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

**WASHINGTON, D.C. 20549**

**FORM 10-K**

** (Mark One)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For the fiscal year ended February 28,2005**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For the transition periodfrom                        to                        **

**Commission File Number0-22154**

**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 markwhether the Registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.

Yes  x  No  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein and will not be contained, to the best of the Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

Indicate by check markwhether the Registrant is an accelerated filer (as defined in Rule 12b-2of the Securities Exchange Act of 1934).

Yes  x  No  o

Asof August 31, 2004, the aggregate market value of the voting stock held bynon-affiliates of the Registrant was approximately $148.4 million. As of April 30,2005, the number of shares outstanding of the Registrant’s common stock wasapproximately 83.8 million, based on information provided by theRegistrant’s transfer agent.

 

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**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of our definitiveProxy Statement relating to the 2005 Annual Meeting of Stockholders areincorporated by reference into Part III of this Annual Report on Form 10-K.We anticipate that our Proxy Statement will be filed with the Securities andExchange Commission within 120 days after the end of our fiscal year ended February 28,2005.

**PART I**

**Item 1.**                        BUSINESS.

The disclosures set forthin this Annual Report on Form 10-K are qualified by the sections captioned“Forward-Looking Statements” and “Factors That May Affect Future Results”in Item 7—“Management’sDiscussion and Analysis of Financial Condition and Results of Operations” ofthis Annual Report 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 chain,demand and revenue management software products and services. We combine theseproducts and services to deliver solutions that address specific business needsof our clients. Our approach to client delivery is to advise clients on howbest to use our solutions and other technologies across their entire demand andsupply chain and in their revenue management practices to enable informed,responsive, rapid and cost and price effective decision-making throughout theirown enterprise and across their extended trading network by creating a fullysynchronized supply chain.

The solution setswe offer are:

·       DemandManagement and Pricing

·       SupplyManagement

·       Transportationand Logistics

·       Collaborationand Visibility

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

·       PerformanceManagement

·       RevenueManagement

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

Our solutions are designed to increase revenue andprofits by enabling our clients to improve customer service, reduce stock-outs,lower costs, source more efficiently, reduce inventory, optimize price,collaborate with suppliers and customers, coordinate supply and demand, managetransportation 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 business units, Retail, Consumer Goods (CG), Government,Aerospace & Defense and Revenue Management (Travel, Transportation &Hospitality), which we call “strategic business units” or “SBUs.” We believethis new 

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operational structure willallow us to most effectively use our capabilities and resources to 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, Dixons, Coca Cola BottlingCo., Kraft Foods, Tyson Foods, Caesars Entertainment, 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 28,2005.

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 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                                 |
| STG Holdings, Inc. (STG)                     |       | January 2001  |       | Advanced factory  planning, scheduling and simulation software |
| Talus Solutions, Inc. (Talus)                |       | December 2000 |       | Pricing and revenue optimization software                      |

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***                   **Assetacquisitions

**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, 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 

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integration of the supply-sideand demand-side of their businesses to lower operational costs and increase thevalue derived from their 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.

The 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 customdeveloped within 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.

**Strategy:**

Our objective is to enhance our position as a leadingglobal provider of supply chain management and demand and revenue managementsolutions. Our strategy to achieve our objective includes the followingelements:

FOCUS ON KEY MARKETS—Wehave organized our sales and marketing operations under four primary businessunits: Retail, Consumer Goods (CG), Government, Aerospace & Defense andRevenue Management (Travel, Transportation & Hospitality), which wecall “strategic business units” or (“SBUs”). We believe this new operationalstructure will allow us to more effectively use our capabilities and resourcesto realize opportunities in our markets.

FOCUS AND DIFFERENTIATE OUR SOLUTIONS—We intendto focus the scope of our solutions offerings on our core products and enhancethe 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 integrated solutionsdifferentiates us from our competitors. We also intend to make our solutionseasier 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 while takingadvantage of lower personnel costs. Our new development center will workclosely with our core product development group at our headquarters inRockville, MD. See “Product Development.”

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—Wecombine our solutions with the competencies of third parties which complementours, such as leading consulting firms and technology providers. This strategypermits us to offer our clients solutions that can better meet their needs. Wealso intend to provide more focused sales and marketing efforts to small and 

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medium-sizedbusinesses in Europe and the Asia-Pacific region through third-party marketingand 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 and clientsupport services. Our solutions are designed to meet the demand and supplychain and revenue management needs of our clients helping them to increaserevenue and profits by enabling them to improve customer service, reduce stockouts, lower costs, source more efficiently, reduce inventory, optimize price,collaborate with suppliers and customers, coordinate supply and demand, managetransportation and logistics operations and improve revenue managementpractices. Our solutions are built on and rely on our internal WebWORKSTMplatform. WebWORKSTM is based on the Java 2TM Platform and J2EE industrystandards.

**Demand Management****and Pricing**—Our Demand Management and Pricing solutions aredesigned to provide integrated price optimization and demand planningcapabilities that enable clients to create business strategies such asconsensus demand planning, optimal pricing strategies, targeted promotioncampaigns and markdown planning to efficiently predict, respond to and shapedemand. Demand Management and Pricing solutions include: NetWORKS DemandTM,NetWORKS Precision PricingTM, NetWORKS PromotionsTM, NetWORKS MarkdownsTM andNetWORKS Target PricingTM.

**Supply Management**—Our SupplyManagement solutions are designed to create an optimal supply network and setsourcing policies to generate a synchronized inventory, distribution,production and material plan for our clients and their supply chain partners. Ourclients use our Supply Management solutions to manage, optimize and synchronizethe many facets of their supply chains—from collaboration with trading partnerson production plans, purchasing, logistics and fill rates to alignment andexecution of a sales and operations planning process to meet corporateobjectives—and to meet customer demand while reducing inventory and cost. SupplyManagement solutions include: NetWORKS FulfillmentTM, NetWORKS StrategyTM,NetWORKS SupplyTM, NetWORKS Master PlanningTM, NetWORKS Order ProvisioningTM,NetWORKS SequencingTM, and NetworksInventory Policy OptimizationTM.

**Transportation and Logistics Management**—OurTransportation and Logistics Management solutions are designed to help globaland other shippers, consignees, carriers, trading partners and logisticsservice providers effectively manage the complexities of transportation andlogistics, including multiple modes of transport such as by air, rail, sea androad. Our capabilities cover the entire spectrum of the logistics process—fromstrategic logistics sourcing, planning and optimization, execution and shipmenttracking, capacity management to payment and performance analysis. Fleetmanagement capabilities include finding the optimal use of a client’s fleetbased upon or measured against shipment requirements and constraints such aslocations, carriers, rates, capacities and hours of operation and generatingdetailed work plans that help manage the fleet. Transportation and Logisticssolutions include: NetWORKS TransportTM, NetWORKS Delivery ManagementTM, NetWORKSRoutingTM, NetWORKS CarrierTM, NetWORKS Freight PaymentTM, NetWORKS Fleet CapacityPlannerTM, NetWORKS RFQTM, offered in two options—a product or service, andNetWORKS RFQ OptimizerTM.

**Collaboration and Visibility**—OurCollaboration solutions are designed to enable collaboration among tradingpartners by allowing them to view and make decisions using the sameinformation. These solutions are intended to help clients facilitate processessuch as collaborative planning, forecasting and replenishment and collaborativesupply planning across extended trading networks. Our Visibility solutionsprovide event-based views into critical supply chain information such asinventory balances and order and shipment status, within the trading network.Multiple trading partners are able to simultaneously review past performanceand current data on sales forecasts, booked orders, direct materialsprocurement, 

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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 CarrierTM andNetWORKS Delivery ManagementTM.

**Contract Materials 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 Master Resource Planning andMaintenance, Repair & Overhaul solutions include: NetWORKSMake-to-OrderTM, NetWORKS Component ManagementTM, NetWORKS Maintenance, Repairand OverhaulTM, NetWORKS CarrierTM and NetWORKS ProcurementTM.

**Performance Management**—OurPerformance Management solutions provide clients with a means to measure andpredict their supply chain performance. Our solutions are designed to enablethe definition and monitoring of key performance indicators (KPIs), such asforecast accuracy, customer service levels, inventory turns and adherence tothe financial plan. Performance Management solutions include such products as:NetWORKS ReportingTM, NetWORKS AnalyticsTM and NetWORKS MonitorTM.

**RevenueManagement**—Our Revenue Management solutions for the travel,transportation, hospitality and media industries are designed to help companiesmeet the unique challenges of industries where products and services areperishable and optimizing capacity utilization is critical. Passenger travelcompanies, cargo carriers, hotel and resort companies, and media networks,broadcast groups and cable companies use our solutions to more accuratelyforecast future demand, optimally allocate capacity, maximize revenue andincrease profits and customer satisfaction. Our Revenue Management solutionsinclude: NetWORKS Airline Revenue OptimizerTM, NetWORKS Cargo RevenueOptimizerTM, NetWORKS Hotel Revenue OptimizerTM and NetWORKS Rental CarOptimizationTM.

**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 products 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.

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**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 products, including product documentation,have been developed by our internal staff and third-party contractors and havebeen supplemented by acquisitions and complementary business relationships.

In developing new products or enhancements, we workclosely with current and prospective clients, as well as with other industryleaders, to make sure that our products address the 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. Inaddition, 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, 2005, our product developmentresources included 183 employees and 108 third-party contractors, 98of which were working in India. Gross product development costs were $42.0 million,$46.1 million and $73.6 million in fiscal 2005, 2004 and 2003, respectively.Gross product development costs in total over the last five fiscal years were$292.5 million.

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.

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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 220 employees as of February 28, 2005.

**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 andtechniques and online support. Upgrades include new features and functionality,as well as core technology enhancements. Our client support personnel alsocollect information that we use to assist us in developing new products,enhancing existing products and in identifying market demand.

Our application hostingservice offers clients the option of letting Manugistics administer and run theclient’s solutions at our data center helping clients to move quickly torealize the benefits of our products by reducing internal resource requirementssuch as costs of hardware, infrastructure, security, training and technologyand by operating in proven technical environments. As of February 28, 2005,our client support and application hosting service group consisted of 62employees.

**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 and Mexicothrough subsidiaries established in those countries.

We license our solutions in regions outside of theAmericas primarily through foreign subsidiaries. Our British, French andBelgian subsidiaries, located in Bracknell, England; Paris, France; andBrussels, Belgium, respectively, provide direct sales, services and supportprimarily to clients located in continental Europe and the United Kingdom. Wehave established subsidiaries and maintain offices in Osaka and Tokyo, Japan;Singapore; Shanghai and Hong Kong, The People’s Republic of China; Hyderabad,India; Kuala Lumpur, Malaysia; and Sydney, Australia. 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 2005,approximately 33.8% of our total revenue came from sales made to clientsoutside the U.S. Details of our geographic revenue are in Note 16—“SegmentInformation” in the Notes to Consolidated Financial Statements includedelsewhere in this Annual Report on Form 10-K. We also use indirect saleschannels to market our software in certain markets. See “Alliances.” Usingthese channels, we seek to increase the market penetration of our software.These relationships enhance our sales resources in target markets and expandour expertise in bringing our solutions to prospects and clients.

We support our sales activities by conducting avariety of marketing programs, including our annual conference called enVISION,which provides a forum for executives and managers to exchange ideas and bestpractices regarding technological innovations in supply chain management anddemand and revenue management. 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, the NationalRetail Federation’s Annual Show, Retail Systems, Logicon, AUSA and in numerouspricing and revenue optimization conferences, such as HITEC and PPS (ProfessionalPricing Society). In addition, we participate in solution 

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demonstration seminars andclient conferences hosted by complementary software vendors. We also conductManugistics brand awareness and lead-generation programs including advertising,direct mail, public relations, seminars, telemarketing and ongoing clientcommunication programs.

As of February 28,2005, we had 127 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 products or services that complement oursolutions.

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. Wemaintain close relationships with major consulting firms worldwide to extendour delivery and solution capability for our clients. We have also developedstrategic alliances pursuant to written agreements with consulting and systemsintegration partners such as Accenture, AT Kearney, Bearing Point, Cap GeminiErnst & Young, IBM and other leading consulting firms to provideimplementation and business process assistance to our clients. We augmentedthis with several geographic and regional alliances and cooperate with otherprofessional services firms on a client-by-client basis.

We have strategic relationships pursuant to writtenagreements with the following software and technology providers: AND Group;Ayeca; Business Objects; CAS; Cognos; Global eXchange Services; Kewill(formerly, Shipnow); Marc Global; Proclarity; Tele Atlas North America; TIBCOSoftware; Vignette; and Workplace plc, with whom we have software license,distribution or strategic relationship agreements; Chrome; KCI Computing; MXI;Softface; and TIP Technologies, with whom we have joint marketing and salesreferral agreements; and Hewlett Packard; IBM; Microsoft; and Sun Microsystems,with whom we have various development support and hardware lease agreements.

We have entered into an Independent Software Vendor (“ISV”)Agreement with BEA Systems, an Application Specific Full Use License Agreementwith Oracle,a SunOne Software Agreement with Sun Microsystems, and an originalequipment manufacturer (“OEM”) software agreement with IBM.

Manugistics has entered into agreements with Ayeca,Chemlogix, Nomis Solutions, and The Rainmaker Group which grant them the rightto resell specific Manugistics products. We have also entered into writtenagreements with various companies located or doing business in Asia, Europe andSouth America, which grant those companies the right to resell Manugisticsproducts.

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; IONA Technologies;MapInfo; Microfocus; Numerical Algorithms Group (NAG); Progress Software; QuestSoftware; 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 2005. See “Sales and Marketing.”

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**Retail**

Ahold USA, Albertsons, Inc.,Canadian Tire Corp, Ltd., Circuit City, CompUSA, DSG Retail Group (Dixon’s),Dollar General, Federated Department Stores, Gordon Food Service, H-E-B GroceryCompany LP, IKEA, Kohl’s Department Stores, L.L. Bean, McDonalds Europe, RadioShackCorporation, Target Corporation, The Great Atlantic & Pacific Tea Co.,The Limited, Toys “R” Us, Wickes Building Supplies and Winn-Dixie Stores.

**Consumer Goods**

Airgas, Inc., Avon,BIC, Black & Decker, Campbell Soup Company, Church & Dwight,Coca-Cola Bottling Co., Coty Inc., Deere & Co., Diageo,Georgia-Pacific, Kraft Foods, Inc., McCormick & Company, Inc.,Ocean Spray Cranberries, Inc., Perdue Farms Inc., Pepsico, Remy Cointreau,Rohm & Haas, Smith & Nephew Orthopaedics, The Scott’sCompany, Tyson Foods Inc.and Unilever.

**Government, Aerospace &Defense**

Boeing Co., DefenseLogistics Agency, Surface Deployment & Distribution Center.

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

Caesars Entertainment,Canadian Pacific Logistics Solutions, Continental Airlines, Delta Air Lines,DHL, Eurostar Railway, Great North Eastern Railway (GNER), Harrah’sEntertainment, Inc., Princess Cruise Lines and TUI UK.

**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, i2 Technologies,JDA Software, Logility, Manhattan Associates, Profit Logic, 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 PeopleSoft and 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;

·       vendor financial stabilityand reputation; and

·       tosome extent, price.

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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 many millions of dollars for initiativesthat are large in scope and complexity.

Clients may obtainsolution support for an annual fee. Our clients may select from three levels ofsupport that our customers choose from to accommodate their needs: Standard,Premium and Signature. Support fees are calculated on an escalated scale, basedon the level of service chosen and the size of the related software licensefees. Support fees are generally billed annually and are subject to changes insupport list prices. We also provide implementation services, training andhosting of our software applications and other related services, generally on atime and materials basis. This allows our clients to determine the level ofsupport or services 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—withthe earliest enduring until 2016. Any patent issued may be invalidated,circumvented or challenged. Any of our pending or future patent applications,whether or not challenged, may not be issued 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 

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logistics or serviceprovider for the benefit of its clients.Use is subject to terms and conditions that prohibit unauthorized reproductionor 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 agreementstypically have terms of two to five years, and automatically renew for one-yearterms unless terminated in accordance with their terms. 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 BEA Systems, we may face delays in releases of certain of our softwaresolutions until equivalent technology can be identified, licensed or developed,and integrated into our current product. These delays, if they occur, mayseriously harm our business. The royalties paid under these licenses were, inaggregate, less than 5% of our total revenue in each of our 2005, 2004 and 2003fiscal years.

**Employees:**

As of February 28,2005, we had 695 full-time regular employees and 221 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. All of our employees sign non-competeagreements as a condition of employment.

**AvailableInformation:**

Our fiscal year ends on February 28 or 29. 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 450 FifthStreet, N.W., Washington D.C. 20549. You can request copies of these documents,upon payment of a duplicating fee, by writing to the Securities and ExchangeCommission. Please call the Securities and Exchange Commission at1-800-SEC-0330 for further information on the operation of the Public ReferenceRoom.

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 at *www.manugistics.com* our Annual Report on Form 10-K,Quarterly Reports 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 soon as reasonablypracticable after we electronically file such material with, or furnish it to,the Securities and Exchange Commission.

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**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 Section406 of 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 the dateof 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 Conduct pursuantto applicable NASDAQ listing standards. The Code of Conduct is available on ourwebsite 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 following thedate of such amendment or waiver.

**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 26% of our corporateheadquarters space is subleased.

In addition, we lease officespace for our 23 sales, service and product development offices located inNorth America, South America, Europe and Asia/Pacific, pursuant to leases thatexpire between calendar 2005 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 15 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.**                        LEGAL PROCEEDINGS.

We are involved from timeto time in disputes and other litigation in the ordinary course of business. Wedo not believe that the outcome of any pending disputes or litigation will havea material adverse effect on our business, operating results, financialcondition and cash flows. However, the ultimate outcome of these matters, aswith dispute resolution and litigation generally, is inherently uncertain, andit is possible that some of these matters may be resolved adversely to us. Theadverse resolution of any one or more of these matters could have a materialadverse effect on our business, operating results, financial condition and cashflows.

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

None.

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**Item 4A.**                EXECUTIVE OFFICERSOF THE REGISTRANT.

Thename, age and position held by each of the executive officers of ManugisticsGroup, Inc. and Manugistics, Inc., its principal operatingsubsidiary, are as follows: 
| **Name**             | ** ** | ** ** | ** ** | **Age**                                                                   | ** ** | **Position** |
|----------------------|------------|------------|------------|---------------------------------------------------------------------------|------------|--------------|
| Joseph L. Cowan      |       | 56         |       | Director and Chief  Executive Officer                                     |
| Raghavan Rajaji      |       | 58         |       | Executive Vice  President and Chief Financial Officer                     |
| Lori Mitchell-Keller |       | 38         |       | Senior Vice  President of Global Marketing & Solution Management |
| Jeffrey L. Kissling  |       | 50         |       | Senior Vice  President and Chief Technology Officer                       |
| Ronald P. Kubera     |       | 40         |       | Senior Vice  President of Consumer Goods                                  |
| Timothy T. Smith     |       | 41         |       | Senior Vice  President, General Counsel and Secretary                     |
| Edward R. Daihl      |       | 51         |       | Group Vice  President, Revenue Management                                 |
| Kelly Davis-Stoudt   |       | 34         |       | Vice President,  Controller and Chief Accounting Officer                  |

 

Mr. Cowan has served as Chief Executive Officersince July 2004 and a member of our Board of Directors since August 2004.From November 2002 to December 2003, Mr. Cowan served asPresident and Chief Executive Officer of EXE Technologies, Inc., aprovider of supply chain management and work management software and services.From April 2001 to November 2002, he served as President and ChiefExecutive Officer of Invensys Automation & Information Systems, abusiness unit of Invensys plc and provider of enterprise resource planning andsupply chain management software. From July 2000 to April 2001, Mr. Cowanserved as President and Chief Executive Officer, and from April 1998 to July 2000,as Senior Vice President, Sales and Marketing, of Wonderware, a business unitof Invensys plc and provider of industrial automation software. From 1997 to April 1998,he served as Senior Vice President, Sales and Marketing of Wonderware, aprovider of industrial automation software.

Mr. Rajaji has served as Executive Vice Presidentand Chief Financial Officer since December 1999.

Ms. Mitchell-Keller has served as Senior VicePresident of Global Marketing & Solution Management since March 2005.From February 2004 to March 2005, Ms. Mitchell-Keller served asSenior Vice President, Product Development & Strategy. From July 2001to February 2004, Ms. Mitchell-Keller served as Senior VicePresident, Market Strategy. From March 2001 to July 2001, she servedas Senior Vice President of Product and Solutions Marketing and from January 1999to March 2001, as Vice President of Product Marketing.

Mr. Kissling has served as Senior Vice Presidentand Chief Technology Officer since September 2004. 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. From June 1999 to June 2001, he served as theChief 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 November 2004 to March 2005,Mr. Kubera served as Senior Vice President of Global Services and Support.From September 2002 to November 2004, he served as Senior VicePresident, Northern European Operations, from March 2001 to September 2002,as Senior Vice President, Global Services, and from March 1999 to March 2001,as Vice President, Consulting Services.

14

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

Mr. Daihl has served as Group Vice President ofRevenue Management since September 2004. From August 2003 to September 2004,Mr. Daihl served as President of Dexec Consulting, a provider ofmanagement advisory services to the high tech industry. From July 2000 to August 2003,he served as President of the CAPS Logistics, a wholly-owned subsidiary of BaanCompany, a provider of enterprise resource planning systems and a provider ofsoftware and consulting services, and from July 1999 to July 2000 asthe Vice President, Consulting, of Baan Company.

Ms. Davis-Stoudt has served as Vice President,Controller and Chief Accounting Officer since May 2004. From April 1999to May 2004, Ms. Davis-Stoudt served as Assistant Controller.

There are no family relationships among any of theexecutive officers or directors of Manugistics Group, Inc. Executiveofficers of Manugistics Group, Inc. are elected by the Board of Directors(the “Board”) on an annual basis and serve at the discretion of the Board.

15

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**PART II**

**Item 5.**                        MARKET FORREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Ourcommon stock, $.002 par value per share, trades on The NASDAQ Stock 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 2005                | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------------------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter                   |       | $          | 7.34       |     | $          | 4.25    |       |   |
| (ended May 31, 2004)       |       |       |       |     |       |    |
| Second Quarter                  |       | $          | 4.20       |     | $          | 2.21    |       |   |
| (ended August 31, 2004)    |       |       |       |     |       |    |
| Third Quarter                   |       | $          | 2.88       |     | $          | 2.20    |       |   |
| (ended November 30,  2004) |       |       |       |     |       |    |
| Fourth Quarter                  |       | $          | 3.07       |     | $          | 1.80    |       |   |
| (ended February 28, 2005)  |       |       |       |     |       |    |

 
| Fiscal 2004                | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------------------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter                   |       | $          | 4.95       |     | $          | 2.25    |       |   |
| (ended May 31, 2003)       |       |       |       |     |       |    |
| Second Quarter                  |       | $          | 6.50       |     | $          | 3.89    |       |   |
| (ended August 31, 2003)    |       |       |       |     |       |    |
| Third Quarter                   |       | $          | 8.15       |     | $          | 4.44    |       |   |
| (ended November 30,  2003) |       |       |       |     |       |    |
| Fourth Quarter                  |       | $          | 9.10       |     | $          | 5.60    |       |   |
| (ended February 29,  2004) |       |       |       |     |       |    |

 

As of April 30, 2005, there were approximately410 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 Silicon Valley Bank (“SVB”)that is scheduled to expire on March 29, 2007. We intend to renew thiscredit facility before it expires. During the term of the credit facility, weare subject to a covenant not to declare or pay cash dividends to holders ofour common 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. See “Management’s Discussion and Analysisof Financial Condition and Results of Operations - Liquidity and CapitalResources” and Note 7 in the Notes to Consolidated Financial Statementsincluded elsewhere in this Annual Report on Form 10-K.

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The following tableprovides information regarding our current equity compensation plans as of February 28,2005. Share amounts are in thousands.

**Equity Compensation Plan Information     **
| ** **                                                  | ** ** | ** **                                 | ** ** | ** **                           | ** ** | **Number of securities** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                  | ** ** | ** **                                 | ** ** | ** **                           | ** ** | **remaining available**       | ** ** |
| ** **                                                  | ** ** | **Number of securities to** | ** ** | **Weighted-average**                 | ** ** | **for future issuance**  | ** ** |
| ** **                                                  | ** ** | **be issued upon exercise** | ** ** | **exercise price of**      | ** ** | **under equity**              | ** ** |
| **Plan Category**                                      | ** ** | ** **                                 | ** ** | **of outstanding options** | ** ** | **outstanding options**       | ** ** | **compensation plans** | ** ** |
| Equity  compensation plans approved by security holders     |       |                                       | 13,891     |                                 |       |                               | $          | 5.29 |   |   |   | 1,799 |   |   |
| Equity  compensation plans not approved by security holders |       |                                       | 5,513      |                                 |       |                               | 7.21       |   |   |   | — |   |   |
| Total                                                       |       |                                       | 19,404     |                                 |       |                               | $          | 5.84 |   |   |   | 1,799 |   |   |
|                                                             |            |                                            |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |  |

 

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 $74.5million of 5% Convertible Subordinated Notes due in 2007 (the “Notes”) inprivately negotiated transactions with note holders in reliance on theexemption from registration set forth in Section 3(a)(9) of theSecurities Act of 1933.

**Item 6.**                        SELECTEDFINANCIAL DATA.

Our selected consolidated financial data for each ofthe five fiscal years in the period ended February 28, 2005 and each ofour last eight fiscal quarters is set forth below. This data should be read inconjunction with our Consolidated Financial Statements and related notesthereto and “Management’s Discussion and Analysis of Financial Condition andResults of Operations” included elsewhere in this Annual Report on Form 10-K.The selected financial data for each of the years in the three-year periodended February 28, 2005, and as of February 28, 2005 and February 29,2004, are derived from the Consolidated Financial Statements that have beenincluded in this Annual Report on Form 10-K. The selected financial dataas of February 28, 2003, 2002 and 2001, the years ended February 28,2002 and 2001, and in each of our last eight fiscal quarters are derived fromthe Consolidated Financial Statements that have not been included in thisAnnual Report on Form 10-K.

17

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| ** **                                                                       | ** ** | **Fiscal year ended February 28 or 29,**                                         | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                                                                                                       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                       | ** ** | **(in thousands, except per share and number of employees data)** | ** ** |
| STATEMENT OF OPERATIONS  DATA:                                                   |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Revenue:                                                                         |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Software                                                                         |       | $                                                                                                              | 36,203     |   | $ | 73,766 |   | $ | 74,899 |   | $ | 129,772 |   | $ | 139,316 |   |
| Support                                                                          |       | 84,050                                                                                                         |       | 86,593 |   | 84,075 |   | 73,852 |   | 55,315 |   |
| Services                                                                         |       | 64,933                                                                                                         |       | 73,254 |   | 102,144 |   | 106,522 |   | 73,333 |   |
| Reimbursed expenses                                                              |       | 7,920                                                                                                          |       | 9,432 |   | 11,268 |   | 9,741 |   | 8,199 |   |
| Total revenue                                                                    |       | 193,106                                                                                                        |       | 243,045 |   | 272,386 |   | 319,887 |   | 276,163 |   |
| Operating  expenses:                                                             |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Cost of revenue:                                                                 |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Cost of software                                                                 |       | 14,213                                                                                                         |       | 15,851 |   | 19,127 |   | 21,144 |   | 19,146 |   |
| Amortization of acquired technology                                              |       | 13,207                                                                                                         |       | 14,210 |   | 13,623 |   | 9,168 |   | 1,122 |   |
| Cost of support and services                                                     |       | 73,694                                                                                                         |       | 80,306 |   | 98,055 |   | 92,083 |   | 59,149 |   |
| Cost of reimbursed expenses                                                      |       | 7,920                                                                                                          |       | 9,432 |   | 11,268 |   | 9,741 |   | 8,199 |   |
| Sales and marketing                                                              |       | 52,662                                                                                                         |       | 66,061 |   | 95,627 |   | 120,437 |   | 115,610 |   |
| Product development                                                              |       | 32,404                                                                                                         |       | 36,233 |   | 63,055 |   | 70,477 |   | 40,830 |   |
| General and administrative                                                       |       | 22,110                                                                                                         |       | 25,060 |   | 27,885 |   | 28,522 |   | 22,925 |   |
| Amortization of intangibles                                                      |       | 6,648                                                                                                          |       | 4,674 |   | 3,866 |   | 86,279 |   | 15,082 |   |
| Goodwill impairment charge                                                       |       | —                                                                                                         |       | — |   | 96,349 |   | — |   | — |   |
| Purchased research and development                                               |       | —                                                                                                         |       | — |   | 3,800 |   | — |   | 9,724 |   |
| Exit and disposal activities                                                     |       | 17,312                                                                                                         |       | 18,627 |   | 19,184 |   | 6,612 |   | — |   |
| Non-cash stock option compensation expense (benefit)                             |       | 168                                                                                                            |       | 1,799 |   | 3,426 |   | (3,111 | ) | 12,801 |   |
| IRI settlement                                                                   |       | —                                                                                                         |       | — |   | — |   | 3,115 |   | — |   |
| Total operating expenses                                                         |       | 240,338                                                                                                        |       | 272,253 |   | 455,265 |   | 444,467 |   | 304,588 |   |
| Loss from operations                                                             |       | (47,232                                                                                                        | )          | (29,208 | ) | (182,879 | ) | (124,580 | ) | (28,425 | ) |
| Debt conversion expense                                                          |       | —                                                                                                         |       | (59,823 | ) | — |   | — |   | — |   |
| Other (expense) income, net                                                      |       | (7,314                                                                                                         | )          | (13,455 | ) | (7,942 | ) | (14,638 | ) | 2,899 |   |
| Loss before income taxes                                                         |       | (54,546                                                                                                        | )          | (102,486 | ) | (190,821 | ) | (139,218 | ) | (25,526 | ) |
| Provision for (benefit from) income taxes                                        |       | 725                                                                                                            |       | 1,314 |   | 21,418 |   | (24,060 | ) | 2,552 |   |
| Net loss                                                                         |       | $                                                                                                              | (55,271    | ) | $ | (103,800 | ) | $ | (212,239 | ) | $ | (115,158 | ) | $ | (28,078 | ) |
| Basic and diluted loss per share                                                 |       | $                                                                                                              | (0.67      | ) | $ | (1.43 | ) | $ | (3.04 | ) | $ | (1.69 | ) | $ | (0.48 | ) |
| BALANCE SHEET AND  OTHER DATA:                                                   |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and marketable securities                                 |       | $                                                                                                              | 129,978    |   | $ | 146,300 |   | $ | 137,735 |   | $ | 233,060 |   | $ | 300,308 |   |
| Working capital                                                                  |       | 105,533                                                                                                        |       | 128,090 |   | 122,791 |   | 237,751 |   | 301,468 |   |
| Long-term investments                                                            |       | 5,911                                                                                                          |       | 8,999 |   | — |   | — |   | — |   |
| Goodwill                                                                         |       | 185,658                                                                                                        |       | 185,501 |   | 187,438 |   | 269,998 |   | 335,651 |   |
| Acquired technology and customer relationships, net  of accumulated amortization |       | 23,151                                                                                                         |       | 43,007 |   | 61,889 |   | 54,206 |   | 45,385 |   |
| Total assets                                                                     |       | 440,280                                                                                                        |       | 498,081 |   | 529,373 |   | 722,640 |   | 847,261 |   |
| Convertible debt                                                                 |       | 175,500                                                                                                        |       | 175,500 |   | 250,000 |   | 250,000 |   | 250,000 |   |
| Total stockholders’ equity                                                  |       | 164,746                                                                                                        |       | 216,860 |   | 172,082 |   | 372,807 |   | 470,321 |   |
| Cash flows from operating activities                                             |       | (5,505                                                                                                         | )          | 6,825 |   | (30,675 | ) | (15,899 | ) | 15,514 |   |
| Employees (period  end)                                                          |       | 695                                                                                                            |       | 897 |   | 1,133 |   | 1,384 |   | 1,451 |   |

 

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| **Fiscal 2005**                                               | ** ** | ** **                                                         | ** ** | **  1st Quarter  ** | ** ** | **  2nd Quarter  ** | ** ** | **  3rd Quarter  ** | ** ** | **  4th Quarter  ** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                         | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenue                                                            |       |                                                               |       |                                         |       |                                         |       |                                         |       |                                         |       |   |   |   |   |   |   |
| Software                                                           |       |                                                               | $          | 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                                                   |       |                                                               | 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 | ) |   |

 
| **Fiscal 2004**                                               | ** ** | ** **                                                         | ** ** | **  1st Quarter  ** | ** ** | **  2nd Quarter  ** | ** ** | **  3rd Quarter  ** | ** ** | **  4th Quarter  ** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                         | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenue                                                            |       |                                                               |       |                                         |       |                                         |       |                                         |       |                                         |       |   |   |   |   |   |   |
| Software                                                           |       |                                                               | $          | 19,909                                       |       |                                         |       | $                                            | 17,802     |                                         |       |   | $ | 17,079 |   |   |   | $ | 18,976 |   |   |
| Support                                                            |       |                                                               | 21,469     |                                         |       |                                         | 21,085     |                                         |       |                                         | 22,195     |   |   |   | 21,844 |   |   |
| Services                                                           |       |                                                               | 21,503     |                                         |       |                                         | 18,414     |                                         |       |                                         | 18,332     |   |   |   | 15,005 |   |   |
| Reimbursed expenses                                                |       |                                                               | 2,760      |                                         |       |                                         | 2,406      |                                         |       |                                         | 2,291      |   |   |   | 1,975 |   |   |
| Total revenue                                                      |       |                                                               | 65,641     |                                         |       |                                         | 59,707     |                                         |       |                                         | 59,897     |   |   |   | 57,800 |   |   |
| Cost of software                                                   |       |                                                               | 4,416      |                                         |       |                                         | 4,449      |                                         |       |                                         | 3,695      |   |   |   | 3,291 |   |   |
| Cost of support  and services                                      |       |                                                               | 23,512     |                                         |       |                                         | 20,940     |                                         |       |                                         | 18,450     |   |   |   | 17,404 |   |   |
| Cost of  reimbursed expenses                                       |       |                                                               | 2,760      |                                         |       |                                         | 2,406      |                                         |       |                                         | 2,291      |   |   |   | 1,975 |   |   |
| Sales and  marketing                                               |       |                                                               | 16,849     |                                         |       |                                         | 16,034     |                                         |       |                                         | 16,326     |   |   |   | 16,852 |   |   |
| Product  development                                               |       |                                                               | 11,293     |                                         |       |                                         | 8,811      |                                         |       |                                         | 8,049      |   |   |   | 8,080 |   |   |
| General and  administrative                                        |       |                                                               | 6,349      |                                         |       |                                         | 5,897      |                                         |       |                                         | 5,912      |   |   |   | 6,902 |   |   |
| Exit and disposal  activities, and acquisition-related expenses(1) |       |                                                               | 15,438     |                                         |       |                                         | 5,382      |                                         |       |                                         | 5,011      |   |   |   | 13,479 |   |   |
| Operating (loss) income                                            |       |                                                               | (14,976    | )                                            |       |                                         | (4,212     | )                                            |       |                                         | 163        |   |   |   | (10,183 | ) |   |
| Net loss                                                           |       |                                                               | (18,471    | )                                            |       |                                         | (7,959     | )                                            |       |                                         | (19,847    | ) |   |   | (57,523 | ) |   |
| Basic and diluted loss per share                                   |       |                                                               | $          | (0.26                                        | )          |                                         |       | $                                            | (0.11      | )                                            |       |   | $ | (0.27 | ) |   |   | $ | (0.74 | ) |   |

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(1)          Exit and disposalactivities and acquisition-related expenses includes amortization ofintangibles and acquired technology, non-cash stock option compensation expenseand exit and disposal activities.

 

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

**Forward-Looking Statements**

***Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with the Consolidated FinancialStatements and the related notes and other financial information includedelsewhere in this Annual Report on Form 10-K. The discussion and analysiscontains forward-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, including those setforth under the caption “Factors that May Affect Future Results.”***

**Executive Summary**

Our Consolidated FinancialStatements are included in Item 15 of this Annual Report on Form 10-K. Thefollowing discussion is provided to allow the reader to have a betterunderstanding of our operating results for the year ended February 28,2005, including (i) a brief discussion of our business and products, (ii) thebusiness environment and factors that affected our financial performance, (iii) ourfocus on future improvements in our financial performance and (iv) asummary of our fiscal 2005 operating results and financial metrics. Thisexecutive summary should be read in conjunction with the more detaileddiscussion and analysis of our financial condition and results of operationsincluded in this Item 7, section titled, “Factors that May Affect FutureResults” and our Consolidated Financial Statements, which are included in Item15 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.

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 entire demand and supply chain andto improve their revenue management practices. These benefits createefficiencies in how goods and services are brought to market, how they arepriced and sold and how they are serviced and maintained. Our softwaresolutions provide the further benefit of simultaneously optimizing cost and revenueon an enterprise-wide basis by integrating pricing, forecasting, operationalplanning and execution, enhancing margins across the client’s enterprise andextended trading network. In addition, our software solutions help our clientsderive more benefits from their existing IT investments with other softwarevendors, such as legacy ERP and other transaction-based systems, and helpensure the security and integrity of their global supply chains.

Our approach to clientdelivery is to advise our clients how to best use our solutions and othertechnologies across their entire demand and supply chain to integrate pricing,forecasting, operational planning and execution in a manner that will allowthem to enhance margins across their entire enterprise and extended tradingnetwork and to improve their revenue management practices. We deliver oursolutions using commercially available products and will provide additionalfunctionality addressed through product extensions for industry-specificcapabilities. Certain of our clients and prospects are also asking for uniquecapabilities on top of our core capabilities to give them a competitive edge inthe market place which we may provide on a case by case basis. In theseinstances, this could lead to an increase in software license revenue beingrecognized on a contract accounting basis over the course of the delivery ofthe solution rather than upon delivery and contract execution. We are alsoentering new markets such as China, which require that software license revenuebe recognized over the period that services and support 

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areperformed. We are primarily focused on the Consumer Goods, Retail, andGovernment, Aerospace & Defense markets. We are also focused onproviding revenue management solutions for the Travel, Transportation &Hospitality markets.

**BusinessEnvironment and Factors That Affected our Fiscal Year Ended February 28,2005 Results**

Our operating results for the past three fiscal yearswere affected by several broad-based factors including global macro-economicconditions and cautious capital spending by corporations, especially forinformation technology such as enterprise application software. We believechanging conditions over the last three fiscal years caused changes in thebehavior patterns in our markets as our clients and prospects intensified theirefforts to reduce costs. Many shifted their focus from longer-term strategicinitiatives to short-term tactical initiatives with more rapid paybacks. Wealso believe that our clients and prospects are focused on realizing benefitsfrom earlier investments in information technology. In addition, we believethat some of our clients and prospects are still deferring capital spending onenterprise application software in part as a result of the challenges they havefaced in complying with the requirements of the Sarbanes-Oxley Act of 2002 andother related regulatory requirements. We believe that our financial results inthe fiscal year ended February 28, 2005 were also affected by themagnitude of changes in our workforce, including our executive management andsales organization, difficulties in execution, a market focus that was toobroad for existing market conditions and a strong competitive environment. As aresult, over the past three fiscal years we have faced challenges in ourability to stabilize revenue and improve our operating performance.

In addition to the trendsin our operating environment, we also recognize that our performance did notmeet our expectations. As previously announced, during our second quarter offiscal 2005 we developed and began executing plans to improve our overallfinancial performance, which we discuss in more detail below.

**Focuson Future Improvements in Our Financial Performance**

In response to our recent financial performance, wecontinue to make focused changes within our business to reduce cost and improveour financial performance. These changes include, among others, the continueddevelopment of a more focused product and market strategy and strategicrestructuring of the organization, and efforts to reduce our operating expensesto a level that may allow us to become profitable. During fiscal 2005 and March 2005,we hired a new Chief Executive Officer, a Chief Technology Officer and a VicePresident of Mid-Markets, consolidated our senior management team, eliminatingseveral positions including that of President, and organized into businessunits to address the Consumer Goods, Retail, Government, Aerospace &Defense and Revenue Management markets. In two European countries where we donot presently have a critical mass of resources, we eliminated certain offices,which are now being serviced from other locations in the region. We also intendto provide more focused sales and marketing efforts to small and medium-sized businessin Europe and the Asia-Pacific region through third-party marketing andreseller agreements.

As part of these initiatives, in our second quarter offiscal 2005, we approved and began to implement exit and disposal plans. As of February 28,2005, we had achieved quarterly cost savings of approximately $4.0 million,compared to the first quarter of fiscal 2005, as a result of these initiatives.These exit and disposal plans included the abandonment of certain office spaceand related asset write-offs and the involuntary termination of employees. Werecorded exit and disposal charges of $17.3 million in the twelve months ended February 28,2005 related to these cost-cutting initiatives, including $11.3 million inlease abandonment and related asset write-offs and $6.0 million in severanceand other benefits related to headcount reductions. We have completed most ofthe planned initiatives approved in our second quarter exit and disposal plansand will complete the remainder of the initiatives in fiscal 2006.

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During the fourth quarter of fiscal 2005, we commencedoperations at our new product development center in Hyderabad, India. We intendto move a substantial portion of our product development capabilities to ournew facility over the course of the next year while keeping our core productdevelopment capabilities at our headquarters in Rockville, Maryland. We believethis will allow us to both increase our product development resources and tolower our product development costs.

If market conditions forour products and services do not improve, we may need to make furtheradjustments to our cost structure to improve performance.

**Summary of Fiscal2005 Operating Results and Financial Metrics**

As we entered fiscal 2005, 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 fiscal2005 than in past years. We have not lost any major customers in recentquarters that had a negative material impact on revenue.

Our cost containment andcost reduction measures enacted in fiscal 2004 and fiscal 2005 have lessenedthe adverse impact on our financial performance of our declining revenue.During fiscal 2005, our employee workforce decreased from 897 employees to 695employees, or 22.5%, while total revenue declined 20.5% compared to the sameperiod.

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*Key FinancialMetrics—Fiscal 2005*

Our fiscal 2005 resultsand key financial metrics were negatively affected by decreased revenue,however, we have made progress in decreasing our operating costs, particularlyin the second half of fiscal 2005. The following is a summary of ourperformance relative to certain key financial metrics during fiscal 2005compared to fiscal 2004, as well as a summary of our quarterly performance infiscal 2005.
| ** **                                                               | ** ** | **Year Ended February 28 or 29,**                                                                       | ** ** | **Year Ended February 28, 2005**                                                     | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                               | ** ** | **          2004          ** | ** ** | **        2005        ** | ** ** | **Q1** | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| ** **                                                               | ** ** | **(in thousands, except number of employees and DSO)**                                        | ** ** |
| **Revenue:**                                                             |       |                                                                                                                             |       |                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Software                                                                 |       |                                                                                                                             | $          | 73,766                                                                                                   |       |   |   | $ | 36,203 |   |   | $ | 10,368 |   | $ | 11,111 |   | $ | 6,664 |   | $ | 8,060 |   |
| Support                                                                  |       |                                                                                                                             | 86,593     |                                                                                                     |       |   | 84,050 |   |   | 21,421 |   | 21,296 |   | 20,666 |   | 20,667 |   |
| Services & reimbursed  expenses                                 |       |                                                                                                                             | 82,686     |                                                                                                     |       |   | 72,853 |   |   | 19,794 |   | 18,855 |   | 17,715 |   | 16,489 |   |
| Total revenue                                                            |       |                                                                                                                             | 243,045    |                                                                                                     |       |   | 193,106 |   |   | 51,583 |   | 51,262 |   | 45,045 |   | 45,216 |   |
| **Operating expenses and employee headcount:**                           |       |                                                                                                                             |       |                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Exit and disposal activities and acquisition-related  expenses(1)        |       |                                                                                                                             | 39,310     |                                                                                                     |       |   | 37,335 |   |   | 2,811 |   | 11,478 |   | 8,139 |   | 14,907 |   |
| All other operating  expenses(2)                                         |       |                                                                                                                             | 232,943    |                                                                                                     |       |   | 203,003 |   |   | 53,922 |   | 54,740 |   | 48,366 |   | 45,975 |   |
| Total operating expenses                                                 |       |                                                                                                                             | 272,253    |                                                                                                     |       |   | 240,338 |   |   | 56,733 |   | 66,218 |   | 56,505 |   | 60,882 |   |
| Total employees (period end)                                             |       |                                                                                                                             | 897        |                                                                                                     |       |   | 695 |   |   | 865 |   | 815 |   | 733 |   | 695 |   |
| Total average employees                                                  |       |                                                                                                                             | 991        |                                                                                                     |       |   | 800 |   |   | 880 |   | 845 |   | 766 |   | 714 |   |
| Total revenue per average employee                                       |       |                                                                                                                             | $          | 245                                                                                                      |       |   |   | $ | 241 |   |   | $ | 59 |   | $ | 61 |   | $ | 59 |   | $ | 63 |   |
| **Financial condition, liquidity and capital  structure**                |       |                                                                                                                             |       |                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash, cash equivalents, marketable securities and  long-term investments |       |                                                                                                                             | $          | 155,299                                                                                                  |       |   |   | $ | 135,889 |   |   | $ | 148,737 |   | $ | 137,911 |   | $ | 132,170 |   | $ | 135,889 |   |
| Days sales outstanding (DSO)                                             |       |                                                                                                                             | 84         |                                                                                                     |       |   | 86 |   |   | 81 |   | 75 |   | 75 |   | 91 |   |
| Convertible debt                                                         |       |                                                                                                                             | 175,500    |                                                                                                     |       |   | 175,500 |   |   | 175,500 |   | 175,500 |   | 175,500 |   | 175,500 |   |
| Total stockholders’ equity                                          |       |                                                                                                                             | 216,860    |                                                                                                     |       |   | 164,746 |   |   | 209,030 |   | 192,094 |   | 181,185 |   | 164,746 |   |
| Common shares outstanding (period end)                                   |       |                                                                                                                             | 81,973     |                                                                                                     |       |   | 83,869 |   |   | 82,072 |   | 82,304 |   | 83,542 |   | 83,869 |   |
| Cash flows from  operating activities                                    |       |                                                                                                                             | 6,825      |                                                                                                     |       |   | (5,505 | ) |   | (1,014 | ) | (6,758 | ) | (5,598 | ) | 7,865 |   |

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(1)          Includes exit anddisposal activities plus acquisition related expenses such as amortization ofacquired technology and intangibles and non-cash stock option compensationexpense.

(2)          Includes cost of software,cost of support and services, cost of reimbursed expenses, sales and marketing,product development 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 2004 and fiscal 2005 and recenttrends.

**Software revenue**

Oursoftware revenue decreased during fiscal 2005 by 50.9% to $36.2 million. Thefollowing table highlights some of the significant trends impacting oursoftware revenue:
| ** **              | ** ** | ** **      | ** ** | **Average**            | ** ** | **Software**          | ** ** |
|-------------------------|------------|-----------------|------------|------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **Significant** | ** ** | **Selling Price** | ** ** | **Transactions**      | ** ** |
| ** **              | ** ** | **Software**    | ** ** | **(“ASP”)**  | ** ** | **$1.0 Million** | ** ** |
| **Quarter Ended**  | ** ** | ** **      | ** ** | **Transactions(1)**    | ** ** | **(in 000s)**    | ** ** | **or Greater** | ** ** |
| May 31, 2003       |       |            | 14         |                   |       |                  | $          | 1,279 |   |   |   | 5 |   |   |
| August 31,  2003   |       |            | 27         |                   |       |                  | 556        |   |   |   | 6 |   |   |
| November 30,  2003 |       |            | 31         |                   |       |                  | 513        |   |   |   | 4 |   |   |
| February 29,  2004 |       |            | 27         |                   |       |                  | 654        |   |   |   | 3 |   |   |
| May 31, 2004       |       |            | 13         |                   |       |                  | 695        |   |   |   | 1 |   |   |
| August 31,  2004   |       |            | 18         |                   |       |                  | 533        |   |   |   | 3 |   |   |
| November 30,  2004 |       |            | 11         |                   |       |                  | 491        |   |   |   | 1 |   |   |
| February 28,  2005 |       |            | 12         |                   |       |                  | 559        |   |   |   | 2 |   |   |
| Fiscal 2004—Total  |       |            | 99         |                   |       |                  | 672        |   |   |   | 18 |   |   |
| Fiscal 2005—Total  |       |            | 54         |                   |       |                  | 570        |   |   |   | 7 |   |   |
|                         |            |                 |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |

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(1)          Significant softwaretransactions are those with a value of $100,000 or greater recognized withinthe fiscal quarter.

Softwarerevenue by industry for fiscal 2005, fiscal 2004 and fiscal 2003 is as follows(in thousands):
| ** **                           | ** ** | **Fiscal year ended February 28 or 29,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Government,  Aerospace & Defense |       | $                                                                      | 2,789      |   | $ | 22,629 |   | $ | 10,681 |   |
| Consumer Goods                       |       | 15,161                                                                 |       | 29,273 |   | 51,167 |   |
| Revenue  Management                  |       | 2,453                                                                  |       | 477 |   | 1,359 |   |
| Retail                               |       | 12,227                                                                 |       | 10,938 |   | 5,907 |   |
| Other                                |       | 3,573                                                                  |       | 10,449 |   | 5,785 |   |
|                                 |       | $                                                                      | 36,203     |   | $ | 73,766 |   | $ | 74,899 |   |

 

The previous tablesindicate the following trends affecting our software revenue over the past twofiscal years:

·       Thenumber of significant software transactions consummated during each of thequarters and in all of fiscal 2005 was significantly fewer than the number ofsignificant software transactions consummated during each of the same periodsin fiscal 2004.

·       Theaverage selling price (“ASP”) of software has been relatively stable during thepast seven quarters. ASP has ranged from $491,000 to $695,000 during thisperiod. The ASP for the quarter ended May 31, 2003 was significantlyhigher than the past seven quarters as it included software revenue frominstallments under a large multi-year government contract.

·       Softwarerevenue declined for all industries with the exception of an increase in theRetail and Revenue Management industries during fiscal 2005 compared to fiscal2004. We believe the increase in our revenue from the Retail industry in thepast two fiscal years is partially a result of the efforts by retailers tocompete more effectively with Wal-Mart through increased investments in 

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information technology. Inaddition, Retailers have benefited from increased consumer spending which hasenabled them to increase their investments in information technology. Theincrease in revenue in the Revenue Management industry (other than airlines)reflects a recovery in travel, transportation and hospitality, following a few yearsof decreased spending in these areas following the September 11, 2001terrorist attack.

·       Softwarerevenue in the Government, Aerospace & Defense industry decreasedsignificantly in fiscal 2005 compared to fiscal 2004, after having increasedsignificantly in fiscal 2004. We believe the decline in our Government,Aerospace & Defense software revenue resulted from the FederalGovernment shifting monies (especially within the Department of Defense) to thewar on terror. The increase in software revenue in fiscal 2004 compared tofiscal 2003 resulted from (i) continued spending by the United StatesDepartment of Defense on business modernization initiatives, includingprocuring and installing commercial off-the-shelf software, such as supplychain management software, to replace legacy applications and processes and (ii) increasedsales to aerospace and defense customers acquired in the acquisition of WDSassets in April 2002.

·       Softwarerevenue in the Consumer Goods industry decreased in fiscal 2005 compared to thefiscal 2004. We believe that the decrease in consumer goods spending is due tolack of capital spending by these customers who are now largely focused onrealizing benefits from earlier investments in information technology ratherthan investing in new capabilities. In addition, we believe that some consumergoods prospects have 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$84.1 million in fiscal 2005 compared to $86.6 million in fiscal 2004. Ourpercentage of annual support renewals by our clients remains high; however,decreases in support revenue from non-renewals was not fully offset byincreases in support revenue from new software sales during fiscal 2005.

**Servicesand reimbursed expense revenue**

Our services andreimbursed expense revenue decreased 11.9% in fiscal 2005 to $72.9 million.Services revenue tends to track software revenue in prior periods. As such, weprimarily attribute the decrease in services revenue to the decrease in thenumber of completed software license transactions in fiscal 2005. Additionally,we experienced competitive rate pressures on consulting engagements and adecrease in the number of consulting employees who generate services revenue,from both voluntary and involuntary terminations in fiscal 2005. We have alsoexperienced a decrease in services margin during the past two fiscal years,primarily due to lower volume and lower margins on fixed fee arrangements andservices performed on non-revenue generating activities.

**Total revenue per average employee**

Our total revenue peraverage employee decreased by 1.6% to $241,000 for fiscal 2005 (calculated astotal revenue for the year divided by average employees for the year). Thisdecrease was due to lower software and services revenue in fiscal 2005partially offset by a 22.5% decrease in total employee headcount in fiscal2005.

**Total operating expenses**

Our total operatingexpenses declined by 11.7% during fiscal 2005 to $240.3 million. Exit anddisposal activities and acquisition-related expenses declined 5.0% duringfiscal 2005 to $37.3 million. This decrease 

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was theresult of lower exit and disposal charges in fiscal 2005 as compared to fiscal2004 as well as the completed amortization of non-cash stock optioncompensation expense in the second quarter of fiscal 2005 related to theunvested portion of stock options assumed with the acquisition of Talus. Allother operating expenses declined 12.9% during fiscal 2005 to $203.0 million.This decrease was primarily the result of a 19.3% decrease in average employeeheadcount and reduced office space costs as a result of exit and disposal plansexecuted during fiscal 2005 and fiscal 2004. In addition, we had lower outsidecontractor costs in both the product development and consulting services areas,partially offset by higher bad debt expense (See “Critical AccountingPolicies-Allowance for Doubtful Accounts”).

**Financialcondition, liquidity and capital structure**

During fiscal 2005,we experienced declines in our financial condition, liquidity and capitalstructure, including the following:

·       Cash,cash equivalents, marketable securities and long-term investments decreased by$19.4 million to $135.9 million primarily as a result of negative cash flowsfrom operations of approximately $5.5 million and a decrease in cash flowsprovided by financing activities of approximately $7.2 million from theprior year.

·       Theconvertible debt to equity ratio increased from 0.8:1 at February 29, 2004to 1.1:1 at February 28, 2005 primarily as a result of reported net lossesin fiscal 2005.

**Useof Estimates and 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 arenot readily 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 deferredrevenue, allowance for doubtful accounts, capitalized software developmentcosts, valuation of long-lived assets, including intangible assets andimpairment review of goodwill, income taxes, exit and disposal related expensesand stock option-based compensation plans. These policies, and our proceduresrelated to these policies, are described in detail below. In addition, pleaserefer to the Consolidated Financial Statements and Notes to ConsolidatedFinancial Statements included elsewhere in this Annual Report on Form 10-Kfor further discussion of our accounting policies.

**RevenueRecognition and Deferred Revenue**

Our 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, “*Modificationof SOP 97-2, Software Revenue Recognition with Respect to CertainTransactions (“SOP 98-9”*),” as well as Technical Practice Aidsissued from time to time by the American Institute of Certified 

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PublicAccountants, and Securities and Exchange Commission (“SEC”) Staff AccountingBulletin 104, “*Revenue Recognition*” (“SAB 104”),we exercise judgment and use estimates in connection with the determination ofthe amount of software license, support and professional services revenue to berecognized each accounting period.

Software license revenue isgenerally recognized using the residual method 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 fee is notsubject to refund or adjustment and is payable within twelve months of theagreement 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:  *We perform a credit review for all significant transactions at the timethe arrangement 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, “*Accounting for*

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*Performance of Construction Type and Certain Production Type Contracts*.” 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.

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 for Doubtful 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 provision for doubtful accounts,which has ranged between approximately 0.1% and 2.1% of total revenue over thethree years ending February 28, 2005; (v) our historical write-offsand recoveries; (vi) the credit worthiness of each customer; (vii) theeconomic conditions of the customer’s industry; and (viii) generaleconomic conditions. In cases where we are aware of circumstances that mayimpair a specific customer’s ability to meet their financial obligations to us,we record a specific allowance against amounts due from the customer.

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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 2005, our provision for doubtful accounts wouldchange by approximately $1.9 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 receivable), in the ConsolidatedStatement of Operations.

**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 $9.6 millionand $10.5 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 $11.6million per year during our last three fiscal years. A change in the expectedeconomic life of our capitalized software development costs of six months wouldchange our annual operating expenses by approximately $(1.9) million if weincreased the expected economic life by six months and by $3.2 million if wedecreased the expected economic life by six months.

**Valuationand Impairment 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 “acquiredtechnology,” are amortized to expense over time, while in-process research anddevelopment, 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 theirestimated useful 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.

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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.

During fiscal 2005, 2004 and 2003, we recordedimpairment charges of $2.7 million, $4.2 million and $2.5 million,respectively, associated with certain furniture, fixtures and leaseholdimprovements that we abandoned in connection with exit and disposal plans.These assets were located in facilities that we ceased to use. Based on ourevaluation of these assets we determined that the assets were not marketablefor resale and oftentimes could not be removed from the premises (e.g., theasset consisted of a dividing wall or other permanent fixture). In fiscal 2003,$1.2 million of the aforementioned $2.5 million was related to the discontinueduse of certain internal software used by our sales force that was replaced withanother tool.

As of February 28,2005 and February 29, 2004, our net book value of long-lived assets,consisted of the following (in thousands):
| ** **                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Property and  equipment              |       | $        | 15,795     |     | $          | 21,632 |   |
| Software  development costs          |       | 14,390   |       | 14,224   |       |
| Software  developed for internal use |       | 1,951    |       | 2,966    |       |
| Goodwill                             |       | 185,658  |       | 185,501  |       |
| Acquired  technology                 |       | 13,816   |       | 27,023   |       |
| Customer  relationships              |       | 9,335    |       | 15,984   |       |
| Other                                |       | 6,897    |       | 7,953    |       |
| Total                                |       | $        | 247,842    |     | $          | 275,283 |   |

 

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, the Company’s marketcapitalization, control premium and recent stock price volatility) below ourcarrying value. Please see “Factors That May Affect Future Results—RisksRelated to Our Business.” During the six months ended August 31, 2004, theCompany experienced adverse changes in its stock price resulting from its poorfinancial performance. As a result, we performed a test for goodwill impairmentat August 31, 2004 and determined that based upon the implied fair value(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 there was no impairment of goodwill. Weperformed goodwill impairment reviews on February 28, 2005 and February 29,2004, our annual dates for goodwill impairment review, and determined that theimplied fair 

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value of the Companyexceeded the carrying value. Accordingly, no goodwill impairment charge wasrecorded during fiscal 2005 or fiscal 2004.

We performed goodwill impairment reviews during oursecond and third quarters of fiscal 2003 due to a decrease in marketcapitalization, and no impairment losses were recognized. We performed a testfor goodwill impairment as of February 28, 2003, our annual date forgoodwill impairment review, and determined that our implied fair value was lessthan stockholders’ equity, including goodwill, an indication that goodwill maybe impaired. Therefore, we performed the second step of the goodwill impairmenttest. As a result, we recorded a goodwill impairment charge of $96.3 million toreduce goodwill associated with our acquisitions to the estimated fair value asof that date. The goodwill impairment loss was determined by calculating thedifference between: a) our implied fair value as of February 28, 2003 lessthe fair value of our net assets and b) the carrying value of goodwill. Thefair value of the identifiable intangible assets of the Company were determinedby an independent valuation. Our implied fair value was estimated based on theclosing quoted market price of our common stock on February 28, 2003 multipliedby the number of outstanding common shares (market capitalization) plus animplied control premium as if we were 100% owned by a single stockholder. Theimplied control premium used for purposes of measuring the implied fair valueof the Company was determined by review of the premiums paid by other companiesin past public technology and software acquisitions.

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 thatthe fair 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. Based on various factors, including our cumulativelosses for the three year period ended February 28, 2003, the fiscal year2003 loss, and estimates of future profitability, management recorded avaluation allowance for the full amount of our net deferred tax assets, whichresulted in a $20.4 million charge to income tax expense in the fiscal yearended February 28, 2003. Management performed a similar analysis as of February 28,2005, and concluded that future taxable income will, more likely than not, beinsufficient to recover our net deferred tax assets as of February 28,2005. Therefore, we have maintained a valuation allowance for the full amountof our net deferred tax assets. Management will continue to monitor itsestimates of future profitability and the likelihood of realizing our netdeferred 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 an extendedperiod to resolve. Changes in the geographical mix or estimated level of annualpretax income can impact our overall income tax expense. This process involvesestimating our current tax liabilities in each jurisdiction in which weoperate.

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**Exit and Disposal Activities**

During fiscal 2003, 2004 and 2005 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 Bulletin No. 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 EITF Issue No. 94-3 *“Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(Including Certain Costs Associated with a Restructuring)”* (“EITF94-3”) and EITF Issue No. 88-10 *“Costs Associated withLease Modification or Termination”* (“EITF 88-10”). We adopted SFAS146 effective January 1, 2003; therefore, exit and disposal chargessubsequent to December 31, 2002 were accounted for in accordance with SFAS146. The adoption 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 and otherapplicable 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.

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/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-Lived Assets”described above for a further discussion of our accounting policy and relatedaccounting 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 wererequired to make significant estimates related to the expenses associated withour excess 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 other factors.These estimates, along with other estimates made by management in connectionwith the Exit Plans may vary significantly depending, 

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in part,upon factors 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.

**Stock Option-Based Compensation Plans**

Weaccount for our stock option-based compensation plans in accordance withAccounting Principles Board (“APB”) Opinion No. 25, “*Accountingfor Stock Issued to Employees*” and related interpretations using theintrinsic value based method of accounting. If we accounted for our stockoption-based compensation plans using the fair value based method of accountingin accordance with the provisions as required by Statement of FinancialAccounting Standards No. 123 (“SFAS 123”), “*Accountingfor Stock-Based Compensation*,” as amended by Statement of FinancialAccounting Standards No. 148 (“SFAS 148”), “*Accountingfor Stock-Based Compensation—Transition and Disclosure,”* our netloss and loss per basic and diluted share amounts would have been as follows,in thousands except per share amounts:
| ** **                                                                              | ** ** | **February 28 or 29,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                              | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net loss, as  reported                                                                  |       | $                                     | (55,271    | ) | $ | (103,800 | ) | $ | (212,239 | ) |
| Add: Stock  option-based compensation expense included in reported net loss, net of tax |       | 168                                   |       | 1,799 |   | 3,426 |   |
| Less: Stock  option-based compensation, net of tax                                      |       | (6,301                                | )          | (2,611 | ) | (26,564 | ) |
| Pro forma net  loss                                                                     |       | $                                     | (61,404    | ) | $ | (104,612 | ) | $ | (235,377 | ) |
| Basic and diluted loss per share, as reported                                           |       | $                                     | (0.67      | ) | $ | (1.43 | ) | $ | (3.04 | ) |
| Basic and diluted loss  per share, pro forma                                            |       | $                                     | (0.75      | ) | $ | (1.44 | ) | $ | (3.37 | ) |

 

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 $1.62, $3.28 and $3.48 per share for fiscal 2005, 2004 and 2003respectively, 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 $0.52, $2.23 and $3.96 pershare for fiscal 2005, 2004 and 2003, 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**   | ** ** |
|---------------------------|------------|-------------|------------|------------|------------|
| ** **                | ** ** | **2005**    | ** ** | **2004**   | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Risk-free  interest rates |       | 3.12        | %          | 2.51       | %          | 2.53 | % | 2.028 | % | 1.357 | % | 1.75 | % |
| Expected term             |       | 4.37 years  |       | 4.53 years |       | 3.95 years |   | 3 months |   | 6 months |   | 6 months |   |
| Volatility                |       | .7399       |       | .9423      |       | 1.01 |   | .5498 |   | .8492 |   | .8705 |   |

 

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**Results of Operations**

Thefollowing table includes the consolidated statements of operations data foreach of the years in the three-year period ended February 28, 2005expressed as a percentage of revenue:
| ** **                                                           | ** ** | **Fiscal Year Ended February 28 or 29,** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **   2005   **                           | ** ** | **   2004   ** | ** ** | **   2003   ** | ** ** |
| Revenue:                                                             |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Software                                                             |       |                                                                   | 18.7       | % |   |   | 30.4 | % |   |   | 27.5 | % |   |
| Support                                                              |       |                                                                   | 43.5       | % |   |   | 35.6 | % |   |   | 30.9 | % |   |
| Services                                                             |       |                                                                   | 33.6       | % |   |   | 30.1 | % |   |   | 37.5 | % |   |
| Reimbursed expenses                                                  |       |                                                                   | 4.2        | % |   |   | 3.9 | % |   |   | 4.1 | % |   |
| Total revenue                                                        |       |                                                                   | 100.0      | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| Operating expenses:                                                  |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Cost of software                                                     |       |                                                                   | 7.4        | % |   |   | 6.5 | % |   |   | 7.0 | % |   |
| Amortization of acquired technology                                  |       |                                                                   | 6.8        | % |   |   | 5.9 | % |   |   | 5.0 | % |   |
| Cost of services and support                                         |       |                                                                   | 38.2       | % |   |   | 33.0 | % |   |   | 36.0 | % |   |
| Cost of reimbursed expenses                                          |       |                                                                   | 4.2        | % |   |   | 3.9 | % |   |   | 4.1 | % |   |
| Sales and marketing                                                  |       |                                                                   | 27.3       | % |   |   | 27.2 | % |   |   | 35.1 | % |   |
| Product development                                                  |       |                                                                   | 16.8       | % |   |   | 14.9 | % |   |   | 23.1 | % |   |
| General and administrative                                           |       |                                                                   | 11.4       | % |   |   | 10.3 | % |   |   | 10.2 | % |   |
| Amortization of intangibles                                          |       |                                                                   | 3.4        | % |   |   | 1.9 | % |   |   | 1.4 | % |   |
| Goodwill impairment charge                                           |       |                                                                   | —     |   |   |   | — |   |   |   | 35.4 | % |   |
| Purchased research and development and  acquisition-related expenses |       |                                                                   | —     |   |   |   | — |   |   |   | 1.4 | % |   |
| Exit and disposal activities                                         |       |                                                                   | 9.0        | % |   |   | 7.7 | % |   |   | 7.0 | % |   |
| Non-cash stock compensation expense                                  |       |                                                                   | 0.1        | % |   |   | 0.7 | % |   |   | 1.3 | % |   |
| Total operating expenses                                             |       |                                                                   | 124.6      | % |   |   | 112.0 | % |   |   | 167.0 | % |   |
| Loss from operations                                                 |       |                                                                   | (24.6      | )% |   |   | (12.0 | )% |   |   | (67.0 | )% |   |
| Debt conversion  expense                                             |       |                                                                   | —     |   |   |   | (24.6 | )% |   |   | — |   |   |
| Other expense—net                                               |       |                                                                   | (3.8       | )% |   |   | (5.5 | )% |   |   | (2.9 | )% |   |
| Loss before income taxes                                             |       |                                                                   | (28.4      | )% |   |   | (42.1 | )% |   |   | (69.9 | )% |   |
| Provision for  income taxes                                          |       |                                                                   | 0.4        | % |   |   | 0.5 | % |   |   | 7.9 | % |   |
| Net loss                                                             |       |                                                                   | (28.8      | )% |   |   | (42.6 | )% |   |   | (77.8 | )% |   |

 

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 compensation expense as follows (inthousands):
| ** **                    | ** ** | **Fiscal Year Ended February 28 or 29,** | ** ** |
|-------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                    | ** ** | **     2005     **   | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** |
| Cost of services  and support |       |                                                                   | $          | 75 |   |   |   | $ | 865 |   |   |   | $ | 1,673 |   |   |
| Sales and  marketing          |       |                                                                   | 26         |   |   |   | 456 |   |   |   | 931 |   |   |
| Product  development          |       |                                                                   | 15         |   |   |   | 140 |   |   |   | 298 |   |   |
| General and  administrative   |       |                                                                   | 52         |   |   |   | 338 |   |   |   | 524 |   |   |
|                          |       |                                                                   | $          | 168 |   |   |   | $ | 1,799 |   |   |   | $ | 3,426 |   |   |

 

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

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**Revenue**

Software Revenue.   Software revenue decreased50.9%, or $37.6 million, in fiscal 2005 and decreased 1.5%, or $1.1 million, infiscal 2004. We believe the decreases in software revenue in fiscal 2005 weredue to cautious capital spending for supply chain software purchases and toeffects resulting from the magnitude of changes in our workforce, including ourexecutive management and sales organization, difficulties in sales executionand a strong competitive environment. We experienced lengthening sales cyclesand reductions in the size of customer orders compared to the same period infiscal 2004. These factors resulted in a decrease in the number of significantsoftware license transactions with a value of $100,000 or greater, the numberof transactions greater than $1.0 million and our ASP. The modest decrease insoftware revenue in fiscal 2004 was due to a continued decline in the ASPoffset by an increase in the number of significant software transactions andincreased software revenue from transactions accounted for on apercentage-of-completion basis.

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 2002consumed the internal resources of our clients and prospects in fiscal 2005 andslowed the decision making process for other software purchases.

Thefollowing table summarizes significant software transactions consummated duringfiscal 2005, 2004 and 2003:
| ** **                                      | ** ** | **Fiscal Year Ended February 28 or 29,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **     2005     **   | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** |
| *Significant  Software Transactions(1)*         |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Number of  transactions $100,000 to $999,999    |       |                                                                   | 47         |   |   |   | 81 |   |   |   | 70 |   |   |
| Number of  transactions $1.0 million or greater |       |                                                                   | 7          |   |   |   | 18 |   |   |   | 19 |   |   |
| Total number of  transactions                   |       |                                                                   | 54         |   |   |   | 99 |   |   |   | 89 |   |   |
| Average selling price  (in thousands)           |       |                                                                   | $          | 570 |   |   |   | $ | 672 |   |   |   | $ | 785 |   |   |
|                                                 |            |                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

(1)          Significant softwaretransactions are those with a value of $100,000 or greater recognized withinthe fiscal year.

Support Revenue.   Support revenue decreased 2.9%,or $2.5 million, in fiscal 2005 and increased 3.0%, or $2.5 million, in fiscal2004. Our percentage of annual support renewals by our clients remains high;however, decreases in support revenue from non-renewals were not fully offsetby increases in support revenue from new software sales during the year. Wehave not lost any of our largest support customers in the past year that had amaterial negative effect on revenue. The increase in support revenue in fiscal2004 was due to the increase in the base of clients that have licensed oursoftware products and entered into annual support arrangements, coupled withnet renewals of annual support agreements by our existing client base. Therecan be no assurance that our historical renewal rate will continue. See “Forward-LookingStatements” and “Factors That May Affect Future Results.”

Services Revenue.   Services revenue decreased11.4%, or $8.3 million, in fiscal 2005 and decreased 28.3%, or $28.9 million,in fiscal 2004. The decrease in services revenue in the past two fiscal yearswas the result of the decrease in the number of completed software licensetransactions in fiscal 2005, fiscal 2004 and fiscal 2003, resulting in lowerdemand for implementation services and competitive rate pressures on consultingengagements. Additionally, we have experienced a decrease in the number ofservices employees from both voluntary and involuntary terminations. Servicesrevenue tends to track software license revenue in prior periods. There can beno assurance that the rates we charge for consulting and implementationservices will improve, or even 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 licenses and maintain adequateresource capacity and capabilities. We also expect that services revenue willcontinue to fluctuate on a quarter-to-quarter basis, as revenue from theimplementation of software is not generally recognized in the same period asthe related license revenue. See “Forward-Looking Statements” and “Factors ThatMay Affect Future Results.”

Reimbursed Expenses.   Reimbursed expensesdecreased 16.0%, or $1.5 million, in fiscal 2005 and decreased 16.3%, or $1.8million, in fiscal 2004. The decrease in reimbursed expenses is consistent withdecreases in services revenue in these periods.

International Revenue.   We market and sell oursoftware and services internationally, primarily in Europe, Asia, Canada,Central America and South America. Revenue outside of the U.S. decreased $17.4million, or 21.1%, to $65.2 million, in fiscal 2005 compared to fiscal 2004 andincreased $14.5 million, or 21.4%, to $82.6 million, in fiscal 2004 compared to$68.0 million in fiscal 2003. Revenue by geographic area is determined on thebasis of the geographic area in which transactions are consummated. Revenueoutside of the U.S. as a percentage of total revenue was 33.8%, 34.0% and 25.0%in fiscal 2005, 2004 and 2003, respectively. Although the percentage ofinternational revenue to total revenue remained consistent in fiscal 2005, thedecrease in our international revenue was the result of cautious capitalspending for supply chain software purchases and the effects resulting from themagnitude of changes in our workforce, including our executive management andsales organization, difficulties in execution and a strong competitive environment.The increase in international revenue in fiscal 2004 was due to improved salesexecution in Europe and growth in the emerging markets in the Asia-Pacificregion.

Customer Concentration.   Noindividual customer accounted for more than 10% of annual revenue in the threeyears ended February 28, 2005.

**Operating Expenses**

***Costof Software***.   Cost of software consists primarily ofamortization of capitalized software development costs and royalty feesassociated with third-party software either embedded in our software or resoldby us. The following table sets forth amortization of capitalized softwaredevelopment costs and other costs of software for the three fiscal years ended February 28or 29, 2005, 2004 and 2003 (in thousands):
| ** **                            | ** ** | **Fiscal Year Ended February 28 or 29,**           | ** ** |
|---------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** |
| Amortization of  capitalized software |       |                                                                             | $          | 9,407 |   |   |   | $ | 8,987 |   |   |   | $ | 11,587 |   |   |
| Percentage of software revenue        |       |                                                                             | 26.0       | % |   |   | 12.2 | % |   |   | 15.5 | % |   |
| Other costs of  software              |       |                                                                             | 4,806      |   |   |   | 6,864 |   |   |   | 7,540 |   |   |
| Percentage of software revenue        |       |                                                                             | 13.3       | % |   |   | 9.3 | % |   |   | 10.1 | % |   |
| Total cost of  software               |       |                                                                             | $          | 14,213 |   |   |   | $ | 15,851 |   |   |   | $ | 19,127 |   |   |
| Percentage of  software revenue       |       |                                                                             | 39.3       | % |   |   | 21.5 | % |   |   | 25.5 | % |   |

 

The decrease in the total cost of software in fiscal2005 as compared to fiscal 2004 was a result of decreased royalties paid tothird parties as a result of a decrease in software revenue, partially offsetby an increase in amortization of capitalized software due to the productrelease of version 7.2 in February 2004 and the write-off of one of ourcapitalized products for which the anticipated future gross revenue were lessthan the estimated future costs of completing and disposing of the product. Thedecrease in the total cost of software in fiscal 2004 as compared to fiscal2003 was a result of decreased royalties paid to third parties as a result of adecrease in software revenue and changes in the mix of products licensed aswell as a decrease in amortization of capitalized software due to productrelease 6.1 becoming fully amortized in 

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fiscal 2003 while productrelease 7.2 was completed in February 2004 resulting in no incrementalamortization in fiscal 2004. Amortization of capitalized software developmentcosts does not vary with software revenue while royalty fees do.

***Amortization of AcquiredTechnology***.   In connection with acquisitions infiscal 2003, 2002 and 2001, we acquired developed technology that we offer aspart of our integrated solutions. Acquired technology is amortized over periodsranging from four to six years. We expect annual amortization of acquiredtechnology to be approximately $6.7 million in fiscal 2006.

***Cost of Services and Support***.   Costof services and support primarily includes personnel and third-partycontractor costs. Cost of services and support, excluding the cost ofreimbursed expenses and non-cash stock-option compensation expense, as apercentage of related revenue was 49.5% in fiscal 2005, 50.2% in fiscal 2004and 52.7% in fiscal 2003. Cost of services and support decreased $6.6 million,or 8.2%, to $73.7 million in fiscal 2005 compared to fiscal 2004 and decreased$17.7 million, or 18.1%, to $80.3 million in fiscal 2004 compared to fiscal2003. The decrease in cost of services and support was attributable to anoverall decrease in the average number of services and support employees to 304in fiscal 2005, compared to 366 in fiscal 2004. This was a result of theimplementation of our cost containment and cost reduction initiatives duringfiscal 2005 and fiscal 2004, as well as from voluntary attrition. The decreasein cost of services and support as a percentage of related revenue in fiscal2005 as compared to fiscal 2004 reflects a slight increase in the proportion ofthis revenue derived from support services, which historically have highermargins than implementation services. The decrease in cost of services andsupport during fiscal 2004 compared to fiscal 2003 was attributable to adecrease in the average number of services and support employees to 366 infiscal 2004, compared to 455 in fiscal 2003. This was a result of theimplementation of our cost containment and cost reduction initiatives duringfiscal 2004 and fiscal 2003 and voluntary attrition.

***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 $13.4 million, or 20.3%, to $52.7 million in fiscal 2005 ascompared to fiscal 2004 and decreased $29.6 million, or 30.9%, to $66.1 millionin fiscal 2004 as compared to fiscal 2003. The decrease in fiscal 2005 andfiscal 2004 was due to:

·       anoverall decrease in the average number of sales, marketing and businessdevelopment employees to 170 for fiscal 2005 compared to 216 for fiscal 2004and 328 for fiscal 2003, which was primarily a result of the implementation ofour exit and disposal plans in fiscal 2005, fiscal 2004 and fiscal 2003;

·       adecrease in promotional spending, travel, advertising and public relationsspending resulting from cost containment and cost reduction measuresimplemented in fiscal 2005, fiscal 2004 and fiscal 2003; and

·       adecrease in sales commissions due to lower software revenue.

Offset by:

·       anincrease in bad debt expense in fiscal 2005.

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***ProductDevelopment***.   Product development costs includeexpenses associated with the development of new software products, enhancementsof existing products and quality assurance activities and are reported net ofcapitalized software development costs. Such costs are primarily from employeesand third-party contractors. The following table sets forth productdevelopment costs for the three fiscal years ended February 28 or 29,2005, 2004 and 2003 (in thousands):
| ** **                                          | ** ** | **Fiscal Year Ended February 28 or 29,**           | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** |
| Gross product  development costs                    |       |                                                                             | $          | 41,977 |   |   |   | $ | 46,121 |   |   |   | $ | 73,570 |   |   |
| Percentage of total revenue                         |       |                                                                             | 21.7       | % |   |   | 19.0 | % |   |   | 27.0 | % |   |
| Less: Capitalized  software development costs  |       |                                                                             | 9,573      |   |   |   | 9,888 |   |   |   | 10,515 |   |   |
| Percentage of total revenue                         |       |                                                                             | 5.0        | % |   |   | 4.1 | % |   |   | 3.9 | % |   |
| Product  development costs, as reported             |       |                                                                             | $          | 32,404 |   |   |   | $ | 36,233 |   |   |   | $ | 63,055 |   |   |
| Percentage of  total revenue                        |       |                                                                             | 16.8       | % |   |   | 14.9 | % |   |   | 23.1 | % |   |

 

Gross productdevelopment costs decreased $4.1 million, or 9.0%, in fiscal 2005 as comparedto fiscal 2004 and decreased $27.4 million, or 37.3%, in fiscal 2004 ascompared to fiscal 2003. The decrease in fiscal 2005 and 2004 was due to:

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

·       anoverall decrease in the average number of product development employees to 218in fiscal 2005, compared to 275 in fiscal 2004 and 414 in fiscal 2003. This wasprimarily a result of the implementation of our exit and disposal plans infiscal 2005, fiscal 2004 and fiscal 2003;

·       anincrease in the proportion of our development work being performed bycontractors in India in order to take advantage of cost efficiencies associatedwith India’s lower wage scale;

·       adecrease in the average number of product development contractors in the U.S.in fiscal 2005 and fiscal 2004; and

·       lowerpersonnel costs in fiscal 2005 as we migrated some of our product developmentefforts to our new product development center in Hyderabad, India.

***General and Administrative***.   Generaland administrative expenses include personnel and other costs of our legal,finance, accounting, human resources, facilities and information systemsfunctions. General and administrative expenses decreased $2.9 million, or11.8%, to $22.1 million in fiscal 2005 as compared to fiscal 2004 and decreased$2.8 million, or 10.1%, to $25.1 million in fiscal 2004 compared to fiscal2003. The decrease in fiscal 2005 as compared to fiscal 2004 was the result ofa decrease in the average number of general and administrative employeesresulting from the implementation of our exit and disposal plans in fiscal 2005and fiscal 2004, in addition to a decrease in property tax expense related to asettlement with the State of Maryland. The decrease was partially offset by anincrease in accounting professional fees primarily related to compliance withthe Sarbanes-Oxley Act of 2002. The decrease in fiscal 2004 as compared tofiscal 2003 was the result of a decrease in the average number of general andadministrative employees resulting from the implementation of our exit anddisposal plans in fiscal 2004 and fiscal 2003.

***Amortization of Intangibles.  ***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 increased $2.0 million, or 42.2%, to $6.6 million in fiscal 2005compared to fiscal 2004 and increased $0.8 million, or 20.9%, to $4.7 millionin fiscal 2004 compared to fiscal 2003. The increase in 

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amortization ofintangibles in fiscal 2005 and 2004 was due to a change in the Talus customerrelationships amortization from seven years to five years in late fiscal 2004.In fiscal 2005, the increase in amortization of intangibles was partiallyoffset by the completion of amortization in fiscal 2005 of acquired technologyrelated to the STG and Talus acquisitions.

***Goodwill Impairment.  ***Wetest goodwill for impairment on an annual basis, coinciding with our fiscalyear end, or on an interim basis if circumstances change that would more likelythan not reduce our implied fair value (which includes factors such as, but notlimited to, the Company’s market capitalization, control premium and recentstock price volatility) below our carrying value. Please see “Factors That May AffectFuture Results—Risks Related to Our Business.” During the six months ended August 31,2004, the Company experienced adverse changes in its stock price resulting fromits poor financial performance. As a result, the Company performed a test forgoodwill impairment at August 31, 2004 and determined that based upon theimplied 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 August 31, 2004, there was no impairmentof goodwill. We performed our annual goodwill impairment reviews on February 28,2005 and February 29, 2004 and determined that the implied fair value ofthe Company exceeded the carrying value. Accordingly, no goodwill impairmentcharge was recorded during fiscal 2005. Details of our amortization ofintangibles and goodwill impairment are included in Note 6 in the Notes toConsolidated Financial Statements included elsewhere in this Annual Report on Form 10-Kand details of our acquisitions are included in Note 14 in the Notes toConsolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.During fiscal 2003 we recorded a goodwill impairment charge of $96.3 million toreduce goodwill associated with our acquisitions to the estimated fair value asof that date. See further discussion in “Valuation and Impairment Review ofLong-Lived Assets”.

***Purchased Research andDevelopment***.   Our acquisition of WDS in fiscal 2003included the purchase of technology that had not yet been determined to betechnologically feasible and had no alternative future use at its then-currentstage of development. Accordingly, in fiscal 2003 the portion of the purchaseprice for WDS allocated to purchased research and development of $3.8 million,in aggregate, was expensed immediately in accordance with generally acceptedaccounting principles. Details of our acquisitions are included in Note 14 inthe Notes to Consolidated Financial Statements included elsewhere in thisAnnual Report on Form 10-K.

***Exit and Disposal Activities***.   Inorder to adjust our cost structure and resource allocation to increaseefficiencies and reduce excess office space, we adopted exit and disposal plansin the second quarter of fiscal 2005, the first and fourth quarters of fiscal2004 and in the second, third and fourth quarters of fiscal 2003. In connectionwith our decision to implement these plans, we incurred related exit anddisposal charges of $17.3 million, $18.6 million and $19.2 million in fiscal2005, fiscal 2004 and fiscal 2003, respectively.

Thefollowing table sets forth a summary of exit and disposal activity charges, netof adjustments, for fiscal 2005, fiscal 2004 and fiscal 2003 (in thousands):
| ** **                          | ** ** | **Fiscal Year Ended February 28 or 29,**           | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** |
| Lease obligations and  terminations |       |                                                                             | $          | 8,119 |   |   |   | $ | 12,917 |   |   |   | $ | 7,973 |   |   |
| Severance and related  benefits     |       |                                                                             | 6,064      |   |   |   | 855 |   |   |   | 7,942 |   |   |
| Impairment charges                  |       |                                                                             | 2,742      |   |   |   | 4,241 |   |   |   | 2,528 |   |   |
| Other                               |       |                                                                             | 387        |   |   |   | 614 |   |   |   | 741 |   |   |
| Total exit and disposal activities  |       |                                                                             | $          | 17,312 |   |   |   | $ | 18,627 |   |   |   | $ | 19,184 |   |   |

 

The impact to reportedbasic and diluted loss per share as a result of the exit and disposal chargeswas $(0.21), $(0.26), and $(0.27) for fiscal 2005, fiscal 2004 and fiscal 2003,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 four fiscal years to better align our cost structurewith expected revenue. Specifically, we took the following actions:

1.                We reduced ourworkforce by 127, 79 and 343 employees through involuntary terminations withthe fiscal 2005, 2004 and 2003 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 2004 and fiscal 2003. This included the relocation of certain employeesfrom Wayne, Pennsylvania; San Carlos, California; Atlanta, Georgia; Denver, Coloradoand 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 2005, 2004, 2003 and 2002 were located in Wayne,Pennsylvania; Irving, Texas; Detroit, Michigan; Denver, Colorado; Ottawa,Canada; Itasca, Illinois; Milan, Italy; Munich and Ratingen, Germany andStockholm, Sweden and the Philippines. A portion of the office space waspermanently 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 2005”) by $29.9 million to $203.0 million for the fiscal yearended February 28, 2005. Details of our exit and disposal charges areincluded in Note 15 in the Notes to Consolidated Financial Statements includedelsewhere in this Annual 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, 2005, we had achieved quarterly cost savings ofapproximately $4.0 million, compared to the first quarter of fiscal 2005 as aresult of implementing our exit and disposal plans during fiscal 2005. We havecompleted most of the planned initiatives approved in our second quarter fiscal2005 exit and disposal plans and will complete the remainder of the initiativesin fiscal 2006. The total exit and disposal charges reflected in the financialstatements are based on management’s current estimates, which may changematerially if actual lease-related expenditures or sublease income differ fromcurrent estimates. See “Forward-Looking Statements.”

***Non-Cash Stock OptionCompensation Expense.  ***We recognized non-cash stockoption compensation expense of $0.2 million, $1.8 million and $3.4 million infiscal 2005, fiscal 2004 and fiscal 2003, respectively, related to unvestedstock options assumed in the acquisition of Talus. As part of the Talusacquisition, we assumed all outstanding Talus stock options, which wereconverted into our stock options. Options to purchase approximately 631,000shares of our common stock were unvested at the acquisition date. FASBInterpretation No. 44 (“FIN 44”) “*Accounting for CertainTransactions Involving Stock Compensation*” requires the acquiringcompany to measure the intrinsic value of unvested stock options assumed at theacquisition date in a purchase business combination and record a compensationcharge over the remaining vesting period of those options to the extent thoseoptions remain outstanding. The unamortized value of these stock awards isincluded as a separate component of stockholders’ equity. All of theseoutstanding options are fully vested and all compensation expense has beenrecognized as of February 28, 2005.

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***Repriced Options.  ***InJanuary 1999, the Company repriced certain employee stock options, otherthan those held by executive officers or directors. This resulted inapproximately 3.0 million options being repriced and the four-year vestingperiod starting over. Under FIN 44, repriced options are subject to variableplan accounting, which requires compensation cost or benefit to be recordedeach period based on changes in our stock price until the repriced options areexercised, forfeited or expire. The initial fair value used to measure theongoing stock option compensation charge or benefit was $22.19 based on theclosing price of our common stock on June 30, 2000. Since our stock priceat the beginning and end of fiscal 2005, 2004 and 2003 was below $22.19, nocharge or benefit was recorded during fiscal 2005, 2004 and 2003. As of February 28,2005, approximately 372,900 repriced options were still outstanding, all ofwhich are fully vested. In future periods, we will record additional charges orbenefits related to the repriced stock options still outstanding based on thechange in our common stock price compared to the last reporting period. If ourstock price at the beginning and end of any reporting period is less than$22.19, no charge or benefit will be recorded.

**Other Expense, Net**

Other expense, net,includes interest income from cash equivalents, marketable securities and long-terminvestments, interest expense from borrowings and payments on our capital leaseobligations, foreign currency exchange gains or losses and other gains orlosses. Other expense, net, decreased $6.1 million, or 45.6%, to $7.3million in fiscal 2005 as compared to fiscal 2004 and increased $5.5 million,or 69.4%, to $13.5 million in fiscal 2004 compared to fiscal 2003. The decreasein Other Expense, Net in fiscal 2005 compared to fiscal 2004 relates to adecrease in interest expense of approximately $3.6 million primarily related toa reduction in interest expense on our outstanding convertible notes due to theconversion 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 infiscal 2005 and a decrease of other expense of $0.1 million and a foreigncurrency exchange gain of $0.3 million in fiscal 2005 compared to a $1.6million foreign currency exchange loss in fiscal 2004. The increase in OtherExpense, Net in fiscal 2004 as compared to fiscal 2003 relates to a reduction ininterest income of $2.0 million and $1.6 million foreign currency exchange lossin fiscal 2004, compared to a $2.3 million exchange gain in fiscal 2003.

**Debt Conversion Expense**

During fiscal 2004, the Company exchanged $74.5million of its Notes for 9,725,750 shares of its common stock in privatelynegotiated transactions with note holders. The offer and issuance of the commonstock underlying these transactions were exempt from registration under Section 3(a) (9) ofthe Securities Act of 1933 and were freely traded 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 inthese transactions are considered an inducement for the holders to converttheir Notes, which required the Company to record a non-operating expense equalto the fair value of the additional shares issued to the holders. Accordingly, theCompany recorded a non-cash debt conversion expense of approximately$59.8 million during the year ended February 29, 2004. These transactionsresulted in a $74.5 million reduction of the Notes outstanding and increasedstockholders’ equity by $74.5 million. The 9,725,750 shares of common stockissued in these transactions represented approximately 11.9% of the sharesoutstanding as of February 29, 2004.

**Provision for Income Taxes**

We recorded an income taxprovision of $0.7 million, $1.3 million and $21.4 million in fiscal 2005,fiscal 2004 and fiscal 2003, respectively. In fiscal 2005, fiscal 2004 andfiscal 2003, $0.6 million, $1.0 million 

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and $4.4million of the income tax provision relates to foreign taxes, respectively.During fiscal 2003, management concluded that, based on various factors,including our cumulative losses for fiscal 2001, 2002 and 2003, the size of ourloss for fiscal 2003 and estimates of future profitability, future taxableincome will, more likely than not, be insufficient to cover our net deferredtax assets. Based on the weight of positive and negative evidence regardingrecoverability of our net deferred tax assets (including net operating losscarryforwards), we recorded a valuation allowance for the full amount of ournet deferred tax assets, which resulted in a $20.4 million charge to income taxexpense in fiscal 2003. Management will continue to monitor its estimates offuture profitability and realizability of our net deferred tax assets based onevolving business conditions. In fiscal 2005 and fiscal 2004, we maintained afull valuation allowance against our net deferred tax assets because we haveconcluded that future taxable income will, more likely than not, beinsufficient to recover our net deferred tax assets as of February 28,2005 and February 29, 2004, respectively.

**Loss Per Common Share**

Loss per commonshare is computed in accordance with SFAS No. 128, “*Earnings PerShare*,” which requires dual presentation of basic and dilutedearnings per common share for entities with complex capital structures. Basicloss per common share is based on net loss divided by the weighted-averagenumber of common shares outstanding during the period. Diluted earnings or lossper common share includes, when dilutive, (i) the effect of stock options,warrants and restricted stock granted using the treasury stock method, (ii) theeffect of 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 we have positive net income);

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

·       assumedor actual conversions of our convertible debt into common stock.

**Liquidity and Capital 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 2005,working capital decreased $22.6 million, to $105.5 million, as of February 28,2005, primarily as a result of cash used in operating activities directlyattributed to decreased revenue during fiscal 2005 and investing activities.

Cash, cashequivalents, marketable securities and long-term investments decreased $19.4million during fiscal 2005, to $135.9 million, as of February 28, 2005.The decrease is due to changes in working capital items, including $12.7million in payments for exit and disposal obligations, as well as:

·       $13.9million in expenditures on property, equipment and software, including $9.9million of capitalized software; and

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·       $2.5million in principal payments on long-term debt and capital leases.

Offset by:

·       $2.0million in cash proceeds from the disposal of our right to certain fractionalshares of a jet; and

·       $0.9million in cash proceeds from the exercise of stock options and employee stockpurchase plan purchases.

Although we were a netuser of cash in fiscal 2005, we believe that the combination of cash and cashequivalents, marketable securities and long-term investments, and anticipatedcash flows from operations will be sufficient to fund expected capitalexpenditures, capital lease obligations and working capital needs for the nexttwelve months. Although we have no current plans to do so, we may elect toobtain additional debt or equity financing if we are able to raise it on termsacceptable to us. See “Forward-Looking Statements” and “Factors That May AffectFuture Results.”

***Commitments***

As of February 28,2005, our future fixed commitments and the effect these commitments areexpected to have on our liquidity and cash flows in future periods are asfollows (in thousands):
| ** **                                                       | ** ** | **Fiscal Year Ended February 28 or 29,** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                                               | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | ** Thereafter ** | ** ** | **Total** | ** ** |
| Capital lease  obligations(1)                                    |       | $                                                                      | 2,029      |   | $ | 1,371 |   | $ | 426 |   | $ | — |   | $ | — |   |   | $ | — |   |   | $ | 3,826 |   |
| Operating lease  obligations not in exit and disposal activities |       | 7,563                                                                  |       | 6,376 |   | 5,989 |   | 5,455 |   | 5,546 |   |   | 17,864 |   |   | 48,793 |   |
| Operating lease  obligations in exit and disposal activities     |       | 7,286                                                                  |       | 7,007 |   | 5,610 |   | 4,116 |   | 3,943 |   |   | 17,959 |   |   | 45,921 |   |
| Equipment line of  credit(1)                                     |       | 747                                                                    |       | — |   | — |   | — |   | — |   |   | — |   |   | 747 |   |
| Convertible  subordinated notes(1)                               |       | 8,775                                                                  |       | 8,775 |   | 185,006 |   | — |   | — |   |   | — |   |   | 202,556 |   |
| Total fixed commitments                                          |       | $                                                                      | 26,400     |   | $ | 23,529 |   | $ | 197,031 |   | $ | 9,571 |   | $ | 9,489 |   |   | $ | 35,823 |   |   | $ | 301,843 |   |

 

(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 Issue No. 88-10 “*Costs Associated with Lease Modification or Termination”*(“EITF88-10”) and SFAS 146, we have reduced these lease commitments by estimatedsublease income in determining the total exit and disposal obligations of $19.5million recorded in the accompanying balance sheet as of February 28,2005. Please refer to Note 8 and Note 16 in the Notes to Consolidated FinancialStatements included elsewhere in this Annual Report on Form 10-K.

*ConvertibleSubordinated Notes*

TheCompany had $175.5 million in Notes as of February 28, 2005. The Notesbear interest at 5.0% per annum which is payable semi-annually. The fair marketvalue of the Notes in the hands of the holders was $161.2 million on February 28,2005, 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 

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common stock, we subdivide, combine or reclassify ourcommon stock, we issue rights to our common stockholders to purchase our commonstock at less than market price, we make certain distributions of securities,cash or other property to our common stockholders (other than ordinary cashdividends), or we make certain repurchases of our common stock. Upon a changeof control of the Company, the holders of the Notes would have the right torequire us or our successor to repurchase the Notes at a purchase price equalto 100% of the principal amount, plus accrued and unpaid interest to the dateof repurchase in cash. 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’ noticeif the 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,  2004 through October 31, 2005 |       |       | 102        | %                         |       |
| November 1,  2005 through October 31, 2006 |       |       | 101        | %                         |       |
| November 1, 2006  through maturity              |       |       | 100        | %                         |       |

 

We may choose to purchasea portion of the Notes in the open market from time to time with cash or enterinto alternative transactions to reduce the balance of the Notes, such asexchanging Notes for shares of our common stock, if we are able to do so onterms favorable 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 facility(the “Credit Facility”) with Silicon Valley Bank (“SVB”) for $15.0 millionwhich expired on March 30, 2005. Under the terms of the Credit Facility,we could request cash advances, letters of credit, or both. On April 8,2005, we renewed the Credit Facility (the “New Credit Facility”) with SVB for$15.0 million and a two year term, effective March 29, 2005. Under theterms of the New Credit Facility, we may request cash advances, letters ofcredit, or both. Borrowings under the New Credit Facility accrue interest atthe prime rate plus 0.5%. The New Credit Facility requires us to comply withthe following financial covenants: (i) minimum tangible net worth (definedas stockholders’ equity plus convertible debt less goodwill, capitalizedsoftware costs and other intangible assets) must be at least $90.0 million plus50% of consolidated net income generated cumulatively commencing with the firstquarter of fiscal 2006 and (ii) our 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. We were incompliance with all financial covenants as of February 28, 2005 and therewere no cash draws outstanding. As of February 28, 2005, we had $9.5million in letters of credit outstanding under the Credit Facility to secureour lease obligations for certain office space.

The New Credit Facility requires us to maintain $50.0million in funds with SVB Asset Management and its affiliates. The New CreditFacility also restricts the amount of additional debt we can incur andrestricts the amount of cash that we can use for acquisitions and for therepurchase of convertible debt. Under the terms of the New Credit Facility, weretain the right to terminate the facility at any time upon repayment of anyadvances and the posting of cash collateral for any outstanding letters ofcredit. Under the New Credit Facility, SVB has the right to obtain a lien onall of our assets, other than intellectual property, upon an occurrence ofdefault, unless we terminate the facility as provided above. The New CreditFacility also provides that, upon an event of default, we are prohibited frompaying a cash dividend to our shareholders.

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The New 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 may be borrowed for such capital expenditures through December 31,2005 and accrue interest at a fixed interest rate equal to 7.75% annually.Equipment advances will be repaid monthly over a 36 month-period, beginning inthe month following the advance. The financial covenants for the supplementalequipment advances are the same as the financial covenants for the New CreditFacility.

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. During fiscal2003, we borrowed $2.9 million under the Equipment Line. The principal balanceremaining as of February 28, 2005 was approximately $0.7 million. 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, 2005.

***Cash Flows***

Cash (used in) provided by operations was $(5.5) million,$6.8 million and $(30.7) million in fiscal 2005, 2004 and 2003, respectively.The decline in operating cash flows of $12.3 million in fiscal 2005 compared tofiscal 2004 resulted from a decreasein contribution of accounts receivable due to lower revenue, increased paymentsrelated to exit and disposal activities, increased payments made to vendorsrelated to the timing of receiving vendor invoices, partially offset by adecrease in the payment of interest on our convertible debt as a result of thedecrease in our outstanding debt balance and a lower net loss in fiscal 2005compared to fiscal 2004. The improvement in operating cash flows of $37.5million in fiscal 2004 compared to fiscal 2003 resulted from a decreasedoperating loss in fiscal 2004 compared to fiscal 2003.

Cash (used in) provided by investing activities was$(10.8) million, $(34.0) million and $19.5 million in fiscal 2005, 2004 and2003, 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 $4.1 million in fiscal 2005, an increase of $1.9 millioncompared to fiscal 2004. Total purchases of property and equipment were $2.2million in fiscal 2004, a decrease of $12.7 million compared to fiscal 2003 dueto the completion of the build-out of our new corporate headquarters spaceduring fiscal 2003. In fiscal 2004, approximately $13.0 million was provided bythe elimination of cash restrictions upon the transfer of our letters of creditfrom Bank of America to SVB. Approximately $3.3 million of this $13.0 millionwas recorded as a deposit to secure an international lease. Acquisitions ofbusinesses, net of cash acquired, of $2.0 million and $(32.3) millionduring the fiscal 2004 and 2003 relates to approximately $2.2 million which wasprovided by proceeds held in escrow from prior acquisitions (fiscal 2004) andthe WDS and DFE acquisitions (fiscal 2003), respectively. Sales of marketablesecurities, net of (purchases), were $20.1 million in fiscal 2005, $(26.3)million in fiscal 2004 and $90.8 million in fiscal 2003. Sales of long-terminvestments, net of (purchases), were $(18.9) million in fiscal 2005 and $(9.0)million in fiscal 2004.

Cash (used in) provided by financing activities was$(1.7) million, $5.5 million and $5.1 million in fiscal 2005, 2004 and 2003,respectively. Cash (used in) provided by financing activities consisted of cashproceeds from the exercise of stock options and employee stock plan purchases,cash proceeds from borrowings on our line of credit and cash payments forprincipal amounts on our SVB equipment line of credit and capital leaseobligations.

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In the future, we may pursue acquisitions ofcomplementary businesses and technologies. In addition, we may make strategicinvestments in businesses and enter into joint ventures that complement ourexisting business. Any future acquisition or investment may result in adecrease to our liquidity and working capital to the extent we pay with cash.

We have experienced substantial negative cash flowsduring the three years ended February 28, 2005, primarily due to largedeclines in our revenue and our inability to reduce our expenses to a level ator below the levels of our revenue. Although we recently initiated additionalexit and disposal activities focused on, among other things, further reducingour cost structure, a failure to rationalize expenses, stabilize or growrevenue and achieve positive cash flows will eventually impair our ability tosupport our operations and adversely affect our liquidity.

Our cash position may continue to decline, 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 million of Notes.Additionally, the Notes will mature and become due and payable in November 2007.

Although we expect thatexisting cash, cash equivalents and short and long-term investment balanceswill satisfy our working capital and capital expenditure requirements for atleast the next twelve months, there can be no assurance that in the longer termwe will be successful in obtaining or maintaining an adequate level of cashresources. We may be forced to act more aggressively in the future in the areaof expense reduction in order to conserve cash as we look for alternativeliquidity solutions.

**Off-Balance Sheet Arrangements**

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 oftentimes referred to as a form ofoff-balance sheet financing. Future minimum lease payments under our operatingleases as of February 28, 2005 are detailed previously in “Liquidity andCapital Resources.” We have a two-year unsecured revolving credit facility (the“Credit Facility”) with SVB for $15.0 million which will expire on March 29,2007, unless renewed. Under the terms of the Credit Facility, we may requestcash advances, letters of credit, or both. As of February 28, 2005, $9.5million in letters of credit was outstanding under the Credit Facility tosecure our lease obligations for certain office space.

*Indemnification Obligations.*

We license software to our customers under contractswhich we refer to as Software License Agreements (“SLAs”). Each SLA containsthe relevant terms of the contractual arrangement with the customer, andgenerally includes provisions for indemnifying the customer against damages,judgments, reasonable cost and expenses incurred by the customer for any claimor suit based on infringement of a trademark or copyright as a result of thecustomer’s use of our software. The SLA generally limits our indemnificationobligations in a variety of industry-standard respects. To date, we have nothad to reimburse any of our customers for any losses related to theseindemnification provisions and no material claims are outstanding as of February 28,2005. We account for these indemnity obligations in accordance with Statementof Financial Accounting Standards No. 5, *Accountingfor Contingencies*, and record a liability for these obligations whena loss is probable and reasonably estimable. We have not recorded anyliabilities for indemnification obligations as of February 28, 2005. Forseveral reasons, including the lack of 

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prior indemnificationclaims and the lack of a monetary liability limit for certain infringementcases under the SLAs, we cannot determine the maximum amount of potentialfuture payments, if any, related to such indemnification provisions. There canbe no assurance that potential future payments will not have a material adverseeffect on our operating performance, financial condition and cash flows.

The SLA generally providesthat in the event of a determination that our software, or the customer’s useof our software, infringes any trademark or copyright of any third party, or ifwe reasonably believe that such is the case, we, at our option and expense,have the right to obtain for the customer the right to continue using theinfringing item, replace the infringing item or modify the infringing item sothat it is no longer infringing.

*Warranty Obligations.*

We warrant to ourcustomers in the SLA that our software products will perform in all materialrespects in accordance with our standard published specifications in effect atthe time of delivery of the licensed products. If necessary, we would providefor the estimated cost of product and service warranties based on specificwarranty claims and claim history. However, we have not incurred significantrecurring expense under our product or service warranties. As a result, webelieve the estimated fair value of these warranties is nominal. Accordingly,we have no liabilities recorded for these warranties as of February 28,2005.

**RecentlyIssued Accounting Pronouncements**

SFAS No. 123 (Revision 2004), “*Share-Based Payment*” (“SFAS 123 (R)”) was issued in December 2004and was to be effective for reporting periods beginning after June 15,2005. The new statement requires all share-based payments to employees to berecognized in the financial statements based on their fair values. The Companycurrently accounts for its share-based payments to employees under theintrinsic value method of accounting set forth in Accounting Principles BoardOpinion No. 25, “*Accounting for StockIssues to Employees*.” Additionally, the Company complies with thestock-based employer compensation disclosure requirements of SFAS 148. 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 next fiscalyear, instead of their next reporting period beginning after June 15,2005. The Company plans to adopt the new statement beginning in the firstquarter of fiscal 2007. Management believes the adoption of SFAS 123 (R) willhave a material impact on our financial position and results of operations.Management is currently in the process of estimating the value the impact ofthe adoption of SFAS 123 (R) will have on our financial position andresults of operations.

In December 2004, the FASB issued two FASB StaffPositions (“FSP”) related to the American Jobs Creation Act (“AJCA”). FSP No. 109-1“*Application of SFAS No. 109, Accounting forIncome Taxes, to the Tax Deduction on Qualified Production Activities.*”(“FSP 109-1”) requires companies that qualify for a deduction for domesticproduction activities under the AJCA to account for the deduction as a specialdeduction under SFAS No. 109 and reduce their tax expense in the period orperiods the amounts are deductible on the tax return.

FSP No. 109-2 “*Accountingand Disclosure Guidance for the Foreign Earnings Repatriation Provision withinthe American Jobs Creation Act of 2004*” (“FSP 109-2”) allowscompanies additional time to evaluate whether foreign earnings will berepatriated under the repatriation provisions of the AJCA and requiresspecified disclosures for companies needing the additional time to complete theevaluations. Once a decision is made to repatriate the foreign earnings,companies must reflect the deferred tax liabilities attributable to foreignearnings in the period that the decision is made to remit those earnings.Management does not believe the adoption of FSP 109-1 and FSP 109-2 will have amaterial impact on our financial condition or results of operations.

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In March 2004, theFASB issued Emerging Issues Task Force Issue No. 03-1, *“The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments*” (“EITF 03-1”). EITF 03-1includes new guidance for evaluating and recording impairment loses on debt andequity investments, as well as new disclosure requirements for investments thatare deemed to be temporarily impaired. In September 2004, the FASB issuedStaff Position EITF 03-1-1, which delays the effective date until additionalguidance is issued for the application of the recognition and measurement provisionsof EITF 03-1 to investments in securities that are impaired. Management doesnot believe the adoption of EITF 03*-*1 willhave a material impact on our financial condition or results of operations.

**Factorsthat May Affect Future Results**

In addition to the otherinformation in this Annual Report on Form 10-K, the following factorsshould 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 OURINDEBTEDNESS AND FINANCIAL CONDITION***

**OURINDEBTEDNESS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION.**

In November 2000,we completed a convertible debt offering of $250.0 million in Notes that aredue November 2007. During fiscal 2004, the balance of the Notes wasreduced to $175.5 million as a result of $74.5 million of Notes being exchangedfor shares of our common stock. Our indebtedness could have importantconsequences for investors. For example, it could:

·       increaseour vulnerability to general adverse economic and industry conditions;

·       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

·       placeus at a competitive disadvantage relative to our competitors.

Although we have no presentplans to do so, we may incur substantial additional debt in the future. Whilethe terms of our credit facility impose certain limits on our ability to incuradditional debt, we are permitted to incur additional debt subject tocompliance with the terms and conditions set forth in the credit facility. Theterms of the Notes set forth no limits on our ability to incur additional debt.If a significant amount of new debt is added to our current levels, the relatedrisks described above could intensify.

**WE MAY HAVEINSUFFICIENT CASH FLOW TO MEET OUR DEBT SERVICE OBLIGATIONS WHICH COULDNEGATIVELY AFFECT OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS.**

Wewill be required to generate sufficient cash to pay all amounts due on theNotes and to conduct our business operations. The Notes require interestpayments of $8.8 million annually with $175.5 million of principal due November 2007.As of February 28, 2005, the remaining principal and interest payments dueunder the Notes were $202.6 million. Our cash, cash equivalents, marketablesecurities and long-term investments totaled $135.9 million as of February 28,2005. Assuming our cash, cash equivalents, marketable securities and long-terminvestments remain constant from our February 28, 2005 levels, we 

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will have to generate a minimum of $66.7 million of netcash flow through any combination of normal operations of our Company, raisingof debt and equity capital or asset sales by November 2007 to meet ourremaining principal and interest payments under the Notes. We have incurred netlosses in the past, and we may not be able to cover our anticipated debtservice obligations. This may materially hinder our ability to make principaland interest payments on the Notes. Concerns about our ability to meet our debtservice obligations could negatively affect our ability to attract and retaincustomers. Our ability to meet our future debt service obligations will bedependent upon our future performance, which will be subject to financial,business and other factors affecting our operations, many of which are beyondour control.

**WE MAY CHOOSETO EXCHANGE THE NOTES FOR SHARES OF OUR COMMON STOCK IN THE OPEN MARKET ORPURCHASE A PORTION OF THE NOTES FOR CASH, WHICH COULD MATERIALLY DILUTEEXISTING STOCKHOLDERS OR COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIALCONDITION.**

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, and we may enter into such transactions from time totime if we are able to do so on terms that are favorable to us. If we choose toenter into privately negotiated transactions to exchange some of ouroutstanding Notes for shares of our common stock, it could materially dilutethe ownership percentage of our existing shareholders and result in non-cashcharges to earnings. In addition, to the extent we are able to do so on termsfavorable to us, we may choose to purchase a portion of the Notes outstandingfrom time to time in the open market with cash. 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 VIOLATEFINANCIAL COVENANTS UNDER OUR CREDIT FACILITY WHICH COULD HAVE A MATERIALADVERSE EFFECT ON OUR LIQUIDITY AND FINANCIAL CONDITION.**

We have an unsecuredcredit facility with SVB with borrowing capacity of $15.0 million. Under theterms of the credit facility, which expires on March 29, 2007, we are alsoable to borrow up to an additional $5.0 million for the purchase of equipmentor other capital expenditures through December 31, 2005. As of February 28,2005, approximately $9.5 million of letters of credit were outstandingwith SVB, and approximately $0.7 million was outstanding under a previousequipment financing credit line. The terms of the credit facility require 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) 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. If our future financial performance results in a violation ofthese 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.

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***RISKS RELATED TO OUR BUSINESS***

**ADVERSEECONOMIC AND POLITICAL CONDITIONS CAUSED A DETERIORATION OF DEMAND IN THEMARKETS FOR OUR PRODUCTS AND SERVICES AND HAVE ADVERSELY AFFECTED AND COULDFURTHER 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 caused a deterioration of the markets for our products and services inrecent years. Recent improvements in economic conditions have not yet resultedin improvements in the markets for supply chain management software. Thesefactors resulted in reductions, delays and postponements of customer purchases,which materially and adversely affected our financial performance during thelast four fiscal years. Demand for our solutions designed to optimize pricingand revenue management, a component of our demand management solutions, wasmore severely affected than our other solutions for which there are more maturemarkets. If these adverse conditions continue or worsen, we would likelyexperience further reductions, delays, and postponements of customer purchasesfurther adversely affecting our operating 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 theflow of information or monies.

**WEBELIEVE OUR RECENT FINANCIAL PERFORMANCE WAS ADVERSELY AFFECTED BY DIFFICULTIESIN EXECUTION AND A MARKET FOCUS THAT WAS TOO BROAD FOR EXISTING MARKETCONDITIONS AND A STRONG COMPETITIVE ENVIRONMENT. IF WE CANNOT OVERCOME THESEDIFFICULTIES OUR OPERATING PERFORMANCE AND FINANCIAL CONDITION COULD BEMATERIALLY AND ADVERSELY AFFECTED.**

We incurred significant losses during the past fourfiscal years. We believe our recent financial performance was adverselyaffected by difficulties in execution and a market focus that was too broad forexisting market conditions and a strong competitive environment.

We experienced sequentialdeclines in software and total revenue during our second and third quarters offiscal 2002. Total annual revenue decreased in each of fiscal 2003 and fiscal2004, as compared to prior fiscal years. For the fiscal year ended 2005, therewere declines in software and total revenue in comparison to the fiscal yearended 2004. The losses incurred during these periods were $115.2 million infiscal 2002, $212.2 million in fiscal 2003, $103.8 million in fiscal 2004 and$55.3 million in fiscal 2005. If we do not successfully align our coststructure with our revenue without hindering our ability to grow revenue, or ifwe do not successfully overcome the recent internal factors that have hinderedour performance, our operating performance and financial condition could beharmed, and we could continue to incur significant losses.

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**WERECORDED A GOODWILL IMPAIRMENT CHARGE OF $96.3 MILLION IN OUR FOURTH QUARTER OFFISCAL 2003 AS A RESULT OF SIGNIFICANT DECLINES IN OUR STOCK PRICE DURINGFISCAL 2003. IF OUR STOCK PRICE DECREASES TO LEVELS SUCH THAT THE IMPLIED FAIRVALUE OF OUR COMPANY IS SIGNIFICANTLY LESS THAN STOCKHOLDERS’ EQUITY FOR A SUSTAINEDPERIOD OF TIME, WE MAY BE REQUIRED TO RECORD ADDITIONAL SIGNIFICANTNON-CASH CHARGES 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, coincidingwith our fiscal year end, or on an interim basis if circumstances change thatwould more likely than not reduce our implied fair value below our carryingvalue. During fiscal 2003, we experienced adverse changes in our stock priceresulting from a decline in our financial performance caused by adversebusiness conditions that affected the technology industry, especiallyenterprise application software companies. As a result of these tests, wedetermined that based upon the implied fair value (which includes factors suchas, but not limited to, our market capitalization, control premium and recentstock price volatility) of our Company as of February 28, 2003, there wasan impairment of goodwill. As a result of the impairment of goodwill as of February 28,2003, we recorded a non-cash goodwill impairment charge of $96.3 million toreduce goodwill associated with our acquisitions to their estimated fair valueas of that date. We performed our fiscal 2005 goodwill impairment review on February 28,2005, our annual date for goodwill impairment review, and determined that theimplied fair value of the Company exceeded its carrying value. Accordingly, nogoodwill impairment charge was recorded for fiscal 2005.

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 record anadditional impairment loss related to goodwill below its carrying amount.

**OURFUTURE RESULTS WILL BE ADVERSELY AFFECTED BY SEVERAL TYPES OF SIGNIFICANTNON-CASH CHARGES WHICH COULD IMPAIR OUR ABILITY TO ACHIEVE OR MAINTAINPROFITABILITY IN THE FUTURE.**

We will incur significantnon-cash charges in the future related to the amortization of acquiredtechnology and intangible assets from past acquisitions. During fiscal 2002, weannounced that we were required to write-off our investment in Converge, Inc.,which resulted in a pre-tax charge of $10.2 million. During fiscal 2003, werecorded a valuation allowance for the full amount of our net deferred taxassets which resulted in a $20.4 million non-cash charge to income tax expense.Also during fiscal 2003, we recorded a goodwill impairment charge of $96.3million to reduce goodwill associated with our acquisitions to their estimatedfair value as of that date. During fiscal 2002, 2003, 2004 and 2005, werecorded net write*-*downs of long-lived assetsassociated with exit and disposal activities of approximately $0.1 million,$2.5 million, $4.2 million and $2.7 million, respectively, consisting of the abandonmentor disposal of certain furniture, fixtures, computer equipment, leaseholdimprovements related to vacating office space and other long-lived assets.During fiscal 2004, we exchanged $74.5 million of the Notes for 9.7 millionshares of our common stock in privately negotiated transactions, which resultedin a non-cash debt conversion expense of $59.8 million. We may also incurnon-cash charges in future periods related to impairments of long-lived assetsand future exchanges of Notes for shares of our common stock, if any. Toachieve profitability, we must grow our revenue sufficiently to cover thesecharges. Our failure to achieve profitability could cause our stock price todecline.

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**IFOUR EXIT AND DISPOSAL PLANS AND OUR COST CONTAINMENT 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.**

In response to deteriorations in our markets, duringfiscal 2002, 2003, 2004 and 2005, we implemented exit and disposal plans andcost containment and cost reduction measures and are continuing to implementcost containment and cost reduction measures to align our cost structure withour revenue. These actions have included, among other things, reductions inworkforce and consolidations of our operational facilities. Headcount at theend of fiscal 2005 was 695 compared to 897 at the end of fiscal 2004. We alsoabandoned additional idle space in our Rockville, Maryland; Tokyo, Japan; SanCarlos and Calabasas, California and Bracknell, United Kingdom facilities andclosed two offices in Europe and one in the Philippines during fiscal 2005.

As part of the consolidation of our facilities, wenegotiate lease termination agreements or subleases for certain of ourfacilities. We cannot predict when or if we will be successful in negotiatinglease termination agreements or subleases on terms acceptable to us. Should webe unsuccessful in such negotiations or if the negotiated terms are lessfavorable than currently anticipated, we may be required to materially increaseour exit and disposal related expenses in future periods. Further, if weconsolidate additional facilities in the future, we may incur additional exitand disposal related expenses, which could have a material adverse effect onour business, financial condition or results of operations.

We also cannot assure you that we will not reduce orotherwise adjust our workforce again in the future or that related transitionissues associated with such a reduction will not occur again.

In fiscal 2002, 2003, 2004and 2005, we recorded exit and disposal charges of $6.6 million, $19.2 million,$18.6 million and $17.3 million, respectively. If we fail to achieve thedesired results of our exit and disposal plans and our cost containment andcost reduction measures, we may suffer material harm to our operatingperformance and financial condition.

**WEREDUCED OUR WORKFORCE AS PART OF OUR COST CONTAINMENT AND COST REDUCTIONINITIATIVES. IF WE FAIL TO ATTRACT AND RETAIN A QUALIFIED WORKFORCE, OUROPERATING PERFORMANCE AND FINANCIAL CONDITION COULD BE MATERIALLY ADVERSELYAFFECTED. FURTHER, OUR COST CONTAINMENT AND COST REDUCTION INITIATIVES MAY HINDEROR IMPAIR OUR ABILITY TO TAKE ADVANTAGE OF IMPROVEMENTS IN MARKET CONDITIONS.**

We believe that our success depends on our ability tomotivate and retain highly skilled technical, managerial, sales, marketing andservices personnel. Competition for skilled personnel can be intense, and thereis no assurance that we will be successful in attracting, motivating andretaining the personnel we need to improve our financial performance and grow.

As part of our cost containment and cost reductioninitiatives, we have recently reduced our workforce. During the fiscal yearended February 28, 2005, voluntary employee attrition increased comparedto recent periods. In addition, the recent trading levels of our stock havedecreased the value of our stock options granted to employees under our stockoption plans. We consider stock options to be critically important inattracting and retaining employees.

As a result of thesefactors, our employees, whether or not affected by our reduction in workforce,may seek employment elsewhere. Continuity of personnel is a very importantfactor in our success. Moreover, the cost of hiring, training and retainingskilled employees is high, and we may have difficulty attracting such personnelas a result of a perceived risk of future workforce reductions. Our costcontainment and cost reduction initiatives may yield further unintendedconsequences, such as reduced employee morale, decreased productivity anddisclosures of confidential information about us by 

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employeesthat seek employment with others in violation of their confidentialityagreements with us. Failure to attract, motivate and retain highly skilledpersonnel could materially and adversely affect our business. Further, our costcontainment and cost reduction initiatives may hinder or impair our ability totake advantage of improvements in market conditions.

**WEHAVE EXPERIENCED SIGNIFICANT CHANGES IN SENIOR MANAGEMENT RECENTLY. THE SUCCESSAND GROWTH OF OUR BUSINESS MAY SUFFER IF WE EXPERIENCE TOO MANY CHANGES INKEY PERSONNEL IN TOO SHORT A PERIOD OF TIME.**

We have recently undergonesignificant changes in our senior management. As a result, our seniormanagement team has only recently begun to work together. In July 2004,Gregory J. Owens resigned as our Chief Executive Officer and was replaced byJoseph L. Cowan as Chief Executive Officer. In April 2005, Mr. Owensresigned as Chairman of the Board. In August of 2004, our President,Jeremy P. Coote resigned and the position of President was eliminated. Inaddition, two other senior management personnel left the Company during ourthird quarter of fiscal 2005 and one, whose position was eliminated, left theCompany at the end of our fourth quarter of fiscal 2005. In September 2004,Jeffrey L. Kissling was hired as our Chief Technology Officer, and two othersenior management personnel were promoted to new positions. In March 2005,we reorganized our sales and marketing organization under four primary businessunits which resulted in further management changes within the organizationalstructure. Our success depends significantly on the continued service of ourexecutive officers and their ability to work together effectively as amanagement team. We do not have fixed-term employment agreements with anyexecutive officers, other than with Joseph L. Cowan, who has a two-year employmentagreement with our Company that commenced in July, 2004, and we do not maintainkey person life insurance on our executive officers. The loss of services ofany of our senior management for any reason or their inability to manage ourCompany effectively could have a material adverse effect on our operatingperformance and financial condition.

**WEHAVE RESTRUCTURED, AND MAY IN THE FUTURE RESTRUCTURE, OUR SALES FORCE,WHICH CAN BE DISRUPTIVE. WE HAVE ALSO REDUCED OUR SALES FORCE AS PART OFOUR COST CONTAINMENT AND COST REDUCTION INITIATIVES. OUR FAILURE TO FIELD ANEFFECTIVE SALES ORGANIZATION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUROPERATING 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 March 2005. In fiscal 2003, 2004 and 2005, we reduced oursales force as a result of the deterioration in our markets and restructuring ofour operations. Decreasing software revenue has resulted in reducedcompensation earned by members of our sales force; it also has resulted, andmay continue to result, in voluntary attrition of our sales force over time. Inorder to stabilize and then grow our revenue, we will have to field aneffective sales force. Changes in the structure of the sales force and salesforce management have generally resulted in a temporary lack of focus andreduced productivity. We cannot assure you that we will be able to field a moreproductive sales force or successfully attract and retain qualified salespeople at levels sufficient to support growth. We cannot assure you that wewill not continue to restructure our sales force or that the transition issuesassociated with restructuring the sales force will not recur. Suchrestructuring or associated transition issues can be disruptive and adverselyimpact our operating performance and financial condition.

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**SALESCYCLES FOR OUR PRODUCTS AND SERVICES CAN BE LONG AND UNPREDICTABLE. VARIATIONSIN THE TIME IT TAKES US TO LICENSE OUR SOFTWARE MAY CAUSE FLUCTUATIONS INOUR QUARTERLY OPERATING RESULTS.**

Each client’s decision to license and implement ourproducts and services is discretionary, involves a significant commitment ofresources and is subject to the client’s budget cycles. The time it takes tolicense our software to prospective clients varies substantially, buthistorically has ranged between three and twelve months. Prior sales andimplementation cycles should not be relied upon as any indication of futurecycles. As a result of current economic conditions and increased competition,our sales cycle has recently become longer than historical sales cycles.

Variations in the length of our sales cycles willcause our revenue to fluctuate widely from period to period. We base ouroperating expenses on anticipated revenue trends. Because a high percentage ofour expenses are relatively fixed in the short-term and we typically recognizea substantial portion of our software revenue in the last month of a quarter,any delay in the licensing of our products could cause significant variationsin our revenue from quarter to quarter. These delays have occurred on a numberof occasions in the past and have materially and adversely affected ourfinancial performance, most recently in the fiscal year ended February 28,2005.

The length of oursales cycle depends on a number of factors, many of which are beyond ourcontrol, 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;

·       customerfinancial constraints and credit-worthiness;

·       theevaluation and approval processes employed by the clients and prospects, whichhas become more complex and lengthy;

·       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, andwe believe that period-to-period comparisons of our results of operations arenot necessarily meaningful. You should not rely on these comparisons asindications of future performance. Our future quarterly operating results fromtime to time may not meet the expectations of market analysts or investors,which would likely have an adverse effect on the price of our common stock.

**ANINCREASE IN SALES OF SOFTWARE PRODUCTS THAT REQUIRE CUSTOMIZATION WOULD RESULTIN REVENUE BEING RECOGNIZED OVER THE TERM OF THE CONTRACT FOR THOSE PRODUCTSAND COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING PERFORMANCE ANDFINANCIAL 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 basis 

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over thecourse of the delivery of the solution rather than upon delivery and contractexecution. The period between initial contact and the completion of theimplementation 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 software licensecontracts requiring contract accounting would have a material adverse effect onour operating performance and financial condition and cause our operatingresults to vary significantly from quarter to quarter.

**FAILURETO MAINTAIN OUR MARGINS AND SERVICE RATES FOR IMPLEMENTATION SERVICES COULDHAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING PERFORMANCE AND FINANCIALCONDITION.**

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 and market conditions.

**CHANGESIN THE SIZE OR NUMBER OF OUR SOFTWARE TRANSACTIONS MAY CAUSE MATERIALFLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS.**

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 more subject to delays) have had and couldhave a proportionately greater effect on our revenue and financial performancefor a particular period. We have experienced declines in the number of softwaretransactions of $1.0 million or greater since fiscal 2002. Specifically, werecorded 38 such software transactions in fiscal 2002, 19 such softwaretransactions in fiscal 2003, 18 such software transactions in fiscal 2004 and 7such software transactions in fiscal, 2005. As a result of these changes in thesize and number of our software transactions, our quarterly revenue andfinancial performance have fluctuated significantly and may fluctuatesignificantly in the future.

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**WEEXPERIENCED DECLINES IN SOFTWARE REVENUE IN FISCAL 2003, FISCAL 2004 AND FISCAL2005. LOWER SOFTWARE LICENSE REVENUE HAS RESULTED AND MAY CONTINUE TORESULT 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. During fiscal 2003,2004 and 2005, we experienced declines in services revenue primarily as aresult of declining software revenue in prior periods. Additional decreases ofsoftware license revenue or slowdowns in licensing may have a material adverseeffect on our services and support revenue in future periods.

**FURTHERDECLINES IN SOFTWARE REVENUE, A REDUCTION IN THE RENEWAL RATE OF ANNUAL SUPPORTCONTRACTS, OR BOTH, COULD RESULT IN A MATERIAL ADVERSE EFFECT ON OUR OPERATINGPERFORMANCE AND FINANCIAL CONDITION.**

In our third quarter offiscal 2003, second and fourth quarters of fiscal 2004 and the first threequarters of fiscal 2005, we experienced sequential quarterly declines insupport revenue resulting from both the recent decline in software revenue andclients not renewing or partially renewing existing support contracts. Oursupport revenue includes post-contract support and the rights to unspecifiedsoftware upgrades and enhancements. Support contracts are generally renewableannually at the option of our customers. We have experienced high rates ofrenewed annual support contracts from our customers. If our software revenuedoes not grow and if our customers fail to renew or to fully renew theirsupport contracts at historical rates, our support revenue could materiallydecline.

**OURBUSINESS IS SUBJECT TO CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLICDISCLOSURE THAT HAS INCREASED BOTH OUR COSTS AND 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 NASDAQ, have recently issued new requirements andregulations and continue to develop additional regulations and requirements inresponse to recent laws enacted by Congress, most notably the Sarbanes-OxleyAct of 2002. Our efforts to comply with these new regulations have resulted in,and are likely to continue to result in, increased general and administrativeexpenses and a diversion of management time and attention from revenue-generatingactivities 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.

**DURING OURRECENT AUDIT, WE RECOGNIZED ONE MATERIAL WEAKNESS REGARDING THE ACCOUNTINGTREATMENT FOR ONE LARGE TRANSACTION INVOLVING COMPLEX JUDGMENT. ALTHOUGH THEACCOUNTING ERROR WAS DETECTED AND CORRECTED PRIOR TO THE RELEASE OF OURFINANCIAL RESULTS FOR THE PERIOD, IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OFINTERNAL CONTROL OVER FINANCIAL REPORTING, WE MAY NOT BE ABLE TO ACCURATELYREPORT OUR FINANCIAL RESULTS OR PREVENT FRAUD. AS A RESULT, OUR BUSINESS,RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE**

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**HARMEDAND INVESTORS COULD LOSE CONFIDENCE IN OUR FINANCIAL REPORTING, WHICH COULDCAUSE OUR 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 that needimprovement. For example, during the recent audit of our system of internalcontrol over financial reporting, we recognized one material weakness regardingthe accounting treatment for one large transaction involving complex judgmentas to whether services in the transaction were essential to the functionalityof the software sold. The accounting error was detected and corrected prior tothe release of our financial results for the period. Any system of controls,however well designed and operated, is based in part on certain assumptions andcan provide only reasonable, and not absolute, assurances that the objectivesof the system are met. Any failure of our system of internal control overfinancial reporting could have a material adverse effect on our business,results of operations and financial condition. Inadequate internal controlsover financial reporting could also cause investors to lose confidence in ourreported financial information, which could cause our stock price to decline.

**OURMARKETS ARE VERY COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETEEFFECTIVELY.**

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. We expect this trend towardsconsolidation to continue. This industry consolidation may result in strongercompetitors that are better able to compete as sole-source vendors forcustomers. If there is significant consolidation among enterprise applicationsoftware companies, we may be at a competitive disadvantage.

Some competitors are offering software that competeswith ours at little or no charge as components of bundled products or on astand-alone basis. Smaller niche software companies have been and will likelycontinue to develop unique offerings that compete effectively with some of oursolutions. Further, our current or prospective clients and partners may becomecompetitors in the future.

Increased competition hasresulted and in the future could result in price reductions, lower grossmargins, longer sales cycles and the loss of market share. Each of thesedevelopments could have a material adverse effect on our operating performanceand financial condition.

**MANYOF OUR CURRENT AND POTENTIAL COMPETITORS HAVE SIGNIFICANTLY GREATER RESOURCESTHAN WE DO, AND THEREFORE, WE MAY BE AT A DISADVANTAGE IN COMPETING WITHTHEM.**

We directly compete withother enterprise application software vendors including: Aspen Technology,DemandTec, Global Logistics Technologies, i2 Technologies, JDA Software,Logility, Manhattan Associates, Profit Logic, PROS Revenue Management, Rapt,Retek (acquired by Oracle), Sabre, SAP and Teradata (a division of NCR).Certain enterprise resource planning (“ERP”) vendors, in addition to SAP, allof which are substantially larger than Manugistics, have acquired or developeddemand-driven and supply chain management software companies, products, orfunctionality or have announced intentions to develop and sell demand andsupply chain management solutions. Such vendors include Oracle, (which recentlyacquired PeopleSoft and Retek) and SSA Global Technologies. Some of our currentand potential competitors, particularly the ERP vendors, have significantlygreater financial, marketing, technical and other competitive resources than wedo, as well as greater name recognition and larger installed bases of clients.Three of our competitors, Oracle and PeopleSoft and Retek, have combined andother of our 

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currentand potential competitors may combine pursuant to recently announced mergers ortender offers and subsequently utilize enhanced financial and human resourcesto develop and sell more competitive demand-driven supply chain products. Inaddition, many of our competitors have well-established relationships with ourcurrent and potential clients and have extensive knowledge of our industry. Asa result, they may be able to adapt more quickly to new or emergingtechnologies and changes in client requirements or to devote greater resourcesto the development, promotion and sale of their products than we can. Any ofthese factors could materially impair our ability to compete and have amaterial adverse effect on our operating performance and financial condition.

**IFTHE DEVELOPMENT OF OUR PRODUCTS AND SERVICES FAILS TO KEEP PACE WITH OURINDUSTRY’S RAPIDLY EVOLVING TECHNOLOGY, OUR FUTURE RESULTS MAY BEMATERIALLY AND ADVERSELY AFFECTED.**

The markets for our solutions are subject to rapidtechnological change, changing client needs, frequent new product introductionsand evolving industry standards. If we fail to keep pace with these changes,our products and services may be rendered less competitive or obsolete. Ourproduct development and testing efforts have required, and are expected tocontinue to require, substantial investments. We may not possess sufficientresources in the future to continue to make further necessary investments intechnology.

If we are unable, fortechnological or other reasons, to develop and introduce new and enhancedsoftware in a timely manner, we may lose existing clients and fail to attractnew clients, which may have a material adverse effect on our operatingperformance and financial condition.

**OURCONTINUED SHIFT OF OUR PRODUCT DEVELOPMENT OPERATIONS TO INDIA POSESSIGNIFICANT RISKS.**

We recently opened our ownproduct development facility in India, and plan to move a substantial portionof our product development to India. In addition, we maintain relationshipswith third parties in India to which we outsource a significant portion of ourproduct development effort. We are increasing the proportion of our productdevelopment work being performed at our facility in India in order to increaseproduct 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. We also have a heightened risk exposure to changes in the economic,security and political conditions of India. Economic and political instability,military actions and other unforeseen occurrences in India could impair 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.

**DEFECTSIN OUR SOFTWARE, THE IMPROPER SCOPING OF A PROJECT, OR PROBLEMS IN THEIMPLEMENTATION OF OUR SOFTWARE COULD LEAD TO CLAIMS FOR DAMAGES BY OUR CLIENTS,LOSS OF REVENUE OR DELAYS IN THE MARKET ACCEPTANCE OF 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 properlyscope the initial project or detect errors in our software prior toimplementation. We may not discover the existence of these problems until ourcustomers install and use a given product or until the volume of services thata product provides increases. In addition, when our software is installed, thetechnical environment into which it is installed is frequently complex andtypically contains a wide variety of systems and third-party software, withwhich our software must be integrated. This can make the process ofimplementation itself difficult 

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andlengthy. As a result of these factors, some customers may have difficultyimplementing our products successfully within anticipated timeframes orotherwise achieving the expected benefits. These problems may result in claimsfor 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.

**WEUTILIZE THIRD-PARTY SOFTWARE THAT WE INCORPORATE INTO AND INCLUDE WITH OURPRODUCTS AND SOLUTIONS, AND IMPAIRED RELATIONS WITH THESE THIRD PARTIES,DEFECTS IN THIRD-PARTY SOFTWARE OR THEIR INABILITY OR FAILURE TO ENHANCE THEIRSOFTWARE OVER TIME COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATINGPERFORMANCE AND FINANCIAL CONDITION.**

We incorporate and includethird-party software into and with our products and solutions. We are likely toincorporate and include additional third-party software into and with ourproducts and solutions as we expand our product offerings. 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.

**WEUTILIZE THIRD PARTIES TO INTEGRATE OUR SOFTWARE WITH OTHER SOFTWARE PRODUCTSAND PLATFORMS. IF ANY OF THESE THIRD PARTIES SHOULD CEASE TO PROVIDEINTEGRATION SERVICES TO US, OUR OPERATING PERFORMANCE AND FINANCIAL CONDITIONCOULD 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.

**OUREFFORTS TO DEVELOP AND SUSTAIN RELATIONSHIPS WITH VENDORS SUCH AS SOFTWARECOMPANIES, CONSULTING FIRMS, RESELLERS AND OTHERS TO MARKET AND IMPLEMENT OURSOFTWARE PRODUCTS MAY FAIL, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ONOUR 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 couldadversely affect our operating margins. We may be unable to developrelationships with organizations that will be able to market our productseffectively. Our arrangements with these organizations are not exclusive and,in many cases, may be terminated by either party without cause. Many of theorganizations with which we are developing or maintaining marketingrelationships have commercial relationships with our competitors. There can beno assurance that any organization will continue its involvement with us andour 

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products.The loss of relationships with important organizations could materially and adverselyaffect our operating performance and financial condition.

**GOVERNMENTCONTRACTS ARE SUBJECT TO COST AND OTHER AUDITS BY THE GOVERNMENT ANDTERMINATIONS FOR THE CONVENIENCE OF THE GOVERNMENT. GOVERNMENT PROCUREMENT ISHIGHLY REGULATED, AND CONTRACTORS ARE SUBJECT TO THE RISKS OF PROTESTS, CLAIMS,PENALTIES, FINES, DEFAULT TERMINATION, AND RESCISSION, AMONG OTHER ACTIONS. THEADVERSE RESULT OF A GOVERNMENT AUDIT OR ACTION AGAINST ANY OF OUR CONTRACTSWITH THE GOVERNMENT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATINGPERFORMANCE AND FINANCIAL CONDITION.**

***Government contracts face special risks due topotential 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.

***Government contracts are subject to unique risks of earlytermination.***

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.

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***Competitive bidding, a cornerstone to governmentcontracting, 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 other contractors poses risks, includingrisks to our reputation.***

As a prime contractor, wemay rely upon other companies as subcontractors to perform work we areobligated to deliver to our clients. A failure by one or more of oursubcontractors to perform the agreed-upon services on a timely andsatisfactory basis may compromise our ability to perform our obligations as aprime contractor. In some cases, we have limited involvement in the workperformed by the subcontractor and may have exposure as a result of problemscaused by the subcontractor. In extreme cases, performance deficiencies on thepart of our subcontractors could result in a government client terminating ourcontract for default. A default termination could expose us to liability forthe agency’s costs of re-procurement, damage our reputation, and hurt ourability to compete for future contracts. Additionally, we may have disputeswith our subcontractors that could impair our ability to execute our contractsas required.

***Despite careful precautions that we take, we areexposed to risk due to potential employee misconduct in the highly regulatedgovernment marketplace.***

We are exposed to the riskthat employee fraud or other misconduct could occur. Misconduct by employeescould include intentional failures to comply with federal government procurementregulations, engaging in unauthorized activities, or falsifying time records.Employee misconduct could also involve the improper use of our clients’sensitive or classified information, which could result in regulatory sanctionsagainst us and serious harm to our reputation. It is not always possible todeter employee misconduct, and the precautions we take to prevent and detectthis activity may be ineffective in controlling unknown or unmanaged risks orlosses, which could harm our business.

***The government marketplace has a unique risk: thatappropriations to fund contracts will not be made, or will be diverted ordelayed.***

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 contracts are subject to unique terms andrisks, not commonly found in the commercial marketplace.***

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;

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·       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

·       suspendor debar contractors.

***Our federal contracts 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 those benchmark customers drop, so too mustour prices on our GSA Schedules contract. Although we have undertaken extensiveefforts to comply with the Price Reductions clause, it is possible that we,through, for example, an unreported discount offered to a “benchmark” customer,might fail to honor the obligations of the Price Reductions clause. If thatoccurred, we could, under certain circumstances, be subject to an audit, an actionin fraud, or other adverse government actions or penalties.

**THELIMITED ABILITY OF LEGAL PROTECTIONS TO SAFEGUARD OUR INTELLECTUAL PROPERTYRIGHTS COULD IMPAIR OUR ABILITY TO COMPETE EFFECTIVELY.**

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 useinformation that we regard as proprietary. The shift of an increasing amount ofour product development work to India may increase this risk. Policing unauthorizeduse of our 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. Furthermore, our competitorsmay independently develop technology similar to ours.

**OURPRODUCTS MAY INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS,WHICH MAY CAUSE US TO INCUR UNEXPECTED COSTS OR PREVENT US FROM SELLINGOUR PRODUCTS.**

The number of intellectualproperty claims in our industry may increase as the number of competingproducts grows and the functionality of products in different industry segmentsoverlaps. In recent years, there has been a tendency by software companies tofile substantially increasing numbers of patent applications, including thosefor business methods and processes. We have no way of knowing what patent applicationsthird parties have filed until the application is published or until a patentis issued. Patent applications are often published within 18 months of filing,but it can take as long as three years or more for a patent to be granted afteran application has been filed. Although we are not aware that any of ourproducts infringe upon the proprietary rights of third parties, there can be noassurance that third parties 

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will notclaim infringement by us with respect to current or future products. Any of theseclaims, with or without merit, could be time-consuming to address, result incostly litigation, cause product shipment delays or require us to enter intoroyalty or license agreements. These royalty or license agreements might not beavailable on terms acceptable to us or at all, which could materially andadversely affect our financial performance.

**OURINTERNATIONAL OPERATIONS POSE RISKS FOR OUR BUSINESS AND FINANCIAL CONDITION.**

We currentlyconduct operations in Australia, Belgium, Brazil, Canada, France, Hong Kong,Japan, Malaysia, Mexico, Taiwan, The People’s Republic of China, Singapore, andthe United Kingdom. We recently opened a product development center in India,where we also have relationships with third parties to outsource a portion ofour product development and implementation services effort. We intend to expandour international operations and to increase the proportion of our revenue fromoutside the U.S. These operations require significant management attention andfinancial resources and additionally subject us to risks inherent in doingbusiness 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;

·       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 be unpopularin 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.

**CHANGESIN THE VALUE OF THE U.S. DOLLAR, IN RELATION TO THE CURRENCIES OF FOREIGNCOUNTRIES WHERE WE TRANSACT BUSINESS, COULD HARM OUR OPERATING PERFORMANCE ANDFINANCIAL CONDITION.**

For the fiscal year ended February 28,2005, 33.8% of our total revenue was derived from outside the U.S. Our primaryinternational operations are located throughout Europe and Asia-Pacific. Wealso have operations in Brazil, Canada and Mexico. Our international revenueand expenses are denominated in foreign currencies, typically the localcurrency of the selling business unit. Therefore, changes in the value of theU.S. Dollar as compared to these other currencies may adversely affect ouroperating results. We generally do not implement hedging programs to mitigateour exposure to currency fluctuations affecting international accountsreceivable, cash balances and intercompany accounts, and we do not hedge our 

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exposureto currency fluctuations affecting future international revenue and expensesand other commitments. For the foregoing reasons, currency exchange ratefluctuations have caused, and likely will continue to cause, variability in ourforeign currency denominated revenue streams and costs and our cost to settleforeign currency denominated liabilities, which could have a material adverseeffect on our operating performance and financial condition.

**WE MAY BESUBJECT TO FUTURE LIABILITY CLAIMS, AND THE REPUTATIONS OF OUR COMPANY ANDPRODUCTS MAY SUFFER.**

Many of ourimplementations involve projects that are critical to the business operationsof our clients and provide benefits, some of 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 their clients’expectations or cause failures in their clients’ systems, our reputation andthat of our products could be materially and adversely affected even if oursoftware products perform in accordance with their functional specifications.

**WE MAY CHOOSETO CHANGE OUR BUSINESS PRACTICES OR OUR EARNINGS MAY BE AFFECTED AS ARESULT OF CHANGES IN THE REQUIREMENTS RELATING TO THE ACCOUNTING TREATMENT OFEMPLOYEE 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.

We currently account for stock options in accordancewith Accounting Principles Board Opinion No. 25 (“APB 25”), “*Accounting for Stock Issued to Employees”* and, accordingly,we only record compensation expense related to stock options if the currentmarket price of the underlying stock exceeds the exercise price of the stockoption on the date of grant. On December 16, 2004, the FASB published FASBStatement No. 123 (R)*“Share-Based Payment”*(“FAS 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 FAS 123 (R). The new rule allows companies toimplement FAS 123(R) at the beginning of their next fiscal year instead oftheir next reporting period beginning after June 15, 2005. We will berequired to implement FAS 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 FAS 123(R). As aresult, we could decide to reduce the number of stock options granted toemployees or to grant options to fewer employees. This could affect our abilityto retain existing employees or attract qualified candidates, and increase thecash compensation we pay to employees. Such a change could have a materialeffect on our operating performance.

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 shareholders at the Company’s 2003 Annual Meeting ofShareholders on July 29, 2003. On November 3, 2004, the Companyissued 1.3 million shares of restricted stock to certain key employees. Therestricted stock awards granted to key employees have a vesting schedulepursuant to which the stock award vests in three equal annual increments overthree years from the date of grant, with the first increment vesting on November 3,2005. The total value of the 2004 restricted stock awards 

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granted of approximately$2.6 million was computed using the closing stock price on the date of grantand a 22% estimated forfeiture rate and was recorded as a component of deferredcompensation. The related compensation expense will be amortized over thevesting period. During fiscal 2005, 333,000 shares were issued to the new ChiefExecutive Officer, resulting in a combined increase in deferred compensation instockholders’ equity of $0.9 million. All restricted shares issued to the ChiefExecutive Officer fully vest on January 1, 2006.

On October 17, 2003,the Company issued 205,000 shares of restricted stock to certain key employees.The restricted stock awards granted to key employees have a vesting schedulepursuant to which the stock award vests in four equal increments over fouryears from the date of grant, with the first increment vesting on April 17,2005. The total value of the 2003 restricted stock awards granted ofapproximately $1.3 million was computed using the closing stock price on thedate of grant and was recorded as a component of deferred compensation. Therelated compensation expense will be recognized and amortized over the vestingperiod. The Company recorded $1.2 million in compensation expense related torestricted shares outstanding during fiscal 2005.

**IT MAY BECOMEINCREASINGLY EXPENSIVE TO OBTAIN AND 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***

**OURSTOCK PRICE HAS BEEN AND IS LIKELY TO CONTINUE TO BE VOLATILE. SIGNIFICANTDECLINES IN OUR STOCK PRICE MAY RESULT FOR VARIOUS REASONS, INCLUDING POORFINANCIAL PERFORMANCE.**

The trading priceof our common stock has been and is likely to be highly volatile. Our stockprice has been and could continue to be subject to wide fluctuations inresponse to a variety 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;

·       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;

·       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;

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·       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 stockmarkets in general, The NASDAQ National Market and the equity markets forsoftware companies in particular, have experienced extraordinary price andvolume volatility in recent years. Such volatility has adversely affected thestock prices for many companies irrespective of, or disproportionately to, theoperating performance of these companies. These broad market and industryfactors may materially and adversely further affect the market price of ourcommon stock, regardless of our actual operating performance.

**OURCHARTER, BYLAWS AND SHAREHOLDER RIGHTS PLAN, DELAWARE LAW AND THE INDENTURE FORTHE NOTES CONTAIN PROVISIONS THAT COULD DISCOURAGE A TAKEOVER EVEN IFBENEFICIAL TO STOCKHOLDERS. IN ADDITION, CERTAIN OF OUR CURRENT OFFICERS,DIRECTORS, AN ENTITY AFFILIATED WITH A DIRECTOR AND ONE OF OUR FOUNDERSTOGETHER MAY BE ABLE TO EXERCISE SUBSTANTIAL INFLUENCE OVER MATTERSREQUIRING STOCKHOLDER 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 tostockholders. For example, our bylaws provide for a classified board ofdirectors and allow our board of directors to expand its size and fill anyvacancies without stockholder 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 stockholders. 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 stockholders.

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 a premium over their shares.

In addition, our currentofficers, directors, Warburg Pincus Private Equity VIII, L.P. (“WP VIII”) anentity affiliated with William H. Janeway, one of our directors, and one of ourfounders, William M. Gibson, together beneficially owned approximately 23.8% ofthe outstanding shares of our common stock at April 30, 2005. While thesestockholders do not hold a majority of our outstanding common stock, if theywere to vote together, they may be able to exercise significant influence overmatters requiring stockholder approval, including the election of directors andthe approval of mergers, consolidations and sales of our assets. This factormay prevent or discourage tender offers for our common stock. In connectionwith the appointment of Mr. Janeway to the Board in October 2002, theCompany entered into a standstill agreement with WP VIII under which WP VIIIagreed that it and certain of its affiliates would not acquire more than 19.9%of the common stock of our Company without our consent for a period of threeyears or until the earlier occurrence of certain specified events.

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**FUTURESALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TODECLINE**

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, WP VIII, an entity affiliated with William H.Janeway, one of our directors, and one of our founders, William M. Gibson,together beneficially owned approximately 23.8% of the outstanding shares ofour common stock at April 30, 2005. Sales of substantial amounts of ourcommon stock in the public market by these shareholders, or the perception thatsuch sales may occur, could cause the market price of our common stock todecline.

**Item 7A.**                QUANTITATIVE ANDQUALITATIVE 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 33.8%, 34.0% and 25.0% for fiscal 2005, 2004 and 2003,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 2005, 2004 and 2003. 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 long-term investments,marketable securities and certain cash equivalents are subject to interest raterisk. Fixed income instruments are subject to interest rate risk and,accordingly, if market interest rates increase, these investments will declinein value. We manage this risk by maintaining an overall investment portfolio ofavailable-for-sale instruments with high credit quality and relatively shortaverage maturities. All securities in our long-term investment portfolio maturein two years or less. Instruments in our entire portfolio include, but are notlimited to, commercial paper, money-market instruments, bank timedeposits and variable rate and fixed rate obligations of corporations andnational, state and local governments and agencies, in accordance with an investmentpolicy approved by our Board of Directors. These instruments are denominated inU.S. dollars. As of February 28, 2005 and February 29, 2004, the fairmarket value of our long-term investments and marketable securities held was$55.5 million and $57.7 million, respectively. We also hold cash balances inaccounts with commercial banks in the U.S. and foreign countries. These cashbalances represent operating balances only and are invested in short-termdeposits of the local bank.

The U.S. Federal Reserve Board influences the generalmarket rates of interest. During fiscal 2005, the Federal Reserve Boardincreased the discount rate by 150 basis points from 1.00% to 2.50%. TheFederal Reserve Board subsequently raised the discount rate by 0.50 basispoints. As of May 3, 2005, the discount rate was 3.00%.

The weighted average yield on interest-bearinginvestments held as of February 28, 2005 and February 29, 2004 wasapproximately 1.7% and 1.3%, respectively. Based on our investment holdings at February 28,2005, a 100 basis point decline in the average yield would reduce our annualinterest income by $1.0 million.

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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 maintain an allowance for potential credit losses. We do notrequire collateral or other security to support client receivables since mostof our customers are large, well-established companies. Our credit risk is alsomitigated because our customer base is diversified both by geography andindustry, and no single customer has accounted for more than 10% of ourconsolidated revenue on an annual basis, although we have had customers whichaccounted for more than 10% of our consolidated revenue on a quarterly basis.We generally do not use foreign exchange contracts to hedge the risk inreceivables denominated in foreign currencies. We do not hold or issuederivative financial instruments for 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.**                        CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

**Item 9A.**                CONTROLS ANDPROCEDURES.

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of our disclosure controls and procedures as of theend of the period covered by this Annual Report on Form 10-K. Theterm “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 Chief Financial Officer concluded that becauseof the material weakness described below, as of such date, our disclosurecontrols and procedures were not effective at the reasonable assurance level.

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**MANAGEMENT’SREPORT ON INTERNAL CONTROL OVER FINANCIAL 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 and expenditures of the Company arebeing made only in accordance with authorizations of management and directorsof 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.

A material weakness is a significant deficiency (asdefined in PCAOB Auditing Standard No. 2), or combination of significantdeficiencies, that results in there being more than a remote likelihood that amaterial misstatement in financial statements will not be prevented or detectedon a timely basis by employees in the normal course of their work.

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, 2005. Inmaking this assessment, management used the criteria set forth in the InternalControl-Integrated Framework by the Committee of Sponsoring Organizationsof the Treadway Commission (“COSO”).

In performing the assessment, our management hasidentified one material weakness in internal control over financial reportingexisting as of February 28, 2005. The error was detected and correctedprior to the release to the public of the Company’s financial results for thefourth quarter and year ended February 28, 2005. During the fourth quarter2005, it was determined that the Company had incorrectly accounted for therecognition of revenue on one large transaction involving complex judgment asto whether the services in the transaction are essential to the functionalityof the software sold. When services are determined to be essential to thefunctionality of the software, revenue is recognized using the contractaccounting method. Company personnel had initially concluded that contractaccounting was not appropriate for the transaction, which was determined to bean error. Upon further analysis, the Company determined that although we havepersonnel with the requisite technical accounting skills to make complexjudgments on software revenue recognition, the incorrect accounting resultedbecause there was no accounting review and consultation with a person who hadnot been involved in the negotiation and structuring of the transaction. Ourmanagement has concluded that given the size of the transaction involved andthe potential for a misstatement to occur as a result of the internal controldeficiency existing on February 28, 2005, there is more than a remotelikelihood that a material misstatement in our financial statements could occurand would not be prevented or detected by our internal control over financialreporting. Accordingly, management has concluded that our internal control overfinancial reporting was not effective as of that date.

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The Company’s independentauditors have issued an audit report on our assessment of the Company’sinternal control over financial reporting. This report appears on page 70.

**RemediationSteps to Address the Material Weakness**

We are implementingimprovements to our internal controls over the accounting for softwaretransactions involving complex judgments. These control improvements include:

·       Areview of the revenue recognition for significant software transactions byCompany personnel with the requisite technical accounting skills who are notinvolved in the contract negotiation or structuring of the transaction or inmaking the initial accounting determination.

·       Adetermination by Company personnel with the requisite technical accountingskills as to the need to solicit an opinion from a third-party professional.

·       Consultationwith a third party professional if determined necessary as described above.

**Changesin Internal Control over Financial Reporting**

Based on the evaluation conducted by management,including the Chief Executive Officer and the Chief Financial Officer, therewere no changes in our internal controls during the fourth quarter ended February 28,2005 that have materially affected, or are reasonably likely to materiallyaffect our internal control over financial reporting.

We undertook significantefforts in fiscal 2005 to establish a framework to improve internal controlsover financial reporting. We committed considerable resources to the design,implementation, documentation and testing of our internal controls. Ourmanagement believes that these efforts have improved our internal controls overfinancial reporting, but were not sufficient to remedy the control issue thatexisted as of February 28, 2005. We are taking the remedial actionsdescribed above under the caption “Remediation Steps to Address the MaterialWeakness.”

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

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

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over FinancialReporting, that Manugistics Group, Inc. and its subsidiaries (the “Company”)did not maintain effective internal control over financial reporting as of February 28,2005, because of the effect of the material weakness identified in management’sassessment based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operating 

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effectiveness of internalcontrol, and performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) 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 the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency, orcombination of significant deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The following material weaknesshas been identified and included in management’s assessment:

The controls related to the application of GAAP for asignificant, complex software revenue transaction did not operate to prevent ordetect a misapplication of accounting principles. This resulted in anadjustment to software revenue initially improperly recognized in the fourthquarter before the public release of financial information. Specifically, theCompany lacked a sufficient independent review of the proposed accountingtreatment.This was concluded to bea material weakness due to the magnitude of the adjustment, which could havehad a material effect on the interim or annual financial statements.

This material weakness was considered in determiningthe nature, timing, and extent of audit tests applied in our audit of the consolidatedbalance sheet as of February 28, 2005, and the related consolidatedstatements of operations and comprehensive loss, stockholders’ equity and cashflows as of and for the year ended February 28, 2005, of the Company andthis report does not affect our report on such financial statements.

In our opinion, management’s assessment that theCompany did not maintain effective internal control over financial reporting asof February 28, 2005, is fairly stated, in all material respects, based onthe criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Also in our opinion, because of theeffect of the material weakness described above on the achievement of theobjectives of the control criteria, the Company has not maintained effectiveinternal control over financial reporting as of February 28, 2005, basedon the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheet as of February 28, 2005,and the related 

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consolidatedstatements of operations and comprehensive loss, stockholders’ equity and cashflows as of and for the year ended February 28, 2005, of the Company andour report dated May 12, 2005 expressed an unqualified opinion on thosefinancial statements.

/s/ DELOITTE & TOUCHE LLP

McLean, VirginiaMay 12, 2005

**PART III**

**Item 10.**                 DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT.

Reference is made to theinformation to be set forth in the definitive Proxy Statement relating to the2005 Annual Meeting of Stockholders (which we anticipate will be filed with theSecurities and Exchange Commission within 120 days after the end of our fiscalyear ended February 28, 2005) (the “Proxy Statement”) under the captions “AuditCommittee Financial Experts,” “Election of Directors” and “Section 16(a) BeneficialOwnership Reporting Compliance” and to the information set forth in Part Iof this annual report on Form 10-K regarding executive officers under thecaption “Item 4A. Executive Officers of the Registrant.”

**Item 11.**                 EXECUTIVECOMPENSATION.

Reference is made to theinformation to be set forth in the Proxy Statement under the caption “ExecutiveCompensation.”

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

Reference is made to theinformation to be set forth in the Proxy Statement under the captions “Ownershipof Manugistics Group, Inc. Stock” and “Equity Compensation PlanInformation.”

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

Reference is made to theinformation to be set forth in the Proxy Statement under the caption “CertainBusiness Relationships.”

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

Reference is made to the information required to beset forth in the Proxy Statement under the caption “Audit Fees.” 

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**PART IV**

**Item 15.**                 EXHIBITS ANDFINANCIAL STATEMENT SCHEDULES. 

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

(1)         Financial Statements
|                                                               | ** ** | **Page Number** |
|---------------------------------------------------------------|------------|----------------------|
| ** **                                                    | ** ** | **In This Report**   |
| **Financial Statements:**                                     |       |                 |
| 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 financial statements listed above are filed aspart of this Annual Report on Form 10-K.

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(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 

Theexhibits required by Item 601 of Regulation S-K are listed below and are filedor incorporated by reference as part of this Annual Report on Form 10-K.Exhibits 10.1, 10.2, 10.11, 10.12, 10.13, 10.13(a), 10.13(b), 10.14, 10.16through 10.28(b) and 10.32 through 10.37 and 10.62 through 10.64 aremanagement contracts or compensatory plans 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          |
| 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)                                      |
| 3.2    |       | (Q)        |       | Amended and Restated  By-Laws of the Company                                                                                                                       |
| 3.3    |       | (W)        |       | Amendment to Second  Amended and Restated By-Laws of the Company (adopted January 22, 2003)                                                                   |
| 3.4    |       | (X)        |       | Amendment to Second  Amended and Restated By-Laws of the Company (adopted June 11, 2003)                                                                      |

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| 4.1      |   | (M)  |   | Purchase Agreement dated October 16, 2000,  between Deutsche Bank Securities, Inc., (as representative of the  initial purchasers) and Manugistics Group, Inc.                                                                                             |
|----------|--------|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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                                                                                                                                                   |
| 10.2     |   | (F)  |   | Fifth Amended and  Restated Employee Stock Option Plan of the Company                                                                                                                                                                                                     |
| 10.11    |   | (D)  |   | Outside Directors  Non-Qualified Stock Option Plan                                                                                                                                                                                                                        |
| 10.13(b) |   | (Y)  |   | Amended and Restated  1998 Stock Option Plan of Manugistics Group, Inc., incorporated herein  by reference to Exhibit 10 to the registrant’s Post-Effective Amendment  No. 1 to Form S-8, filed with the Commission on September 15,  2003. |
| 10.14    |   | (E)  |   | Employee Stock Purchase  Plan of the Company                                                                                                                                                                                                                              |
| 10.16    |   | (G)  |   | Employment Agreement  dated April 25, 1999 among the Company, Manugistics, Inc. and with  Gregory J. Owens, Chief Executive Officer and President                                                                                                     |
| 10.19    |   | (H)  |   | Employment Agreement  dated August 25, 1999 between Manugistics, Inc. and James J.  Jeter, as amended                                                                                                                                                      |
| 10.20    |   | (I)  |   | Employment Agreement  dated December 6, 1999 between Manugistics, Inc. and Raghavan  Rajaji                                                                                                                                                                     |
| 10.21    |   | (K)  |   | Employment Agreement  dated December 6, 1999 between Manugistics, Inc. and Timothy T.  Smith.                                                                                                                                                              |
| 10.23(a) |   | (K)  |   | Stock Option Agreement  dated April 27, 1999, between the Company and Gregory J. Owens                                                                                                                                                                          |
| 10.23(b) |   | (K)  |   | Stock Option Agreement  dated December 1, 1999, between the Company and Gregory J. Owens                                                                                                                                                                        |
| 10.23(c) |   | (K)  |   | Stock Option Agreement  dated December 17, 1999, between the Company and Gregory J. Owens                                                                                                                                                                       |
| 10.28(a) |   | (X)  |   | Employment agreement  dated June 19, 2003 between the Company and Jeremy P. Coote.                                                                                                                                                                         |
| 10.28(b) |   | (AA) |   | Stock Option Agreement  dated June 19, 2003 between the Company and Jeremy P. Coote.                                                                                                                                                                       |
| 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 July 24, 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.                                                                                                              |

74

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| 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)    |   | Second Amended and  Restated 2000 Stock Option Plan of the Company (effective January 29,  2002).                                                                            |
| 10.33    |   | (Q)    |   | Employment Agreement  dated November 21, 2000, between the Company and Jeffrey Hudkins.                                                                                      |
| 10.34    |   | (W)    |   | Amended Employment  Agreement dated February 27, 2002 between the Company and Jeffrey L.  Holmes.                                                                       |
| 10.45    |   | (T)    |   | Standstill Agreement  dated October 24, 2002 between Manugistics Group, Inc and Warburg Pincus  Private Equity VIII, LP.                                                     |
| 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    |   | (CC)   |   | Second Loan Modification  Agreement dated September 22, 2004 between the Company and Silicon  Valley Bank.                                                                   |
| 10.54    |   |   |   | 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  and Security Agreement dated March 31, 2004 between the Company and  Silicon Valley Bank.                                                           |
| 10.58    |   | (CC)   |   | Fourth Amendment to Loan  Agreement dated September 22, 2004 between the Company and Silicon  Valley Bank.                                                                   |
| 10.59    |   |   |   | Fifth Amendment to Loan  Agreement dated April 8, 2005 between the Company and Silicon Valley  Bank.                                                                         |
| 10.60    |   |   |   | Second Amended and  Restated Revolving Promissory Note dated March 29, 2005 between the  Company and Silicon Valley Bank.                                                    |
| 10.61    |   |   |   | Equipment Term Note  dated April 8, 2005 between the Company and Silicon Valley Bank.                                                                                        |
| 10.62    |   |   |   | Separation Agreement  between Jeffrey L. Holmes and the Company dated February 28, 2005.                                                                                     |
| 10.63    |   |   |   | Form of Stock  Option Agreement between Kevin C. Melia and the Company dated April 7,  2005.                                                                            |
| 10.64    |   |   |   | Form of Stock  Option Agreement for Directors under the Amended and Restated 1998 Stock  Option Plan of the Company.                                                         |
| 21       |   |   |   | Subsidiaries of the  Company                                                                                                                                                      |
| 23       |   |   |   | Independent Auditors’  Consent                                                                                                                                               |

75

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| 31.1 |   |   |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002  |
|------|--------|--------|--------|-----------------------------------------------------------------------------------------------------------|
| 31.2 |   |   |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
| 32.1 |   |   |   | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |
| 32.2 |   |   |   | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |

----

   (A)    Incorporated byreference 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 registration statement 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.

   (K)           Incorporatedby reference from the exhibits to the Company’s annual report on Form 10-Kfor fiscal year ended February 29, 2000.

    (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.

76

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   (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.

   (T)           Incorporatedby reference from the exhibits to the Company’s current report on Form 8-Kdated October 25, 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.

  (W)           Incorporatedby reference from the exhibits to the Company’s annual report on Form 10-Kfor the fiscal year ended February 28, 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)   Incorporated by reference to the Company’sregistration statement on Form S-8 filed by the Company on September 15,2003 (No. 333-108811).

(BB)    Incorporated by reference from exhibits to theCompany’s annual report on Form 10-K for the fiscal year ended February 29,2004.

(CC)    Incorporated by reference from exhibits to theCompany’s current report on Form 8-K dated September 22, 2004.

(b)          Exhibits

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

77

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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 16, 2005.
|        | 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 16, 2005.
|     | /s/ JOSEPH  L. COWAN                   |
|----------|----------------------------------------|
|     | Joseph L. Cowan                        |
| * * | *Director and Chief Executive Officer* |
| * * | *(Principal executive officer)*        |
|     | /s/ RAGHAVAN RAJAJI                    |
|     | Raghavan Rajaji                        |
| * * | *Executive Vice President and*         |
| * * | *Chief Financial Officer*              |
| * * | *(Principal financial officer)*        |
|     | /s/ KELLY DAVIS-STOUDT                 |
|     | Kelly Davis-Stoudt                     |
| * * | *Vice President, Controller and*       |
| * * | *Chief Accounting Officer*             |
| * * | *(Principal accounting officer)*       |

 
| /s/  J. MICHAEL CLINE  |     | /s/ THOMAS  A. SKELTON |
|------------------------|----------|------------------------|
| J. Michael Cline       |     | Thomas A. Skelton      |
| *Director*             | * * | *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/ KEVIN C. MELIA     |     |                   |
| Kevin C. Melia         |     |                   |
| *Chairman*             |     |                   |

 

78

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**
| To the Board of Directors and Stockholders of |
|-----------------------------------------------|
| Manugistics Group, Inc.                  |
| Rockville, Maryland                           |

 

We have audited the accompanying consolidated balancesheets of Manugistics Group, Inc. and its subsidiaries (the “Company”) asof February 28, 2005 and February 29, 2004, and the relatedconsolidated statements of operations and comprehensive loss, stockholders’equity, and cash flows for each of the three years in the period ended February 28,2005. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards 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 its subsidiaries as of February 28, 2005 and February 29,2004, and the results of their operations and their cash flows for each of thethree years in the period ended February 28, 2005, in conformity withaccounting principles generally accepted in the United States of America.

As described in Note 6 to the consolidated financialstatements, the Company adopted Statement of Financial Accounting Standards No. 142,“*Goodwill and Other Intangible Assets,”*duringthe year ended February 28, 2003.

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of the Company’sinternal control over financial reporting as of February 28, 2005, basedon the criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated May 12, 2005expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anadverse opinion on the effectiveness of the Company’s internal control overfinancial reporting because of a material weakness.
| /s/ DELOITTE & TOUCHE  LLP |
|-------------------------------------|
| McLean, Virginia                    |
| May 12, 2005                   |

 

F-1

----

**MANUGISTICS GROUP,INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands)**
| ** **                                                                                                                                                                        | ** ** | **February 28 or 29,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| **ASSETS**                                                                                                                                                                        |       |                                  |       |   |   |
| **CURRENT  ASSETS:**                                                                                                                                                              |       |                                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                        |       | $                                     | 80,342     |   | $ | 97,559 |   |
| Marketable  securities                                                                                                                                                            |       | 49,636                                |       | 48,741 |   |
| Total cash, cash  equivalents and marketable securities                                                                                                                           |       | 129,978                               |       | 146,300 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $7,605 and $4,395 at  February 28, 2005 and February 29, 2004, respectively                             |       | 45,659                                |       | 55,575 |   |
| Other current  assets                                                                                                                                                             |       | 10,890                                |       | 11,924 |   |
| Total current  assets                                                                                                                                                             |       | 186,527                               |       | 213,799 |   |
| **NON-CURRENT  ASSETS:**                                                                                                                                                          |       |                                  |       |   |   |
| Property and  equipment, net of accumulated depreciation                                                                                                                          |       | 15,795                                |       | 21,632 |   |
| Software  development costs, net of accumulated amortization                                                                                                                      |       | 14,390                                |       | 14,224 |   |
| Long-term  investments                                                                                                                                                            |       | 5,911                                 |       | 8,999 |   |
| Goodwill                                                                                                                                                                          |       | 185,658                               |       | 185,501 |   |
| Acquired  technology, net of accumulated amortization                                                                                                                             |       | 13,816                                |       | 27,023 |   |
| Customer  relationships, net of accumulated amortization                                                                                                                          |       | 9,335                                 |       | 15,984 |   |
| Other intangibles  and non-current assets, net of accumulated amortization                                                                                                        |       | 8,848                                 |       | 10,919 |   |
| **TOTAL  ASSETS**                                                                                                                                                                 |       | $                                     | 440,280    |   | $ | 498,081 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                    |       |                                  |       |   |   |
| **CURRENT  LIABILITIES:**                                                                                                                                                         |       |                                  |       |   |   |
| Accounts payable                                                                                                                                                                  |       | $                                     | 7,117      |   | $ | 10,368 |   |
| Accrued  compensation                                                                                                                                                             |       | 2,858                                 |       | 6,180 |   |
| Accrued exit and  disposal obligations                                                                                                                                            |       | 8,032                                 |       | 5,112 |   |
| Deferred revenue                                                                                                                                                                  |       | 43,173                                |       | 43,508 |   |
| Other current  liabilities                                                                                                                                                        |       | 19,814                                |       | 20,541 |   |
| Total current  liabilities                                                                                                                                                        |       | 80,994                                |       | 85,709 |   |
| **NON-CURRENT LIABILITIES:**                                                                                                                                                      |       |                                  |       |   |   |
| Convertible debt                                                                                                                                                                  |       | 175,500                               |       | 175,500 |   |
| Accrued exit and  disposal obligations                                                                                                                                            |       | 13,799                                |       | 14,393 |   |
| Long-term debt and  capital leases                                                                                                                                                |       | 1,668                                 |       | 2,633 |   |
| Other non-current  liabilities                                                                                                                                                    |       | 3,573                                 |       | 2,986 |   |
| Total non-current  liabilities                                                                                                                                                    |       | 194,540                               |       | 195,512 |   |
| **COMMITMENTS AND CONTINGENCIES  (Note 8)**                                                                                                                                       |       |                                  |       |   |   |
| **STOCKHOLDERS’  EQUITY:**                                                                                                                                                   |       |                                  |       |   |   |
| Preferred stock,  $.01 par value per share, 4,620,253 shares authorized; none outstanding                                                                                         |       | —                                |       | — |   |
| Common stock,  $.002 par value per share; 300,000 shares authorized; 83,869 and 81,973  issued and outstanding at February 28, 2005 and February 29, 2004, respectively |       | 168                                   |       | 164 |   |
| Additional paid-in  capital                                                                                                                                                       |       | 780,306                               |       | 775,969 |   |
| Deferred  compensation                                                                                                                                                            |       | (3,044                                | )          | (1,410 | ) |
| Accumulated other  comprehensive income                                                                                                                                           |       | 4,065                                 |       | 3,615 |   |
| Accumulated  deficit                                                                                                                                                              |       | (616,749                              | )          | (561,478 | ) |
| Total  stockholders’ equity                                                                                                                                                  |       | 164,746                               |       | 216,860 |   |
| **TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                              |       | $                                     | 440,280    |   | $ | 498,081 |   |

 

See accompanying Notes to Consolidated Financial Statements.

F-2

----

**MANUGISTICS GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFOPERATIONS AND COMPREHENSIVE LOSS(in thousands, except per share data)**
| ** **                                                                   | ** ** | **February 28 or 29,**                                            | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **      2005      ** | ** ** | **       2004       ** | ** ** | **       2003       ** | ** ** |
| **REVENUE:**                                                                 |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Software                                                                     |       |                                                                             | $          | 36,203 |   |   |   | $ | 73,766 |   |   |   | $ | 74,899 |   |   |
| Support                                                                      |       |                                                                             | 84,050     |   |   |   | 86,593 |   |   |   | 84,075 |   |   |
| Services                                                                     |       |                                                                             | 64,933     |   |   |   | 73,254 |   |   |   | 102,144 |   |   |
| Reimbursed  expenses                                                         |       |                                                                             | 7,920      |   |   |   | 9,432 |   |   |   | 11,268 |   |   |
| Total revenue                                                                |       |                                                                             | 193,106    |   |   |   | 243,045 |   |   |   | 272,386 |   |   |
| **OPERATING  EXPENSES:**                                                     |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Cost of revenue:                                                             |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Cost of software                                                             |       |                                                                             | 14,213     |   |   |   | 15,851 |   |   |   | 19,127 |   |   |
| Amortization of  acquired technology                                         |       |                                                                             | 13,207     |   |   |   | 14,210 |   |   |   | 13,623 |   |   |
| Total cost of  software                                                      |       |                                                                             | 27,420     |   |   |   | 30,061 |   |   |   | 32,750 |   |   |
| Cost of services  and support                                                |       |                                                                             | 73,694     |   |   |   | 80,306 |   |   |   | 98,055 |   |   |
| Cost of reimbursed  expenses                                                 |       |                                                                             | 7,920      |   |   |   | 9,432 |   |   |   | 11,268 |   |   |
| Non-cash  stock-option compensation expense for cost of services and support |       |                                                                             | 75         |   |   |   | 865 |   |   |   | 1,673 |   |   |
| Total cost of  services and support                                          |       |                                                                             | 81,689     |   |   |   | 90,603 |   |   |   | 110,996 |   |   |
| Sales and marketing                                                          |       |                                                                             | 52,662     |   |   |   | 66,061 |   |   |   | 95,627 |   |   |
| Non-cash  stock-option compensation expense for sales and marketing          |       |                                                                             | 26         |   |   |   | 456 |   |   |   | 931 |   |   |
| Total cost of  sales and marketing                                           |       |                                                                             | 52,688     |   |   |   | 66,517 |   |   |   | 96,558 |   |   |
| Product  development                                                         |       |                                                                             | 32,404     |   |   |   | 36,233 |   |   |   | 63,055 |   |   |
| Non-cash  stock-option compensation expense for product development          |       |                                                                             | 15         |   |   |   | 140 |   |   |   | 298 |   |   |
| Total cost of  product development                                           |       |                                                                             | 32,419     |   |   |   | 36,373 |   |   |   | 63,353 |   |   |
| General and  administrative                                                  |       |                                                                             | 22,110     |   |   |   | 25,060 |   |   |   | 27,885 |   |   |
| Non-cash  stock-option compensation expense for general and administrative   |       |                                                                             | 52         |   |   |   | 338 |   |   |   | 524 |   |   |
| Total cost of  general and administrative                                    |       |                                                                             | 22,162     |   |   |   | 25,398 |   |   |   | 28,409 |   |   |
| Amortization of  intangibles                                                 |       |                                                                             | 6,648      |   |   |   | 4,674 |   |   |   | 3,866 |   |   |
| Goodwill  impairment charge                                                  |       |                                                                             | —     |   |   |   | — |   |   |   | 96,349 |   |   |
| Purchased research  and development charge                                   |       |                                                                             | —     |   |   |   | — |   |   |   | 3,800 |   |   |
| Exit and disposal  activities                                                |       |                                                                             | 17,312     |   |   |   | 18,627 |   |   |   | 19,184 |   |   |
| Total operating  expenses                                                    |       |                                                                             | 240,338    |   |   |   | 272,253 |   |   |   | 455,265 |   |   |
| **LOSS  FROM OPERATIONS**                                                    |       |                                                                             | (47,232    | ) |   |   | (29,208 | ) |   |   | (182,879 | ) |   |
| **DEBT  CONVERSION EXPENSE**                                                 |       |                                                                             | —     |   |   |   | (59,823 | ) |   |   | — |   |   |
| **OTHER  EXPENSE, NET**                                                      |       |                                                                             | (7,314     | ) |   |   | (13,455 | ) |   |   | (7,942 | ) |   |
| **LOSS  BEFORE INCOME TAXES**                                                |       |                                                                             | (54,546    | ) |   |   | (102,486 | ) |   |   | (190,821 | ) |   |
| **PROVISION  FOR INCOME TAXES**                                              |       |                                                                             | 725        |   |   |   | 1,314 |   |   |   | 21,418 |   |   |
| **NET LOSS**                                                                 |       |                                                                             | $          | (55,271 | ) |   |   | $ | (103,800 | ) |   |   | $ | (212,239 | ) |   |
| **BASIC  AND DILUTED LOSS PER SHARE**                                        |       |                                                                             | $          | (0.67 | ) |   |   | $ | (1.43 | ) |   |   | $ | (3.04 | ) |   |
| **SHARES  USED IN BASIC AND DILUTED LOSS PER SHARE COMPUTATION**        |       |                                                                             | 81,913     |   |   |   | 72,715 |   |   |   | 69,768 |   |   |
| **COMPREHENSIVE  LOSS:**                                                     |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                     |       |                                                                             | $          | (55,271 | ) |   |   | $ | (103,800 | ) |   |   | $ | (212,239 | ) |   |
| Other comprehensive loss,  net of tax:                                       |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Foreign currency  translation adjustments                                    |       |                                                                             | 806        |   |   |   | 4,622 |   |   |   | 1,658 |   |   |
| Unrealized  (losses) gains on securities                                     |       |                                                                             | (356       | ) |   |   | 80 |   |   |   | (41 | ) |   |
| Total other  comprehensive income (loss)                                     |       |                                                                             | 450        |   |   |   | 4,702 |   |   |   | 1,617 |   |   |
| TOTAL  COMPREHENSIVE LOSS                                                    |       |                                                                             | $          | (54,821 | ) |   |   | $ | (99,098 | ) |   |   | $ | (210,622 | ) |   |

 

See accompanying Notes to Consolidated Financial Statements.

F-3

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**MANUGISTICS GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY(in thousands)**
| ** **                                                                               | ** ** | ** **            | ** ** | ** **            | ** ** | ** **  | ** ** | ** **       | ** ** | **Accumulated**        | ** ** | ** **      | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-------------|------------|------------------|------------|------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                               | ** ** | **Common Stock** | ** ** | **Additional**        | ** ** | ** **  | ** ** | **Other**        | ** ** | ** **             | ** ** | ** **      | ** ** |
| ** **                                                                               | ** ** | ** **            | ** ** | **Par**               | ** ** | **Paid-in** | ** ** | **Deferred**     | ** ** | **Comprehensive**      | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                                                               | ** ** | **Shares**            | ** ** | ** Value ** | ** ** | **Capital** | ** ** | **Compensation** | ** ** | **Income (Loss)** | ** ** | **(Deficit)**   | ** ** | **Total**  | ** ** |
| BALANCE, FEBRUARY 28, 2002                                                               |       | 69,042                |       |                  | $          | 138         |       |             |       | $                      | 629,861    |            |       |       | $          | (9,049 | ) |   |   | $ | (2,704 | ) |   |   | $ | (245,439 | ) |   | $ | 372,807 |   |
| Issuance of common stock—employee stock purchase plan                               |       | 429                   |       |                  | 1          |        |       |             | 1,481      |                   |       |            | —     |       |       |   | — |   |   |   | — |   |   | 1,482 |   |
| Issuance of common stock—One Release Acquisition                                    |       | 67                    |       |                  | —     |        |       |             | 1,000      |                   |       |            | —     |       |       |   | — |   |   |   | — |   |   | 1,000 |   |
| Exercise of stock options                                                                |       | 566                   |       |                  | 1          |        |       |             | 3,595      |                   |       |            | —     |       |       |   | — |   |   |   | — |   |   | 3,596 |   |
| Stock option-based compensation  expense                                                 |       | —                |       |                  | —     |        |       |             | —     |                   |       |            | 3,426      |       |       |   | — |   |   |   | — |   |   | 3,426 |   |
| Deferred stock-based compensation related to acquisitions  and other                     |       | —                |       |                  | —     |        |       |             | (2,136     | )                      |       |            | 2,529      |       |       |   | — |   |   |   | — |   |   | 393 |   |
| Translation adjustment                                                                   |       | —                |       |                  | —     |        |       |             | —     |                   |       |            | —     |       |       |   | 1,658 |   |   |   | — |   |   | 1,658 |   |
| Net change in unrealized gain / loss on marketable securities                            |       | —                |       |                  | —     |        |       |             | —     |                   |       |            | —     |       |       |   | (41 | ) |   |   | — |   |   | (41 | ) |
| Net loss                                                                                 |       | —                |       |                  | —     |        |       |             | —     |                   |       |            | —     |       |       |   | — |   |   |   | (212,239 | ) |   | (212,239 | ) |
| 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 |   |

 

See accompanying Notes to Consolidated Financial Statements

F-4

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**MANUGISTICS GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFCASH FLOWS(in thousands)**
| ** **                                                                                 | ** ** | **February 28 or 29,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                 | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                                   |       |                                  |       |   |   |   |   |
| Net loss                                                                                   |       | $                                     | (55,271    | ) | $ | (103,800 | ) | $ | (212,239 | ) |
| Adjustments to reconcile net loss to net cash (used  in) provided by operating activities: |       |                                  |       |   |   |   |   |
| Depreciation and  amortization                                                             |       | 37,825                                |       | 37,046 |   | 41,391 |   |
| Amortization of  debt issuance costs                                                       |       | 904                                   |       | 1,175 |   | 1,157 |   |
| Exit and disposal  activities                                                              |       | 17,312                                |       | 18,627 |   | 19,184 |   |
| Goodwill impairment  charge                                                                |       | —                                |       | — |   | 96,349 |   |
| Debt conversion  expense                                                                   |       | —                                |       | 59,823 |   | — |   |
| Purchased research  and development charge                                                 |       | —                                |       | — |   | 3,800 |   |
| Deferred income  taxes                                                                     |       | —                                |       | — |   | 20,350 |   |
| Non-cash stock  option compensation expense                                                |       | 168                                   |       | 1,799 |   | 3,426 |   |
| Loss on  investments                                                                       |       | —                                |       | — |   | 41 |   |
| Bad debt expense                                                                           |       | 4,044                                 |       | 256 |   | 5,072 |   |
| Other                                                                                      |       | 2,103                                 |       | 769 |   | (47 | ) |
| Changes in assets and  liabilities:                                                        |       |                                  |       |   |   |   |   |
| Accounts  receivable                                                                       |       | 6,041                                 |       | 8,109 |   | 10,401 |   |
| Other assets                                                                               |       | 1,158                                 |       | (4,020 | ) | 85 |   |
| Accounts payable                                                                           |       | (3,251                                | )          | 630 |   | (118 | ) |
| Accrued compensation                                                                       |       | (3,322                                | )          | (976 | ) | (7,023 | ) |
| Other liabilities                                                                          |       | (204                                  | )          | (3,143 | ) | (849 | ) |
| Accrued exit and  disposal obligations                                                     |       | (12,677                               | )          | (9,830 | ) | (8,037 | ) |
| Deferred revenue                                                                           |       | (335                                  | )          | 360 |   | (3,618 | ) |
| Net cash (used in)  provided by operating activities                                       |       | (5,505                                | )          | 6,825 |   | (30,675 | ) |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                                   |       |                                  |       |   |   |   |   |
| Acquisitions, net  of cash acquired                                                        |       | —                                |       | 1,968 |   | (32,259 | ) |
| Restricted cash                                                                            |       | —                                |       | 12,980 |   | (12,980 | ) |
| Sales of  marketable securities                                                            |       | 76,105                                |       | 66,296 |   | 137,811 |   |
| Sales of long-term  investments                                                            |       | 3,170                                 |       | — |   | — |   |
| Proceeds from sale  of fractional shares of jet                                            |       | 1,958                                 |       | — |   | — |   |
| Purchases of  property and equipment                                                       |       | (4,067                                | )          | (2,165 | ) | (14,821 | ) |
| Capitalization and  purchases of software                                                  |       | (9,877                                | )          | (11,520 | ) | (11,222 | ) |
| Purchases of  marketable securities                                                        |       | (56,025                               | )          | (92,592 | ) | (46,999 | ) |
| Purchases of  long-term investments                                                        |       | (22,065                               | )          | (8,999 | ) | — |   |
| Net cash (used in)  provided by investing activities                                       |       | (10,801                               | )          | (34,032 | ) | 19,530 |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                  |       |                                  |       |   |   |   |   |
| Line of credit  borrowings                                                                 |       | —                                |       | — |   | 2,830 |   |
| Principal payments  of debt and capital lease obligations and debt issuance costs          |       | (2,528                                | )          | (3,046 | ) | (2,771 | ) |
| Proceeds from  exercise of stock options and employee stock plan purchases                 |       | 877                                   |       | 8,548 |   | 5,078 |   |
| Net cash (used in)  provided by financing activities                                       |       | (1,651                                | )          | 5,502 |   | 5,137 |   |
| **EFFECTS  OF EXCHANGE RATES ON CASH BALANCES**                                            |       | 740                                   |       | 3,975 |   | 1,495 |   |
| **NET  CHANGE IN CASH AND CASH EQUIVALENTS**                                               |       | (17,217                               | )          | (17,730 | ) | (4,513 | ) |
| **CASH AND CASH EQUIVALENTS,  BEGINNING OF PERIOD**                                        |       | 97,559                                |       | 115,289 |   | 119,802 |   |
| **CASH AND CASH EQUIVALENTS, END  OF PERIOD**                                              |       | $                                     | 80,342     |   | $ | 97,559 |   | $ | 115,289 |   |
| **SUPPLEMENTAL  DISCLOSURES:**                                                             |       |                                  |       |   |   |   |   |
| Cash paid for  interest                                                                    |       | $                                     | 9,087      |   | $ | 13,809 |   | $ | 12,741 |   |
| Cash paid for  income taxes                                                                |       | $                                     | 132        |   | $ | 940 |   | $ | 1,418 |   |
| **SUPPLEMENTAL  SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:**                 |       |                                  |       |   |   |   |   |
| Acquisition of  capital leases                                                             |       | $                                     | 1,963      |   | $ | — |   | $ | 4,694 |   |
| Issuance of common  stock for acquisition (Note 14)                                        |       | $                                     | —     |   | $ | — |   | $ | 1,000 |   |
| Issuance of common  stock in exchange for Notes (Note 7)                                   |       | $                                     | —     |   | $ | 74,500 |   | $ | — |   |

 

See accompanying Notes to Consolidated Financial Statements.

F-5

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**MANUGISTICS GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATEDFINANCIAL 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 of Presentation**

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’s 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 Cash Equivalents**

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. The Company reclassified prior year auction rate securities toavailable-for-sale securities (marketable securities) in accordance withFinancial Accounting Standards No. 115 “*Investmentsin Debt and Equity Securities*” (“SFAS 115”). In prior years, auctionrate securities were classified as cash equivalents due to the short period oftime between auctions.

**Marketable Securities**

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 specific identificationmethod. As of February 28, 2005 and February 29, 2004, marketablesecurities consisted of investments in corporate debt, municipal bonds andother short-term investments which mature in one year or less. Marketablesecurities also consisted of investments in auction-rate securities, withauctions held monthly and maturity dates ranging from 2028 to 2043. Purchasesof auction rate 

F-6

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securitieswere $29.1 million and $60.4 million and sales of auction rate securities were$60.5 million and $38.4 million in fiscal 2005 and fiscal 2004, respectively,and are included in purchases and sales of marketable securities in theConsolidated Statement of Cash Flows.

**Long-Term Investments**

The Company’s long-terminvestments are classified as “available-for-sale.” These investments arerecorded at fair value with unrealized gains and losses reported as a componentof stockholders’ equity and comprehensive loss. Realized gains and losses onavailable-for-sale securities are computed using the specific identificationmethod. As of February 28, 2005 and February 29, 2004, long-terminvestments consisted of corporate debt securities and U.S. agency securitieswith original maturities in excess of one year.

**Concentration of Credit 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 clients’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 and Equipment**

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 are expensedas incurred. When assets are sold or retired, the related asset and accumulateddepreciation amounts are removed from their respective accounts and any gain orloss is recognized in the Consolidated Statements of Operations andComprehensive Loss.

F-7

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**CapitalizedSoftware Development Costs**

The Companycapitalizes the development costs of software, other than internal usesoftware, in accordance with Statement of Financial Accounting Standards No. 86(“SFAS 86”), “*Accounting for the Costs of Computer Softwareto be Sold, Leased or Otherwise Marketed.*” Software developmentcosts are expensed as incurred until technological feasibility has beenestablished, at which time such costs are capitalized until the product isavailable for general release to clients. Software development costs areamortized at the greater of the amount computed using either:

(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 Assets and 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, has been recorded in conjunction with several ofthe Company’s business combinations. Goodwill recorded in business combinationsprior to June 30, 2001 was amortized on a straight-line basis through February 28,2002 over five years (see Notes 6 and 14). Assembled workforce acquired inconjunction with certain of the Company’s purchase business combinations wasamortized using the straight-line method through February 28, 2002 overtwo years. Acquired technology is amortized on a straight-line basis over fourto six years. Customer relationships acquired in conjunction with certain ofthe Company’s business combinations are amortized using the straight-linemethod over five to seven years. In accordance with Statement of FinancialAccounting Standards No. 142 *“Goodwill and OtherIntangible Assets”* (“SFAS 142”), the Company ceased amortizinggoodwill and assembled workforce, effective March 1, 2002.

**Software Developed for 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 the Costs of Computer SoftwareDeveloped or Obtained for Internal Use.”* These capitalized costs areamortized on a straight-line basis over a period of two to five years aftercompletion or acquisition of the software. Software developed for internal useis included in other intangibles and non-current assets in theConsolidated Balance Sheets.

**Impairment of Long-Lived Assets**

The Company assesses theimpairment of long-lived assets, including property and equipment, identifiableintangible assets and software developed for internal use, whenever events orchanges in circumstances indicate that the carrying value may not be fullyrecoverable. When the Company determines that the carrying value of such assetsmay not be recoverable, it measures recoverability based on the undiscounted cashflows expected to be generated by the related asset or asset group. If theCompany determines that a long-lived asset or asset group is not recoverable,it records an impairment loss equal to the difference between the carryingamount of the asset or asset group and fair value of the asset or asset group.The Company generally measures fair value of an asset or asset group inaccordance with Statement of Financial Accounting Standards No. 144 “*Accounting for the Impairment or Disposal of Long-Lived Assets*”(“SFAS 144”). In addition, at each reporting date, the Company compares the netrealizable value of capitalized software development costs to the unamortizedcapitalized costs. To the 

F-8

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extentthe unamortized capitalized costs exceed the net realizable value, the excessamount is written off and the loss is recognized in the Consolidated Statementof Operations.

**Purchased Research and 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 price allocation,the Company considers present value calculations of projected income, ananalysis of project accomplishments and remaining outstanding items, anassessment 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-Current Assets**

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

**Other Current Liabilities**

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 $5.0 million, $6.4million and $10.7 million in fiscal 2005, 2004 and 2003, respectively.

**Contingent Liabilities**

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. If a potential loss is considered probable and the amount can bereasonably estimated as defined by SFAS 5, the Company reflects the estimatedloss in its results of operations. Significant judgment is required todetermine the probability that a liability has been incurred and whether suchliability is 

F-9

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reasonablyestimable. 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.

**Accountingfor and Disclosure of Guarantees**

The Company accounts forguarantees in accordance with Financial Accounting Standards Board (“FASB”)issued Interpretation No. 45, *“Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others”* (“Interpretation No. 45”).Interpretation 45 elaborates on the disclosures required in financialstatements concerning obligations under certain guarantees. It also clarifiesthe requirements related to the recognition of liabilities by a guarantor atthe inception of certain guarantees. The provisions related to recognizing aliability at inception of the guarantee do not apply to product warranties orindemnification provisions in the Company’s software license agreements.

**Fair Value of Financial 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 $161.2 million on February 28,2005 and $174.4 million on February 29, 2004 based on market quotes.

**ForeignCurrency Translation 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 be adverselyaffected by the imposition of governmental controls, foreign currency exchangerate fluctuations and economic and political instability.

**RevenueRecognition and 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, “*Modificationof SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions(“SOP 98-9”*),” as well as Technical Practice Aids issuedfrom time to time by the American Institute of Certified Public Accountants,and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin 104, “*Revenue Recognition*” (“SAB 104”), the Company exercisesjudgment and uses estimates in connection with the determination of the amountof software license, support and professional services revenue to be recognizedeach accounting period.

F-10

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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. 

·       *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:  *The Company considers the license fee to be fixed or determinable if thefee is not subject to refund or adjustment and is payable within twelve monthsof the agreement date, based upon the Company’s successful collection historyon such arrangements. If the arrangement fee is not fixed or determinable,revenue is recognized as amounts become due and payable. 

·       *Collection is probable:  *The Company performs a credit review for all significant transactions atthe time the arrangement is executed to determine the credit-worthiness of thecustomer. Collection is deemed probable if the Company expects that thecustomer will be able to pay amounts under the arrangement as they become due.If the Company determines that collection is not probable, revenue recognitionis deferred until collection.

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, 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 SOP97-2 and SAB 104 have been met.

The Company’s customerarrangements typically contain multiple elements that may include software,options for future purchases of software products not previously licensed tothe customer, support, consulting, training, hosting and reimbursed expenses.Fees are allocated to the various elements of software license agreements usingthe residual 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, the entirearrangement fee is recognized over the period the undelivered elements aredelivered.

In addition to evaluating theVSOE of fair value of each element of an arrangement, the Company alsoconsiders whether such elements can be separated into separate units ofaccounting in accordance with SOP 97-2. When making this determination, theCompany considers the nature of services provided, when purchased with asoftware license (i.e., consideration of whether services are essential to thefunctionality of software products licensed), degree of risk, availability ofservices from other vendors and timing of payments, among other things. Whenthe Company provides services deemed to be essential to the functionality ofthe software products licensed or the licensed software requires significantproduction, modification or customization, revenue is recognized on a percentage-of-completionbasis in accordance 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.

F-11

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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 incurred to date to totalestimated labor hours. In the event services are billed in advance of workbeing performed, the billed amount is initially recorded as deferred servicesrevenue and recognized as services revenue when the work is performed. Whentotal cost estimates exceed revenue, the Company accrues for the estimatedlosses immediately using cost estimates that are based upon an average fullyburdened daily rate applicable to the consulting organization delivering theservices. VSOE of fair value for implementation services is based upon separatesales of services 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 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 our revenue and results of operations if the Company is requiredto increase 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 for Income 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. Based onvarious factors, including cumulative losses for the three year period ended February 28,2003, the fiscal year 2003 loss, and estimates of future profitability, theCompany recorded a valuation allowance for the full amount of the net deferredtax assets, which resulted in a $20.4 million charge to income tax expense inthe fiscal year ended February 28, 2003. The Company performed a similaranalysis as of February 28, 2005 and February 29, 2004, and concludedthat future taxable income will, more likely than not, be insufficient torecover the net deferred tax assets as of February 28, 2005 and February 29,2004. Therefore, the Company continues to maintain a valuation allowance forthe full amount of the net deferred tax assets. The Company will continue tomonitor the estimates of future profitability and realizability of the netdeferred 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 assets

F-12

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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 the Company’s overall income tax expense.This process involves estimating current tax liabilities in each jurisdictionin which the Company operates.

**Net Loss Per Share**

Basic net loss per shareis computed using the weighted average number of shares of common stockoutstanding. Diluted net loss per share is computed using the weighted averagenumber of shares of common stock and, when dilutive, potential common sharesfrom options, restricted stock and warrants to purchase common stock using thetreasury stock method and the effect of the assumed conversion of the Company’sconvertible subordinated debt. The dilutive effect of options, restricted stockand warrants to acquire 1.1 million, 1.1 million and 1.9 million shares wasexcluded from the calculation of diluted net loss per share in fiscal 2005,2004 and 2003, respectively, because including these shares would beanti-dilutive due to the Company’s reported net loss. The assumed conversion ofthe Company’s convertible debt was excluded from the computation of diluted netloss per share for fiscal 2005, 2004 and 2003 because including these shareswould be anti-dilutive due to the Company’s reported net loss.

**Stock Option-Based Compensation 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,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                              | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net loss, as  reported                                                                  |       | $                                     | (55,271    | ) | $ | (103,800 | ) | $ | (212,239 | ) |
| Add: Stock option-based  compensation expense included in reported net loss, net of tax |       | 168                                   |       | 1,799 |   | 3,426 |   |
| Less: Stock  option-based compensation, net of tax                                      |       | (6,301                                | )          | (2,611 | ) | (26,564 | ) |
| Pro forma net  loss                                                                     |       | $                                     | (61,404    | ) | $ | (104,612 | ) | $ | (235,377 | ) |
| Basic and diluted loss per share, as reported                                           |       | $                                     | (0.67      | ) | $ | (1.43 | ) | $ | (3.04 | ) |
| Basic and diluted loss  per share, pro forma                                            |       | $                                     | (0.75      | ) | $ | (1.44 | ) | $ | (3.37 | ) |

 

The Company adopted FASBInterpretation No. 44, “*Accounting for CertainTransactions Involving Stock Compensation”*(“FIN 44”) effective July 1,2000. In accordance with FIN 44, repriced stock options are accounted for ascompensatory options using variable accounting treatment (see Note 9). Inaddition, deferred compensation is recorded for the intrinsic value of unvestedstock options exchanged in a purchase business combination (see Note 9 andNote 14) and amortized over the vesting period.

**New Accounting Pronouncements**

FASB Statement 123 (Revision 2004), “*Share-Based Payment*,” (FAS 123 (R)), was issued in December 2004and was to be effective for reporting periods beginning after June 15,2005. The new statement requires all share-based payments to employees to berecognized in the financial statements based on their fair values. The Companycurrently accounts for its share-based payments to employees 

F-13

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under the intrinsic valuemethod of accounting set forth in Accounting Principles Board Opinion No. 25,“*Accounting for Stock Issues to Employees.*”Additionally, the Company complies with the stock-based employer compensationdisclosure requirements of SFAS 148. On April 14, 2005, the Securities andExchange Commission announced the adoption of a new rule that amends thecompliance dates for FAS 123 (R). The new rule allows companies toimplement FAS 123 (R) at the beginning of their next fiscal year,instead of their next reporting period beginning after June 15, 2005. TheCompany plans to adopt the new statement beginning in the first quarter offiscal 2007. The Company believes the adoption of SFAS 123 (R) will have amaterial impact on its financial position and results of operations. TheCompany is currently in the process of estimating the value of the impact theadoption of SFAS 123 (R) will have on its financial position and results ofoperations.

In December 2004, the FASB issued two FASB StaffPositions related to the American Jobs Creation Act (“AJCA”). FSP No. 109-1“*Application of FASB Statement No. 109,Accounting for Income Taxes, to the Tax Deduction on Qualified ProductionActivities*” (“FSP 109-1”) requires companies that qualify fora deduction for domestic production activities under the AJCA to account forthe deduction as a special deduction under FASB Statement No. 109 andreduce their tax expense in the period or periods the amounts are deductible onthe tax return.

FSP No. 109-2 *“Accountingand Disclosure Guidance for the Foreign Earnings Repatriation Provision withinthe American Jobs Creation Act of 2004.”* (“FSP 109-2”) allowcompanies additional time to evaluate whether foreign earnings will berepatriated under the repatriation provisions of the AJCA and requiredspecified disclosures for companies needing the additional time to complete theevaluations. Once a decision is made to repatriate the foreign earnings,companies must reflect the deferred tax liabilities attributable to foreignearnings in the period that the decision is made to remit those earnings.Management does not believe the adoption of FSP 109-1 and FSP 109-2will have a material impact on the Company’s financial condition or results ofoperations.

In March 2004, the FASB issued Emerging IssuesTask Force Issue No. 03-1, *“The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments*”(“EITF 03-1”). EITF 03-1 includes new guidance for evaluating andrecording impairment losses on debt and equity investments, as well as newdisclosure requirements for investments that are deemed to be temporarilyimpaired. In September 2004, the FASB issued Staff Position EITF 03-1-1,which delays the effective date until additional guidance is issued for theapplication of the recognition and measurement provisions of EITF 03-1to investments in securities that are impaired. Management does not believe theadoption of EITF 03-1 will have a material impact on the Company’sfinancial condition or results of operations.

F-14

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**2.   CASH, CASHEQUIVALENTS, MARKETABLE SECURITIES AND LONG TERM INVESTMENTS**

Thefollowing is a summary of cash, cash equivalents and marketable securities asof February 28, 2005 and February 29, 2004 (in thousands):
| ** **                                              | ** ** | **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:                                |       |           |       |   |   |   |   |   |   |   |   |
| Corporate notes                                         |       | —         |       |   | — |   |   | — |   | — |   |
| 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 |   |
|                                                         |            |                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                              | ** ** | **Unrealized** | ** ** |
|---------------------------------------------------------|------------|----------------|------------|
| **February 29, 2004**                         | ** ** | ** **     | ** ** | **Cost** | ** ** | **   Gain   ** | ** ** | **   Loss   ** | ** ** | **Market** | ** ** |
| Cash and cash  equivalents:                             |       |           |       |   |   |   |   |   |   |   |   |   |   |
| Cash                                                    |       | $              | 53,185     |   |   | $ | — |   |   |   | $ | — |   |   | $ | 53,185 |   |
| Money market funds                                      |       | 42,875         |       |   | — |   |   |   | — |   |   | 42,875 |   |
| Commercial paper                                        |       | 1,499          |       |   | — |   |   |   | — |   |   | 1,499 |   |
| Total cash and  cash equivalents                        |       | 97,559         |       |   | — |   |   |   | — |   |   | 97,559 |   |
| Marketable securities:                                  |       |           |       |   |   |   |   |   |   |   |   |   |   |
| Auction rate securities:                                |       |           |       |   |   |   |   |   |   |   |   |   |   |
| Corporate notes                                         |       | 3,100          |       |   | — |   |   |   | — |   |   | 3,100 |   |
| US treasury and agency                                  |       | 38,325         |       |   | — |   |   |   | — |   |   | 38,325 |   |
| Total auction  rate securities                          |       | 41,425         |       |   | — |   |   |   | — |   |   | 41,425 |   |
| Other marketable  securities                            |       | 7,307          |       |   | 9 |   |   |   | — |   |   | 7,316 |   |
| Total marketable  securities                            |       | 48,732         |       |   | 9 |   |   |   | — |   |   | 48,741 |   |
| Total cash, cash  equivalents and marketable securities |       | $              | 146,291    |   |   | $ | 9 |   |   |   | $ | — |   |   | $ | 146,300 |   |
|                                                         |            |                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See “Cash and Cash equivalents” in Note 1 regardingcertain reclassifications of auction rate securities made in fiscal 2005 andfiscal 2004.

Long-terminvestments are comprised of corporate debt securities and U.S. treasury andagency debt securities with original maturities in excess of one year. Thefollowing is a summary of long-term investments as of February 28, 2005and February 29, 2004 (in thousands):
| ** **                       | ** ** | **Unrealized** | ** ** |
|----------------------------------|------------|----------------|------------|
| **February 28, 2005**  | ** ** | ** **     | ** ** | **Cost** | ** ** | ** Gain ** | ** ** | **Loss** | ** ** | **Market** | ** ** |
| Long-term debt  securities:      |       |           |       |   |   |   |   |   |   |   |   |
| Corporate notes                  |       | $              | —     |   |   | $ | — |   |   | $ | — |   | $ | — |   |
| US treasury and agency           |       | 5,952          |       |   | — |   |   | (41 | ) | 5,911 |   |
| Total long-term  debt securities |       | $              | 5,952      |   |   | $ | — |   |   | $ | (41 | ) | $ | 5,911 |   |
|                                  |            |                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-15

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| ** **                       | ** ** | **Unrealized** | ** ** |
|----------------------------------|------------|----------------|------------|
| **February 29, 2004**  | ** ** | ** **     | ** ** | **Cost** | ** ** | **Gain** | ** ** | **  Loss  ** | ** ** | **Market** | ** ** |
| Long-term debt  securities:      |       |           |       |   |   |   |   |   |   |   |   |
| Corporate notes                  |       | $              | 6,967      |   | $ | 20 |   |   | $ | — |   |   | $ | 6,987 |   |
| US treasury and agency           |       | 2,006          |       | 6 |   |   | — |   |   | 2,012 |   |
| Total long-term debt  securities |       | $              | 8,973      |   | $ | 26 |   |   | $ | — |   |   | $ | 8,999 |   |
|                                  |            |                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**3.   ALLOWANCEFOR DOUBTFUL ACCOUNTS**

Activityin the allowance for doubtful accounts for the fiscal years ended February 28or 29, 2005, 2004 and 2003 was as follows (in thousands):
| ** **                                                     | ** ** | **February 28 or 29,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Beginning balance                                              |       | $                                     | 4,395      |   | $ | 7,007 |   | $ | 8,308 |   |
| Write-offs and  other adjustments                              |       | (834                                  | )          | (2,868 | ) | (6,433 | ) |
| Increase in  allowance—acquisitions                       |       | —                                |       | — |   | 60 |   |
| Provision for  doubtful accounts charged to costs and expenses |       | 4,044                                 |       | 256 |   | 5,072 |   |
| Ending balance                                                 |       | $                                     | 7,605      |   | $ | 4,395 |   | $ | 7,007 |   |

 

**4.   PROPERTYAND EQUIPMENT**

Propertyand equipment consists of the following (in thousands):
| ** **                                               | ** ** | **February 28 or 29,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                               | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Information  technology equipment and purchased software |       | $                                     | 29,187     |   | $ | 27,079 |   |
| Office furniture  and equipment                          |       | 8,751                                 |       | 13,695 |   |
| Leasehold  improvements                                  |       | 6,610                                 |       | 10,395 |   |
| Total                                                    |       | 44,548                                |       | 51,169 |   |
| Less: accumulated  depreciation                          |       | (28,753                               | )          | (29,537 | ) |
| Total property  and equipment, net                       |       | $                                     | 15,795     |   | $ | 21,632 |   |

 

Depreciation expense forfiscal 2005, 2004 and 2003 was approximately $7.3 million, $6.5 million and$8.2 million, respectively.

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

*CAPITALIZEDSOFTWARE DEVELOPMENT COSTS*

The Companycapitalizes costs incurred in the development of its software products forcommercial availability. Software development costs include certain internaldevelopment costs. Costs incurred prior to establishing technologicalfeasibility are charged to product development expense as incurred. Softwaredevelopment costs are amortized at the greater of the amount computed usingeither:

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

Generally, an economic life of two years is assignedto capitalized software development costs.

F-16

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The Company capitalized software development costs of$9.6 million, $9.9 million and $10.5 million and recorded related amortizationexpense of $9.4 million, $9.0 million and $11.6 million for fiscal 2005, 2004and 2003, respectively, in accordance with SFAS 86.

The total amortizationexpense for the Company’s capitalized software development costs for fiscal2005, 2004 and 2003 include write-offs totaling approximately $0.3 million,$0.2 million and $1.2 million, respectively, of previously capitalized softwaredevelopment costs. These capitalized costs were deemed to exceed their futurenet realizable value as a result of new technologies developed by the Companyand acquired in connection with acquisitions.

*SOFTWARE DEVELOPEDFOR INTERNAL USE*

The Company capitalized internally developed softwarecosts (excluding amounts acquired) of $0.3 million, $1.6 million and $0.5million and recorded related amortization expense of $1.2 million, $1.1 millionand $1.6 million for fiscal 2005, 2004 and 2003, respectively, in accordancewith SOP 98-1.

During fiscal 2003, theCompany wrote-off approximately $1.2 million of previously capitalized softwaredeveloped for internal use (see Note 15).

**6.   INTANGIBLEASSETS AND GOODWILL**

Acquisition-relatedintangible assets subject to amortization as of February 28, 2005 and February 29,2004 are as follows (in thousands):
| ** **                      | ** ** | **February 28 or 29,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Acquired  technology            |       | $                                     | 64,739     |   | $ | 64,739 |   |
| Less: accumulated  amortization |       | (50,923                               | )          | (37,716 | ) |
| Acquired  technology, net       |       | $                                     | 13,816     |   | $ | 27,023 |   |
| Customer relationships          |       | 28,109                                |       | 28,109 |   |
| Less: accumulated  amortization |       | (18,774                               | )          | (12,125 | ) |
| Customer relationships,  net    |       | $                                     | 9,335      |   | $ | 15,984 |   |

 

Thechanges in the carrying amount of goodwill for fiscal 2005 and 2004 are asfollows (amounts in thousands):
| ** **                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Beginning balance                               |       | $        | 185,501    |     | $          | 187,438 |   |
| Proceeds from  settlement of acquisition escrow |       | —   |       | (2,170   | )          |
| Other                                           |       | 157      |       | 233      |       |
| Ending balance                                  |       | $        | 185,658    |     | $          | 185,501 |   |

 

Amortizationexpense related to goodwill and other intangible assets was $19.9 million,$18.9 million and $17.5 million during fiscal 2005, 2004 and 2003,respectively. Estimated aggregate future amortization expense for acquisition-relatedintangible assets in future fiscal years are as follows (amounts in thousands):
| ** **            | ** ** | **Fiscal Year Ending February 28 or 29,** | ** ** |
|-----------------------|------------|-------------------------------------------------------------------------|------------|
| ** **            | ** ** | **2006**                                                                | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Total** | ** ** |
| Amortization  expense |       | $                                                                       | 12,497     |   | $ | 7,146 |   | $ | 2,441 |   | $ | 914 |   | $ | 153 |   | $ | 23,151 |   |
|                       |            |                                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-17

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In accordance with SFAS142, the assembled workforce intangible asset was reclassified to goodwill andthe Company no longer amortizes goodwill effective March 1, 2002.

**GOODWILL IMPAIRMENT**

On March 1, 2002, the Company adopted theprovisions of SFAS 142, which required assembled workforce and certain otheridentifiable intangible assets to be reclassified as goodwill. The Companytests goodwill for impairment on an annual basis, coinciding with the Company’sfiscal year end, or on an interim basis if circumstances change that would morelikely than not reduce the Company’s implied fair value (which includes factorssuch as, but not limited to, the Company’s market capitalization, controlpremium and recent stock price volatility) below its carrying value.

The Company performed a test for goodwill impairmentas of February 28, 2003, the Company’s annual date for goodwill impairmentreview and determined the implied fair value of the Company was less thanstockholders’ equity, including goodwill, an indication that goodwill may beimpaired. Therefore, the Company performed the second step of the impairmenttest. As a result, the Company recorded a goodwill impairment charge of $96.3million to reduce goodwill associated with acquisitions to the estimated fairvalue as of that date. The goodwill impairment loss was determined bycalculating the difference between: a) the implied fair value of the Company asof February 28, 2003 less the fair value of the net assets of the Companyand b) the carrying value of goodwill. The fair value of the identifiableintangible assets of the Company were determined by an independent valuation.The implied fair value of the Company was estimated based on the closing quotedmarket price of the Company’s common stock on February 28, 2003 multipliedby the number of outstanding common shares (market capitalization) plus animplied control premium as if the Company were 100% owned by a singlestockholder. The implied control premium used for purposes of measuring theimplied fair value of the Company was determined by review of the premiums paidby other companies in past public technology and software acquisitions.

During the six months ended August 31, 2004, theCompany experienced adverse changes in its stock price resulting from its poorfinancial performance. As a result, the Company performed a test for goodwillimpairment at August 31, 2004 and determined that based upon the impliedfair value (which includes factors such as, but not limited to, the Company’smarket capitalization, control premium and recent stock price volatility) ofthe Company as of August 31, 2004, there was no impairment of goodwill.There was no change in circumstances during the three months ended November 30,2004 that caused the Company to perform an additional test for goodwillimpairment at November 30, 2004.

The Company performed atest for goodwill impairment at February 28, 2005, the Company’s annualdate for goodwill impairment review and determined that based upon the impliedfair value (which includes factors such as, but not limited to, the Company’smarket capitalization, control premium and recent stock price volatility) ofthe Company as of February 28, 2005, there was no impairment of goodwill.The Company will continue to test for impairment on an annual basis, coincidingwith its fiscal year end, or on an interim basis, if circumstances change thatwould more likely than not reduce the implied fair value of the Company belowits 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 and November 2000.The Notes bear interest at 5.0% per annum which is payable semi-annually. The Companyhad $175.5 million outstanding as of February 28, 2005 and February 29,2004, respectively. The fair market value of the Notes was $161.2 million and$174.4 million on February 28, 2005 and February 29, 2004,respectively, based on market quotes. The Notes mature in November 2007and are convertible into approximately 4.0 million shares of the Company’scommon stock at a conversion price of $44.06, subject to adjustment undercertain conditions. The conversion price of the 

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Notes will be adjusted in theevent that the Company issues common stock as a dividend or distribution withrespect to its common stock, subdivides, combines or reclassifies its commonstock, issues rights to its common stockholders to purchase common stock atless than market price, makes certain distributions of securities, cash orother property to its common stockholders (other than ordinary cash dividends),or makes certain repurchases of common stock. Upon a change of control of theCompany, the holders of the Notes would have the right to require the Companyor its successor to repurchase the Notes at a purchase price equal to 100% ofthe principal amount, plus accrued and unpaid interest to the date ofrepurchase in cash. The Notes do not have any financial covenants.

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’scommon stock for 20 trading days in a period of 30 consecutive trading daysending on the day prior to the mailing of notice of redemption exceeds 120% ofthe conversion price of the Notes. The redemption price, expressed as apercentage of the principal amount, is:
| **Redemption Period**                           | ** ** | ** ** | ** ** | **Redemption Price** | ** ** |
|------------------------------------------------------|------------|------------|------------|---------------------------|------------|
| November 1,  2004 through October 31, 2005 |       |       | 102        | %                         |       |
| 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 from registrationunder Section 3(a)(9) of the Securities Act of 1933 and may be freelytraded upon issuance.

At the conversion price of $44.06 per share, the $74.5million of Notes exchanged would have been convertible into 1,690,780 shares ofcommon stock. For accounting purposes, the additional 8,034,970 shares ofcommon stock that the Company issued in these transactions are considered aninducement for the holders to convert their Notes, which required the Companyto record a non-operating expense equal to the fair value of the additionalshares issued to the holders. Accordingly, the Company recorded a non-cash debtconversion expense of approximately $59.8 million during the twelve monthsended February 29, 2004. These transactions resulted in a $74.5 millionreduction of the Notes outstanding and increased stockholders’ equity by $74.5million. The 9,725,750 shares of common stock issued in these transactionsrepresented approximately 11.9% of the shares outstanding as of February 29,2004.

Line of Credit.   The Company had a one-yearunsecured revolving credit facility (the “Credit Facility”) with Silicon ValleyBank (“SVB”) for $15.0 million which expired on March 30, 2005. Under theterms of the Credit Facility, the Company could request cash advances, lettersof credit, or both. The Credit Facility requires the Company to comply withfinancial covenants including (i) a minimum tangible net worth requirementand (ii) a minimum ratio of (a) unrestricted cash, cash equivalents,marketable securities and long-term investments deposited with SVB and itsaffiliates plus net accounts receivable to (b) current liabilities, pluslong-term indebtedness to SVB and outstanding letters of credit, minus deferredrevenue, of at least 1.75 to 1.0. On September 22, 2004, the Company andSVB amended the terms of the Credit Facility to change the minimum tangible networth (defined as the total consolidated assets of the Company minus goodwill,capitalized software costs, other intangible assets and total liabilities plusconvertible debt and up to $10.0 million in exit and disposal accruals)requirement to $120.0 million as of November 30, 2004 and $120.0 millionplus 50% of net quarterly GAAP profit for the quarter ended February 28,2005. The Company was in compliance with all financial covenants as of February 28,2005 and February 29, 2004. There were no cash draws outstanding under theCredit Facility as of February 28, 2005 and February 29, 2004. As of February 28,2005 and February 29, 2004, the Company had $9.5 million and $9.9 million,respectively, in letters of credit outstanding under the Credit Facility tosecure its lease obligations for certain office space.

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The Credit Facility requires the Company to maintain$50.0 million in funds with SVB Asset Management and its affiliates. The CreditFacility also restricts the amount of additional debt the Company can incur andrestricts the amount of cash that the Company can use for acquisitions and forthe repurchase of convertible debt. Under the terms of the Credit Facility, theCompany retains the right to terminate the facility at any time upon repaymentof any advances and the posting of cash collateral for any outstanding lettersof credit. Under the Credit Facility, SVB has the right to obtain a lien on allof the Company’s assets, other than intellectual property, upon an occurrenceof default, unless the Company terminates the facility as provided above. TheCredit Facility also provides that, upon an event of default, the Company isprohibited from paying a cash dividend to its shareholders.

The Company had an additional credit agreement (the “EquipmentLine”) with SVB, as amended, which expired on March 31, 2003, under whichthe Company was permitted to borrow up to $5.0 million for the purchase ofequipment. During fiscal 2003, the Company borrowed $2.9 million under theEquipment Line. Amounts borrowed under the Equipment Line in fiscal 2003 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. Theprincipal balance remaining as of February 28, 2005 and February 29,2004 was approximately $0.7 million and $1.7 million, respectively. Thefinancial covenants for the Equipment Line are the same as the financial covenantsfor the Credit Facility. The Company was in compliance with all financialcovenants as of February 28, 2005 and February 29, 2004.

On April 8, 2005, the Company renewed the CreditFacility (the “New Credit Facility”) with SVB for $15.0 million and a two yearterm effective March 29, 2005. Under the terms of the New Credit Facility,the Company may request cash advances, letters of credit, or both. Borrowingsunder the New Credit Facility accrue interest at the prime rate plus 0.5%. TheNew Credit Facility requires the Company to comply with the following financialcovenants: (i) minimum tangible net worth (defined as stockholders’ equityplus convertible debt less goodwill, capitalized software costs and otherintangible assets) must be at least $90.0 million plus 50% of consolidated netincome generated cumulatively commencing with the first quarter of fiscal 2006and (ii) our ratio of (a) unrestricted cash, cash equivalents,marketable securities and long-term investments deposited with SVB and itsaffiliates plus net accounts receivable to (b) current liabilities pluslong-term indebtedness to SVB and outstanding letters of credit minus deferredrevenue, must be at least 2.0 to 1.0.

The New Credit Facility requires the Company tomaintain $50.0 million in funds with SVB Asset Management and its affiliates.The New Credit Facility also restricts the amount of additional debt theCompany can incur and restricts the amount of cash that the Company can use foracquisitions and for the repurchase of convertible debt. Under the terms of theNew Credit Facility, the Company retains the right to terminate the facility atany time upon repayment of any advances and the posting of cash collateral forany outstanding letters of credit. Under the New Credit Facility, SVB has theright to obtain a lien on all of the Company’s assets, other than intellectualproperty, upon an occurrence of default, unless the Company terminates thefacility as provided above. The New Credit Facility also provides that, upon anevent of default, the Company is prohibited from paying a cash dividend to theCompany’s shareholders.

Additionally, the New Credit Facility includes aprovision for supplemental equipment advances, under which the Company is ableto borrow up to an additional $5.0 million for the purchase of equipment,office furniture and other capital expenditures. Amounts may be borrowed forsuch capital expenditures through December 31, 2005 and accrue interest ata fixed interest rate equal to 7.75% annually. Equipment advances will berepaid monthly over a 36 month-period, beginning in the month following theadvance. The financial covenants for the supplemental equipment advances arethe same as the financial covenants for the New Credit Facility.

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Prior to entering into thecredit facility agreement with SVB, the Company had a credit facility agreementwith Bank of America (“BOA”) that expired on February 26, 2003. As of February 28,2003, the Company had $13.0 million in outstanding letters of credit with BOAwhich were fully collateralized. In March 2003, $9.3 million ofoutstanding letters of credit with BOA were transferred to SVB. The remaining$3.3 million in outstanding letters of credit was used to secure a leaseobligation for certain international office space. During the year ended February 29,2004, the Company was informed by BOA that BOA would not renew the letter ofcredit and the holder would not accept a replacement for the letter of creditfrom another bank on terms that were favorable to the Company. During fiscal2004, the holder requested a cash draw for the full amount of the letter ofcredit. Accordingly, $3.7 million and $3.3 million was recorded as a deposit innon-current assets in the Consolidated Balance Sheet as of February 28,2005 and February 29, 2004, respectively.

**8.   COMMITMENTS AND CONTINGENCIES**

Commitments.   The Company leases office space,office equipment and automobiles under operating leases and various computersand other equipment under capital leases. Aggregate property acquired throughcapital leases amounted to $7.9 million and $6.2 million at February 28,2005 and February 29, 2004, respectively, and has been included inpurchased software and office furniture and equipment (see Note 4). Totalaccumulated amortization relating to these leases was $3.7 million and $2.5million as of February 28, 2005 and February 29, 2004, respectively.

Rentexpense for fiscal 2005, 2004 and 2003, was approximately $13.6 million, 19.7million and $27.5 million, respectively. The future minimum lease paymentsunder these capital and operating leases for each of the succeeding fiscalyears beginning March 1, 2005 are as follows (in thousands):
| ** **                         | ** ** | **Capital** | ** ** | **Operating** | ** ** |
|------------------------------------|------------|-------------|------------|---------------|------------|
| **Fiscal Year**               | ** ** | ** **  | ** ** | **Leases**    | ** ** | **Leases** | ** ** |
| 2006                               |       | $           | 2,029      |          | $          | 14,849 |   |
| 2007                               |       | 1,371       |       | 13,383        |       |
| 2008                               |       | 426         |       | 11,599        |       |
| 2009                               |       | —      |       | 9,571         |       |
| 2010                               |       | —      |       | 9,489         |       |
| Thereafter                         |       | —      |       | 35,823        |       |
| Total minimum lease payments       |       | 3,826       |       | 94,714        |       |
| Less amounts representing interest |       | (253        | )          | —        |       |
| Less sublease income               |       | —      |       | (12,453       | )          |
| Net minimum lease payments(1)      |       | $           | 3,573      |          | $          | 82,261 |   |
|                                    |            |             |            |               |            |  |  |  |  |

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(1)          Approximately $1.9million and $1.7 million is included in other current liabilities and long-termdebt and capital leases, respectively, in the consolidated balance sheet as of February 28,2005.

Contingencies.   The Company is involved indisputes and litigation in the normal course of business. The Company does notbelieve that the outcome of any of these disputes or litigation will have amaterial affect on the Company’s operating performance and financial conditionor results of operations. The Company has established accruals related to suchmatters that are probable and reasonably estimable. However, an unfavorableoutcome of some or all of these matters could have a material affect on theCompany’s operating performance, financial condition and cash flows.

Indemnification.   The Company licenses softwareto its customers under contracts which the Company refers to as SoftwareLicense Agreements (“SLA”). Each SLA contains the relevant terms of the 

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contractual arrangementwith the customer, and generally includes certain provisions for indemnifyingthe customer 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 a thirdparty. The SLA generally limits the scope and remedies for such indemnificationobligations in a variety of industry-standard respects, including but notlimited to certain time and geography-based scope limitations and a right toreplace an infringing product or modify the product so that it is no longerinfringing. If the Company cannot address the infringement by replacing theproducts or services, or modifying the products or services, the Company isallowed to cancel the software license and return the fees paid by customer.The Company requires its employees to sign a proprietary information andinventions 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, 2005. 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 the Company’soperating performance or financial condition.

Product Warranty.   TheCompany generally warrants its software products. The Company provides for theestimated cost of product warranties based on specific warranty claims,provided that it is probable that a liability exists and provided the amountcan be reasonably estimated. To date, the Company has not had any materialcosts associated with these warranties.

**9.**   STOCKHOLDERS’EQUITY

**Preferred Stock**

The Company has authorized4,620,253 shares of $.01 par value preferred stock. As of February 28,2005, 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.

**Warrantsand Customer Stock Issuances**

In connection with the acquisition of Talus Solutions, Inc.(“Talus”) in fiscal 2001, the Company assumed warrants issued to purchase up to65,000 shares of the Company’s common stock for certain past services renderedby outside consultants and the issuance of certain notes payable. On February 28,2001, warrants to purchase 49,096 shares were exercised. As of February 28,2005, warrants to purchase up to 8,879 shares were exercisable and haveexercise prices ranging from $6.83 to $16.90 and expire between May 2005and June 2005.

In March 2004, the Companyentered into an amendment to an existing alliance agreement with InternationalBusiness Machines Corporation (“IBM”) under which the companies will develop,market, sell and deliver demand and supply chain solutions globally. Inconnection with entering into the amendment to the alliance agreement, theCompany issued a warrant (the “Warrant”) to IBM to acquire 250,000 shares ofthe Company’s common stock at a per share purchase price of $8.51, in relianceupon an exception provided under Section 4(2) of the Securities Act of 1933, asamended, for transactions not involving a public offering. The Warrant isimmediately exercisable, expires March 12, 2009, and provides 

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forcustomary registration and indemnification rights and certain limited transferrights. The fair value of the Warrant of $1.1 million is being recognized asoperating expense over the three-year service period of the alliance agreement.The fair value of the Warrant was calculated using the Black-Scholes optionpricing model with the following assumptions: risk-free interest rate of 2.79%;dividend yield of zero; volatility of 99%; and a Warrant life of five years. TheCompany recorded $0.4 million in amortization expense associated with theWarrant in fiscal 2005.

**Employee Stock Purchase Plan**

In October 1994, theCompany adopted an employee stock purchase plan (“ESPP”) that authorizes theCompany 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 totaled163,015 shares, 211,589 shares and 428,972 shares in fiscal 2005, 2004 and2003, respectively. The weighted average estimated fair value of sharespurchased in fiscal 2005, 2004 and 2003 was $0.52, $2.23 and $3.96,respectively.

**Stock Options**

Effective September 13, 2000, the Company adoptedthe 2000 Non-Qualified Stock Option Plan (“2000 Plan”) under whichnon-qualified stock options may be granted to officers, directors and employeesto purchase a total of up to 8.0 million new shares of common stock at pricesnot less than fair market value at the time of grant. Effective July 24,1998, the Company adopted the 1998 Plan under which incentive and non-qualifiedstock options may be granted to officers, directors and employees to purchase atotal of up to 10.5 million new shares of common stock at prices not less thanthe fair market value at the time of grant. In April 2001, the Board ofDirectors of the Company adopted a proposed amendment to the 1998 Stock OptionPlan (“1998 Plan”) to increase the number of shares of Common Stock reservedfor issuance to 20,475,800. In addition, the Board of Directors approved thetermination of the 2000 Plan. The terms of the 2000 Plan remain in effect foroptions outstanding at the termination date. Prior to the adoption of the 1998Plan, the Company had additional plans under which it granted stock optionsincluding the 1994 Employee Stock Option Plan (“1994 Plan”), the 1994 OutsideDirectors Non-qualified Stock Option Plan (“1994 Director Plan”) and the 1994Executive Incentive Stock Option Plan (“1994 Executive Plan”). No new optionswill be granted under these additional stock option plans, which will remain ineffect with respect to options outstanding under such plans until such optionsare exercised, terminated or expire. Options under the employee option exchangeprogram (see below) were granted under the 1998 Plan and the 2000 Plan. As of February 28,2005, the Company has cumulatively granted options of 4.4 million shares underthe 2000 Plan, 18.7 million shares under the 1998 Plan, 12.3 million sharesunder the 1994 Plan, 763,000 shares under the 1994 Director Plan and 369,332shares 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 

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the vested options expiresupon the earlier of either ten years (or for options granted prior to 1994,eleven years) from the date of grant or, generally, within thirty days oftermination of employment.

During fiscal 2004, 2001 and 2000, the Company grantednon-qualified stock options in the amount of 400,000, 770,000 and 7.3 millionshares, respectively, to several of the Company’s executive officers andemployees. These stock option grants were approved by the Company’s Board ofDirectors and were not granted under any of the above-mentioned stock optionplans. These shares vest and become exercisable over periods ranging fromimmediate vesting to one hundred percent vesting upon the earlier ofachievement of certain pre-defined performance targets or seven years from thedate of grant. As of February 28, 2005, 5.3 million of these options wereoutstanding. No options of this nature were granted in fiscal 2005, fiscal 2003and fiscal 2002.

Effective January 29, 1999, the Company completeda stock option repricing program in which options to purchase a total ofapproximately 3.0 million shares of the Company’s common stock were repriced.Under the repricing program, which was approved by the shareholders of theCompany, outstanding options (other than those held by executive officers anddirectors) surrendered for repricing were exchanged for an equivalent number ofrepriced options. The exercise price of the repriced options is $4.38 per share(the fair market value of the common stock at that date) and the four-yearvesting schedule of each option restarted on February 1, 1999. Inconjunction with the Company’s restructuring, the vesting period for the firsttwo years was accelerated as previously provided for in the plan and approvedby the Compensation Committee of the Board of Directors, pursuant to authoritygranted to it under the related option plans, due to certain earningsmilestones being met in fiscal 2001 and 2000.

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 28,2005, the Company had approximately 372,900 repriced options outstanding. Sincethe stock price at the beginning and end of each of the fiscal 2005 quarterswas below $23.38, no charge or benefit was recorded during fiscal 2005.

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 $0.2million, $1.8 million and $3.4 million fiscal 2005, 2004 and 2003,respectively. All of the outstanding options related to the Talus acquisitionare fully vested and all compensation expense has been recognized as of February 28,2005.

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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,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|
| ** **                        | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                        | ** ** | **Options to**                   | ** ** | ** ** | ** ** | **Options to** | ** ** | ** ** | ** ** | **Options to** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Purchase**                          | ** ** | **Wtd. Avg.** | ** ** | **Purchase** | ** ** | **Wtd. Avg.** | ** ** | **Purchase** | ** ** | **Wtd. Avg.** | ** ** |
| ** **                        | ** ** | **Shares**                            | ** ** | **Ex. Price** | ** ** | **Shares** | ** ** | **Ex. Price** | ** ** | **Shares** | ** ** | **Ex. Price** | ** ** |
| Outstanding at  beginning of year |       |                                  | 16,970     |   |   |   | $ | 6.86 |   |   |   | 20,655 |   |   |   | $ | 13.38 |   |   |   | 22,360 |   |   |   | $ | 16.16 |   |   |
| Options granted  at market value  |       |                                  | 5,680      |   |   |   | 2.89 |   |   |   | 5,473 |   |   |   | 5.87 |   |   |   | 3,153 |   |   |   | 5.11 |   |   |
| Exercised                         |       |                                  | (160       | ) |   |   | 3.62 |   |   |   | (1,726 | ) |   |   | 4.68 |   |   |   | (566 | ) |   |   | 6.36 |   |   |
| Cancelled                         |       |                                  | (3,086     | ) |   |   | 6.14 |   |   |   | (7,432 | ) |   |   | 24.74 |   |   |   | (4,292 | ) |   |   | 22.68 |   |   |
| Outstanding at  end of year       |       |                                  | 19,404     |   |   |   | $ | 5.84 |   |   |   | 16,970 |   |   |   | $ | 6.87 |   |   |   | 20,655 |   |   |   | $ | 13.38 |   |   |
| Exercisable at  end of year       |       |                                  | 11,120     |   |   |   | $ | 7.23 |   |   |   | 10,220 |   |   |   | $ | 7.49 |   |   |   | 11,482 |   |   |   | $ | 13.19 |   |   |

 

**Restricted Stock Program**

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 2005, the Company issued 1.3million shares of restricted stock to certain key employees. The restrictedstock awards granted to key employees have a vesting schedule pursuant to whichthe stock award vests in three equal annual increments over three years fromthe date of grant. The total value of the fiscal 2005 restricted stock awardsgranted of approximately $2.6 million was computed using the closing stockprice on the date of grant and a 22% estimated forfeiture rate and was recordedas a component of deferred compensation. The related compensation expense willbe recognized over the vesting period. Additionally in fiscal 2005, 333,000shares were issued to the new Chief Executive Officer, resulting in an increasein deferred compensation in stockholders’ equity of $0.9 million, which will berecognized over the vesting period. All restricted shares issued to the ChiefExecutive Officer fully vest on January 1, 2006.

On October 17, 2003,the Company issued 205,000 shares of restricted stock to certain key employees.The restricted stock awards granted to key employees have a vesting schedulepursuant to which the stock award vests in four equal increments over fouryears from the date of grant, with the first increment vesting on April 17,2005. The total value of the 2003 restricted stock awards granted ofapproximately $1.3 million was computed using the closing stock price on thedate of grant and was recorded as a component of deferred compensation. Therelated compensation expense will be recognized and amortized over the vestingperiod. The Company recorded $1.2 million and $0.3 million in compensationexpense related to restricted shares outstanding during the fiscal years ended February 28,2005 and February 29, 2004, respectively.

**Stock Option-Based Compensation**

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 isrequired by SFAS 148, which uses the fair value method. The fair value of theCompany’s stock option-based awards to employees was estimated as of the dateof grant using the Black-Scholes option pricing model. Limitations 

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on the effectiveness ofthe Black-Scholes option pricing model include that it was developed for use inestimating the fair value of traded options which have no vesting restrictionsand are fully transferable and that the model requires the use of highlysubjective assumptions including expected stock price volatility. Because theCompany’s stock option-based awards to employees have characteristicssignificantly different from those of traded options and because changes in thesubjective input assumptions can materially affect the fair value estimate, inmanagement’s opinion, the existing models do not necessarily provide a reliablesingle measure of the fair value of its stock 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,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net loss, as  reported                                                           |       | $                                     | (55,271    | ) |   | $ | (103,800 | ) |   | $ | (212,239 | ) |
| Add: Stock-based  compensation expense included in reported net loss, net of tax |       | 168                                   |       |   | 1,799 |   |   | 3,426 |   |
| Less: Stock-based  compensation, net of tax                                      |       | (6,301                                | )          |   | (2,611 | ) |   | (26,564 | ) |
| Pro forma net  loss                                                              |       | $                                     | (61,404    | ) |   | $ | (104,612 | ) |   | $ | (235,377 | ) |
| Basic and diluted loss per share, as reported                                    |       | $                                     | (0.67      | ) |   | $ | (1.43 | ) |   | $ | (3.04 | ) |
| Basic and diluted loss  per share, pro forma                                     |       | $                                     | (0.75      | ) |   | $ | (1.44 | ) |   | $ | (3.37 | ) |

 

Fiscal 2005, 2004 and 2003 pro forma amounts include$37 thousand, $170 thousand and $557 thousand, respectively, related to thepurchases under the employee stock purchase plan.

Theweighted average fair value of options granted in fiscal 2005, 2004 and 2003was $1.62, $3.28 and $3.48 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**   | ** ** |
|---------------------------|------------|-------------|------------|------------|------------|
| ** **                | ** ** | **2005**    | ** ** | **2004**   | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Risk-free  interest rates |       | 3.12        | %          | 2.51       | %          | 2.53 | % | 2.028 | % | 1.357 | % | 1.75 | % |
| Expected term             |       | 4.37 years  |       | 4.53 years |       | 3.95 years |   | 3 months |   | 6 months |   | 6 months |   |
| Volatility                |       | .7399       |       | .9423      |       | 1.01 |   | .5498 |   | .8492 |   | .8705 |   |

 

Asummary of the weighted average remaining contractual life and the weightedaverage exercise price of options outstanding as of February 28, 2005 ispresented below with share amounts in thousands:
| ** **                    | ** ** | ** **      | ** ** | **Weighted Avg.** | ** ** | ** **             | ** ** | ** **      | ** ** | ** **             | ** ** |
|-------------------------------|------------|-----------------|------------|------------------------|------------|------------------------|------------|-----------------|------------|------------------------|------------|
| ** **                    | ** ** | **Number**      | ** ** | **Remaining**          | ** ** | **Weighted Avg.** | ** ** | **Number**      | ** ** | **Weighted Avg.** | ** ** |
| **Range of**             | ** ** | **Outstanding** | ** ** | **Contractual**        | ** ** | **Exercise**           | ** ** | **Exercisable** | ** ** | **Exercise**           | ** ** |
| **Exercise Prices**      | ** ** | ** **      | ** ** | **at 2/28/05**    | ** ** | **Life**               | ** ** | **Price**       | ** ** | **at 2/28/2005**  | ** ** | **Price** | ** ** |
| $0.0000 - $2.5850             |       |            | 3,972      |                   |       |                   | 9.6        |            |       |                   | $          | 2.56 |   |   |   | 431 |   |   |   | $ | 2.52 |   |   |
| $2.5950 - $3.9063             |       |            | 4,200      |                   |       |                   | 5.8        |            |       |                   | 3.59       |   |   |   | 3,077 |   |   |   | 3.86 |   |   |
| $3.9219 - $5.5350             |       |            | 4,331      |                   |       |                   | 6.8        |            |       |                   | 4.85       |   |   |   | 2,252 |   |   |   | 4.77 |   |   |
| $5.5500 - $6.9688             |       |            | 3,938      |                   |       |                   | 7.0        |            |       |                   | 6.25       |   |   |   | 2,473 |   |   |   | 6.15 |   |   |
| $6.9700 - $56.375             |       |            | 2,963      |                   |       |                   | 4.9        |            |       |                   | 14.31      |   |   |   | 2,887 |   |   |   | 14.38 |   |   |
| $  0.000  - $56.375 |       |            | 19,404     |                   |       |                   | 6.9        |            |       |                   | $          | 5.84 |   |   |   | 11,120 |   |   |   | $ | 7.23 |   |   |
|                               |            |                 |            |                        |            |                        |            |                 |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**EmployeeStock Option Exchange Program**

On February 10, 2003, the Company announced avoluntary stock option exchange program for its employees. Under the program,the Company offered to exchange options to purchase approximately an 

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aggregate of 6.1 millionshares of Manugistics common stock held by eligible employees, vested orunvested, that had exercise prices equal to or greater than $7.0001 per share.All employees had the opportunity to exchange existing eligible options for apromise to grant new options at exchange ratios dependent on the exercise priceof the exchanged options. Members of our Board of Directors, including theCompany’s Chairman and CEO, did not participate in this program.

On March 10, 2003, the Company announced that ithad accepted for cancellation and exchange options to purchase approximately4.8 million shares of its common stock in exchange for approximately 1.5million new options of its common stock, to be granted on September 16,2003. The Company granted approximately 1.2 million new options on September 16,2003 as a result of the option exchange program. The number of new optionsgranted to employees declined from the original expected amount as a result ofvoluntary and involuntary terminations. The replacement options have terms andconditions that are substantially the same as those of the cancelled options.The exercise price of the replacement options is $5.55 per share, which was themarket value of a share of the Company’s common stock on the date of grant asdetermined under the Company’s option 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 ashare of series A junior participating preferred stock, $.01 par value pershare, at a purchase price of $19.00 in cash, subject toadjustment. Initially, the Rights are not exercisable and will be attachedto all certificates representing outstanding shares of common stock, and noseparate Rights certificates will be distributed. The Rights will becomeexercisable and separate from the common stock, and the distribution date willoccur, upon the earlier of (i) 10 business days following the later of (a) thefirst date 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.

**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 $1.4 million, $1.8 million and $2.1 million for fiscal2005, 2004 and 2003, respectively.

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**12.   INCOMETAXES**

IncomeTax Provision. The components of the income tax provision are as follows (inthousands): 
| ** **                        | ** ** | **Fiscal year ended February 28 or 29,**           | ** ** |
|-----------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** |
| Current:                          |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Federal                           |       |                                                                             | $          | — |   |   |   | $ | 147 |   |   |   | $ | (799 | ) |   |
| State                             |       |                                                                             | 100        |   |   |   | 150 |   |   |   | 150 |   |   |
| Foreign                           |       |                                                                             | 625        |   |   |   | 1,017 |   |   |   | 1,717 |   |   |
| Total current                     |       |                                                                             | $          | 725 |   |   |   | $ | 1,314 |   |   |   | $ | 1,068 |   |   |
| Deferred:                         |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Federal                           |       |                                                                             | $          | — |   |   |   | $ | — |   |   |   | $ | 15,558 |   |   |
| State                             |       |                                                                             | —     |   |   |   | — |   |   |   | 2,082 |   |   |
| Foreign                           |       |                                                                             | —     |   |   |   | — |   |   |   | 2,710 |   |   |
| Total deferred                    |       |                                                                             | $          | — |   |   |   | $ | — |   |   |   | $ | 20,350 |   |   |
| Total provision  for income taxes |       |                                                                             | $          | 725 |   |   |   | $ | 1,314 |   |   |   | $ | 21,418 |   |   |

 

Loss before income taxes includes losses from foreignoperations of approximately $10.9 million, $0.5 million and $20.0 million infiscal 2005, fiscal 2004 and fiscal 2003, respectively.

Thecomponents of the Company’s deferred tax assets and liabilities are as follows(in thousands):
| ** **                      | ** ** | **February 28 or 29,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Deferred tax assets:            |       |                                  |       |   |   |
| Accrued expenses                |       | $                                     | 4,447      |   | $ | 5,872 |   |
| Operating loss  carryforwards:  |       |                                  |       |   |   |
| Domestic                        |       | 124,460                               |       | 132,974 |   |
| Foreign                         |       | 25,119                                |       | 29,890 |   |
| Exit and disposal charges       |       | 11,321                                |       | 9,681 |   |
| Tax credit carryforwards        |       | 5,787                                 |       | 5,787 |   |
| Stock-based transactions        |       | 5,096                                 |       | 4,767 |   |
| Investment losses               |       | 4,186                                 |       | 4,186 |   |
| Depreciation and amortization   |       | 38,264                                |       | 24,620 |   |
| Software development costs      |       | —                                |       | 3,052 |   |
| Other temporary differences     |       | 5,802                                 |       | 2,601 |   |
| Deferred tax assets             |       | 224,482                               |       | 223,430 |   |
| Less: valuation allowance       |       | (200,699                              | )          | (208,389 | ) |
| Total deferred  tax assets      |       | 23,783                                |       | 15,041 |   |
| Deferred tax  liabilities:      |       |                                  |       |   |   |
| Acquired intangibles            |       | (12,381                               | )          | (12,381 | ) |
| Software development costs      |       | (9,452                                | )          | — |   |
| Other                           |       | (1,950                                | )          | (2,660 | ) |
| Total deferred  tax liabilities |       | (23,783                               | )          | (15,041 | ) |
| Net deferred tax assets         |       | $                                     | —     |   | $ | — |   |

 

Deferred tax assets of approximately $47.7 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 

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period in which the Companyrealizes a benefit on its tax return from a reduction of income tax payablestemming from the utilization of these losses. When realized, the tax benefitsof these credits and losses will be accounted for as a credit to stockholdersequity rather than as a reduction of the income tax provision.

Changesin the valuation allowance during fiscal 2005 are as follows (in thousands):
| Balance,  February 29, 2004 |   | $       | 208,389 |   |
|----------------------------------|--------|---------|---------|--------|
| Current year  operations         |   | 13,955  |    |
| Exit and disposal  activities    |   | 1,668   |    |
| Debt conversion                  |   | (23,737 | )       |
| Stock option  exercises          |   | 183     |    |
| Other                            |   | 241     |    |
| Balance,  February 28, 2005 |   | $       | 200,699 |   |

 

At February 28, 2005, the Company had a total ofapproximately $313.0 million of U.S. federal and $78.0 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 2025. 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 $10.1 million of the foreign net operating lossesexpire during the calendar years 2006 to 2014, 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 $4.5 million of research anddevelopment tax credit carryforwards, which expire between calendar years 2011and 2022, and $1.3 million of foreign tax credit carryforwards that expire incalendar year 2005.

StatutoryRate Reconciliation. The difference between the reported amount of income taxexpense and the amount of income tax expense that would result from applyingstatutory U.S. federal tax rate of 35% is summarized as follows (in thousands):
| ** **                                                        | ** ** | **February 28 or 29,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                        | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Benefit for  income taxes computed at statutory rate              |       | $                                     | (19,091    | ) | $ | (35,870 | ) | $ | (66,787 | ) |
| Increase (reduction) in taxes resulting from:                     |       |                                  |       |   |   |   |   |
| State income taxes (benefit), net of federal provision  (benefit) |       | 100                                   |       | 150 |   | (293 | ) |
| Foreign exchange rate differential                                |       | 2,542                                 |       | 1,321 |   | 849 |   |
| Net change in valuation allowance                                 |       | (7,690                                | )          | 35,987 |   | 54,258 |   |
| Impact of debt conversion and other permanent  differences        |       | 23,821                                |       | — |   | — |   |
| Goodwill amortization and impairment                              |       | —                                |       | — |   | 33,722 |   |
| Other                                                             |       | 1,043                                 |       | (274 | ) | (331 | ) |
| Provision for income  taxes                                       |       | $                                     | 725        |   | $ | 1,314 |   | $ | 21,418 |   |

 

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**13.   OTHER EXPENSE**

Otherexpense consists of the following (in thousands): 
| ** **            | ** ** | **February 28 or 29,** | ** ** |
|-----------------------|------------|---------------------------------------|------------|
| ** **            | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest income       |       | $                                     | 2,350      |   | $ | 1,673 |   | $ | 3,635 |   |
| Interest expense      |       | (10,242                               | )          | (13,839 | ) | (14,127 | ) |
| Exchange gain  (loss) |       | 351                                   |       | (1,609 | ) | 2,309 |   |
| Other                 |       | 227                                   |       | 320 |   | 241 |   |
| Total other  expense  |       | $                                     | (7,314     | ) | $ | (13,455 | ) | $ | (7,942 | ) |

 

**14.   ACQUISITIONS**

During the three yearsended February 28, 2005, the Company completed the following transactions:

**Digital Freight Exchange, Inc.**

On May 23, 2002, theCompany acquired substantially all of the assets of DFE for $4.5 million incash. DFE was a provider of collaborative transportation logistics servicesthat facilitate online, real-time bids for global transportation contracts.Approximately $0.3 million of the purchase price was paid in cash at closing.The remaining purchase price of $4.2 million was paid in cash in September 2002.

**Western Data Systems of Nevada, Inc.**

On April 26, 2002,the Company acquired certain assets and assumed certain liabilities of WesternData Systems of Nevada, Inc. (“WDS”) for $26.2 million in cash. At thetime of the acquisition, WDS was a leading provider of application software andservices to 135 customers in commercial aerospace, defense and maritimeindustries and the military. The WDS acquisition added to the Company’soffering of service & parts management solutions that address thecomplex business operations inherent to asset intensive industries. WDSsoftware includes capabilities ranging from predictive system failure forecastingand parts optimization, to finite capacity and labor resource scheduling, tomaintenance, repair and overhaul (“MRO”) shop planning and execution, anddirect materials purchase management. During the year ended and as of January 31,2002, WDS had revenue of approximately $28.0 million and had approximately 160employees.

The results of operations for WDS have been includedin the Company’s operations since the acquisition date. The purchase price hasbeen allocated to the assets acquired and liabilities assumed based on theirestimated fair values at the acquisition date. The fair value of identifiableintangible assets related to the WDS acquisition was determined by anindependent valuation and includes $16.2 million of acquired technology to beamortized over five years, $6.4 million of customer relationships to beamortized over seven years and $3.3 million of goodwill. 

In connection with the acquisition of WDS, the Companyallocated $3.8 million, or 14.5% of the purchase price to in-process researchand development projects. There were several in-process research anddevelopment projects at the time of the WDS acquisition. At the acquisitiondate, WDS was evaluating the efforts required to complete acquired in-processresearch and development projects including planning, designing, testing andother activities necessary to establish that the product or enhancements toexisting products could be produced to meet desired functionality and technicalperformance requirements. This was being done in conjunction with theenhancement of three software products. The most significant of these projectswas the completion of the Buying Advantage product, which is an advancedinternet-based direct procurement solution designed for large aerospace anddefense companies, 

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mid-sized suppliers andmaintenance, repair and overhaul facilities in industry and government. Itenables single-site or multi-site organizations to leverage the suppliercommunity as a strategic asset through aggregated sourcing and buying, increasedbuyer efficiencies and through efficient collaboration and integration withsuppliers. This results in reduced lead-time and cost and improvedresponsiveness. The value assigned to Buying Advantage was $3.3 million. 

The value of the purchased in-process research anddevelopment was computed using discount rates ranging from 26% to 30% on theanticipated income stream of the related product revenue using the incomeapproach appraisal method. The discounted cash flows were based on management’sforecast of future revenue, costs of revenue and operating expenses related tothe products and technologies purchased from WDS. The determined value was thenadjusted to reflect only the value creation efforts of WDS prior to the closeof the acquisition. At the time of the acquisition, the products andenhancements were at various stages of completion, ranging from approximately5% to 96% complete and future costs to complete the projects were anticipatedto be $2.8 million. Anticipated completion dates ranged from one month to 15months. The resulting value of purchased in-process research and developmentwas further reduced by the estimated value of core technology. A purchasedresearch and development charge of $3.8 million was recorded in fiscal 2003. 

The estimated revenue forthe in-process projects were expected to commence in calendar 2002 and 2003upon project completion and to decline over four years as new products andtechnologies enter the market. The discount rate utilized was higher than the Company’sweighted-average cost of capital due to the inherent uncertainties surroundingthe successful development of the purchased in-process technology, the usefullife of such technology, the profitability levels of the technology and theuncertainty of technological advances that were unknown at the time of theacquisition. The original research and development projects have beencompleted. 

**15.   EXIT AND DISPOSAL ACTIVITIES**

Thefollowing table sets forth a summary of total exit and disposal charges,payments made against those charges and the remaining liabilities as of February 28,2005 (amounts in thousands):
| ** **                                | ** ** | ** **                  | ** ** | **Charges and**            | ** ** | ** **                   | ** ** | **Non-cash**                   | ** ** | ** **                  | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | ** **                  | ** ** | **adjustments to**         | ** ** | **Utilization of**      | ** ** | **activity disposal**     | ** ** | ** **                  | ** ** |
| ** **                                | ** ** | ** **                  | ** ** | **charges in twelve** | ** ** | **cash in twelve** | ** ** | **losses in twelve** | ** ** | ** **                  | ** ** |
| ** **                                | ** ** | **Balance as of** | ** ** | **months ended**           | ** ** | **months ended**        | ** ** | **months ended**          | ** ** | **Balance as of** | ** ** |
| **All Plans**                        | ** ** | ** **                  | ** ** | **Feb. 29, 2004**     | ** ** | **Feb. 28, 2005**  | ** ** | **Feb. 28, 2005**    | ** ** | **Feb. 28, 2005** | ** ** | **Feb. 28, 2005** | ** ** |
| Lease obligations  and terminations(1)    |       |                        | $          | 18,636                          |       |                         |       | $                              | 8,119      |                        |       |   | $ | (8,481 | ) |   |   | $ | — |   |   |   | $ | 18,274 |   |   |
| Severance and  related benefits           |       |                        | 82         |                            |       |                         | 6,064      |                           |       |                        | (3,834     | ) |   |   | — |   |   |   | 2,312 |   |   |
| Impairment  charges and write-downs  |       |                        | —     |                            |       |                         | 2,742      |                           |       |                        | —     |   |   |   | (2,742 | ) |   |   | — |   |   |
| Other                                     |       |                        | 58         |                            |       |                         | 387        |                           |       |                        | (362       | ) |   |   | — |   |   |   | 83 |   |   |
| Subtotal                                  |       |                        | $          | 18,776                          |       |                         |       | $                              | 17,312     |                        |       |   | $ | (12,677 | ) |   |   | $ | (2,742 | ) |   |   | 20,669 |   |   |
| Reclassification  of deferred rent        |       |                        | 729        |                            |       |                         |       |                           |       |                        |       |   |   |   |   |   |   |   | 1,162 |   |   |
| Total                                     |       |                        | $          | 19,505                          |       |                         |       |                           |       |                        |       |   |   |   |   |   |   |   |   | $ | 21,831 |   |   |
|                                           |            |                             |            |                                 |            |                              |            |                                |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Certain accrued leaseobligations extend through fiscal year 2019.

*Plan FY05 Q2 Exit and Disposal Plans (“FY05 Q2Plans”).  *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 as well as a decline incertain of our key financial metrics discussed previously, (see “MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS”) inthe second quarter of fiscal 2005 the Company announced and began 

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implementing the FY05 Q2Plans. Actions taken included the involuntary termination of employees acrossmost business functions and abandoning excess office space deemed no longer inuse.

*Involuntary terminations*.   Duringfiscal 2005, the Company involuntarily terminated a total of 127 employeesacross most functional areas throughout the company, or approximately 14.2% ofthe total headcount at the end of fiscal 2004. 96 of the involuntarilyterminated employees were located in the U.S., 11 employees were located in theUnited Kingdom, 15 employees were located in Europe, four employees werelocated in Asia and one was located in Canada. As a result of the involuntaryterminations, the Company recorded severance and benefit related charges ofapproximately $6.0 million. Three of the terminated employees had employmentcontracts that defined the amount of severance and related benefits they wouldreceive upon termination. The severance and related benefits for employees withemployment contracts were accrued at August 31, 2004 in accordance withStatement of Financial Accounting Standards No. 88, “*Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits*” (“SFAS 88”) as the amounts were bothprobable and estimable. Additionally, there were 23 employees who were requiredto render service beyond the earlier of their termination date or minimumretention period of 60 days, as defined by SFAS 146. The severance cost forthese employees is recognized and accrued over the required service period inaccordance with SFAS 146. All terminated employees were notified within therequisite time period as proscribed by SFAS 146 and except for those 23employees noted above, all other employees were not required to render serviceto the Company for severance and related benefits beyond the earlier of theirtermination date or a minimum retention period of 60 days.

*Excess office space.  *TheCompany recorded charges, net of adjustments, totaling approximately $8.5million related to consolidating certain office space and abandoning excesscapacity deemed no longer in use. The Company recorded the charge for excessoffice space for properties located in San Carlos, California, Calabassas,California, Rockville, Maryland and Bracknell, United Kingdom. The Companypermanently vacated the office space located in Munich, Germany, Stockholm,Sweden and The Philippines and consolidated certain office space in Tokyo,Japan. The costs associated with the facilities charge were recorded based onthe present value of the sum of expected remaining lease commitments andinclude management’s best estimates of expected sublease income and costs associatedwith subleasing the vacated space. The estimated sublease income amountsrequires judgment and include assumptions regarding the period of sublease andthe price per square foot to be paid by the sublessors. As required by theapplicable accounting standards, the Company will review these estimatesperiodically and make adjustments, as necessary, to reflect managements bestestimates. In connection with the abandonment of the excess office space, theCompany recorded a write-down of certain property plant and equipment andleasehold improvements in accordance with SFAS 144. Total charges for the write-downof certain property, plant and equipment and leasehold improvements wereapproximately $2.5 million and included a benefit of approximately $0.4 millionrelated to the sale of the Company’s right to certain fractional shares of ajet. 

*Other contract termination cost.  *TheCompany recorded approximately $0.3 million in contract termination-relatedcosts primarily related to the termination of the Fall 2004 Envision Series Conference.

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Thefollowing table sets forth a summary of the FY05 Q2 Plans exit and disposalcharges, payments made and the remaining liabilities as of February 28,2005 (amounts in thousands):
| ** **                                                     | ** ** | ** **                  | ** ** | **Charges and**            | ** ** | ** **                   | ** ** | **Non-cash**                   | ** ** | ** **                  | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **                                                     | ** ** | ** **                  | ** ** | **adjustments to**         | ** ** | **Utilization of**      | ** ** | **activity disposal**     | ** ** | ** **                  | ** ** |
| ** **                                                     | ** ** | ** **                  | ** ** | **charges in twelve** | ** ** | **cash in twelve** | ** ** | **losses in twelve** | ** ** | ** **                  | ** ** |
| ** **                                                     | ** ** | **Balance as of** | ** ** | **months ended**           | ** ** | **months ended**        | ** ** | **months ended**          | ** ** | **Balance as of** | ** ** |
| **FY05 Q2 Plan**                                     | ** ** | ** **                  | ** ** | **Feb. 29, 2004**     | ** ** | **Feb. 28, 2005**  | ** ** | **Feb. 28, 2005**    | ** ** | **Feb. 28, 2005** | ** ** | **Feb. 28, 2005** | ** ** |
| Lease obligations  and terminations(1)     |       |                        | $          | —                          |       |                         |       | $                              | 8,501      |                        |       |   | $ | (1,174 | ) |   |   | $ | — |   |   |   | $ | 7,327 |   |   |
| Severance and  related benefits                                |       |                        | —     |                            |       |                         | 6,045      |                           |       |                        | (3,733     | ) |   |   | — |   |   |   | 2,312 |   |   |
| Impairment  charges and write-downs                       |       |                        | —     |                            |       |                         | 2,496      |                           |       |                        | —     |   |   |   | (2,496 | ) |   |   | — |   |   |
| Other                                                          |       |                        | —     |                            |       |                         | 266        |                           |       |                        | (183       | ) |   |   | — |   |   |   | 83 |   |   |
| Subtotal                                                       |       |                        | $          | —                          |       |                         |       | $                              | 17,308     |                        |       |   | $ | (5,090 | ) |   |   | $ | (2,496 | ) |   |   | 9,722 |   |   |
| Reclassification  of deferred rent                             |       |                        | —     |                            |       |                         |       |                           |       |                        |       |   |   |   |   |   |   |   | 352 |   |   |
| Total                                                          |       |                        | $          | —                          |       |                         |       |                           |       |                        |       |   |   |   |   |   |   |   |   | $ | 10,074 |   |   |
|                                                                |            |                             |            |                                 |            |                              |            |                                |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Includes $26 thousand ofaccretion expense in adjustments to charges in the twelve months ended February 28,2005.

In accordance with SFAS 146, in periods subsequent tothe initial recording of the FY05 Q2, FY04 Q4 and FY04 Q1 Plans facilitiescharge, the Company will recognize accretion expense due to the passage oftime. Accretion expense will be recorded as an additional restructuring-relatedexpense and increase to restructuring liabilities.

*Plan FY04 Q4 Exit and Disposal Plan (“FY04 Q4 Plan”).  *Duringthe three months ended February 29, 2004, the Company announced andimplemented the FY04 Q4 Plan designed to further adjust its cost structure andresource allocation to increase efficiencies and reduce excess office space.Actions taken included reductions in workforce through involuntaryterminations, further consolidation of the Company’s U.S. product developmentfunctions to the corporate headquarters in Rockville, Maryland and abandoningexcess office space deemed no longer in use. 

*Involuntary terminations*.   TheCompany involuntarily terminated seven employees within the product developmentfunction as a result of further consolidating the product development functionfrom Wayne, Pennsylvania to Rockville, Maryland. The Company recorded a chargefor severance and related benefits of approximately $0.1 million. Allterminated employees were notified within the requisite time period asproscribed by SFAS 146 and were not required to render service to the Companyfor severance and related benefits beyond the earlier of their termination dateor a minimum retention period of 60 days.

*Excess office space*.   TheCompany recorded charges totaling approximately $5.6 million related toconsolidating certain office space and abandoning excess capacity deemed nolonger in use. The Company recorded the charge for excess office space forproperties located in Atlanta, Georgia; Itasca, Illinois; Calabasas,California; and Bracknell, United Kingdom. The Company permanently vacated theoffice space located in Wayne, Pennsylvania and the remaining office space inIrving, Texas and Detroit, Michigan. The costs associated with the facilitiescharge were recorded based on the present value of the sum of expectedremaining lease commitments and include management’s best estimates of expectedsublease income and costs associated with subleasing the vacated space. Theestimated sublease income amounts requires judgment and include assumptionsregarding the period of sublease and the price per square foot to be paid bythe sublessors. As required by the applicable accounting standards, the Companywill review these estimates periodically and make adjustments, as necessary, toreflect management’s best estimates. In connection with the abandonment of theexcess office space, the Company recorded a write-down of certainproperty, plant and equipment and leasehold improvements in accordance with 

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SFAS 144. Total chargesfor the write-down of certain property, plant and equipment and leaseholdimprovements were approximately $1.1 million.

*Other.  *Other exit anddisposal related costs were $0.1 million.

*Adjustments to charges.  *Duringthe 12 months ended February 28, 2005, the Company recorded the followingadjustments to the FY04 Q4 Plan:

·       $(0.4)million benefit related to a lease termination settlement with our landlord forour Itasca, Illinois property, (the total benefit recorded related to thissettlement was $(2.8) million, the remaining $(2.4) million benefit was relatedto the Prior Plans discussed below.

·       $(0.5)million benefit primarily related to changes in sublease income estimates forour Atlanta, Georgia and Wayne, Pennsylvania properties, related to signingsubleases with sublessors in the fourth quarter of fiscal 2005. 

·       $0.6million charge related to changes in sublease income estimate related to ourCalabassas, California, Detroit, Michigan and Bracknell United Kingdomproperties.

·       $0.2million charge related to other miscellaneous costs and accretion expense.

Thefollowing table sets forth a summary of the FY04 Q4 Plan exit and disposalcharges, payments made and the remaining liabilities as of February 28,2005 (amounts in thousands):
| ** **                                                     | ** ** | ** **                  | ** ** | **Charges and**            | ** ** | ** **                   | ** ** | **Non-cash**                   | ** ** | ** **                  | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **                                                     | ** ** | ** **                  | ** ** | **adjustments to**         | ** ** | **Utilization of**      | ** ** | **activity disposal**     | ** ** | ** **                  | ** ** |
| ** **                                                     | ** ** | ** **                  | ** ** | **charges in twelve** | ** ** | **cash in twelve** | ** ** | **losses in twelve** | ** ** | ** **                  | ** ** |
| ** **                                                     | ** ** | **Balance as of** | ** ** | **months ended**           | ** ** | **months ended**        | ** ** | **months ended**          | ** ** | **Balance as of** | ** ** |
| **FY04 Q4 Plan**                                     | ** ** | ** **                  | ** ** | **Feb. 29, 2004**     | ** ** | **Feb. 28, 2005**  | ** ** | **Feb. 28, 2005**    | ** ** | **Feb. 28, 2005** | ** ** | **Feb. 28, 2005** | ** ** |
| Lease obligations  and terminations(1)     |       |                        | $          | 5,338                           |       |                         |       | $                              | (162       | )                           |       |   | $ | (1,907 | ) |   |   | $ | — |   |   |   | $ | 3,269 |   |   |
| Severance and  related benefits                                |       |                        | 24         |                            |       |                         | 19         |                           |       |                        | (43        | ) |   |   | — |   |   |   | — |   |   |
| Other                                                          |       |                        | 58         |                            |       |                         | 105        |                           |       |                        | (163       | ) |   |   | — |   |   |   | — |   |   |
| Subtotal                                                       |       |                        | $          | 5,420                           |       |                         |       | $                              | (38        | )                           |       |   | $ | (2,113 | ) |   |   | $ | — |   |   |   | 3,269 |   |   |
| Reclassification  of deferred rent                             |       |                        | 225        |                            |       |                         |       |                           |       |                        |       |   |   |   |   |   |   |   | 225 |   |   |
| Total                                                          |       |                        | $          | 5,645                           |       |                         |       |                           |       |                        |       |   |   |   |   |   |   |   |   | $ | 3,494 |   |   |
|                                                                |            |                             |            |                                 |            |                              |            |                                |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Includes $131 thousandof accretion expense in adjustments to charges in the twelve months ended February 28,2005.

*Plan FY04 Q1 Exit and Disposal Plan (“FY04 Q1 Plan”)*.   Duringthe three months ended May 31, 2003,**the Companyannounced and implemented the FY04 Q1 Plan designed to further adjust its coststructure and resource allocation to increase efficiencies and reduce excessoffice space. Actions taken included reductions in workforce throughinvoluntary terminations, further consolidation of the Company’s U.S. productdevelopment functions to the corporate headquarters in Rockville, Maryland andabandoning excess office space deemed no longer in use.

*Involuntary terminations.  *TheCompany involuntarily terminated 72 employees across most functional areaswithin the company. Involuntary terminations by geography consisted of 66employees in the U.S., three in Mexico, two in Canada and one in Japan. TheCompany recorded a charge for severance and related benefits of approximately$1.3 million. All terminated employees were notified within the requisite timeperiod as proscribed by SFAS 146 and were not required to render service to theCompany for severance and related benefits beyond the earlier of theirtermination date or a minimum retention period of 60 days.

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*Excess office space*.   TheCompany recorded charges totaling approximately $5.9 million related toconsolidating certain office space and abandoning excess capacity deemed nolonger in use. The Company recorded the charge for excess office space forproperties located in Rockville, Maryland, San Carlos, California, Atlanta,Georgia, Irving, Texas and Detroit, Michigan. The costs associated with thefacilities charge were recorded based on the present value of the sum ofexpected remaining lease commitments and include management’s best estimates ofexpected sublease income and costs associated with subleasing the vacatedspace. The estimated sublease income amounts requires judgment and includeassumptions regarding the period of sublease and the price per square foot tobe paid by the sublessors. As required by the applicable accounting standards,the Company will review these estimates periodically and make adjustments, asnecessary, to reflect managements best estimates. In connection with theabandonment of the excess office space, the Company recorded a write-down ofcertain property, plant and equipment and leasehold improvements in accordancewith SFAS 144. Total charges for the write-down of certain property, plant andequipment and leasehold improvements were approximately $3.2 million.

*Adjustments to charges.  *Duringthe twelve months ended February 28, 2005, the Company recordedadjustments of approximately $0.6 million related to changes in sublease incomeestimates for its properties located in San Carlos, California, Detroit,Michigan and Atlanta, Georgia and accretion expense. During the twelve monthsended February 29, 2004, the Company recorded adjustments of approximately$0.2 million primarily related to changes in sublease income estimates.

Thefollowing table sets forth a summary of FY04 Q1 Plan exit and disposal charges,payments made and the remaining liabilities as of February 28, 2005(amounts in thousands):
| ** **                             | ** ** | ** **                  | ** ** | **Charges and**            | ** ** | ** **                   | ** ** | **Non-cash**                   | ** ** | ** **                  | ** ** |
|----------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | ** **                  | ** ** | **adjustments to**         | ** ** | **Utilization of**      | ** ** | **activity disposal**     | ** ** | ** **                  | ** ** |
| ** **                             | ** ** | ** **                  | ** ** | **charges in twelve** | ** ** | **cash in twelve** | ** ** | **losses in twelve** | ** ** | ** **                  | ** ** |
| ** **                             | ** ** | **Balance as of** | ** ** | **months ended**           | ** ** | **months ended**        | ** ** | **months ended**          | ** ** | **Balance as of** | ** ** |
| **FY04 Q1 Plan**             | ** ** | ** **                  | ** ** | **Feb. 29, 2004**     | ** ** | **Feb. 28, 2005**  | ** ** | **Feb. 28, 2005**    | ** ** | **Feb. 28, 2005** | ** ** | **Feb. 28, 2005** | ** ** |
| Lease obligations  and terminations(1) |       |                        | $          | 3,632                           |       |                         |       | $                              | 622        |                        |       |   | $ | (737 | ) |   |   | $ | — |   |   |   | $ | 3,517 |   |   |
| Severance and  related benefits        |       |                        | 40         |                            |       |                         | —     |                           |       |                        | (40        | ) |   |   | — |   |   |   | — |   |   |
| Subtotal                               |       |                        | $          | 3,672                           |       |                         |       | $                              | 622        |                        |       |   | $ | (777 | ) |   |   | $ | — |   |   |   | 3,517 |   |   |
| Reclassification  of deferred rent     |       |                        | 504        |                            |       |                         |       |                           |       |                        |       |   |   |   |   |   |   |   | 504 |   |   |
| Total                                  |       |                        | $          | 4,176                           |       |                         |       |                           |       |                        |       |   |   |   |   |   |   |   |   | $ | 4,021 |   |   |
|                                        |            |                             |            |                                 |            |                              |            |                                |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Includes $140 thousandof accretion expense in adjustments to charges in the twelve months ended February 28,2005.

*Plans FY03, FY02 and FY99 Exit and Disposal Plans(the “Prior Plans”).  *During fiscal years 2003, 2002 and1999,**the Company announced and implementedthree, two and two exit and disposal plans, respectively, designed to furtheradjust its cost structure and resource allocation to increase efficiencies andreduce excess office space. Actions taken included reductions in workforcethrough involuntary terminations, further consolidation of the Company’s U.S.product development functions to the corporate headquarters in Rockville,Maryland and abandoning excess office space deemed no longer in use.

*Involuntary terminations*.   TheCompany involuntarily terminated 918 employees and recorded approximately $14.3million in charges related to severance and related benefits while implementingthe Prior Plans. A summary of involuntary terminations related to the PriorPlans is as follows:

·       Infiscal 2003, the Company involuntarily terminated 343 employees across mostfunctional areas within the company and recorded a charge for severance andrelated benefits of approximately $7.9 million.

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·       Infiscal 2002, the Company involuntarily terminated 163 employees across mostfunctional areas within the company and recorded a charge for severance andrelated benefits of approximately $2.3 million.

·       Infiscal 1999, the Company involuntarily terminated 412 employees across mostfunctional areas within the company and recorded a charge for severance andrelated benefits of approximately $4.1 million.

*Excess office space.  *TheCompany recorded charges totaling approximately $32.5 million related toconsolidating certain office space and abandoning excess capacity deemed nolonger in use. These costs include management’s best estimates of expectedsublease income. A summary of facility charges and facility abandonmentsrelated to the prior plans is as follows:

·       Infiscal 2003, the Company recorded a charge of approximately $8.6 millionrelated to excess office space deemed no longer in use for Bracknell, UnitedKingdom; San Carlos, California; and Atlanta, Georgia and the expected loss ofsublease rental income from a previously closed office in Bracknell, UnitedKingdom. The charge also related to permanently vacated offices located inRatingen, Germany; Milan, Italy; and Denver, Colorado. The facility chargeswere offset by a credit of approximately $0.7 million related to the reductionof a previously recorded office space liability assumed as part of the TalusSolutions, Inc. (“Talus”) acquisition where the landlord subsequentlyagreed to reduce the remaining office space and lease obligation held by theCompany. In connection with the abandonment of the excess office space, theCompany recorded a write-down of certain property, plant and equipment andleasehold improvements in accordance with SFAS 144. Total charges for thewrite-down of certain property, plant and equipment and leasehold improvementswere approximately $1.3 million. Additionally, the Company recorded animpairment charge of approximately $1.2 million related to the discontinued useof certain internal software used by its sales force that was replaced withanother tool. The remaining book value of $0.7 million was amortized over itsremaining useful life;

·       Infiscal 2002, the Company recorded a charge of approximately $3.7 millionrelated to excess office space deemed no longer in use for office space locatedin Itasca, Illinois and Ottawa, Canada and $0.1 million related to the closureand abandonment of certain leased facilities; and

·       Infiscal 1999, the Company recorded a charge of approximately $20.2 millionrelated to excess office space deemed no longer in use for office space locatedin Itasca, Illinois and Ratingen, Germany. Additionally, in connection with thefiscal 1999 exit and disposal plan, the Company recorded impairment charges andwrite-downs of approximately $9.1 million related to its property and equipment,leasehold improvements, goodwill and certain capitalized software developmentcosts in accordance with Statement of Financial Accounting Standards No. 121(“*Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed Of*”) (“SFAS 121”).

*Other.  *In connection withthe Prior Plans, the Company recorded contract termination and other relatedexit and disposal costs of $0.9 million in FY03, $0.5 million in FY02 and $0.4million in FY99.

*Adjustments to charges.  *Duringthe twelve months ending February 28, 2005, the Company recordedadjustments to the Prior Plans totaling $(0.6) million related to thefollowing:

·       $(2.4)million benefit related to a lease termination settlement with our landlord forour Itasca, Illinois property, (the total benefit recorded related to thissettlement was $(2.8) million, the remaining $(0.4) million benefit was relatedto Q4 FY04 Plan previously discussed) in addition to recording approximately$0.2 million related to a write-down of certain furniture, fixtures andleasehold improvements.

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·       $1.9million in net charges for changes in estimated sublease income related toproperties located in San Carlos, California; Munich, Germany; Atlanta, Georgiaand Braknell, United Kingdom.

·       $(0.3)million benefit related to a partial lease termination with our landlord forour facility located in Ratingen, Germany.

During the twelve months ending February 29,2004, the Company recorded adjustments of approximately $1.2 million forchanges in estimated sublease income for properties located in San Carlos,California; Atlanta, Georgia and Bracknell, United Kingdom. Additionally, theCompany recorded severance and benefit related adjustments of $(0.6) millionand other exit and disposal related adjustments of $0.5 million.

Thefollowing table sets forth a summary of the Prior Plans exit and disposalcharges, payments made and the remaining liabilities as of February 28,2005 (amounts in thousands):
| ** **                          | ** ** | ** **                  | ** ** | **Charges and**            | ** ** | ** **                   | ** ** | **Non-cash**                   | ** ** | ** **                  | ** ** |
|-------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | ** **                  | ** ** | **adjustments to**         | ** ** | **Utilization of**      | ** ** | **activity disposal**     | ** ** | ** **                  | ** ** |
| ** **                          | ** ** | ** **                  | ** ** | **charges in twelve** | ** ** | **cash in twelve** | ** ** | **losses in twelve** | ** ** | ** **                  | ** ** |
| ** **                          | ** ** | **Balance as of** | ** ** | **months ended**           | ** ** | **months ended**        | ** ** | **months ended**          | ** ** | **Balance as of** | ** ** |
| **Prior Plans**                | ** ** | ** **                  | ** ** | **Feb. 29, 2004**     | ** ** | **Feb. 28, 2005**  | ** ** | **Feb. 28, 2005**    | ** ** | **Feb. 28, 2005** | ** ** | **Feb. 28, 2005** | ** ** |
| Lease obligations and  terminations |       |                        | $          | 9,666                           |       |                         |       | $                              | (842       | )                           |       |   | $ | (4,663 | ) |   |   | $ | — |   |   |   | $ | 4,161 |   |   |
| Severance and related  benefits     |       |                        | 18         |                            |       |                         | —     |                           |       |                        | (18        | ) |   |   | — |   |   |   | — |   |   |
| Impairment charges and  write-downs |       |                        | —     |                            |       |                         | 246        |                           |       |                        | —     |   |   |   | (246 | ) |   |   | — |   |   |
| Other                               |       |                        | —     |                            |       |                         | 16         |                           |       |                        | (16        | ) |   |   | — |   |   |   | — |   |   |
| Subtotal                            |       |                        | $          | 9,684                           |       |                         |       | $                              | (580       | )                           |       |   | $ | (4,697 | ) |   |   | $ | (246 | ) |   |   | 4,161 |   |   |
| Reclassification of  deferred rent  |       |                        | —     |                            |       |                         |       |                           |       |                        |       |   |   |   |   |   |   |   | 81 |   |   |
| Total                               |       |                        | $          | 9,684                           |       |                         |       |                           |       |                        |       |   |   |   |   |   |   |   |   | $ | 4,242 |   |   |
|                                     |            |                             |            |                                 |            |                              |            |                                |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**16.**   SEGMENT INFORMATION

The Company and its subsidiaries are principally engagedin the design, development, marketing, licensing and support and implementationof demand and supply chain management software. Substantially all revenueresults from the licensing of the Company’s software products and relatedconsulting and support services. The Company’s chief operating decision makerreviews financial information, presented on a consolidated basis, accompaniedby disaggregated information about revenue by geographic region for purposes ofmaking operating decisions and assessing financial performance. Accordingly,the Company considers itself to be in a single industry segment.

F-37

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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 2005, 2004 and 2003:
| ** **          | ** ** | **February 28 or 29,** | ** ** |
|---------------------|------------|---------------------------------------|------------|
| ** **          | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **          | ** ** | **(in thousands)**               | ** ** |
| Revenue:            |       |                                  |       |   |   |   |   |
| United States       |       | $                                     | 127,891    |   | $ | 160,487 |   | $ | 204,352 |   |
| Europe              |       | 43,359                                |       | 57,723 |   | 44,932 |   |
| Asia/Pacific        |       | 15,060                                |       | 19,094 |   | 17,666 |   |
| Other               |       | 6,796                                 |       | 5,741 |   | 5,436 |   |
|                |       | $                                     | 193,106    |   | $ | 243,045 |   | 272,386 |   |
| Long-lived  Assets: |       |                                  |       |   |   |   |   |
| United States       |       | $                                     | 239,374    |   | $ | 265,434 |   | $ | 308,587 |   |
| Europe              |       | 5,351                                 |       | 5,992 |   | 3,584 |   |
| Asia/Pacific        |       | 770                                   |       | 1,840 |   | 2,072 |   |
| Other               |       | 2,347                                 |       | 2,017 |   | 1,843 |   |
|                |       | $                                     | 247,842    |   | $ | 275,283 |   | $ | 316,086 |   |

 

No single customeraccounted for 10% or more of the Company’s annual revenue in fiscal 2005, 2004or 2003.

**17.**   RELATEDPARTY TRANSACTIONS

Relationship with Warburg 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, 2005and February 29, 2004, Warburg Pincus and certain of its affiliates heldapproximately 9.1% and 9.3% of Manugistics common stock, respectively.

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**18.**   SELECTED QUARTERLY FINANCIAL DATA(UNAUDITED)

Summarizedquarterly consolidated financial information for fiscal 2005 and 2004 follows:
| ** **                                          | ** ** | ** 1st Quarter **                                   | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                          | ** ** | **(in thousands, except per share data)** | ** ** |
| ***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 share computation |       |                                                               | 81,819     |                 |       |                 | 81,907     |                 |       |   | 81,928 |   |   |   | 81,929 |   |   |
| ***Fiscal  2004***                                  |       |                                                               |       |                 |       |                 |       |                 |       |   |   |   |   |   |   |   |   |
| Total revenue                                       |       |                                                               | $          | 65,641               |       |                 |       | $                    | 59,707     |   |   |   | $ | 59,897 |   |   |   | $ | 57,800 |   |   |
| Operating (loss)  income                            |       |                                                               | (14,976    | )                    |       |                 | (4,212     | )                    |       |   | 163 |   |   |   | (10,183 | ) |   |
| Net loss                                            |       |                                                               | (18,471    | )                    |       |                 | (7,959     | )                    |       |   | (19,847 | ) |   |   | (57,523 | ) |   |
| Basic and diluted  loss per share                   |       |                                                               | $          | (0.26                | )          |                 |       | $                    | (0.11      | ) |   |   | $ | (0.27 | ) |   |   | $ | (0.74 | ) |   |
| Shares used in  basic and diluted share computation |       |                                                               | 70,105     |                 |       |                 | 70,424     |                 |       |   | 72,753 |   |   |   | 77,634 |   |   |

 

Included in the first,second, third and fourth quarters of fiscal 2005 and fiscal 2004 are chargesand adjustment to charges related to exit and disposal activities (See Note 15).Included in the third and fourth quarter of fiscal 2004 are debt conversionexpenses (See Note 7).

**19.**   SUBSEQUENTEVENTS

On April 8, 2005, the Company renewed itsunsecured credit facility with SVB for $15.0 million and a two-year term (SeeNote 7).

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