Sublease  agreement between Theracom, Inc. and the Company dated June  10,  2003.                                                                                 |
| 10.31(b) |       | (Q)        |       | Credit Agreement dated as of February 28, 2002 by the Company in  favor of Bank of America, N.A.                                                                       |
| 10.31(c) |       | (R)        |       | Amendment Agreement dated as of July 12, 2002 to Credit Agreement  dated as of February 28, 2002 by the Company in favor of Bank of  America, N.A.                |
| 10.31(d) |       | (S)        |       | Amendment Agreement No. 2 dated as of November 22, 2002 to  Credit Agreement dated as of February 28, 2002 by the Company in favor  of Bank of America, N.A. |
| 10.32    |       | (Q)        |       | Amended and  Restated 2000 Stock Option Plan of the Company .                                                                                                               |
| 10.50    |       | (U)        |       | Loan and Security  Agreement dated April 12, 2002 by the Company in favor of Silicon Valley  Bank.                                                                     |
| 10.51    |       | (V)        |       | Loan Modification  Agreement dated January 14, 2003 between the Company and Silicon Valley  Bank.                                                                      |
| 10.52    |       | (BB)       |       | Second Amendment  to Loan and Security Agreement dated March 31, 2004 between the Company  and Silicon Valley Bank.                                                    |
| 10.53    |       | (DD)       |       | Second Loan Modification  Agreement dated September 22, 2004 between the Company and Silicon  Valley Bank.                                                             |

 

93

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| Number | ** ** | ** ** | ** ** | **Notes**                                                                                                                                                                | ** ** | **Description** |
|--------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 10.54  |       | (GG)       |       | Third Loan Modification  Agreement dated April 8, 2005 between the Company and Silicon Valley  Bank.                                                                |
| 10.55  |       | (V)        |       | Loan Agreement  dated January 14, 2003 between the Company and Silicon Valley Bank.                                                                                 |
| 10.56  |       | (Z)        |       | Loan Modification  Agreement dated December 16, 2003 between the Company and Silicon Valley  Bank.                                                                  |
| 10.57  |       | (BB)       |       | Third Amendment  to Loan Agreement dated March 31, 2004 between the Company and Silicon  Valley Bank.                                                               |
| 10.58  |       | (DD)       |       | Fourth Amendment  to Loan Agreement dated September 22, 2004 between the Company and  Silicon Valley Bank.                                                          |
| 10.59  |       | (GG)       |       | Fifth Amendment  to Loan Agreement dated April 8, 2005 between the Company and Silicon  Valley Bank.                                                                |
| 10.60  |       | (GG)       |       | Second Amended  and Restated Revolving Promissory Note dated March 29, 2005 between the  Company and Silicon Valley Bank.                                           |
| 10.61  |       | (GG)       |       | Equipment Term  Note dated April 8, 2005 between the Company and Silicon Valley Bank.                                                                               |
| 10.62  |       | (GG)       |       | Separation  Agreement between Jeffrey L. Holmes and the Company dated August 29, 2005.                                                                                   |
| 10.63  |       | (GG)       |       | Form of  Stock Option Agreement between Kevin C. Melia and the Company dated  April 7, 2005.                                                                   |
| 10.64  |       | (GG)       |       | Form of  Stock Option Agreement for Directors under the Amended and Restated 1998  Stock Option Plan of the Company.                                                |
| 10.65  |       | (BB)       |       | Loan and Security  Agreement dated March 31, 2004 between the Company and Silicon Valley Bank.                                                                           |
| 10.66  |       | (II)       |       | Change in Status  Agreement, dated November 4, 2005, between Manugistics Group, Inc.  and Raghavan Rajaji.                                                     |
| 10.67  |       | (II)       |       | Description of  Manugistics Group, Inc. Supplemental Retention Program.                                                                                             |
| 10.68  |       | (HH)       |       | Offer Letter  dated September 1, 2004 between Manugistics Group, Inc. and Edward   R. Daihl.                                                              |
| 10.70  |       | (HH)       |       | Amendment to  Employment Agreement dated July 22, 2004 between Manugistics  Group, Inc. and Joseph L. Cowan.                                              |
| 10.71  |       | (HH)       |       | Form of Change  in Control Agreement dated September 23, 2005 to September 26, 2005  between Manugistics Group, Inc. and certain executive officers. |
| 10.72  |       | (HH)       |       | Description of  Compensation Arrangements for Certain Executive Officers.                                                                                                |
| 10.73  |       | (HH)       |       | Description of  Director Compensation Arrangements.                                                                                                                      |
| 10.74  |       | (JJ)       |       | Form of  Restricted Stock Bonus Agreement for the Supplemental Retention Program.                                                                                   |
| 10.75  |       | (JJ)       |       | Form of  Stock Option Grant Agreement for the Supplemental Retention Program.                                                                                       |
| 10.76  |       | (JJ)       |       | Form of Award  Agreement for the Supplemental Retention Program.                                                                                                    |

 

94

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| Number | ** ** | ** ** | ** ** | **Notes**                                                                                                            | ** ** | **Description** |
|--------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 10.77  |       | (JJ)       |       | Settlement Agreement  between Manugistics France and Jean-Claude Walravens.                                          |
| 10.78  |       | (JJ)       |       | Termination  Agreement between Manugistics Benelux, S.A. and Jean-Claude Walravens.                                  |
| 10.79  |       |       |       | Amendment to  Employment Agreement of Joseph L. Cowan Agreement.                                                     |
| 10.80  |       |       |       | Revolving  Promissory Note dated January 14, 2003.                                                                   |
| 10.81  |       |       |       | Loan & Security  Agreement dated March 31, 2004 by the Company in favor of Silicon Valley  Bank.                 |
| 21     |       |       |       | Subsidiaries of  the Company                                                                                         |
| 23     |       |       |       | Consent of  Registered Public Accounting Firm.                                                                       |
| 31.1   |       |       |       | Certification of  Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002        |
| 31.2   |       |       |       | Certification of  Acting Principal Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |
| 32.1   |       |       |       | Certification of  Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002        |
| 32.2   |       |       |       | Certification of  Acting Principal Financial Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
| 99.1   |       | (KK)       |       | Form of Voting  Agreement.                                                                                      |

----

(A)                    Incorporatedby reference from the exhibits to the Company’s registration statement on Form S-1(REG No. 33-65312).

(B)                     Incorporatedby reference to 4.1(A) to the Company’s registration statement on Form S-3(REG. No. 333-31949).

(C)                     Incorporatedby reference to exhibit 4.1(b) to the Company’s registrationstatement on Form S-3 (REG. No. 333-31949).

(D)                    Incorporatedby reference from Exhibit 10.1 to the Company’s quarterly registrationstatement on Form S-8 filed August 5, 2004 (REG No. 333-117955).

(E)                     Incorporatedby reference from the exhibits to the Company’s quarterly report on Form 10-Qfor the quarter ended August 31, 1995.

(F)                      Incorporatedby reference from the exhibits to the Company’s registration statement on Form S-8filed August 2, 1996 (REG No. 333-09481).

(G)                   Incorporatedby reference from the exhibits to the Company’s annual report on Form 10-Kfor fiscal year ended February 28, 1999.

(H)                   Incorporatedby reference from the exhibits to the Company’s quarterly report on Form 10-Qfor the quarter ended August 31, 1999.

(I)                         Incorporatedby reference from the exhibits to the Company’s quarterly report on Form 10-Qfor the quarter ended November 30, 1999.

(J)                        Incorporatedby reference from the exhibits to the Company’s quarterly report on Form 10-Qfor the quarter ended August 31, 1998.

95

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(L)                      Incorporatedby reference from the exhibits to the Company’s quarterly report on Form 10-Qfor the quarter ended May 31, 2000.

(M)                  Incorporatedby reference from the exhibits to the Company’s current report on Form 8-K/Adated October 11, 2000.

(N)                    Incorporatedby reference from the exhibits to the Company’s current report on Form 10-Qfor the quarter ended November 30, 2000.

(O)                   Incorporatedby reference from the exhibits to the Company’s registration statement on Form S-3/A(No. 333-53918).

(P)                      Incorporatedby reference from the exhibits to the Company’s quarterly report on Form 10-Qfor the quarter ended May 31, 2001.

(Q)                   Incorporatedby reference from the exhibits to the Company’s annual report on Form 10-Kfor the fiscal year ended February 28, 2002.

(R)                    Incorporatedby reference from the exhibits to the Company’s quarterly report on Form 10-Qfor the quarter ended May 31, 2002.

(S)                       Incorporatedby reference from the exhibits to the Company’s quarterly report on Form 10-Qfor the quarter ended November 30, 2002.

(U)                   Incorporatedby reference from the exhibits to the Company’s quarterly report on Form 10-Qfor the quarter ended August 31, 2002.

(V)                    Incorporatedby reference from the exhibits to the Company’s current report on Form 8-Kdated January 16, 2003.

(X)                    Incorporatedby reference from the exhibits to the Company’s quarterly report on Form 10-Qfor the quarter ended May 31, 2003.

(Y)                    Incorporatedby reference from the exhibits to the Company’s quarterly report on Form 10-Qfor the quarter ended August 31, 2003.

(Z)                     Incorporatedby reference from the exhibits to the Company’s quarterly report on Form 10-Qfor the quarter ended November 30, 2003.

(AA)          Incorporatedby reference to the Company’s Post-effective Amendment No. 1 to Form S-8filed by the Company on September 15, 2003 (No. 333-108811).

(BB)            Incorporatedby reference from exhibits to the Company’s annual report on Form 10-Kfor the fiscal year ended February 29, 2004.

(CC)            Incorporatedby reference from exhibits to the Company’s quarterly report on Form 10-Qfor the quarter ended August 31, 2004.

(DD)          Incorporatedby reference from exhibits to the Company’s current report on Form 8-Kdated September 23, 2004.

(EE)            Incorporatedby reference from exhibits to the Company’s current report on Form 8-Kdated October 29, 2004.

(GG)        Incorporatedby reference from exhibits to the Company’s annual report on Form 10-Kfor the fiscal year ended February 29, 2004.

(HH)        Incorporatedby reference from exhibits to the Company’s quarterly report on Form 10-Qfor the quarter ended August 31, 2005.

96

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(II)                    Incorporatedby reference from exhibits to the Company’s current report on Form 8-Kdated November 7, 2005.

(JJ)                  Incorporatedby reference from exhibits to the Company’s quarterly report on Form 10-Qfor the quarter ended November 30, 2005.

(KK)          Incorporatedby reference from exhibits to the Company’s current report on Form 8-Kdated April 25, 2006.

(b)          Exhibits

See the response to Item 15(a)(2) above.

97

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this annual report to be signed onits behalf by the undersigned, thereunto duly authorized, on May 15, 2006.
| MANUGISTICS GROUP, INC.              |   |
|--------------------------------------|--------|
| (Registrant)                         |   |
| /s/ Joseph L. Cowan                  |   |
| Joseph L. Cowan                      |   |
| Director and Chief Executive Officer |   |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this annual reporthas been signed below by the following persons on behalf of the Registrant andin the capacities indicated on May 15, 2006.
| /s/ Joseph L. Cowan                                                                                                              |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|
| Joseph L. Cowan                                                                                                                  |   |
| Director and Chief Executive Officer  (Principal Executive Officer)                                                              |   |
| /s/ Kelly Davis-Stoudt                                                                                                           |   |
| Kelly Davis-Stoudt                                                                                                               |   |
| Vice President, Controller and  Chief Accounting Officer  (Principal Accounting Officer and  Acting Principal Financial Officer) |   |

 
| /s/ Kevin C. Melia     |   | /s/ Thomas A. Skelton |
|------------------------|--------|-----------------------|
| Kevin C. Melia         |   | Thomas A. Skelton     |
| Chairman of the Board  |   | Director              |
| /s/ William H. Janeway |   | /s/ Lynn C. Fritz     |
| William H. Janeway     |   | Lynn C. Fritz         |
| Director               |   | Director              |
| /s/ Joseph H. Jacovini |   | /s/ William G. Nelson |
| Joseph H. Jacovini     |   | William G. Nelson     |
| Director               |   | Director              |
| /s/ William M. Gibson  |   |                  |
| William M. Gibson      |   |                  |
| Director               |   |                  |

 

98

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofManugistics Group, Inc.Rockville, Maryland

We have audited the accompanying consolidated balancesheets of Manugistics Group, Inc. and subsidiaries (the “Company”) as of February 28,2006 and 2005, and the related consolidated statements of operations andcomprehensive loss, stockholders’ equity, and cash flows for each of the threeyears in the period ended February 28, 2006. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of ManugisticsGroup, Inc. and subsidiaries as of February 28, 2006 and 2005, andthe results of their operations and their cash flows for each of the threeyears in the period ended February 28, 2006, in conformity with accountingprinciples generally accepted in the United States of America.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of February 28, 2006, based on the criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated May 14, 2006 expressed an unqualified opinion onmanagement’s assessment of the effectiveness of the Company’s internal controlover financial reporting and an unqualified opinion on the effectiveness of theCompany’s internal control over financial reporting.

/s/ DELOITTE & TOUCHELLP

McLean, VirginiaMay 14, 2006

F-1

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**MANUGISTICS GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS(in thousands)**

| ** **                                                                                                                                                      | ** ** | **February 28,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| **CURRENT ASSETS:**                                                                                                                                             | ** ** | ** **            | ** ** | ** ** | ** ** |
| Cash and cash  equivalents                                                                                                                                      |       | $                     | 79,538     |   | $ | 80,342 |   |
| Marketable  securities                                                                                                                                          |       | 61,189                |       | 49,636 |   |
| Total cash, cash  equivalents and marketable securities                                                                                                         |       | 140,727               |       | 129,978 |   |
| Account  receivable, net of allowance for doubtful accounts of $4,205 and $7,605 at  February 28, 2006 and February 28, 2005, respectively            |       | 41,183                |       | 45,659 |   |
| Other current  assets                                                                                                                                           |       | 8,474                 |       | 10,890 |   |
| Total current  assets                                                                                                                                           |       | 190,384               |       | 186,527 |   |
| **NON-CURRENT ASSETS:**                                                                                                                                         | ** ** | ** **            | ** ** | ** ** | ** ** |
| Property and  equipment, net of accumulated depreciation                                                                                                        |       | 13,682                |       | 15,795 |   |
| Software  development costs, net of accumulated amortization                                                                                                    |       | 8,311                 |       | 14,390 |   |
| Long-term  investments                                                                                                                                          |       | —                |       | 5,911 |   |
| Goodwill                                                                                                                                                        |       | 185,818               |       | 185,658 |   |
| Acquired  technology, net of accumulated amortization                                                                                                           |       | 4,405                 |       | 13,816 |   |
| Customer  relationships, net of accumulated amortization                                                                                                        |       | 3,582                 |       | 9,335 |   |
| Other intangibles  and non-current assets, net of accumulated amortization                                                                                      |       | 7,129                 |       | 8,848 |   |
| **TOTAL ASSETS**                                                                                                                                                |       | $                     | 413,311    |   | $ | 440,280 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                   | ** ** | ** **            | ** ** | ** ** | ** ** |
| **CURRENT LIABILITIES:**                                                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| Accounts payable                                                                                                                                                |       | $                     | 6,062      |   | $ | 7,117 |   |
| Accrued  compensation                                                                                                                                           |       | 5,947                 |       | 2,858 |   |
| Accrued exit and  disposal obligations                                                                                                                          |       | 5,367                 |       | 8,032 |   |
| Deferred revenue                                                                                                                                                |       | 39,628                |       | 43,173 |   |
| Other current  liabilities                                                                                                                                      |       | 12,607                |       | 19,814 |   |
| Total current  liabilities                                                                                                                                      |       | 69,611                |       | 80,994 |   |
| **NON-CURRENT LIABILITIES:**                                                                                                                                    | ** ** | ** **            | ** ** | ** ** | ** ** |
| Convertible debt                                                                                                                                                |       | 175,500               |       | 175,500 |   |
| Accrued exit and  disposal obligations                                                                                                                          |       | 9,961                 |       | 13,799 |   |
| Long-term debt and  capital leases                                                                                                                              |       | 910                   |       | 1,668 |   |
| Other non-current  liabilities                                                                                                                                  |       | 3,406                 |       | 3,573 |   |
| Total non-current  liabilities                                                                                                                                  |       | 189,777               |       | 194,540 |   |
| **COMMITMENTS AND CONTINGENCIES (Note 8)**                                                                                                                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| **STOCKHOLDERS’ EQUITY:**                                                                                                                                  | ** ** | ** **            | ** ** | ** ** | ** ** |
| Preferred stock,  $.01 par value per share, 4,620 shares authorized; none outstanding                                                                           |       | —                |       | — |   |
| Common stock,  $.002 par value per share; 300,000 shares authorized; 84,161 and 83,869  issued and outstanding at February 28, 2006 and 2005, respectively |       | 168                   |       | 168 |   |
| Additional paid-in  capital                                                                                                                                     |       | 780,949               |       | 780,306 |   |
| Deferred  compensation                                                                                                                                          |       | (1,063                | )          | (3,044 | ) |
| Accumulated other  comprehensive income                                                                                                                         |       | 2,861                 |       | 4,065 |   |
| Accumulated  deficit                                                                                                                                            |       | (628,992              | )          | (616,749 | ) |
| Total  stockholders’ equity                                                                                                                                |       | 153,923               |       | 164,746 |   |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                             |       | $                     | 413,311    |   | $ | 440,280 |   |

 

See accompanying Notes to Consolidated Financial Statements.

F-2

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**MANUGISTICS GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(in thousands, except per share data)**

| ** **                                                                       | ** ** | **For the year ended  February 28 or 29,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **REVENUE:**                                                                     | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Software license                                                                 |       | $                                                         | 27,480     |   | $ | 36,203 |   | $ | 73,766 |   |
| Support                                                                          |       | 86,493                                                    |       | 84,050 |   | 86,593 |   |
| Services                                                                         |       | 56,121                                                    |       | 64,933 |   | 73,254 |   |
| Reimbursed  expenses                                                             |       | 6,098                                                     |       | 7,920 |   | 9,432 |   |
| Total revenue                                                                    |       | 176,192                                                   |       | 193,106 |   | 243,045 |   |
| **OPERATING EXPENSES:**                                                          | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of revenue:                                                                 |       |                                                      |       |   |   |   |   |
| Cost of software  license                                                        |       | 14,900                                                    |       | 14,213 |   | 15,851 |   |
| Amortization of  acquired technology                                             |       | 5,678                                                     |       | 13,207 |   | 14,210 |   |
| Total cost of  software license                                                  |       | 20,578                                                    |       | 27,420 |   | 30,061 |   |
| Cost of services  and support                                                    |       | 60,846                                                    |       | 73,694 |   | 80,306 |   |
| Cost of reimbursed  expenses                                                     |       | 6,098                                                     |       | 7,920 |   | 9,432 |   |
| Non-cash  stock-option compensation expense for cost of services and support     |       | —                                                    |       | 75 |   | 865 |   |
| Total cost of  services and support                                              |       | 66,944                                                    |       | 81,689 |   | 90,603 |   |
| Sales and  marketing                                                             |       | 38,556                                                    |       | 52,662 |   | 66,061 |   |
| Non-cash  stock-option compensation expense for sales and marketing              |       | —                                                    |       | 26 |   | 456 |   |
| Total cost of  sales and marketing                                               |       | 38,556                                                    |       | 52,688 |   | 66,517 |   |
| Product  development                                                             |       | 27,517                                                    |       | 32,404 |   | 36,233 |   |
| Non-cash  stock-option compensation expense for product development              |       | —                                                    |       | 15 |   | 140 |   |
| Total cost of  product development                                               |       | 27,517                                                    |       | 32,419 |   | 36,373 |   |
| General and  administrative                                                      |       | 19,876                                                    |       | 22,110 |   | 25,060 |   |
| Non-cash  stock-option compensation expense for general and administrative  |       | —                                                    |       | 52 |   | 338 |   |
| Total cost of  general and administrative                                        |       | 19,876                                                    |       | 22,162 |   | 25,398 |   |
| Amortization of  intangibles                                                     |       | 5,753                                                     |       | 6,648 |   | 4,674 |   |
| Asset impairment                                                                 |       | 3,733                                                     |       | — |   | — |   |
| Exit and disposal  activities                                                    |       | 3,299                                                     |       | 17,312 |   | 18,627 |   |
| Total operating  expenses                                                        |       | 186,256                                                   |       | 240,338 |   | 272,253 |   |
| **LOSS  FROM OPERATIONS**                                                        |       | (10,064                                                   | )          | (47,232 | ) | (29,208 | ) |
| **DEBT  CONVERSION EXPENSE**                                                     |       | —                                                    |       | — |   | (59,823 | ) |
| **OTHER  EXPENSE, NET**                                                          |       | (5,789                                                    | )          | (7,314 | ) | (13,455 | ) |
| **LOSS  BEFORE INCOME TAXES**                                                    |       | (15,853                                                   | )          | (54,546 | ) | (102,486 | ) |
| **(BENEFIT)  PROVISION FOR INCOME TAXES**                                        |       | (3,610                                                    | )          | 725 |   | 1,314 |   |
| **NET LOSS**                                                                     |       | $                                                         | (12,243    | ) | $ | (55,271 | ) | $ | (103,800 | ) |
| **BASIC  AND DILUTED LOSS PER SHARE**                                            |       | $                                                         | (0.15      | ) | $ | (0.67 | ) | $ | (1.43 | ) |
| **SHARES  USED IN BASIC AND DILUTED LOSS PER SHARE COMPUTATION**                 | ** ** | 82,417                                                    | ** ** | 81,913 | ** ** | 72,715 | ** ** |
| **COMPREHENSIVE LOSS:**                                                          | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                         |       | $                                                         | (12,243    | ) | $ | (55,271 | ) | $ | (103,800 | ) |
| Other comprehensive income (loss), net of tax:                                   |       |                                                      |       |   |   |   |   |
| Foreign currency  translation adjustments                                        |       | (1,429                                                    | )          | 806 |   | 4,622 |   |
| Unrealized gains  (losses) on securities                                         |       | 225                                                       |       | (356 | ) | 80 |   |
| Total other  comprehensive (loss) income                                         |       | (1,204                                                    | )          | 450 |   | 4,702 |   |
| TOTAL  COMPREHENSIVE LOSS                                                        |       | $                                                         | (13,447    | ) | $ | (54,821 | ) | $ | (99,098 | ) |

 

See accompanying Notes to Consolidated Financial Statements.

F-3

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**MANUGISTICS GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands)**

| ** **                                                                               | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** **           | ** ** | **Accumulated  Other**     | ** ** | ** **                            | ** ** | ** **                 | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------|------------|----------------|------------|----------------------|------------|----------------------------|------------|---------------------------------------|------------|----------------------------|------------|
| ** **                                                                               | ** ** | **Shares**       | ** ** | **Par  Value** | ** ** | **Paid-in  Capital** | ** ** | **Deferred  Compensation** | ** ** | **Comprehensive  Income (Loss)** | ** ** | **Accumulated  (Deficit)** | ** ** | **Total** | ** ** |
| BALANCE, FEBRUARY  28, 2003                                                              |       |             | 70,104     |           |       |                 | $          | 140                        |       |                                  |       | $                          | 633,801    |   |   |   | $ | (3,094 | ) |   |   | $ | (1,087 | ) |   |   | $ | (457,678 | ) |   | $ | 172,082 |   |
| Issuance of common  stock—employee stock purchase plan                              |       |             | 212        |           |       |                 | 1          |                       |       |                                  | 470        |                       |       |   | — |   |   |   | — |   |   |   | — |   |   | 471 |   |
| Issuance of common  stock—debt conversion                                           |       |             | 9,726      |           |       |                 | 19         |                       |       |                                  | 134,308    |                       |       |   | — |   |   |   | — |   |   |   | — |   |   | 134,327 |   |
| Issuance of common  stock—restricted stock                                          |       |             | 205        |           |       |                 | 1          |                       |       |                                  | 1,341      |                       |       |   | (1,081 | ) |   |   | — |   |   |   | — |   |   | 261 |   |
| Exercise of stock  options                                                               |       |             | 1,726      |           |       |                 | 3          |                       |       |                                  | 8,074      |                       |       |   | — |   |   |   | — |   |   |   | — |   |   | 8,077 |   |
| Deferred financing  fees reclassification—debt conversion                           |       |             | —     |           |       |                 | —     |                       |       |                                  | (1,293     | )                          |       |   | — |   |   |   | — |   |   |   | — |   |   | (1,293 | ) |
| Stock option-based  compensation benefit                                                 |       |             | —     |           |       |                 | —     |                       |       |                                  | (732       | )                          |       |   | 2,531 |   |   |   | — |   |   |   | — |   |   | 1,799 |   |
| Deferred  stock-based compensation related to acquisitions and other                     |       |             | —     |           |       |                 | —     |                       |       |                                  | —     |                       |       |   | 234 |   |   |   | — |   |   |   | — |   |   | 234 |   |
| Translation  adjustment                                                                  |       |             | —     |           |       |                 | —     |                       |       |                                  | —     |                       |       |   | — |   |   |   | 4,622 |   |   |   | — |   |   | 4,622 |   |
| Net change in  unrealized gain / loss on marketable securities and long-term investments |       |             | —     |           |       |                 | —     |                       |       |                                  | —     |                       |       |   | — |   |   |   | 80 |   |   |   | — |   |   | 80 |   |
| Net loss                                                                                 |       |             | —     |           |       |                 | —     |                       |       |                                  | —     |                       |       |   | — |   |   |   | — |   |   |   | (103,800 | ) |   | (103,800 | ) |
| BALANCE, FEBRUARY  29, 2004                                                              |       |             | 81,973     |           |       |                 | $          | 164                        |       |                                  |       | $                          | 775,969    |   |   |   | $ | (1,410 | ) |   |   | $ | 3,615 |   |   |   | $ | (561,478 | ) |   | $ | 216,860 |   |
| Issuance of common  stock—employee stock purchase plan                              |       |             | 163        |           |       |                 | 1          |                       |       |                                  | 293        |                       |       |   | — |   |   |   | — |   |   |   | — |   |   | 294 |   |
| Issuance of common  stock—restricted stock, net                                     |       |             | 1,573      |           |       |                 | 3          |                       |       |                                  | 3,069      |                       |       |   | (3,093 | ) |   |   | — |   |   |   | — |   |   | (21 | ) |
| Exercise of stock  options                                                               |       |             | 160        |           |       |                 | —     |                       |       |                                  | 579        |                       |       |   | — |   |   |   | — |   |   |   | — |   |   | 579 |   |
| Stock option-based  compensation expense                                                 |       |             | —     |           |       |                 | —     |                       |       |                                  | 34         |                       |       |   | 134 |   |   |   | — |   |   |   | — |   |   | 168 |   |
| Deferred  stock-based compensation related to restricted stock and  other                |       |             | —     |           |       |                 | —     |                       |       |                                  | —     |                       |       |   | 1,325 |   |   |   | — |   |   |   | — |   |   | 1,325 |   |
| Warrant  amortization (See Note 9)                                                       |       |             | —     |           |       |                 | —     |                       |       |                                  | 362        |                       |       |   | — |   |   |   | — |   |   |   | — |   |   | 362 |   |
| Translation  adjustment                                                                  |       |             | —     |           |       |                 | —     |                       |       |                                  | —     |                       |       |   | — |   |   |   | 806 |   |   |   | — |   |   | 806 |   |
| Net change in  unrealized gain / loss on marketable securities and long-term investments |       |             | —     |           |       |                 | —     |                       |       |                                  | —     |                       |       |   | — |   |   |   | (356 | ) |   |   | — |   |   | (356 | ) |
| Net loss                                                                                 |       |             | —     |           |       |                 | —     |                       |       |                                  | —     |                       |       |   | — |   |   |   | — |   |   |   | (55,271 | ) |   | (55,271 | ) |
| BALANCE, FEBRUARY  28, 2005                                                              |       |             | 83,869     |           |       |                 | $          | 168                        |       |                                  |       | $                          | 780,306    |   |   |   | $ | (3,044 | ) |   |   | $ | 4,065 |   |   |   | $ | (616,749 | ) |   | $ | 164,746 |   |
| Issuance of common  stock—employee stock purchase plan                              |       |             | 286        |           |       |                 | —     |                       |       |                                  | 462        |                       |       |   | — |   |   |   | — |   |   |   | — |   |   | 462 |   |
| Issuance of common  stock—restricted stock, net                                     |       |             | 9          |           |       |                 | —     |                       |       |                                  | (226       | )                          |       |   | 226 |   |   |   | — |   |   |   | — |   |   | — |   |
| Deferred  stock-based compensation                                                       |       |             | —     |           |       |                 | —     |                       |       |                                  | —     |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| related to  restricted stock and other                                                   |       |             | (3         | )              |       |                 | —     |                       |       |                                  | 29         |                       |       |   | 1,755 |   |   |   | — |   |   |   | — |   |   | 1,784 |   |
| Warrant  amortization (See Note 9)                                                       |       |             | —     |           |       |                 | —     |                       |       |                                  | 378        |                       |       |   | — |   |   |   | — |   |   |   | — |   |   | 378 |   |
| Translation  adjustment                                                                  |       |             | —     |           |       |                 | —     |                       |       |                                  | —     |                       |       |   | — |   |   |   | (1,429 | ) |   |   | — |   |   | (1,429 | ) |
| Net change in  unrealized gain / loss on marketable securities and long-term investments |       |             | —     |           |       |                 | —     |                       |       |                                  | —     |                       |       |   | — |   |   |   | 225 |   |   |   | — |   |   | 225 |   |
| Net loss                                                                                 |       |             | —     |           |       |                 | —     |                       |       |                                  | —     |                       |       |   | — |   |   |   | — |   |   |   | (12,243 | ) |   | (12,243 | ) |
| BALANCE, FEBRUARY 28,  2006                                                              |       |             | 84,161     |           |       |                 | $          | 168                        |       |                                  |       | $                          | 780,949    |   |   |   | $ | (1,063 | ) |   |   | $ | 2,861 |   |   |   | $ | (628,992 | ) |   | $ | 153,923 |   |
|                                                                                          |            |                  |            |                |            |                      |            |                            |            |                                       |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying Notes to Consolidated Financial Statements

F-4

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**MANUGISTICS GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)**

| ** **                                                                                 | ** ** | **For the year ended  February 28 or 29,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                                   |       |                                                      |       |   |   |   |   |
| Net loss                                                                                   |       | $                                                         | (12,243    | ) | $ | (55,271 | ) | $ | (103,800 | ) |
| Adjustments to reconcile  net loss to net cash provided by (used in) operating activities: |       |                                                      |       |   |   |   |   |
| Depreciation and  amortization                                                             |       | 27,870                                                    |       | 37,825 |   | 37,046 |   |
| Amortization of  debt issuance costs                                                       |       | 899                                                       |       | 904 |   | 1,175 |   |
| Exit and disposal  activities                                                              |       | 3,299                                                     |       | 17,312 |   | 18,627 |   |
| Asset impairment  charge                                                                   |       | 3,733                                                     |       | — |   | — |   |
| Debt conversion  expense                                                                   |       | —                                                    |       | — |   | 59,823 |   |
| Non-cash  stock-option compensation expense                                                |       | —                                                    |       | 168 |   | 1,799 |   |
| Bad debt expense                                                                           |       | (1,091                                                    | )          | 4,044 |   | 256 |   |
| Other                                                                                      |       | 2,118                                                     |       | 2,103 |   | 769 |   |
| Changes in assets and liabilities:                                                         |       |                                                      |       |   |   |   |   |
| Accounts  receivable                                                                       |       | 5,457                                                     |       | 6,041 |   | 8,109 |   |
| Other assets                                                                               |       | 2,118                                                     |       | 1,158 |   | (4,020 | ) |
| Accounts payable                                                                           |       | (1,055                                                    | )          | (3,251 | ) | 630 |   |
| Accrued  compensation                                                                      |       | 3,089                                                     |       | (3,322 | ) | (976 | ) |
| Other liabilities                                                                          |       | (6,825                                                    | )          | (204 | ) | (3,143 | ) |
| Accrued exit and disposal  obligations                                                     |       | (9,688                                                    | )          | (12,677 | ) | (9,830 | ) |
| Deferred revenue                                                                           |       | (3,157                                                    | )          | (335 | ) | 360 |   |
| Net cash provided  by (used in) operating activities                                       |       | 14,524                                                    |       | (5,505 | ) | 6,825 |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                                   |       |                                                      |       |   |   |   |   |
| Acquisitions, net  of cash acquired                                                        |       | —                                                    |       | — |   | 1,968 |   |
| Restricted cash                                                                            |       | —                                                    |       | — |   | 12,980 |   |
| Sales of  marketable securities                                                            |       | 61,491                                                    |       | 76,105 |   | 66,296 |   |
| Sales of long-term  investments                                                            |       | —                                                    |       | 3,170 |   | — |   |
| Proceeds from sale  of fractional shares of jet                                            |       | —                                                    |       | 1,958 |   | — |   |
| Purchases of  property and equipment                                                       |       | (3,090                                                    | )          | (4,067 | ) | (2,165 | ) |
| Capitalization and  purchases of software                                                  |       | (3,621                                                    | )          | (9,877 | ) | (11,520 | ) |
| Purchases of  marketable securities                                                        |       | (66,551                                                   | )          | (56,025 | ) | (92,592 | ) |
| Purchases of  long-term investments                                                        |       | —                                                    |       | (22,065 | ) | (8,999 | ) |
| Net cash used in  investing activities                                                     |       | (11,771                                                   | )          | (10,801 | ) | (34,032 | ) |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                                   |       |                                                      |       |   |   |   |   |
| Principal payments  of debt and capital lease obligations and debt issuance costs          |       | (2,865                                                    | )          | (2,528 | ) | (3,046 | ) |
| Proceeds from  exercise of stock options and employee stock plan purchases                 |       | 463                                                       |       | 877 |   | 8,548 |   |
| Net cash (used in)  provided by financing activities                                       |       | (2,402                                                    | )          | (1,651 | ) | 5,502 |   |
| **EFFECTS  OF EXCHANGE RATES ON CASH BALANCES**                                            |       | (1,155                                                    | )          | 740 |   | 3,975 |   |
| **NET  CHANGE IN CASH AND CASH EQUIVALENTS**                                               |       | (804                                                      | )          | (17,217 | ) | (17,730 | ) |
| **CASH AND  CASH EQUIVALENTS, BEGINNING OF PERIOD**                                        |       | 80,342                                                    |       | 97,559 |   | 115,289 |   |
| **CASH AND  CASH EQUIVALENTS, END OF PERIOD**                                              |       | $                                                         | 79,538     |   | $ | 80,342 |   | $ | 97,559 |   |
| **SUPPLEMENTAL DISCLOSURES:**                                                              |       |                                                      |       |   |   |   |   |
| Cash paid for  interest                                                                    |       | $                                                         | 9,015      |   | $ | 9,087 |   | $ | 13,809 |   |
| Cash paid for  income taxes                                                                |       | $                                                         | 31         |   | $ | 132 |   | $ | 940 |   |
| **SUPPLEMENTAL SCHEDULE OF  NON-CASH INVESTING AND FINANCING ACTIVITIES:**                 |       |                                                      |       |   |   |   |   |
| Acquisition of  capital leases                                                             |       | $                                                         | 1,049      |   | $ | 1,963 |   | $ | — |   |
| Issuance of  restricted stock to employees                                                 |       | $                                                         | 505        |   | $ | 2,600 |   | $ | 1,300 |   |
| Issuance of common  stock in exchange for Notes (Note 9)                                   |       | $                                                         | —     |   | $ | — |   | $ | 74,500 |   |

 

See accompanying Notes to Consolidated Financial Statements.

F-5

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**MANUGISTICS GROUP, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.   THE COMPANY AND SIGNIFICANT ACCOUNTINGPOLICIES**

**The Company**

Manugistics Group, Inc.(the “Company”) is a leading global provider of demand-driven supply chainmanagement software products and services. The Company combines its productsand services to deliver solutions that address the specific demand-drivensupply chain business needs of its clients. The Company’s approach to clientdelivery is to advise clients on how to best use its software and othertechnologies across their entire demand-driven supply chain. The Company’ssolutions enable companies to reduce their operating costs, improve customerservice and increase their top-line revenue by allowing them to plan, optimizeand synchronize their entire demand-driven supply chain.

**Basis ofPresentation**

The Consolidated FinancialStatements include the accounts of the Company and its wholly ownedsubsidiaries. All significant intercompany transactions and balances have beeneliminated. Certain prior year amounts have been reclassified to conform to thecurrent year financial statement presentation.

**Use of Estimates**

The preparation ofconsolidated financial statements, in conformity with accounting principlesgenerally accepted in the U.S. of America (“GAAP”), requires management to makeestimates, judgments and assumptions. These estimates and assumptions affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the consolidated financial statements andthe reported amounts of revenue and expenses during the reporting period.Actual results may differ from these estimates. Significant items subject tosuch estimates and assumptions include revenue recognition, carrying amount anduseful lives of long-lived assets, valuation allowances for accounts receivableand deferred tax assets, sublease income associated with exit and disposalplans, capitalized software development costs and loss contingencies, such aslitigation, claims and assessments.

**Cash and CashEquivalents**

Cash and cash equivalentsare comprised of amounts in operating accounts, money market investments andother short-term, highly liquid investments with original maturities of threemonths or less. In fiscal 2005, the Company reclassified prior year auctionrate securities to available-for-sale securities (marketable securities) inaccordance with Financial Accounting Standards No. 115 “*Investments in Debt and Equity Securities*” (“SFAS 115”). Inprior years, auction rate securities were classified as cash equivalents due tothe short period of time between auctions.

**MarketableSecurities**

The Company’s short-termmarketable securities are classified as available-for-sale. These securitiesare recorded at fair value with unrealized gains and losses reported as acomponent of stockholders’ equity and comprehensive loss. Realized gains andlosses on available-for-sale securities are computed using the specificidentification method. As of February 28, 2006 and February 28, 2005,marketable securities consisted of investments in corporate debt, municipalbonds and other short-term investments which mature in one year or less.Marketable securities also consisted of investments in auction-rate securities,with auctions held monthly and maturity dates ranging from 2028 to 2043.Purchases of auction rate 

F-6

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securitieswere $7.1 million and $29.1 million and sales of auction ratesecurities were $6.8 million and $60.5 million in fiscal 2006 andfiscal 2005, respectively, and are included in purchases and sales ofmarketable securities in the Consolidated Statement of Cash Flows.

**Long-TermInvestments**

The Company’s long-terminvestments are classified as available-for-sale. These investments arereported at fair value with unrealized gains and losses reported as a componentof stockholders’ equity. Realized gains and losses on available-for-salesecurities are computed using the specific identification method. As of February 28,2005, long-term investments consisted of corporate debt securities and U.S.agency securities with original maturities in excess of one year. There were nolong-term investments as of February 28, 2006.

**Concentration ofCredit Risk**

Financial instruments thatpotentially subject the Company to concentrations of credit risk consistprimarily of cash and cash equivalents, investments in marketable securities,long-term investments and trade accounts receivable. The Company has policiesthat limit investments to investment grade securities, limit the amount ofcredit exposure to any one issuer and maximum investment maturities, bothindividually and in aggregate. The Company performs ongoing credit evaluationsof its customers and maintains an allowance for potential credit losses. TheCompany does not require collateral or other security to support customers’receivables since most of its customers are large, well-established companies.The Company’s credit risk is also mitigated because its customer base isdiversified both by geography and industry and no single customer accounts formore than 10% of consolidated annual revenue for any period presented. TheCompany initially records a provision for doubtful accounts based on historicalexperience of write-offs and adjusts the allowance for doubtful accounts at theend of each reporting period based on a detailed assessment of accountsreceivable. In estimating the allowance for doubtful accounts, managementconsiders the age of the accounts receivable, the Company’s historicalwrite-offs, the credit-worthiness of the customer, the economic conditions ofthe customer’s industry and general economic conditions, among other factors.Should any of these factors change, the estimates made by management will alsochange, which could affect the level of the Company’s future provision fordoubtful accounts.

**Property andEquipment**

Property and equipment isstated at cost. Office, furniture and equipment are depreciated on astraight-line basis over three to ten years. Information technology equipmentand purchased software are depreciated on a straight-line basis over two tothree years. Leasehold improvements are amortized over the shorter of the leaseterm or the useful life of the improvements. Repairs and maintenance costs areexpensed as incurred. When assets are sold or retired, the related asset andaccumulated depreciation amounts are removed from their respective accounts andany gain or loss is recognized in the Consolidated Statements of Operations andComprehensive Loss.

**SoftwareDevelopment Costs**

The Company capitalizes the development costs ofsoftware, other than internal use software, in accordance with Statement ofFinancial Accounting Standards No. 86 (“SFAS 86”), “*Accountingfor the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.*”Software development costs are expensed as incurred until technologicalfeasibility has been established, at which time such costs are capitalizeduntil the product is available for general release to clients. Softwaredevelopment costs are amortized at the greater of the amount computed usingeither:

F-7

----

(a)          the straight-line methodover the estimated economic life of the product, commencing with the date theproduct is first available for general release; or

(b)         theratio that current gross revenue bears to the total current and anticipatedfuture gross revenue.

**Intangible Assetsand Goodwill**

Intangible assets includegoodwill, acquired technology, customer relationships and software developedfor internal use. Goodwill, which is equal to the excess of cost over the fairvalue of acquired net assets and identifiable intangible assets, has beenrecorded in conjunction with several of the Company’s business combinations.Goodwill recorded in business combinations prior to June 30, 2001 wasamortized on a straight-line basis through February 28, 2002 over fiveyears (see Notes 6 and 14). Assembled workforce acquired in conjunction withcertain of the Company’s purchase business combinations was amortized using thestraight-line method through February 28, 2002 over two years. Acquiredtechnology is amortized on a straight-line basis over four to six years.Customer relationships acquired in conjunction with certain of the Company’sbusiness combinations are amortized using the straight-line method over five toseven years. In accordance with Statement of Financial Accounting Standards No. 142*“Goodwill and Other Intangible Assets”* (“SFAS142”), the Company ceased amortizing goodwill and assembled workforce,effective March 1, 2002.

**Software Developedfor Internal Use**

The Company capitalizescertain costs to develop internal use software in accordance with AmericanInstitute of Certified Public Accountants (“AICPA”) Statement of Position No. 98-1(“SOP 98-1”)*, “Accounting for theCosts of Computer Software Developed or Obtained for Internal Use.”*These capitalized costs are amortized on a straight-line basis over a period oftwo to five years after completion or acquisition of the software. Softwaredeveloped for internal use is included in other intangibles and non-currentassets in the Consolidated Balance Sheets.

**Impairment ofLong-Lived Assets**

**TheCompany assesses the impairment of long-lived assets, including property andequipment, identifiable intangible assets and software developed for internaluse, whenever events or changes in circumstances indicate that the carryingvalue may not be fully recoverable. When the Company determines that thecarrying value of such assets may not be recoverable, it measuresrecoverability based on the undiscounted cash flows expected to be generated bythe related asset or asset group. If the Company determines that a long-livedasset or asset group is not recoverable, it records an impairment loss equal tothe difference between the carrying amount of the asset or asset group and fairvalue of the asset or asset group. The Company generally measures fair value ofan asset or asset group in accordance with Statement of Financial AccountingStandards No. 144 “*Accounting for theImpairment or Disposal of Long-Lived Assets*” (“SFAS 144”). Inaddition, at each reporting date, the Company compares the net realizable valueof capitalized software development costs to the unamortized capitalized costs.To the extent the unamortized capitalized costs exceed the net realizablevalue, the excess amount is written off and the loss is recognized in theConsolidated Statement of Operations.**

**Purchased Researchand Development**

Technology or businessacquisitions may include the purchase of technology that had not yet beendetermined to be technologically feasible and had no alternative future use atits then-current stage of development. In accordance with Statement ofFinancial Accounting Standards No. 141 “*BusinessCombinations*” (“SFAS 141”), the portion of the purchase priceallocated to in-process research and development is expensed immediately uponthe consummation of the acquisition. In making the purchase 

F-8

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priceallocation, the Company considers present value calculations of projectedincome, an analysis of project accomplishments and remaining outstanding items,an assessment of overall contributions, as well as project risks. The valueassigned to purchased, in-process technology is determined by estimating thecosts to develop the acquired technology into commercially viable projects,estimating the resulting cash flows from the projects, and discounting the netcash flows to their present value. The revenue projection used to value thein-process research and development is based on estimates of relevant marketsizes and growth factors, expected trends in technology, and the nature andexpected timing of new product introduction by competitors and the Company asof the acquisition date. The resulting net cash flows from such projects arebased on estimates of cost of sales and operating expenses from such projects.

**Other Non-CurrentAssets**

Other non-current assetsinclude deferred financing fees and a long-term deposit related to our officefacility located in Bracknell, United Kingdom. No individual amounts exceedfive percent of total assets.

**Other CurrentLiabilities**

Other current liabilitiesconsist primarily of accrued interest, accrued royalty fees, deferred rent,accrued professional fees and income taxes payable. No individual amountsexceed five percent of total current liabilities.

**Advertising Costs**

Advertising andpromotional costs are expensed as incurred. Advertising and promotional costsare included in sales and marketing expense and amounted to $6.5 million,$5.0 million and $6.4  million in fiscal 2006, 2005 and 2004, respectively.

**ContingentLiabilities**

The Company has a number of unresolved regulatory,legal and tax matters, as discussed further in Note 8. The Company provides forcontingent liabilities in accordance with Statement of Financial AccountingStandards No. 5 “*Accounting forContingencies*” (“SFAS 5”). In accordance with SFAS 5, a losscontingency is charged to income when (i) it is probable that an asset hasbeen impaired or a liability has been incurred at the date of the financialstatements and (ii) the amount of the loss can be reasonably estimated.Disclosure in the notes to the financial statements is required for losscontingencies that do not meet both those conditions if there is a reasonablepossibility that a loss may have been incurred. Gain contingencies are notrecorded until realized. The Company expenses all legal costs incurred toresolve regulatory, legal and tax matters as incurred.

Periodically, the Companyreviews the status of each significant matter to assess the potential financialexposure. Significant judgment is required to determine the probability that aliability has been incurred and whether such liability can be reasonablyestimated. Because of uncertainties related to these matters, accruals arebased on the best information available at the time. Further, estimates of thisnature are highly subjective, and the final outcome of these matters could varysignificantly from the amounts that have been included in the accompanyingconsolidated financial statements. As additional information becomes available,the Company reassesses the potential liability related to its pending claimsand litigation and may revise its estimates accordingly. Such revisions in theestimates of potential liabilities could have a material impact on the Company’sresults of operations and financial position.

**Accounting for andDisclosure of Guarantees**

The Company accounts forguarantees in accordance with Financial Accounting Standards Board (“FASB”)issued Interpretation No. 45, *“Guarantor’s Accountingand Disclosure Requirements for*

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*Guarantees,Including Indirect Guarantees of Indebtedness of Others”* (“InterpretationNo. 45”).  Interpretation 45elaborates on the disclosures required in financial statements concerningobligations under certain guarantees. It also clarifies the requirementsrelated to the recognition of liabilities by a guarantor at the inception ofcertain guarantees. The provisions related to recognizing a liability atinception of the guarantee do not apply to product warranties or indemnificationprovisions in the Company’s software license agreements.

**Fair Value ofFinancial Instruments**

The carrying values ofcash and cash equivalents, marketable securities, accounts receivable andaccounts payable approximate fair value due to the short maturities of suchinstruments. The fair value of convertible debt was $164.5 million on February 28,2006 and $161.2 million on February 28, 2005 based on market quotes.

**Foreign CurrencyTranslation and Operations**

Assets and liabilities of the Company’s foreignsubsidiaries are translated at the exchange rate in effect on the balance sheetdate. The related revenue and expenses are translated using the averageexchange rate in effect during the reporting period. Foreign currencytranslation adjustments are disclosed as a separate component of stockholders’equity and comprehensive loss.

The Company generatesrevenue from sales outside the U.S. which are denominated in foreigncurrencies, typically the local currency of the international subsidiary. Thereare certain economic, political, technological and regulatory risks associatedwith operating in foreign countries. Foreign sales and operations may beadversely affected by the imposition of governmental controls, foreign currencyexchange rate fluctuations and economic and political instability.

**Revenue Recognitionand Deferred Revenue**

Revenue consists of (i) feesfrom licenses of our software; (ii) fees from technical support andproduct updates; (iii) fees from professional services, includingimplementation, training and hosting and (iv) reimbursed expenses. Whilethe basis for software license revenue recognition is substantially governed bythe requirements of the American Institute of Certified Public Accountants (“AICPA”)Statement of Position (“SOP”) 97-2, “*Software RevenueRecognition*,” as modified by SOP 98-9, “*Modification of SOP 97-2, Software Revenue Recognition withRespect to Certain Transactions”*(“SOP 98-9”), as well asTechnical Practice Aids issued from time to time by the American Institute ofCertified Public Accountants, and Securities and Exchange Commission (“SEC”)Staff Accounting Bulletin 104, “*Revenue Recognition*”(“SAB 104”), the Company exercises judgment and uses estimates in connectionwith the determination of the amount of software license, support andprofessional services revenue to be recognized each accounting period.

Software license revenue is generally recognized using the residualmethod when:

·       *Persuasive evidence of an arrangement exists*: The Company considers a non-cancelableagreement signed by the Company and the customer to be evidence of anarrangement. 

·       *Deliveryhas occurred or services have been rendered:* Delivery occurs when media containing the licensed program is providedto a common carrier, typically FOB shipping point or, in the case of electronicdelivery, the customer is given access to the licensed programs. 

·       *Fixedor determinable fee:* The Companyconsiders the license fee to be fixed or determinable if the fee is not subjectto refund or adjustment and is payable within twelve months of the agreementdate, based upon the Company’s successful collection history on sucharrangements. If the 

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arrangement fee is not fixed or determinable, revenue isrecognized as amounts become due and payable. 

·       *Collectionis probable:* The Companyperforms a credit review for all significant transactions at the time thearrangement is executed to determine the credit-worthiness of the customer.Collection is deemed probable if the Company expects that the customer will be ableto pay amounts under the arrangement as they become due. If the Companydetermines that collection is not probable, revenue recognition is deferreduntil collection.

If a software license contains customer acceptancecriteria or a cancellation right, recognition of the software revenue isdeferred until the earlier of customer acceptance or the expiration of theacceptance period or cancellation right. Typically, payments for softwarelicenses are due within twelve months of the agreement date. When softwarelicense agreements call for payment terms of twelve months or more from theagreement date, software revenue is recognized as payments become due and allother conditions for revenue recognition have been satisfied. Under theresidual method, the Company defers revenue for the fair value of anyundelivered elements based on vendor specific objective evidence (“VSOE”) offair value, and the remaining portion of the arrangement fee is allocated tothe delivered elements and recognized as revenue when the basic criteria in SOP 97-2and SAB 104 have been met.

The Company’s customer arrangements typically containmultiple elements that may include software, options for future purchases ofsoftware products not previously licensed to the customer, support, consulting,training, hosting and reimbursed expenses. Fees are allocated to the variouselements of software license agreements using the residual method based onVSOE. Each software license arrangement requires careful review to identifyeach individual element and to determine the proper amount of software revenueto be allocated among the various elements based on VSOE. Under the residualmethod, if an arrangement contains one or more undelivered elements, the VSOEof the undelivered elements are deferred and the revenue is recognized once theelements are delivered. If VSOE for one or more of the undelivered elements inan arrangement does not exist, the entire arrangement fee is recognized overthe period the undelivered elements are delivered.

In addition to evaluating the VSOE of fair value of eachelement of an arrangement, the Company also considers whether such elements canbe separated into separate units of accounting in accordance with SOP 97-2.When making this determination, the Company considers the nature of servicesprovided, when purchased with a software license (i.e., consideration ofwhether services are essential to the functionality of software productslicensed), degree of risk, availability of services from other vendors andtiming of payments, among other things. When the Company provides servicesdeemed to be essential to the functionality of the software products licensedor the licensed software requires significant production, modification orcustomization, revenue is recognized on a percentage-of-completion basis inaccordance with SOP 81-1, “*Accounting for Performanceof Construction Type and Certain Production Type Contracts*.” Inthese cases, software revenue is recognized based on labor hours or costsincurred to date compared to total estimated labor hours or costs for thecontract.

Implementation services are separately priced and sold,are generally available from a number of suppliers and typically are notessential to the functionality of the Company’s software products. Implementationservices, which include project management, systems planning, design andimplementation, customer configurations and training are billed on an hourlybasis (time and materials) or under fixed price contracts. Implementationservices are recognized as the work is performed. On fixed price contracts,services revenue is recognized using the percentage-of-completion method ofaccounting by relating labor hours incurred to date to total estimated laborhours. In the event services are billed in advance of work being performed, thebilled amount is initially recorded as deferred services revenue and recognizedas services revenue when the work is performed. When total cost estimatesexceed revenue, the Company accrues for the estimated losses immediately usingcost estimates that are based upon an average fully burdened daily rateapplicable to the consulting organization delivering the services. VSOE of fairvalue for implementation services is based upon separate sales of services atstated hourly rates.

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The process of estimation inherent in the applicationof the percentage-of-completion method of accounting for revenue is subject tojudgments and uncertainties and may affect the amounts of software and servicesrevenue under certain contracts and related expenses reported in theconsolidated financial statements. A number of internal and external factorscan affect the Company’s estimates to complete client engagements, includingskill level and experience of project managers, staff assigned to engagementsand continuity and attrition level of implementation consulting staff. Changesin the estimated stage of completion of a particular project could createvariability in revenue and results of operations if the Company is required toincrease or decrease previously recognized revenue related to a particularproject or if the Company expects to incur a loss on the project.

Support revenue includespost-contract customer support and the rights to unspecified software upgradesand enhancements. Support services are separately priced and stated in theCompany’s arrangements. Customer support is generally billed annually,initially recorded as deferred revenue and recognized as support revenue ratably over the support period. VSOE offair value for support services is typically provided by renewal rates.

**Provision forIncome Taxes**

The Company accounts for income taxes in accordancewith Statement of Financial Accounting Standards No. 109, “*Accounting for Income Taxes*.” The Company assesses thelikelihood that the deferred tax assets will be recovered from future taxableincome, and to the extent that recovery is not likely, a valuation allowance isestablished. The Company considers historical taxable income, estimates offuture taxable income and ongoing prudent and feasible tax planning strategiesin assessing the amount of the valuation allowance. Adjustments could berequired in the future if it is determined that the amount to be realized isgreater or less than the valuation allowance the Company has recorded. TheCompany performed an analysis, based on various factors, including current yearfinancial results, cumulative losses for the three year period endedFebruary 28, 2006 and estimates of future profitability, as ofFebruary 28, 2006 and February 28, 2005, and concluded that futuretaxable income will, more likely than not, be insufficient to recover theCompany’s net deferred tax assets as of February 28, 2006 andFebruary 28, 2005. Therefore, the Company has maintained a valuation allowancefor the full amount of the net deferred tax assets. The Company will continueto monitor its estimates of future profitability and the likelihood ofrealizing our net deferred tax assets based on evolving business conditions.

Also, as part of theprocess of preparing consolidated financial statements, the Company is requiredto estimate full-year income and the related income tax expense on a quarterlybasis, including the impact, if any, of additional taxes resulting from taxexaminations, in each jurisdiction in which the Company operates. Additionally,the Company makes judgments regarding the recoverability of deferred tax assetsfor each jurisdiction. Tax liabilities can involve complex issues and mayrequire an extended period to resolve. Changes in the geographical mix orestimated level of annual pretax income can impact the Company’s overall incometax expense. This process involves estimating current tax liabilities in eachjurisdiction in which the Company operates.

**Net Loss Per Share**

**Basicnet loss per share is computed using the weighted average number of shares ofcommon stock outstanding. Diluted net loss per share is computed using theweighted average number of shares of common stock and, when dilutive, potentialcommon shares from options, restricted stock and warrants to purchase commonstock using the treasury stock method and the effect of the assumed conversionof the Company’s convertible subordinated debt. The dilutive effect of options,restricted stock and warrants to acquire 0.2 million, 1.1 million and1.1 million shares was excluded from the calculation of diluted net lossper share in fiscal 2006, 2005 and 2004, respectively, because including theseshares would be anti-dilutive due to the Company’s reported net loss. The assumedconversion of the Company’s convertible debt was**

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**excludedfrom the computation of diluted net loss per share for fiscal 2006, 2005 and2004 because including these shares would be anti-dilutive due to the Company’sreported net loss.**

**Stock Option-BasedCompensation Plans**

TheCompany accounts for its stock option-based compensation plans in accordancewith Accounting Principles Board (“APB”) Opinion No. 25, “*Accounting for Stock Issued to Employees*” and relatedinterpretations using the intrinsic value based method of accounting. If theCompany accounted for its stock option-based compensation plan using the fairvalue based method of accounting in accordance with the provisions as requiredby Statement of Financial Accounting Standards No. 123 (“SFAS 123”), *“Accounting for Stock-Based Compensation,”* as amended byStatement of Financial Accounting Standards No. 148 (“SFAS 148”), *“Accounting for Stock-Based Compensation—Transition and Disclosure,”*the Company’s net loss and loss per basic and diluted share amounts would havebeen as follows, in thousands except per share amounts:

| ** **                                                                             | ** ** | **February 28 or 29,** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss, as reported                                                                  |       | $                                     | (12,243    | ) | $ | (55,271 | ) | $ | (103,800 | ) |
| Add: Stock option-based  compensation expenseincluded in reported net loss, net of tax |       | —                                |       | 168 |   | 1,799 |   |
| Less: Stock option-based  compensation, net of tax                                     |       | (729                                  | )          | (6,301 | ) | (2,611 | ) |
| Pro forma net loss                                                                     |       | $                                     | (12,972    | ) | $ | (61,404 | ) | $ | (104,612 | ) |
| Basic and diluted loss  per share, as reported                                         |       | $                                     | (0.15      | ) | $ | (0.67 | ) | $ | (1.43 | ) |
| Basic and diluted loss per share, pro forma                                            |       | $                                     | (0.16      | ) | $ | (0.75 | ) | $ | (1.44 | ) |

 

The Company adopted FASBInterpretation No. 44, “*Accounting for CertainTransactions Involving Stock Compensation”*(“FIN 44”) effectiveJuly 1, 2000. In accordance with FIN 44, repriced stock options areaccounted for as compensatory options using variable accounting treatment (seeNote 9). In addition, deferred compensation is recorded for the intrinsic valueof unvested stock options exchanged in a purchase business combination (see Note9) and amortized over the vesting period.

**New AccountingPronouncements**

In May 2005, the FASB issued SFAS 154, “*Accounting Changes and Error Corrections—A replacement of APB OpinionNo. 20 and FASB Statement No. 3*” (“SFAS 154”). The FASBissued SFAS 154 to provide guidance on the accounting for and reporting oferror corrections. Unless otherwise impracticable, it establishes retrospectiveapplication as the required method for reporting a change in accountingprinciple in the absence of explicit transition requirements specific to thenewly adopted accounting principle. SFAS 154 also provides guidance fordetermining whether retrospective application is impracticable and forreporting an accounting change when retrospective application is impracticable.Furthermore, this statement addresses the reporting of a correction of an errorin previously issued financial statements by restating previously issuedfinancial statements. This Statement is effective for financial statements forfiscal years beginning after December 15, 2005. The adoption of thisstatement is not expected to have a material impact on the Company’sconsolidated financial statements.

SFAS No. 123 (Revision 2004), “*Share-Based Payment*” (“SFAS 123 (R)”) was issued inDecember 2004 and was to be effective for reporting periods beginningafter June 15, 2005. The new statement requires all share-based paymentsto employees to be recognized in the financial statements based on their fairvalues. The Company currently accounts for its share-based payments toemployees under the intrinsic value method of accounting set forth inAccounting Principles Board Opinion No. 25, “*Accountingfor Stock Issues to Employees*.” Additionally, the Company complieswith the stock-based employer compensation disclosure requirements of SFAS 148.On March 29, 2005, the SEC issued Staff 

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AccountingBulletin Topic 14, “Share-Based Payment” (“SAB 107”). SAB 107,which becomes effective for public companies upon their adoption ofSFAS No. 123(R), describes the SEC Staff’s views in determining theassumptions that underlie the fair value estimates and interaction of SFAS No. 123(R)with certain existing SEC guidance. On April 14, 2005, The Securities andExchange Commission announced the adoption of a new rule that amends the compliancedates for SFAS 123(R). The new rule allows companies to implementSFAS 123 (R) at the beginning of their next fiscal year, instead of theirnext reporting period beginning after June 15, 2005. The Company plans toadopt the new statement beginning in the first quarter of fiscal 2007. TheCompany believes the adoption of SFAS 123(R) will have a material impacton its financial position and results of operations.

**2.**   CASH,CASH EQUIVALENTS, MARKETABLE SECURITIES AND LONG-TERM INVESTMENTS

Thefollowing is a summary of cash, cash equivalents and marketable securities asof February 28, 2006 and February 28, 2005 (in thousands):

| ** **                                              | ** ** | **Unrealized** | ** ** |
|---------------------------------------------------------|------------|----------------|------------|
| **February 28, 2006**                         | ** ** | ** **     | ** ** | **Cost** | ** ** | **Gain** | ** ** | **Loss** | ** ** | **Market** | ** ** |
| Cash and cash  equivalents:                             |       |           |       |   |   |   |   |   |   |   |   |
| Cash                                                    |       | $              | 50,094     |   |   | $ | — |   |   | $ | — |   | $ | 50,094 |   |
| Money market funds                                      |       | 20,057         |       |   | — |   |   | — |   | 20,057 |   |
| Commercial paper                                        |       | 9,387          |       |   | — |   |   | — |   | 9,387 |   |
| Total cash and  cash equivalents                        |       | 79,538         |       |   | — |   |   | — |   | 79,538 |   |
| Marketable  securities:                                 |       |           |       |   |   |   |   |   |   |   |   |
| Auction rate securities:                                |       |           |       |   |   |   |   |   |   |   |   |
| US treasury and agency                                  |       | 10,350         |       |   | — |   |   | — |   | 10,350 |   |
| Total auction  rate securities                          |       | 10,350         |       |   | — |   |   | — |   | 10,350 |   |
| Other marketable  securities                            |       | 50,933         |       |   | — |   |   | (94 | ) | 50,839 |   |
| Total marketable  securities                            |       | 61,283         |       |   | — |   |   | (94 | ) | 61,189 |   |
| Total cash, cash  equivalents and marketable securities |       | $              | 140,821    |   |   | $ | — |   |   | $ | (94 | ) | $ | 140,727 |   |
|                                                         |            |                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                              | ** ** | **Unrealized** | ** ** |
|---------------------------------------------------------|------------|----------------|------------|
| **February 28, 2005**                         | ** ** | ** **     | ** ** | **Cost** | ** ** | **Gain** | ** ** | **Loss** | ** ** | **Market** | ** ** |
| Cash and cash  equivalents:                             |       |           |       |   |   |   |   |   |   |   |   |
| Cash                                                    |       | $              | 32,100     |   |   | $ | — |   |   | $ | — |   | $ | 32,100 |   |
| Money market funds                                      |       | 44,842         |       |   | — |   |   | — |   | 44,842 |   |
| Commercial paper                                        |       | 3,400          |       |   | — |   |   | — |   | 3,400 |   |
| Total cash and  cash equivalents                        |       | 80,342         |       |   | — |   |   | — |   | 80,342 |   |
| Marketable  securities:                                 |       |           |       |   |   |   |   |   |   |   |   |
| Auction rate securities:                                |       |           |       |   |   |   |   |   |   |   |   |
| US treasury and agency                                  |       | 10,000         |       |   | — |   |   | — |   | 10,000 |   |
| Total auction  rate securities                          |       | 10,000         |       |   | — |   |   | — |   | 10,000 |   |
| Other marketable  securities                            |       | 39,914         |       |   | — |   |   | (278 | ) | 39,636 |   |
| Total marketable  securities                            |       | 49,914         |       |   | — |   |   | (278 | ) | 49,636 |   |
| Total cash, cash equivalents and marketable  securities |       | $              | 130,256    |   |   | $ | — |   |   | $ | (278 | ) | $ | 129,978 |   |
|                                                         |            |                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See “Cash and Cash Equivalents” in Note 1 regardingcertain reclassifications of auction rate securities made in fiscal 2005.

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Long-terminvestments are comprised of U.S. treasury and agency debt securities with originalmaturities in excess of one year. The following is a summary of long-terminvestments as of February 28, 2005 (in thousands):

| ** **                       | ** ** | **Unrealized** | ** ** |
|----------------------------------|------------|----------------|------------|
| **February 28, 2005**  | ** ** | ** **     | ** ** | **Cost** | ** ** | **Gain** | ** ** | **Loss** | ** ** | **Market** | ** ** |
| Long-term debt  securities:      |       |           |       |   |   |   |   |   |   |   |   |
| US treasury and agency           |       | 5,952          |       |   | — |   |   | (41 | ) | 5,911 |   |
| Total long-term debt  securities |       | $              | 5,952      |   |   | $ | — |   |   | $ | (41 | ) | $ | 5,911 |   |
|                                  |            |                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**3.   ALLOWANCEFOR DOUBTFUL ACCOUNTS**

Activityin the allowance for doubtful accounts for the fiscal years ended February 28or 29, 2006, 2005 and 2004 was as follows (in thousands):

| ** **                                                     | ** ** | **February 28 or 29,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Beginning balance                                              |       | $                                     | 7,605      |   | $ | 4,395 |   | $ | 7,007 |   |
| Write-offs and  other adjustments                              |       | (2,309                                | )          | (834 | ) | (2,868 | ) |
| Provision for  doubtful accounts charged to costs and expenses |       | (1,091                                | )          | 4,044 |   | 256 |   |
| Ending balance                                                 |       | $                                     | 4,205      |   | $ | 7,605 |   | $ | 4,395 |   |

 

**4.   PROPERTYAND EQUIPMENT**

Propertyand equipment consists of the following (in thousands): 

| ** **                                               | ** ** | **February 28,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Information  technology equipment and purchased software |       | $                     | 30,875     |   | $ | 29,187 |   |
| Office furniture  and equipment                          |       | 8,283                 |       | 8,751 |   |
| Leasehold  improvements                                  |       | 6,886                 |       | 6,610 |   |
| Total                                                    |       | 46,044                |       | 44,548 |   |
| Less: accumulated  depreciation                          |       | (32,362               | )          | (28,753 | ) |
| Total property and  equipment, net                       |       | $                     | 13,682     |   | $ | 15,795 |   |

 

Depreciation expense forfiscal 2006, 2005 and 2004 was approximately $5.8 million, $7.3 millionand $6.5 million, respectively.

**5.**   CAPITALIZEDSOFTWARE DEVELOPMENT COSTS AND SOFTWARE DEVELOPED FOR INTERNAL USE

*CAPITALIZEDSOFTWARE DEVELOPMENT COSTS*

The Company capitalizes costs incurred in thedevelopment of its software products for commercial availability. Softwaredevelopment costs include certain internal development costs. Costs incurredprior to establishing technological feasibility are charged to productdevelopment expense as incurred. Capitalized software development costs areamortized at the greater of the amount computed using either:

(a)    thestraight-line method over the estimated economic life of the product,commencing with the date the product is first available for general release; or

(b)   the ratiothat current gross revenue bears to the total current and anticipated futuregross revenue.

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Generally, an economic life of two years is assignedto Capitalized Software Development Costs.

The Company capitalized software development costs of$3.5 million, $9.6 million and $9.9 million and recorded relatedamortization expense of $9.6 million, $9.4 million and $9.0 millionfor fiscal 2006, 2005 and 2004, respectively, in accordance with SFAS 86.

The total amortizationexpense for the Company’s capitalized software development costs for fiscal2006, 2005 and 2004 include write-offs totaling approximately $0 million,$0.3 million and $0.2 million, respectively, of previouslycapitalized software development costs. These capitalized costs were deemed toexceed their future net realizable value.

*SOFTWARE DEVELOPEDFOR INTERNAL USE*

The Company capitalizedinternally developed software costs (excluding amounts acquired) of $0.1 million,$0.3 million and $1.6 million and recorded related amortizationexpense of $1.0 million, $1.2 million and $1.1 million forfiscal 2006, 2005 and 2004, respectively.

**6.   INTANGIBLEASSETS AND GOODWILL**

Acquisition-relatedintangible assets subject to amortization as of February 28, 2006 and February 28,2005 are as follows (in thousands): 

| ** **                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Acquired  technology            |       | $        | 51,939     |     | $          | 64,739 |   |
| Less: accumulated  amortization |       | (47,534  | )          | (50,923  | )          |
| Acquired  technology, net       |       | $        | 4,405      |     | $          | 13,816 |   |
| Customer relationships          |       | 28,109   |       | 28,109   |       |
| Less: accumulated  amortization |       | (24,527  | )          | (18,774  | )          |
| Customer  relationships, net    |       | $        | 3,582      |     | $          | 9,335 |   |

 

During the three months ended August 31, 2005,the Company performed an impairment test of its long-lived assets and concludedthat although it continues to sell the products acquired in the PartMiner CSD, Inc.asset acquisition, the Company did not believe that future operating cash flowswould be sufficient to support the related asset balance. Therefore, the Companywrote-off the remaining book value of those intangible assets of $3.7 million.

Thechanges in the carrying amount of goodwill for the years ended February 28,2006 and 2005 are as follows (amounts in thousands):

| ** **                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Beginning balance                         |       | $        | 185,658    |     | $          | 185,501 |   |
| Foreign currency  translation adjustments |       | 160      |       | 157      |       |
| Ending balance                            |       | $        | 185,818    |     | $          | 185,658 |   |

 

Amortizationexpense related to other intangible assets was $11.4 million, $19.9 millionand $18.9 million during fiscal 2006, 2005 and 2004, respectively.Estimated aggregate future amortization expense for acquisition-relatedintangible assets in future fiscal years are as follows (amounts in thousands):

| ** **            | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Amortization  expense |       | $        | 5,013      |     | $          | 1,908    |       | $        | 914        |     | $          | 152 |   |   | $ | — |   |   |
|                       |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |  |  |

 

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**GOODWILL IMPAIRMENT**

The Company tests goodwill for impairment on an annualbasis, coinciding with the Company’s fiscal year end, or on an interim basis ifcircumstances change that would more likely than not reduce the Company’simplied fair value (which includes factors such as, but not limited to, theCompany’s market capitalization, control premium and recent stock pricevolatility) below its carrying value.

During the six months ended August 31, 2004 andthe three months ended May 31, 2005, the Company experienced adversechanges in its stock price resulting from its poor financial performance. As aresult, the Company performed a test for goodwill impairment at August 31,2004 and May 31, 2005 and determined that based upon the implied fairvalue (which includes factors such as, but not limited to, the Company’s marketcapitalization, control premium and recent stock price volatility) of theCompany as of August 31, 2004 and May 31, 2005, there was noimpairment of goodwill.

During the three months ended November 30, 2005,the Company’s Chief Financial Officer left the Company to take a position atanother company. As a result, the Company performed a test for goodwillimpairment as of November 30, 2005. The Company determined that based uponthe implied fair value (which includes factors such as, but not limited to, theCompany’s market capitalization, control premium and recent stock pricevolatility) of the Company as of November 30, 2005, there was noimpairment of goodwill.

The Company performed atest for goodwill impairment at February 28, 2006 and February 28,2005, the Company’s annual date for goodwill impairment review, and determinedthat based upon the implied fair value (which includes factors such as, but notlimited to, the Company’s market capitalization, control premium and recentstock price volatility) of the Company as of February 28, 2006 and February 28,2005, there was no impairment of goodwill. The Company will continue to testfor impairment on an annual basis, coinciding with its fiscal year end, or onan interim basis, if circumstances change that would more likely than notreduce the implied fair value of the Company below its carrying value.

**7.   LONG-TERMDEBT AND DEBT CONVERSION EXPENSE**

5% Convertible Subordinated Notes. The Companycompleted a private placement of $250.0 million of Notes in October andNovember 2000. The Notes bear interest at 5.0% per annum which is payablesemi-annually. The Company had $175.5 million outstanding as of February 28,2006 and February 28, 2005, respectively. The fair market value of theNotes was $164.5 million and $161.2 million on February 28, 2006and February 28, 2005, respectively, based on market quotes. The Notesmature in November 2007 and are convertible into approximately 4.0 millionshares of the Company’s common stock at a conversion price of $44.06, subjectto adjustment under certain conditions. The conversion price of the Notes willbe adjusted in the event that the Company issues common stock as a dividend ordistribution with respect to its common stock, subdivides, combines orreclassifies its common stock, issues rights to its common stockholders topurchase common stock at less than market price, makes certain distributions ofsecurities, cash or other property to its common stockholders (other thanordinary cash dividends), or makes certain repurchases of common stock. Upon achange of control of the Company, the holders of the Notes would have the rightto require the Company or its successor to repurchase the Notes at a purchaseprice equal to 100% of the principal amount, plus accrued and unpaid interestto the date of repurchase in cash. The Notes do not have any financial covenants.

F-17

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At anytime on or after November 7, 2003, the Company may redeem, from time totime, the Notes in whole, or in part, at the Company’s option. Redemption canbe made on at least 30 days notice if the trading price of the Company’s commonstock for 20 trading days in a period of 30 consecutive trading days ending onthe day prior to the mailing of notice of redemption exceeds 120% of theconversion price of the Notes. The redemption price, expressed as a percentageof the principal amount, is: 

| **Redemption Period**                           | ** ** | ** ** | ** ** | **Redemption Price** | ** ** |
|------------------------------------------------------|------------|------------|------------|---------------------------|------------|
| November 1,  2005 through October 31, 2006 |       |       | 101        | %                         |       |
| November 1, 2006  through maturity              |       |       | 100        | %                         |       |

 

Debt Conversion Expense. During fiscal 2004, theCompany exchanged $74.5 million of the Notes for 9,725,750 shares of its commonstock in privately negotiated transactions with note holders. The offer andissuance of the common stock underlying these transactions are exempt fromregistration under Section 3(a)(9) of the Securities Act of 1933 andmay be freely traded upon issuance.

At the conversion price of $44.06 per share, the$74.5 million of Notes exchanged would have been convertible into1,690,780 shares of common stock. For accounting purposes, the additional8,034,970 shares of common stock that the Company issued in these transactionsare considered an inducement for the holders to convert their Notes, whichrequired the Company to record a non-operating expense equal to the fair valueof the additional shares issued to the holders. Accordingly, the Companyrecorded a non-cash debt conversion expense of approximately $59.8 millionduring the twelve months ended February 29, 2004. These transactionsresulted in a $74.5 million reduction of the Notes outstanding andincreased stockholders’ equity by $74.5 million. The 9,725,750 shares ofcommon stock issued in these transactions represented approximately 11.9% ofthe shares outstanding as of February 29, 2004.

*Line of Credit.**  *The Company had a one-year unsecured revolving creditfacility with Silicon Valley Bank (“SVB”) for $15.0 million which expiredon March 30, 2005. On April 8, 2005, the Company renewed the creditfacility with SVB for $15.0 million and a two-year term, effectiveMarch 29, 2005 (the “Credit Facility”). Under the terms of the CreditFacility, the Company may request cash advances, letters of credit, or both.Borrowings under the Credit Facility accrue interest at the prime rate plus0.5%. The Credit Facility requires the Company to comply with the followingfinancial covenants: (i) minimum tangible net worth (defined asstockholders’ equity plus convertible debt less goodwill, capitalized softwarecosts and other intangible assets) must be at least $90.0 million plus 50%of consolidated net income generated cumulatively commencing with the first quarterof fiscal 2006 and (ii) the Company’s ratio of (a) unrestricted cash,cash equivalents, marketable securities and long-term investments depositedwith SVB and its affiliates plus net accounts receivable to (b) currentliabilities plus long-term indebtedness to SVB and outstanding letters ofcredit minus deferred revenue, must be at least 2.0 to 1.0. The Company was incompliance with all financial covenants as of February 28, 2006 and therewere no cash draws outstanding. As of February 28, 2006, the Company had$10.0 million in letters of credit outstanding under the Credit Facility,of which $8.9 million is related to securing our lease obligations forcertain office space and $1.1 million is related to securing an additionalline of credit in China, which was never executed. The $1.1 million letterof credit expires in May 2007 and cannot be drawn upon by the beneficiarybecause the line of credit for which it was issued to secure was neverexecuted.

The Credit Facility requires the Company to maintain$50.0 million in funds with SVB Asset Management and its affiliates. TheCredit Facility also restricts the amount of additional debt the Company canincur and restricts the amount of cash that the Company can use foracquisitions and for the repurchase of convertible debt. Under the terms of theCredit Facility, the Company retains the right to terminate the facility at anytime upon repayment of any advances and the posting of cash collateral for anyoutstanding letters of credit. Under the Credit Facility, SVB has the right toobtain a lien on all of the Company’s assets, other than intellectual property,upon an occurrence of default, unless the Company 

F-18

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terminates the facility asprovided above. The Credit Facility also provides that, upon an event of default,the Company is prohibited from paying a cash dividend to its shareholders.

The Credit Facility includes a provision forsupplemental equipment advances, under which the Company could borrow up to anadditional $5.0 million for the purchase of equipment, office furnitureand other capital expenditures. Amounts could be borrowed for such capitalexpenditures through December 31, 2005 and accrued interest at a fixedinterest rate equal to 7.75% annually. Equipment advances would have beenrepaid monthly over a 36-month-period, beginning in the month followingthe advance. The Company’s right to request supplemental equipment advancesexpired on December 31, 2005 and the Company made no draw downs. Thefinancial covenants for the supplemental equipment advances were the same asThe Credit Facility and the Company was in compliance with all financialcovenants.

The Company had anadditional credit agreement (the “Equipment Line”) with SVB, as amended, whichexpired March 31, 2003, under which the Company was permitted to borrow upto $5.0 million for the purchase of equipment. Amounts borrowed under theEquipment Line accrue interest at a rate equal to the greater of the three-yearTreasury note rate plus 5%, or 8.25%, and are repaid monthly over a 36-monthperiod. During fiscal 2003, the Company borrowed $2.9 million under theEquipment Line. As of February 28, 2006, all amounts borrowed had beenrepaid and there was no outstanding balance. The financial covenants for theEquipment Line are the same as the financial covenants for the Credit Facility.The Company was in compliance with all financial covenants as ofFebruary 28, 2006.

**8.   COMMITMENTSAND CONTINGENCIES**

*Commitments.**  *The Company leases office space, office equipment andautomobiles under operating leases and various computers and other equipmentunder capital leases. Aggregate property acquired through capital leasesamounted to $8.1 million and $7.9 million at February 28, 2006and February 28, 2005, respectively, and has been included in purchasedsoftware and office furniture and equipment (see Note 4). Total accumulatedamortization relating to these leases was $4.5 million and $3.7 millionas of February 28, 2006 and February 28, 2005, respectively.

Rentexpense for fiscal 2006, 2005 and 2004, was approximately $10.0 million,$13.6 million and $19.7 million, respectively. The future minimumlease payments under these capital and operating leases for each of thesucceeding five fiscal years beginning March 1, 2006 are as follows (inthousands):

| **Fiscal Year**               | ** ** | ** ** | ** ** | **Capital  Leases** | ** ** | **Operating  Leases** | ** ** |
|------------------------------------|------------|------------|------------|---------------------|------------|-----------------------|------------|
| 2007                               |       | $          | 1,791      |                | $          | 14,072                |       |
| 2008                               |       | 820        |       | 12,243              |       |
| 2009                               |       | 123        |       | 9,497               |       |
| 2010                               |       | —     |       | 9,308               |       |
| 2011                               |       | —     |       | 9,531               |       |
| Thereafter                         |       | —     |       | 24,700              |       |
| Total minimum  lease payments      |       | 2,734      |       | 79,351              |       |
| Less amounts representing interest |       | (158       | )          | —              |       |
| Less sublease income               |       | —     |       | (11,051             | )          |
| Net minimum lease  payments        |       | $          | 2,576      | (1)                 | $          | 68,300                |       |

----

(1)          Approximately $1.7 millionand $0.9 million is included in other current liabilities and long-termdebt and capital leases, respectively, in the consolidated balance sheet as ofFebruary 28, 2006.

F-19

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*Contingencies.**  *The Company is involved from time to time in disputesand other litigation in the ordinary course of business. The Company hasestablished accruals related to such matters that are probable and reasonablyestimable. The Company does not believe that the outcome of any pendingdisputes or litigation will have a material adverse effect on the Company’sbusiness, operating results, financial condition and cash flows. However, theultimate outcome of these matters, as with dispute resolution and litigationgenerally, is inherently uncertain, and it is possible that some of thesematters may be resolved adversely to the Company. The adverse resolution of anyone or more of these matters could have a material adverse effect on theCompany’s business, operating results, financial condition and cash flows.

*Indemnification.**  *The Company licenses software to its customers undercontracts which the Company refers to as Software License Agreements (“SLA”).Each SLA contains the relevant terms of the contractual arrangement with thecustomer, and generally includes certain provisions for indemnifying thecustomer against losses, expenses, and liabilities from damages that may beawarded against the customer in the event the Company’s software is found toinfringe upon a patent, copyright, trademark or other proprietary right of athird party. The SLA generally limits the scope and remedies for suchindemnification obligations in a variety of industry-standard respects,including but not limited to certain time and geography-based scope limitationsand a right to replace an infringing product or modify the product so that itis no longer infringing. If the Company cannot address the infringement byreplacing the products or services, or modifying the products or services, theCompany is allowed to cancel the software license and return the fees paid bycustomer. The Company requires its employees to sign a proprietary informationand inventions assignment agreement, which assigns the rights in its employees’development work to the Company.

To date, the Company has not had to reimburse any ofits customers for any losses related to these indemnifications provisions andno material claims are outstanding as of February 28, 2006. For severalreasons, including the lack of prior indemnification claims and the lack of amonetary liability limit for certain infringement cases under the SLAs, theCompany cannot determine the maximum amount of potential future payments, ifany, related to such indemnification provisions. There can be no assurance thatpotential future payment will not have a material adverse effect on theCompany’s operating performance or financial condition.

*Product Warranty.**  *The Company generally warrants its software products.The Company provides for the estimated cost of product warranties based onspecific warranty claims, provided that it is probable that a liability existsand provided the amount can be reasonably estimated. To date, the Company hasnot had any material costs associated with these warranties. There was noliability for warranty claims as of February 28, 2006 and 2005,respectively.

**9.**   STOCKHOLDERS’EQUITY

**Preferred Stock**

The Company has authorized4,620,253 shares of $.01 par value preferred stock. As of February 28,2006 and 2005, no preferred shares were outstanding.

**Common Stock**

The Company has authorized300,000,000 shares of $.002 par value common stock. No cash dividends on commonstock have been declared or paid in any of the fiscal years presented.

F-20

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**Warrants andCustomer Stock Issuances**

**In connection with the acquisitionof Talus Solutions, Inc. (“Talus”) in fiscal 2001, the Company assumedwarrants issued to purchase up to 65,000 shares of the Company’s common stockfor certain past services rendered by outside consultants and the issuance ofcertain notes payable. On February 28, 2001, warrants to purchase 49,096shares were exercised. As of February 28, 2006, there were no warrantsoutstanding as all unexercised warrants expired during fiscal 2006.**

In March 2004, theCompany entered into an amendment to an existing alliance agreement withInternational Business Machines Corporation (“IBM”) under which the companieswill develop, market, sell and deliver demand and supply chain solutionsglobally. In connection with entering into the amendment to the allianceagreement, the Company issued a warrant (the “Warrant”) to IBM to acquire250,000 shares of the Company’s common stock at a per share purchase price of$8.51, in reliance upon an exception provided under Section 4(2) ofthe Securities Act of 1933, as amended, for transactions not involving a publicoffering. The Warrant is immediately exercisable, expires March 12, 2009,and provides for customary registration and indemnification rights and certainlimited transfer rights. The fair value of the Warrant of $1.1 million isbeing recognized as operating expense over the three-year service period of thealliance agreement. The fair value of the Warrant was calculated using theBlack-Scholes option pricing model with the following assumptions: risk-freeinterest rate of 2.79%; dividend yield of zero; volatility of 99%; and a Warrantlife of five years. The Company recorded $0.4 million in amortizationexpense in each of the fiscal years ended February 28, 2006 and 2005associated with the Warrant.

**Employee StockPurchase Plan**

**In October 1994,the Company adopted an employee stock purchase plan (“ESPP”) that authorizesthe Company to sell up to 2,000,000 shares of common stock to employees throughvoluntary payroll withholdings. The stock price to be paid by employees isequal to 85% or 95% of the lower of the average market price as reported on theNational Association of Securities Dealers Automated Quotation System foreither the first or last day of each six-month withholding period. Payrolldeductions may not exceed the lesser of 10% of a participant’s compensation or$25,000 per year. The employee stock purchase plan was suspended as of June 30,2003. At the 2004 Annual Meeting of Shareholders, the shareholders of theCompany approved the 2004 Employee Stock Purchase Plan of Manugistics Group, Inc.that authorizes the Company to sell up to 3,000,000 shares of common stock toemployees through voluntary payroll withholdings. Participation commenced on September 1,2004. The number of shares purchased under these plans by employees totaled286,612 shares, 163,015 shares and 211,589 shares in fiscal 2006, 2005 and2004, respectively. The weighted average estimated fair value of sharespurchased in fiscal 2006, 2005 and 2004 was $0.37, $0.52 and $2.23,respectively.**

**Stock Options**

**Effective September 13, 2000,the Company adopted the 2000 Non-Qualified Stock Option Plan (“2000 Plan”)under which non-qualified stock options may be granted to officers, directorsand employees to purchase a total of up to 8.0 million new shares ofcommon stock at prices not less than fair market value at the time of grant.Effective July 24, 1998, the Company adopted the 1998 Plan under whichincentive and non-qualified stock options may be granted to officers, directorsand employees to purchase a total of up to 10.5 million new shares ofcommon stock at prices not less than the fair market value at the time ofgrant. In April 2001, the Board of Directors of the Company adopted aproposed amendment to the 1998 Stock Option Plan (“1998 Plan”) to increase thenumber of shares of Common Stock reserved for issuance to 20,475,800. Inaddition, the Board of Directors approved the termination of the 2000 Plan. Theterms of the 2000 Plan remain in effect for options outstanding at thetermination date. Prior to the adoption of the 1998 Plan, the Company hadadditional plans under which it granted stock options including the 1994Employee Stock Option Plan (“1994 Plan”), the 1994 Outside DirectorsNon-qualified**

F-21

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**StockOption Plan (“1994 Director Plan”) and the 1994 Executive Incentive StockOption Plan (“1994 Executive Plan”). No new options will be granted under theseadditional stock option plans, which will remain in effect with respect tooptions outstanding under such plans until such options are exercised,terminated or expire. Options under the employee option exchange program weregranted under the 1998 Plan and the 2000 Plan. As of February 28, 2006,the Company has cumulatively granted options of 4.4 million shares underthe 2000 Plan, 15.7 million shares under the 1998 Plan, 12.3 millionshares under the 1994 Plan, 0.8 million shares under the 1994 DirectorPlan and 0.4 million shares under the 1994 Executive Plan.**

Under the 2000 Plan and the 1998 Plan, the vestingperiod for new options issued is in accordance with the Incentive andNon-Qualified Stock Option Policy approved by the Compensation Committee of theBoard of Directors. Options outstanding under the plans vest over variousterms, ranging from immediate vesting to annual vesting over a five-year periodfrom the date of grant. The right to exercise the vested options expires uponthe earlier of either ten years (or for options granted prior to 1994, elevenyears) from the date of grant or, generally, within thirty days of terminationof employment.

During fiscal 2004 the Company granted non-qualifiedstock options in the amount of 0.4 million to several of the Company’sexecutive officers and employees. These stock option grants were approved bythe Company’s Board of Directors and were not granted under any of theabove-mentioned stock option plans. These shares vest and become exercisableover periods ranging from immediate vesting to one hundred percent vesting uponthe earlier of achievement of certain pre-defined performance targets or sevenyears from the date of grant. As of February 28, 2006, none of theseoptions were outstanding. No options of this nature were granted in fiscal 2006and fiscal 2005.

Under FASB Interpretation No. 44 “*Accounting for Certain Transactions Involving Stock Compensation,”*(“FIN44”), which is retroactive to option repricings effected after December 15,1998, companies are required to treat repriced options as compensatory optionsaccounted for using variable accounting treatment. As a result, the Companywill record non-cash stock compensation (benefit) expense, over the term of theoption, based upon changes in the market price of its common stock over themarket price at June 30, 2000 ($23.38 per share). As of February 28,2006, the Company had approximately 283,550 repriced options outstanding. Sincethe stock price at the beginning and end of each of the fiscal 2006 quarterswas below $23.38, no charge or benefit was recorded during fiscal 2006.

As part of the Talus acquisition, the Company assumedall outstanding stock options, which were converted into Manugistics’ stockoptions. Options to purchase approximately 631,000 shares of Manugistics’common stock were unvested at the acquisition date. FIN 44 requires theacquiring company to measure the intrinsic value of unvested stock optionsassumed at the acquisition date in a purchase business combination and record acompensation charge over the remaining vesting period of those options to theextent those options remain outstanding. This resulted in a charge of $0.2 millionand $1.8 million in fiscal 2005 and 2004, respectively. All of theoutstanding options related to the Talus acquisition are fully vested and allcompensation expense has been recognized by the end of fiscal 2005.

F-22

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Asummary of the status of the Company’s stock option plans and changes duringthe fiscal years is presented below with share amounts in thousands: 

| ** **                        | ** ** | **February 28 or 29,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|
| ** **                        | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                        | ** ** | **Options to  Purchase  Shares** | ** ** | **Wtd. Avg  Ex. Price** | ** ** | **Options to  Purchase  Shares** | ** ** | **Wtd. Avg.  Ex. Price** | ** ** | **Options to  Purchase  Shares** | ** ** | **Wtd. Avg.   Ex. Price** | ** ** |
| Outstanding at  beginning of year |       |                                  | 19,404     |   |   |   | $ | 5.84 |   |   |   | 16,970 |   |   |   | $ | 6.87 |   |   |   | 20,655 |   |   |   | $ | 13.38 |   |   |
| Options granted  at market value  |       |                                  | 1,548      |   |   |   | 1.82 |   |   |   | 5,680 |   |   |   | 2.89 |   |   |   | 5,473 |   |   |   | 5.87 |   |   |
| Exercised                         |       |                                  | —     |   |   |   | — |   |   |   | (160 | ) |   |   | 3.62 |   |   |   | (1,726 | ) |   |   | 4.68 |   |   |
| Cancelled                         |       |                                  | (10,017    | ) |   |   | 6.16 |   |   |   | (3,086 | ) |   |   | 6.14 |   |   |   | (7,432 | ) |   |   | 24.74 |   |   |
| Outstanding at end of year        |       |                                  | 10,935     |   |   |   | $ | 4.98 |   |   |   | 19,404 |   |   |   | $ | 5.84 |   |   |   | 16,970 |   |   |   | $ | 6.87 |   |   |
| Exercisable at  end of year       |       |                                  | 5,171      |   |   |   | $ | 7.30 |   |   |   | 11,120 |   |   |   | $ | 7.23 |   |   |   | 10,220 |   |   |   | $ | 7.49 |   |   |

 

**Restricted StockProgram**

In June 2003, the Company’s Board of Directorsapproved an amendment to the Company’s 1998 stock option plan to issuerestricted shares of Manugistics’ common stock to its employees. This amendmentwas approved by stockholders at the Company’s 2003 Annual Meeting ofShareholders on July 29, 2003. During fiscal 2006, the Company issued 0.4 millionshares of restricted stock to certain key employees. The restricted stockawards granted to key employees have a vesting schedule pursuant to which thestock awards may vest immediately, upon change in control or up to five yearsfrom the date of grant. The total value of the fiscal 2006 restricted stockawards granted of approximately $0.5 million was computed using theclosing stock price on the date of grant and was recorded as a component ofdeferred compensation. The Company has recorded the deferred compensation usingan estimated forfeiture rate, which has ranged from 0% to 22%. The relatedcompensation expense will be recognized over the vesting period.

In fiscal 2005, the Company issued 1.6 millionshares of restricted stock to certain key employees. The total value of thefiscal 2005 restricted stock awards granted of approximately $3.5 millionwas computed using the closing stock price on the date of grant and wasrecorded as a component of deferred compensation. The Company has recorded thedeferred compensation using an estimated forfeiture rate, which has ranged from0% to 36%. The related compensation expense will be recognized over the vestingperiod.

In fiscal 2004, the Company issued 0.2 millionshares of restricted stock to certain key employees. The total value of thefiscal 2004 restricted stock awards granted of approximately $1.3 millionwas computed using the closing stock price on the date of grant and wasrecorded as a component of deferred compensation. The related compensationexpense will be recognized and amortized over the vesting period.

The Company recorded $1.7 million,$1.2 million and $0.3 million in net compensation expense related torestricted shares outstanding during the fiscal years ended February 28,2006, February 28, 2005 and February 29, 2004, respectively.

**Stock Option-BasedCompensation**

As permitted under SFAS No. 123, as amended bySFAS 148, the Company continues to account for stock option-based compensationto employees in accordance with APB Opinion No. 25, under which nocompensation expense is recognized, since the exercise price of options grantedis equal to or greater than the fair market value of the underlying security onthe grant date. Pro forma information regarding net loss and loss per share asif the fair value method had been applied in accordance with SFAS 123 is requiredby 

F-23

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SFAS No. 148. Thefair value of the Company’s stock option-based awards to employees wasestimated as of the date of grant using the Black-Scholes option pricing model.Limitations on the effectiveness of the Black-Scholes option pricing model includethat it was developed for use in estimating the fair value of traded optionswhich have no vesting restrictions and are fully transferable and that themodel requires the use of highly subjective assumptions including expectedstock price volatility. Because the Company’s stock option-based awards toemployees have characteristics significantly different from those of tradedoptions and because changes in the subjective input assumptions can materiallyaffect the fair value estimate, in management’s opinion, the existing models donot necessarily provide a reliable single measure of the fair value of itsstock option-based awards.

Hadcompensation cost for these plans been recorded, the Company’s net loss andloss per basic and diluted share amounts would have been as follows, inthousands except per share amounts:

| ** **                                                                              | **February 28 or 29,** | ** ** |
|-----------------------------------------------------------------------------------------|---------------------------------------|------------|
| ** **                                                                              | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss, as  reported                                                                  | $                                     | (12,243    | ) | $ | (55,271 | ) | $ | (103,800 | ) |
| Add: Stock  option-based compensation expense included in reported net loss, net of tax | —                                |       | 168 |   | 1,799 |   |
| Less: Stock  option-based compensation, net of tax                                      | (729                                  | )          | (6,301 | ) | (2,611 | ) |
| Pro forma net  loss                                                                     | $                                     | (12,972    | ) | $ | (61,404 | ) | $ | (104,612 | ) |
| Basic and diluted  loss per share, as reported                                          | $                                     | (0.15      | ) | $ | (0.67 | ) | $ | (1.43 | ) |
| Basic and diluted loss  per share, pro forma                                            | $                                     | (0.16      | ) | $ | (0.75 | ) | $ | (1.44 | ) |

 

Fiscal 2006, 2005 and 2004 pro forma amounts include$117 thousand, $37 thousand and $170 thousand, respectively, related to thepurchases under the employee stock purchase plan.

Theweighted average fair value of options granted in fiscal 2006, 2005 and 2004was $0.65, $1.62 and $3.28 per share, respectively. The fair value of optionsgranted was estimated assuming no dividends and using the followingweighted-average assumptions for each of the fiscal years presented: 

| ** **                | ** ** | **OPTIONS** | ** ** | **ESPP**   | ** ** |
|---------------------------|------------|-------------|------------|------------|------------|
| ** **                | ** ** | **2006**    | ** ** | **2005**   | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free  interest rates |       | 4.02        | %          | 3.12       | %          | 2.51 | % | 3.64 | % | 2.01 | % | 1.36 | % |
| Expected term             |       | 2.62 years  |       | 4.37 years |       | 4.53 years |   | 3 months |   | 3 months |   | 6 months |   |
| Volatility                |       | .5322       |       | .7399      |       | .9423 |   | .4780 |   | .5498 |   | .8492 |   |

 

Asummary of the weighted average remaining contractual life and the weightedaverage exercise price of options outstanding as of February 28, 2006 ispresented below with share amounts in thousands:

| **Range of Exercise Prices** | ** ** | ** ** | ** ** | **Number  Outstanding  at 2/28/06** | ** ** | **Weighted Avg.  Remaining  Contractual  Life** | ** ** | **Weighted Avg.  Exercise Price** | ** ** | **Number  Exercisable  at 2/28/2006** | ** ** | **Weighted Avg.  Exercise Price** | ** ** |
|---------------------------------------------|------------|------------|------------|------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|----------------------------------------|------------|
| $0.0000 - $2.5850                           |       | 4,930,066  |       |                                     | 8.9        |                                                 |       |                                   | $          | 2.33                                       |       |                                   |       | 895,761 |   |   |   | $ | 2.51 |   |   |
| $2.6150 - $3.9800                           |       | 1,892,400  |       |                                     | 7.9        |                                                 |       |                                   | 3.28       |                                       |       |                                   | 844,726    |   |   |   | 3.51 |   |   |
| $3.9844 - $5.5500                           |       | 1,970,221  |       |                                     | 4.2        |                                                 |       |                                   | 5.08       |                                       |       |                                   | 1,847,481  |   |   |   | 5.11 |   |   |
| $5.6094 - $6.9700                           |       | 1,324,552  |       |                                     | 6.9        |                                                 |       |                                   | 6.50       |                                       |       |                                   | 781,102    |   |   |   | 6.54 |   |   |
| $7.2657 - $56.375                           |       | 818,234    |       |                                     | 4.2        |                                                 |       |                                   | 22.12      |                                       |       |                                   | 801,464    |   |   |   | 22.41 |   |   |
| $0.000 - $56.375                            |       | 10,935,473 |       |                                     | 7.3        |                                                 |       |                                   | $          | 4.98                                       |       |                                   |       | 5,170,534 |   |   |   | $ | 7.30 |   |   |

 

F-24

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**Employee Stock Option Exchange Program**

On February 10, 2003,the Company announced a voluntary stock option exchange program for itsemployees. Under the program, the Company offered to exchange options topurchase approximately an aggregate of 6.1 million shares of Manugisticscommon stock held by eligible employees, vested or unvested, that had exerciseprices equal to or greater than $7.0001 per share. All employees had theopportunity to exchange existing eligible options for a promise to grant newoptions at exchange ratios dependent on the exercise price of the exchangedoptions. Members of our Board of Directors, including the Company’s Chairmanand CEO, did not participate in this program.

On March 10, 2003,the Company announced that it had accepted for cancellation and exchangeoptions to purchase approximately 4.8 million shares of its common stockin exchange for approximately 1.5 million new options of its common stock,to be granted on September 16, 2003. The Company granted approximately 1.2 millionnew options on September 16, 2003 as a result of the option exchangeprogram. The number of new options granted to employees declined from theoriginal expected amount as a result of voluntary and involuntary terminations.The replacement options have terms and conditions that are substantially thesame as those of the cancelled options. The exercise price of the replacementoptions is $5.55 per share, which was the market value of a share of theCompany’s common stock on the date of grant as determined under the Company’soption plans.

Options cancelled in theexchange program and the new options have been treated as fixed option awardsfor accounting purposes as the new options were granted six months and fivedays after the cancellation date and any options granted after August 9,2002 (the “look back period”) were required to be exchanged in order toparticipate in the program. Therefore, no compensation expense was recorded asa result of the program.

**10.   STOCKHOLDER RIGHTS AGREEMENT**

On October 28, 2004,the Board of Directors declared a dividend of one right (a “Right”) for eachoutstanding share of the Company’s common stock to stockholders of record atthe close of business on November 8, 2004. Each Right entitles theregistered holder to purchase from the Company one one-thousandth of a share ofseries A junior participating preferred stock, $.01 par value per share, at apurchase price of $19.00 in cash, subject to adjustment. Initially, theRights are not exercisable and will be attached to all certificatesrepresenting outstanding shares of common stock, and no separate Rightscertificates will be distributed. The Rights will become exercisable andseparate from the common stock, and the distribution date will occur, upon theearlier of (i) 10 business days following the later of (a) the firstdate of a public announcement that a person or group of affiliated orassociated persons (an “Acquiring Person”) has acquired, or obtained the rightto acquire, beneficial ownership of 20% or more of the outstanding shares ofcommon stock or (b) the first date on which an executive officer of theCompany has actual knowledge that an Acquiring Person has become such or (ii) 10business days following the commencement of a tender offer or exchange offerthat would result in a person or group beneficially owning 20% or more of theoutstanding shares of common stock. The distribution date may be deferred incircumstances determined by the Board of Directors. In addition, certaininadvertent acquisitions will not trigger the occurrence of the distributiondate. The Rights expire upon the close of business on October 27, 2014,unless earlier redeemed or exchanged (See Note 18).

**11.   RETIREMENT PLANS**

The Company has twodefined contribution retirement savings plans (one in the U.S. and another inthe U.K.) under the terms of which the Company matches a percentage of theemployees’ qualified contributions. New employees are eligible to participatein the plans upon completing one month of service. The Company’s contributionto the plans totaled $1.2 million, $1.4 million and $1.8 millionfor fiscal 2006, 2005 and 2004, respectively.

F-25

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**12.**   INCOMETAXES

Thecomponents of the income tax provision are as follows (in thousands):

| ** **     | ** ** | **Fiscal year ended   February 28or 29,** | ** ** |
|----------------|------------|--------------------------------------------------------------------|------------|
| ** **     | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:       |       |                                                               |       |   |   |   |   |
| Federal        |       | $                                                                  | —     |   | $ | — |   | $ | 147 |   |
| State          |       | 100                                                                |       | 100 |   | 150 |   |
| Foreign        |       | (3,710                                                             | )          | 625 |   | 1,017 |   |
| Total current  |       | $                                                                  | (3,610     | ) | $ | 725 |   | $ | 1,314 |   |
| Deferred:      |       |                                                               |       |   |   |   |   |
| Federal        |       | $                                                                  | —     |   | $ | — |   | $ | — |   |
| State          |       | —                                                             |       | — |   | — |   |
| Foreign        |       | —                                                             |       | — |   | — |   |
| Total deferred |       | $                                                                  | —     |   | $ | — |   | $ | — |   |

 

Thecomponents of the Company’s deferred tax assets and liabilities are as follows(in thousands):

| ** **                      | ** ** | **February 28,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Deferred tax assets:            |       |                  |       |   |   |
| Accrued expenses                |       | $                     | 1,785      |   | $ | 4,447 |   |
| Operating loss  carryforwards:  |       |                  |       |   |   |
| Domestic                        |       | 130,875               |       | 124,460 |   |
| Foreign                         |       | 28,189                |       | 25,119 |   |
| Exit and disposal charges       |       | 6,913                 |       | 11,321 |   |
| Tax credit carryforwards        |       | 6,949                 |       | 5,787 |   |
| Stock-based transactions        |       | 5,076                 |       | 5,096 |   |
| Investment losses               |       | 4,186                 |       | 4,186 |   |
| Depreciation and amortization   |       | 42,254                |       | 38,264 |   |
| Other temporary differences     |       | 3,811                 |       | 5,802 |   |
| Deferred tax assets             |       | 230,038               |       | 224,482 |   |
| Less: valuation allowance       |       | (208,425              | )          | (200,699 | ) |
| Total deferred tax assets       |       | 21,613                |       | 23,783 |   |
| Deferred tax  liabilities:      |       |                  |       |   |   |
| Acquired intangibles            |       | (12,381               | )          | (12,381 | ) |
| Software development costs      |       | (8,174                | )          | (9,452 | ) |
| Other                           |       | (1,058                | )          | (1,950 | ) |
| Total deferred  tax liabilities |       | (21,613               | )          | (23,783 | ) |
| Net deferred tax assets         |       | $                     | —     |   | $ | — |   |

 

Deferred tax assets of approximately $47.5 millionpertain to certain net operating loss carryforwards resulting from the exerciseof employee stock options. The Company has provided a valuation allowance onthese deferred tax assets. The valuation allowance on these deferred tax assetswill be reduced in the period in which the Company realizes a benefit on itstax return from a reduction of income tax payable stemming from the utilizationof these losses. When realized, the tax benefits of these credits and losses 

F-26

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will be accounted for as acredit to stockholders equity rather than as a reduction of the income taxprovision.

Changesin the valuation allowance during fiscal 2006 are as follows (in thousands):

| Balance,  February 28, 2005 |   | $      | 200,699 |   |
|----------------------------------|--------|--------|---------|--------|
| Current year  operations         |   | 12,154 |    |
| Exit and disposal  activities    |   | (4,408 | )       |
| Debt conversion                  |   | — |    |
| Stock option  exercises          |   | (20    | )       |
| Other                            |   |   |    |
| Balance,  February 28, 2006 |   | $      | 208,425 |   |

 

At February 28, 2006, the Company had a total ofapproximately $329.8 million of U.S. federal and $86.1 million of foreign netoperating losses available to offset future taxable income in those respectivetaxing jurisdictions. The federal net operating losses expire during the fiscalyears 2012 to 2026. In addition to maintaining a full valuation allowanceagainst the net deferred tax assets, the net operating losses may also besubject to further limitations under Internal Revenue Code 382 should there bea change in ownership pertaining to a single holder of 5% of the Company’scommon stock. Approximately $3.6 million of the foreign net operating lossesexpire during the calendar years 2007 to 2011, while the remaining foreign netoperating losses are available in perpetuity. The Company considers theearnings of foreign subsidiaries to be permanently reinvested outside of theU.S. Accordingly, no U.S. income tax on these earnings has been provided.

The Company also has $6.3 million of research anddevelopment tax credit carryforwards, which expire between calendar years 2011and 2014, and $0.6 million of foreign tax credit carryforwards that expire incalendar year 2010.

Profit (loss) before income taxes includes income(losses) from foreign operations of approximately $7.4 million, $(10.9) millionand $(0.5) million in fiscal 2006, fiscal 2005 and fiscal 2004, respectively.Additionally, the Company had foreign tax refunds and credits totaling $4.1million in fiscal 2006. Of this amount, $1.1 million relates to the reversal ofa previously recorded tax accrual for which the statute of limitations hasexpired. The Company received a $1.9 million tax refund and reversed apreviously recorded liability in the amount of $0.7 million due to thefavorable outcome of a three-year audit performed by the Canadian taxauthorities.

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*Statutory Rate Reconciliation.*   Thedifference between the reported amount of income tax expense and the amount ofincome tax expense that would result from applying statutory U.S. federal taxrate of 35% is summarized as follows (in thousands):

| ** **                                                        | ** ** | **February 28 or 29,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Benefit for  income taxes computed at statutory rate              |       | $                                     | (5,570     | ) | $ | (19,091 | ) | $ | (35,870 | ) |
| Increase  (reduction) in taxes resulting from:                    |       |                                  |       |   |   |   |   |
| State income taxes (benefit), net of federal  provision (benefit) |       | (1,002                                | )          | 100 |   | 150 |   |
| Foreign exchange rate differential                                |       | (208                                  | )          | 2,542 |   | 1,321 |   |
| Net change in valuation allowance                                 |       | 6,139                                 |       | (7,690 | ) | 35,987 |   |
| Impact of foreign refunds and credits                             |       | (3,329                                | )          | — |   | — |   |
| Impact of debt conversion and other permanent  differences        |       | 698                                   |       | 23,821 |   | — |   |
| Other                                                             |       | (337                                  | )          | 1,043 |   | (274 | ) |
| (Benefit)  provision for income taxes                             |       | $                                     | (3,610     | ) | $ | 725 |   | $ | 1,314 |   |

 

**13.   OTHEREXPENSE**

Otherexpense consists of the following (in thousands):

| ** **            | ** ** | **Fiscal year ending February 28 or 29,** | ** ** |
|-----------------------|------------|-------------------------------------------------------------------------|------------|
| ** **            | ** ** | **2006**                                                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest income       |       | $                                                                       | 3,963      |   | $ | 2,350 |   | $ | 1,673 |   |
| Interest expense      |       | (10,231                                                                 | )          | (10,242 | ) | (13,839 | ) |
| Exchange gain  (loss) |       | 369                                                                     |       | 351 |   | (1,609 | ) |
| Other                 |       | 110                                                                     |       | 227 |   | 320 |   |
| Total other  expense  |       | $                                                                       | (5,789     | ) | $ | (7,314 | ) | $ | (13,455 | ) |

 

**14.   EXIT ANDDISPOSAL ACTIVITIES**

***Summary:****  *The Company has adjusted its cost structure andresource allocation several times in recent years to respond to business andmarket conditions. Each exit and disposal plan has included involuntaryterminations across most functional areas throughout the Company and thereduction of excess office space.

Thefollowing table sets forth a summary of total exit and disposal charges,payments made against those charges and the remaining liabilities as of February 28,2006 (amounts in thousands):

| ** **                               | ** ** | **Balance as of  February 28, 2005** | ** ** | **Charges and  adjustments to  charges in twelve  months ended  February 28, 2006** | ** ** | **Utilization of  cash in the twelve  months ended  February 28, 2006** | ** ** | **Non-cash activity  disposal losses in the  twelve months ended  February 28, 2006** | ** ** | **Balance as of  February 28, 2006** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Lease obligations and terminations(1)(2) |       |                                                     | $          | 18,274                                                                                                                 |       |                                                                                                       |       | $                                                                                                                             | 1,955      |                                                     |       |   | $ | (6,531 | ) |   |   | $ | — |   |   |   | $ | 13,698 |   |   |
| Severance and related benefits           |       |                                                     | 2,312      |                                                                                                                   |       |                                                                                                       | 1,163      |                                                                                                                          |       |                                                     | (3,099     | ) |   |   | — |   |   |   | 376 |   |   |
| Impairment charges and write-downs       |       |                                                     | —     |                                                                                                                   |       |                                                                                                       | 206        |                                                                                                                          |       |                                                     | —     |   |   |   | (206 | ) |   |   | — |   |   |
| Other                                    |       |                                                     | 83         |                                                                                                                   |       |                                                                                                       | (25        | )                                                                                                                             |       |                                                     | (58        | ) |   |   | — |   |   |   | — |   |   |
| Subtotal                                 |       |                                                     | $          | 20,669                                                                                                                 |       |                                                                                                       |       | $                                                                                                                             | 3,299      |                                                     |       |   | $ | (9,688 | ) |   |   | $ | (206 | ) |   |   | $ | 14,074 |   |   |
| Reclassification of deferred rent        |       |                                                     | 1,162      |                                                                                                                   |       |                                                                                                       |       |                                                                                                                          |       |                                                     |       |   |   |   |   |   |   |   | 1,254 |   |   |
| Total                                    |       |                                                     | $          | 21,831                                                                                                                 |       |                                                                                                       |       |                                                                                                                          |       |                                                     |       |   |   |   |   |   |   |   |   | $ | 15,328 |   |   |

 

F-28

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(1)             Certain accrued lease obligations extend through fiscalyear 2019.

(2)             Includes $478 thousand of accretion expense inadjustments to charges in the twelve months ended February 28, 2006.

The Company has outstanding lease obligations forfacilities that have been entirely vacated which are located in Brussels, Belgium;Wayne, Pennsylvania; Detroit, Michigan and Munich, Germany. The Company hasoutstanding lease obligations for facilities for which a portion of the officespace was vacated in certain facilities that are located in Rockville,Maryland; Atlanta, Georgia; San Carlos, California; and Bracknell, UnitedKingdom.

***Exit and disposal activities:****  *In order to further adjust the Company’s coststructure and resource allocation to increase efficiencies and reduce excessoffice space in response to current business conditions, the Company announcedand began implementing two exit and disposal plans, (the “FY05 Q2 Plans”) inthe second quarter of fiscal 2005. Actions taken included the involuntarytermination of employees across most business functions and the abandonment ofexcess office space. The Company has completed most of the planned initiatives approvedin the FY05 Q2 Plans and expects to complete the remainder of the initiativesin fiscal 2007.

Thefollowing table summarizes the Company’s exit and disposal activities sincefiscal year 2003 (amounts in millions, except number of involuntarily terminatedemployees)

| ** **       | ** ** | **Involuntary terminations** | ** ** | ** **                    | ** ** | ** **        | ** ** | ** **         | ** ** | ** **                       | ** ** |
|------------------|------------|-----------------------------------|------------|-------------------------------|------------|-------------------|------------|--------------------|------------|----------------------------------|------------|
| **Period**       | ** ** | ** **                        | ** ** | **Number of  employees** | ** ** | **$ Amount** | ** ** | **Office  leases** | ** ** | **Property and  equipment** | ** ** | **Other** | ** ** | **Total** | ** ** |
| Fiscal Year 2006 |       |                              | 46         | (a)                           |       |              | $          | 1.2                |       |                             | $          | 1.9 | (b) |   | $ | 0.2 |   |   |   | — |   |   | $ | 3.3 |   |
| Fiscal Year 2005 |       |                              | 127        | (a)                           |       |              | $          | 6.1                |       |                             | $          | 8.1 | (b) |   | $ | 2.7 |   |   |   | $ | 0.4 |   |   | $ | 17.3 |   |
| Fiscal Year 2004 |       |                              | 79         | (c)                           |       |              | $          | 0.9                |       |                             | 12.9       | (d) |   | $ | 4.2 |   |   |   | $ | 0.6 |   |   | $ | 18.6 |   |
| Fiscal Year 2003 |       |                              | 343        |                          |       |              | $          | 8.0                |       |                             | $          | 8.0 |   |   | $ | 2.5 |   |   |   | $ | 0.7 |   |   | $ | 19.2 |   |
|                  |            |                                   |            |                               |            |                   |            |                    |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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a)                141 US, 11 UnitedKingdom, 16 Other Europe, 4 Asia, 1 Canada.

b)               Partiallyvacated-Rockville, Maryland; San Carlos and Calabasas, California; Bracknell,United Kingdom and Tokyo, Japan. Completely vacated-Brussels, Belgium, Munichand Ratingen, Germany; Stockholm, Sweden and the Philippines and includesadjustments to estimated sublease income based upon actual signed subleases inSan Carlos, California, Atlanta, Georgia, Wayne, Pennsylvania and Detroit,Michigan.

c)                73 US, 3 Mexico, 2Canada, 1 Asia.

d)               Partially vacatedAtlanta, Georgia, Bracknell, United Kingdom, Calabasas and San Carlos,California, Detroit, Michigan, Itasca, Illinois, Irving, Texas, Rockville,Maryland. Completely vacated Wayne, Pennsylvania.

***Exit and disposalaccounting policies and practices:******  ***The Company records exit anddisposal costs in accordance with SFAS 146.

*SFAS146 (excess office space):**  *TheCompany records charges for excess office space once vacated based on thepresent value of the sum of expected remaining lease commitments offset bymanagement’s best estimate of expected sublease income and costs associatedwith subleasing the vacated space. The estimated sublease income amountsrequire judgment and include assumptions regarding the period of sublease andthe price per square foot to be paid by sublessors. The Company reviews theseestimates periodically and records appropriate adjustments, as necessary, toreflect management’s best estimates. In certain cases, only a portion of thetotal office space within a property is vacated when such excess office spaceallows appropriate physical separation.

F-29

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*SFAS146 (severance costs):*   All terminated employeesare notified within the requisite time period as prescribed by SFAS 146 and aretypically not required to render service beyond the earlier of theirtermination date or a minimum retention period of 60 days, as defined by SFAS146. When employees are required to render service beyond the earlier of theirtermination date or minimum retention period of 60 days, the severance cost forsuch employees is recognized and accrued over the required service period inaccordance with SFAS 146. There were seven employees involuntarily terminatedduring fiscal year 2006 and 23 during fiscal year 2005 who were required torender service beyond 60 days.

*SFAS88:**  *Certainterminated employees had employment contracts that defined the amount ofseverance and related benefits received upon termination. The severance andrelated benefits for such employees are accounted for in accordance with SFAS88**when amounts are both probable andestimable. During fiscal year 2005, three employees with employment contractsthat defined the amount of severance and related benefits were involuntarilyterminated.

*SFAS 144:**  *In connection with permanently vacating excess officespace, the Company records an impairment charge of certain property, plant andequipment and leasehold improvements in accordance with SFAS 144.

**15.   SEGMENTINFORMATION**

The Company considers itself to be in a singlereportable segment. The Company and its subsidiaries are principally engaged inthe design, development, marketing, licensing and support and implementation ofdemand and supply chain management software. Substantially all revenue resultsfrom the licensing of the Company’s software products and related consultingand support services. The Company’s chief operating decision maker reviewsfinancial information, presented on a consolidated basis, accompanied bydisaggregated information about revenue by geographic region for purposes ofmaking operating decisions and assessing financial performance.

Revenueis attributable to geographic regions based on the location of the Company’scustomers. The following table presents total revenue and total long-livedassets by geographic region for fiscal 2006, 2005 and 2004:

| ** **          | ** ** | **February 28 or 29,** | ** ** |
|---------------------|------------|---------------------------------------|------------|
| ** **          | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **          | ** ** | **(in thousands)**               | ** ** |
| Revenue:            |       |                                  |       |   |   |   |   |
| United States       |       | $                                     | 113,635    |   | $ | 127,891 |   | $ | 160,487 |   |
| United Kingdom      |       | 31,817                                |       | 30,572 |   | 31,444 |   |
| Other Europe        |       | 15,450                                |       | 12,787 |   | 26,279 |   |
| Asia-Pacific        |       | 11,901                                |       | 15,060 |   | 19,094 |   |
| Other               |       | 3,389                                 |       | 6,796 |   | 5,741 |   |
|                |       | $                                     | 176,192    |   | $ | 193,106 |   | $ | 243,045 |   |
| Long-lived  Assets: |       |                                  |       |   |   |   |   |
| United States       |       | $                                     | 213,702    |   | $ | 239,430 |   | $ | 265,434 |   |
| United Kingdom      |       | 4,562                                 |       | 5,006 |   | 5,465 |   |
| Other Europe        |       | 171                                   |       | 345 |   | 527 |   |
| India               |       | 1,612                                 |       | 167 |   | — |   |
| Asia-Pacific        |       | 588                                   |       | 770 |   | 1,840 |   |
| Other               |       | 2,292                                 |       | 2,124 |   | 2,017 |   |
|                |       | $                                     | 222,927    |   | $ | 247,842 |   | $ | 275,283 |   |

 

F-30

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No single customeraccounted for 10% or more of the Company’s annual revenue in fiscal 2006, 2005or 2004.

**16.   RELATEDPARTY TRANSACTIONS**

**Relationship withWarburg Pincus**

In October, 2002, the Company appointed William H.Janeway, a Vice-Chairman of Warburg Pincus LLC, a private equity investmentfirm, as a Class III director of its Board of Directors, with a termexpiring in 2004. In connection with Dr. Janeway’s appointment to theBoard, the Company entered into an agreement with Warburg Pincus Private EquityVIII, L.P. in which the Company consented to the acquisition by Warburg Pincusand certain of its affiliates of up to 19.9% of Manugistics common stock andagreed that for as long as Warburg Pincus and its affiliates beneficially ownat least ten percent (10%) of Manugistics common stock, the Company wouldnominate and use its best efforts to have elected to its Board one persondesignated by Warburg Pincus and reasonably acceptable to the Company. Inaddition, Warburg Pincus agreed that, for the duration of the standstillperiod, neither it nor its affiliates would acquire more than 19.9% ofManugistics common stock.

The standstillperiod is the earlier of:

·       threeyears;

·       thedate on which another person acquires more than 15% of Manugistics common stockwith the Company’s consent and on terms more favorable than those obtained byWarburg Pincus; or

·       thedate on which the Company fails to perform its agreement with respect to theacquisition of additional shares by Warburg Pincus and the election of adirector designated by Warburg Pincus.

At the time the agreementwas entered into, Warburg Pincus and certain of its affiliates heldapproximately 10.9% of Manugistics common stock. As of February 28, 2006and February 28, 2005, Warburg Pincus and certain of its affiliates heldapproximately 9.1% of Manugistics common stock.

F-31

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**17.   SELECTEDQUARTERLY FINANCIAL DATA (UNAUDITED)**

Summarizedquarterly consolidated financial information for fiscal 2006 and 2005 follows: 

| ** **                                                    | ** ** | **1st Quarter**                                               | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                    | ** ** | **(in thousands, except per share data)** | ** ** |
| ***Fiscal  2006***                                            | ** ** |                                                               | ** ** | ** **           |       |                 | ** ** | ** **           |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Total revenue                                                 |       |                                                               | $          | 46,657               |       |                 |       | $                    | 43,649     |   |   |   | $ | 39,924 |   |   |   | $ | 45,962 |   |   |
| Operating (loss)  income                                      |       |                                                               | $          | (3,024               | )          |                 |       | $                    | (7,113     | ) |   |   | $ | (3,622 | ) |   |   | $ | 3,695 |   |   |
| Net (loss) income                                             |       |                                                               | $          | (4,916               | )          |                 |       | $                    | (6,118     | ) |   |   | $ | (4,644 | ) |   |   | $ | 3,435 |   |   |
| Basic (loss)  earnings per share                              |       |                                                               | $          | (0.06                | )          |                 |       | $                    | (0.07      | ) |   |   | $ | (0.06 | ) |   |   | $ | 0.04 |   |   |
| Diluted (loss)  earnings per share                            |       |                                                               | $          | (0.06                | )          |                 |       | $                    | (0.07      | ) |   |   | $ | (0.06 | ) |   |   | $ | 0.04 |   |   |
| Shares used in  basic (loss) earnings per share computation   |       |                                                               | 82,109     |                 |       |                 | 82,171     |                 |       |   | 82,368 |   |   |   | 82,888 |   |   |
| Shares used in  diluted (loss) earnings per share computation |       |                                                               | 82,109     |                 |       |                 | 82,171     |                 |       |   | 82,368 |   |   |   | 83,202 |   |   |
| ***Fiscal  2005***                                            | ** ** |                                                               | ** ** | ** **           |       |                 | ** ** | ** **           |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Total revenue                                                 |       |                                                               | $          | 51,583               |       |                 |       | $                    | 51,262     |   |   |   | $ | 45,045 |   |   |   | $ | 45,216 |   |   |
| Operating loss                                                |       |                                                               | $          | (5,150               | )          |                 |       | $                    | (14,956    | ) |   |   | $ | (11,460 | ) |   |   | $ | (15,666 | ) |   |
| Net loss                                                      |       |                                                               | $          | (7,733               | )          |                 |       | $                    | (17,114    | ) |   |   | $ | (13,268 | ) |   |   | $ | (17,156 | ) |   |
| Basic and diluted  loss per share                             |       |                                                               | $          | (0.09                | )          |                 |       | $                    | (0.21      | ) |   |   | $ | (0.16 | ) |   |   | $ | (0.21 | ) |   |
| Shares used in  basic and diluted los per share computation   |       |                                                               | 81,819     |                 |       |                 | 81,907     |                 |       |   | 81,928 |   |   |   | 81,929 |   |   |

 

Included in the first,second, third and fourth quarters of fiscal 2006 and fiscal 2005 are chargesand adjustments to charges related to exit and disposal activities (See Note14).

**18.   SUBSEQUENTEVENTS**

*Mergeragreement.*   On April 24, 2006, the Companyentered into a definitive Agreement and Plan of Merger (the “Merger Agreement”)with JDA Software Group, Inc., a Delaware corporation (“JDA”), and StanleyAcquisition Corp., a Delaware corporation and a wholly-owned subsidiary of JDA(the “Merger Sub”). Under the Merger Agreement, the Merger Sub will be mergedwith and into the Company (the “Merger”), with the Company continuing after theMerger as a wholly-owned subsidiary of JDA. At the effective time of theMerger, each issued and outstanding share of the Company’s Common Stock, parvalue $0.002 per share (the “Company Common Stock”), will be converted into theright to receive $2.50 in cash.

The Merger Agreement has been approved by the Board ofDirectors (the “Board”) of the Company. The transactions contemplated by theMerger Agreement are subject to approval by the holders of a majority of theissued and outstanding shares of Company Common Stock. The transactionscontemplated by the Merger Agreement also are subject to the expiration ortermination of the applicable waiting period under the Hart-Scott-RodinoAntitrust Improvements Act of 1976, as amended, and certain other closingconditions. The Merger Agreement provides for a termination fee of up to $9.75million in connection with the transactions contemplated by the MergerAgreement, which is payable by the Company under certain circumstances.

*StockholderRights amendment.*   In connection with the MergerAgreement, on April 24, 2006, the Company entered into an amendment to theRights Agreement between the Company and Computershare Trust Company, N.A. As aresult of the amendment, the preferred stock purchase rights issued under theRights Agreement will be inapplicable to the Merger, the Merger Agreement, theVoting Agreements and the transactions contemplated by the Merger Agreement andthe Voting Agreements. 

F-32

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The execution, delivery,consummation or performance of the Merger Agreement, the Voting Agreements andthe transactions contemplated thereby will not cause the rights to separatefrom shares of Company Common Stock or permit the Company’s stockholders toexercise the rights. In addition, the rights will expire immediately upon theeffective time of the Merger. (See Note 10 “Stockholder Rights Agreement.”)

F-33

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