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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2005



or



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission file number: 000-30883



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I-MANY, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 01-0524931                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



399 Thornall Street

12th Floor

Edison, New Jersey 08837

(Address of principal executive offices)



(800) 832-0228

(Registrants telephone number, including area code)



---



Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes  x    No ̈



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



On August 4, 2005, 44,675,334 shares of the
registrants common stock, $.0001 par value, were issued and outstanding.



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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS



This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. Discussions containing forward-looking statements may be found in the information set forth under Managements Discussion and Analysis of Financial Condition and Results of Operations and
Certain Factors That May Affect Future Operating Results as well as in the Form 10-Q generally. The Company uses words such as believes, intends, expects, anticipates,
plans, estimates, should, may, will, scheduled and similar expressions to identify forward-looking statements. The Company uses these words to describe its present belief about
future events relating to, among other things, its expected marketing plans, future hiring, expenditures and sources of revenue. This Form 10-Q may also contain third party estimates regarding the size and growth of our market, which also are
forward-looking statements. Our forward-looking statements apply only as of the date of this Form 10-Q. The Companys actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including
the risks described above and elsewhere in this Form 10-Q.



Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. The Company is under no duty to
update any of the forward-looking statements after the date of this Form 10-Q to conform these statements to actual results or to changes in our expectations, other than as required by law.



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##### Table of Contents

I-MANY, INC.



FORM 10-Q



TABLE OF CONTENTS



|        |  |                                                                                                                  |  |     
|------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                                  |  | PAGE
|PART I. |  | UNAUDITED FINANCIAL INFORMATION                                                                                  |  |     
|        |  |                                                                                                                 
|Item 1. |  | Condensed Consolidated Financial Statements                                                                      |  |     
|        |  |                                                                                                                 
|        |  | Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004                                  |  | 4   
|        |  |                                                                                                                 
|        |  | Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2005 and 2004 |  | 5   
|        |  |                                                                                                                 
|        |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004                  |  | 6   
|        |  |                                                                                                                 
|        |  | Notes to Condensed Consolidated Financial Statements                                                             |  | 7   
|        |  |                                                                                                                 
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 16  
|        |  |                                                                                                                 
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                       |  | 29  
|        |  |                                                                                                                 
|Item 4. |  | Controls and Procedures                                                                                          |  | 30  
|        |  |                                                                                                                 
|PART II |  | OTHER INFORMATION                                                                                                |  |     
|        |  |                                                                                                                 
|Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                      |  | 31  
|        |  |                                                                                                                 
|Item 6. |  | Exhibits                                                                                                         |  | 31  
|        |  |                                                                                                                 
|        |  | Signatures                                                                                                       |  | 31  
|        |  |                                                                                                                 
|        |  | Index to Exhibits                                                                                                |  | 32  



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PART I. UNAUDITED FINANCIAL INFORMATION



ITEM 1. UNAUDITED FINANCIAL STATEMENTS



I-MANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share-related amounts)



|                                                                                                                                                                                |  |               |          |   |                   |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                                |  | June 30, 2005 |          |   | December 31, 2004 |  
|ASSETS                                                                                                                                                                          |  |               |          |   |                   |   |          |  
|Current assets:                                                                                                                                                                 |  |               |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                       |  | $             | 18,412   |   |                   | $ | 6,098    |  
|Restricted cash                                                                                                                                                                 |  |               | 41       |   |                   |   | 161      |  
|Short-term investments and securities held for sale                                                                                                                             |  |               |         |   |                   |   | 14,610   |  
|Accounts receivable, net of allowance                                                                                                                                           |  |               | 7,591    |   |                   |   | 9,964    |  
|Prepaid expenses and other current assets                                                                                                                                       |  |               | 1,223    |   |                   |   | 518      |  
|                                                                                                                                                                                |  |               |          |   |                   |   |          |  
|Total current assets                                                                                                                                                            |  |               | 27,267   |   |                   |   | 31,351   |  
|Property and equipment, net                                                                                                                                                     |  |               | 1,447    |   |                   |   | 1,300    |  
|Restricted cash                                                                                                                                                                 |  |               | 646      |   |                   |   | 663      |  
|Other assets                                                                                                                                                                    |  |               | 127      |   |                   |   | 120      |  
|Acquired intangible assets, net                                                                                                                                                 |  |               | 1,399    |   |                   |   | 2,097    |  
|Goodwill                                                                                                                                                                        |  |               | 8,667    |   |                   |   | 8,667    |  
|                                                                                                                                                                                |  |               |          |   |                   |   |          |  
|Total assets                                                                                                                                                                    |  | $             | 39,553   |   |                   | $ | 44,198   |  
|                                                                                                                                                                                |  |               |          |   |                   |   |          |  
|LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITY                                                                                                                |  |               |          |   |                   |   |          |  
|Current liabilities:                                                                                                                                                            |  |               |          |   |                   |   |          |  
|Accounts payable                                                                                                                                                                |  | $             | 1,364    |   |                   | $ | 2,372    |  
|Accrued expenses                                                                                                                                                                |  |               | 4,177    |   |                   |   | 4,199    |  
|Current portion of deferred revenue                                                                                                                                             |  |               | 9,487    |   |                   |   | 9,975    |  
|Capital lease obligations                                                                                                                                                       |  |               | 41       |   |                   |   | 160      |  
|                                                                                                                                                                                |  |               |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                       |  |               | 15,069   |   |                   |   | 16,706   |  
|Deferred revenue, net of current portion                                                                                                                                        |  |               | 252      |   |                   |   | 275      |  
|Other long-term liabilities                                                                                                                                                     |  |               | 1,157    |   |                   |   | 1,347    |  
|                                                                                                                                                                                |  |               |          |   |                   |   |          |  
|Total liabilities                                                                                                                                                               |  |               | 16,478   |   |                   |   | 18,328   |  
|                                                                                                                                                                                |  |               |          |   |                   |   |          |  
|Series A redeemable convertible preferred stock, $.01 par value Authorized  1,700 shares Issued and outstanding 
none                                                         |  |               |         |   |                   |   |         |  
|Stockholders equity:                                                                                                                                                           |  |               |          |   |                   |   |          |  
|Undesignated preferred stock, $.01 par value Authorized - 5,000,000 shares; designated 1,700 shares Issued and outstanding -
none                                               |  |               |         |   |                   |   |         |  
|Common stock, $.0001 par value  Authorized - 100,000,000 shares Issued and outstanding  44,455,077 and 42,720,060 shares at June
30, 2005 and December 31, 2004, respectively |  |               | 4        |   |                   |   | 4        |  
|Additional paid-in capital                                                                                                                                                      |  |               | 152,091  |   |                   |   | 151,014  |  
|Deferred stock-based compensation                                                                                                                                               |  |               | (20      | ) |                   |   | (91      | )
|Accumulated other comprehensive income                                                                                                                                          |  |               | 7        |   |                   |   | 58       |  
|Accumulated deficit                                                                                                                                                             |  |               | (129,007 | ) |                   |   | (125,115 | )
|                                                                                                                                                                                |  |               |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                                      |  |               | 23,075   |   |                   |   | 25,870   |  
|                                                                                                                                                                                |  |               |          |   |                   |   |          |  
|Total liabilities and stockholders equity                                                                                                                                      |  | $             | 39,553   |   |                   | $ | 44,198   |  
|                                                                                                                                                                                |  |               |          |   |                   |   |          |  



See notes to condensed consolidated
financial statements.



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I-MANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



|                                            |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                            |  | Three months ended June 30, |        |   | Six months ended June 30, |  
|                                            |  | 2005                        |        |   | 2004                      |   |        | 2005 |  |   | 2004   |  
|Net revenues:                               |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Product                                     |  | $                           | 1,480  |   |                           | $ | 1,040  |      |  | $ | 3,557  |   |  | $ | 5,948  |  
|Services                                    |  |                             | 6,886  |   |                           |   | 7,115  |      |  |   | 13,743 |   |  |   | 13,637 |  
|                                            |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Total net revenues                          |  |                             | 8,366  |   |                           |   | 8,155  |      |  |   | 17,300 |   |  |   | 19,585 |  
|Cost of revenues                            |  |                             | 3,969  |   |                           |   | 4,067  |      |  |   | 7,771  |   |  |   | 7,969  |  
|                                            |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                                |  |                             | 4,397  |   |                           |   | 4,088  |      |  |   | 9,529  |   |  |   | 11,616 |  
|                                            |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Operating expenses:                         |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Sales and marketing                         |  |                             | 2,177  |   |                           |   | 2,140  |      |  |   | 4,216  |   |  |   | 4,371  |  
|Research and development                    |  |                             | 2,886  |   |                           |   | 2,610  |      |  |   | 5,932  |   |  |   | 6,120  |  
|General and administrative                  |  |                             | 1,149  |   |                           |   | 1,188  |      |  |   | 2,293  |   |  |   | 2,853  |  
|Depreciation                                |  |                             | 207    |   |                           |   | 220    |      |  |   | 387    |   |  |   | 431    |  
|Amortization of acquired intangible assets  |  |                             | 343    |   |                           |   | 378    |      |  |   | 698    |   |  |   | 709    |  
|In-process research and development         |  |                             |       |   |                           |   | 290    |      |  |   |       |   |  |   | 290    |  
|Restructuring and other charges (credits)   |  |                             | (6     | ) |                           |   | 162    |      |  |   | (33    | ) |  |   | 1,309  |  
|                                            |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses                    |  |                             | 6,756  |   |                           |   | 6,988  |      |  |   | 13,493 |   |  |   | 16,083 |  
|                                            |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Loss from operations                        |  |                             | (2,359 | ) |                           |   | (2,900 | )    |  |   | (3,964 | ) |  |   | (4,467 | )
|Other income, net                           |  |                             | 41     |   |                           |   | 29     |      |  |   | 72     |   |  |   | 60     |  
|                                            |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Net loss                                    |  | $                           | (2,318 | ) |                           | $ | (2,871 | )    |  | $ | (3,892 | ) |  | $ | (4,407 | )
|                                            |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Basic and diluted net loss per common share |  | $                           | (0.05  | ) |                           | $ | (0.07  | )    |  | $ | (0.09  | ) |  | $ | (0.11  | )
|                                            |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Weighted average shares outstanding         |  |                             | 43,637 |   |                           |   | 41,000 |      |  |   | 43,252 |   |  |   | 40,827 |  
|                                            |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  



See notes to condensed consolidated
financial statements



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|                                                                           
|---------------------------------------------------------------------------
|I-MANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)

|                                                                             |  |                           |        |   |      |   |        |  
|---------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | -
|                                                                             |  | Six Months Ended June 30, |       
|                                                                             |  | 2005                      |        |   | 2004 |  
|Cash Flows from Operating Activities:                                        |  |                           |        |   |      |   |        |  
|Net loss                                                                     |  | $                         | (3,892 | ) |      | $ | (4,407 | )
|Adjustments to reconcile net loss to net cash used in operating activities:  |  |                           |        |   |      |   |        |  
|Depreciation and amortization                                                |  |                           | 1,085  |   |      |   | 1,140  |  
|In-process research and development                                          |  |                           |       |   |      |   | 290    |  
|Restructuring and other charges                                              |  |                           | (33    | ) |      |   | 1,309  |  
|Amortization of deferred stock-based compensation                            |  |                           | 109    |   |      |   | 2,442  |  
|Provision for doubtful accounts                                              |  |                           |       |   |      |   | 120    |  
|Changes in operating assets and liabilities, net of acquisitions:            |  |                           |        |   |      |   |        |  
|Restricted cash                                                              |  |                           | 137    |   |      |   | 83     |  
|Accounts receivable                                                          |  |                           | 2,320  |   |      |   | 944    |  
|Prepaid expense and other current assets                                     |  |                           | (705   | ) |      |   | (160   | )
|Accounts payable                                                             |  |                           | (1,008 | ) |      |   | 316    |  
|Accrued expenses                                                             |  |                           | 78     |   |      |   | (2,440 | )
|Deferred revenue                                                             |  |                           | (511   | ) |      |   | (2,757 | )
|Deferred rent                                                                |  |                           | (7     | ) |      |   | 8      |  
|Other assets                                                                 |  |                           | (7     | ) |      |   | 49     |  
|                                                                             |  |                           |        |   |      |   |        |  
|Net cash used in operating activities                                        |  |                           | (2,434 | ) |      |   | (3,063 | )
|                                                                             |  |                           |        |   |      |   |        |  
|Cash Flows from Investing Activities:                                        |  |                           |        |   |      |   |        |  
|Purchases of property and equipment                                          |  |                           | (534   | ) |      |   | (236   | )
|Proceeds from disposition of property and equipment                          |  |                           |       |   |      |   | 27     |  
|Cash paid to acquire Pricing Analytics, Inc.                                 |  |                           | (248   | ) |      |   | (385   | )
|Purchases of short-term investments and securities held for sale             |  |                           | (2,694 | ) |      |   | (9,371 | )
|Redemptions of short-term investments and securities held for sale           |  |                           | 17,304 |   |      |   | 9,300  |  
|                                                                             |  |                           |        |   |      |   |        |  
|Net cash provided by (used in) investing activities                          |  |                           | 13,828 |   |      |   | (665   | )
|                                                                             |  |                           |        |   |      |   |        |  
|Cash Flows from Financing Activities:                                        |  |                           |        |   |      |   |        |  
|Payments on capital lease obligations                                        |  |                           | (119   | ) |      |   | (319   | )
|Proceeds from exercises of stock options                                     |  |                           | 323    |   |      |   | 202    |  
|Proceeds from exercises of warrant                                           |  |                           | 600    |   |      |   |       |  
|Proceeds from Employee Stock Purchase Plan                                   |  |                           | 116    |   |      |   | 73     |  
|                                                                             |  |                           |        |   |      |   |        |  
|Net cash provided by (used in) financing activities                          |  |                           | 920    |   |      |   | (44    | )
|                                                                             |  |                           |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                         |  |                           | 12,314 |   |      |   | (3,772 | )
|Cash and cash equivalents, beginning of period                               |  |                           | 6,098  |   |      |   | 8,914  |  
|                                                                             |  |                           |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                     |  | $                         | 18,412 |   |      | $ | 5,142  |  
|                                                                             |  |                           |        |   |      |   |        |  
|Supplemental Disclosure of Cash Flow Information:                            |  |                           |        |   |      |   |        |  
|Cash paid during the period for interest                                     |  | $                         | 4      |   |      | $ | 18     |  
|                                                                             |  |                           |        |   |      |   |        |  
|Supplemental Disclosure of Noncash Activities:                               |  |                           |        |   |      |   |        |  
|Increase (decrease) in deferred stock-based compensation, net of forfeitures |  | $                         | 41     |   |      | $ | (452   | )
|                                                                             |  |                           |        |   |      |   |        |  



See notes to condensed consolidated
financial statements.



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##### Table of Contents

I-MANY, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



(UNAUDITED)



NOTE 1. BASIS OF PRESENTATION



The accompanying
unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America applicable to interim financial reporting pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q. It is recommended that these condensed consolidated financial statements be read in conjunction with the financial statements and the related notes
of I-many, Inc. (the Company) for the year ended December 31, 2004 as reported in the Companys Annual Report on Form 10-K filed with the SEC. In the opinion of management, all adjustments (consisting of normal, recurring
adjustments) considered necessary for the fair presentation of these interim financial statements have been included. The results of operations for the three months and six months ended June 30, 2005 may not be indicative of the results that may be
expected for the year ending December 31, 2005, or for any other period.



NOTE 2. SIGNIFICANT ACCOUNTING POLICIES



Revenue Recognition:



Software license fees
are recognized upon execution of a signed license agreement and delivery of the software to customers provided there are no significant post-delivery obligations, the payment is fixed or determinable and collection is probable. If an acceptance
period is required, revenues are deferred until customer acceptance. In multiple-element arrangements, the total fee is allocated to the undelivered professional services, training and maintenance and support services based on the fair value of
those elements, which is defined as the price charged when those elements are sold separately. The residual amount is then allocated to the software license fee.



Service revenues include professional services, training, maintenance and support services and out-of-pocket reimbursable
expenses. Professional service revenues are recognized as the services are performed. If conditions for acceptance exist, professional service revenues are recognized upon customer acceptance. For fixed fee professional service contracts,
anticipated losses are provided for in the period in which the loss is probable and can be reasonably estimated. Training revenues are recognized as the services are provided. Included in training revenues are registration fees received from
participants in the Companys off-site user training conferences.



Maintenance and customer support fees are recognized ratably over the term of the maintenance contract, which is generally twelve months. When maintenance and support is included in the total license fee, a portion of the total fee is
allocated to maintenance and support based upon the price paid by the customer when sold separately, generally as renewals in the second year.



Payments received from customers at the inception of a maintenance period are treated as deferred service revenues and recognized ratably over the
maintenance period. Payments received from customers in advance of product shipment or revenue recognition are treated as deferred revenues and recognized when the product is shipped to the customer or when otherwise earned. Substantially all of the
amounts included in cost of revenues represent direct costs related to the delivery of professional services, training and customer support.



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Current and prospective customers have the option of entering into a subscription agreement as an
alternative to the Companys standard license contract model. The standard subscription arrangement is presently a fixed fee agreement over three or more years, covering license fees and maintenance and support, generally payable in equal
quarterly installments commencing upon execution of the agreement. Due to the extended payment terms, the installment payments are recognized as revenue ratably over the term of the subscription agreement.



The Company accounts for consideration given to a customer or reseller of its
products as a reduction of revenue in certain circumstances. To the extent that consideration earned by a customer or reseller during a reporting period exceeds revenue earned by the Company from the customer or reseller, such excess is reported as
sales and marketing expense.



Stock Options:



The Company uses the intrinsic value method to measure compensation expense
associated with the grants of stock options or awards to employees and directors. The Company accounts for stock options and awards granted to non-employees other than directors using the fair value method.



Under the intrinsic value method, compensation associated with stock awards
to employees and directors is determined as the excess, if any, of the current fair value of the underlying common stock on the measurement date over the price an employee must pay to exercise the award. The measurement date for employee awards is
generally the date of grant. Under the fair value method, compensation associated with stock awards to non-employees other than directors is determined based on the estimated fair value of the award itself, measured using either current market data
or an established option pricing model. The measurement date for such non-employee awards is generally the date that performance of certain services is complete.



Had the Company used the fair value method to measure compensation related to stock awards to employees and directors,
reported loss and loss per share would have been as follows:



|                                                                                                                                    |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                    |  | Three months ended June 30, |        |   | Six months endedJune 30, |  
|(Amounts in thousands)                                                                                                              |  | 2005                        |        |   | 2004                     |   |        | 2005 |  |   | 2004   |  
|Net loss, as reported                                                                                                               |  | $                           | (2,318 | ) |                          | $ | (2,871 | )    |  | $ | (3,892 | ) |  | $ | (4,407 | )
|Add: stock-based compensation recorded                                                                                              |  |                             | 8      |   |                          |   | 579    |      |  |   | 109    |   |  |   | 2,443  |  
|Deduct: Total stock-based employee compensation determined under fair value based method for all awards, net of related tax
effects |  |                             | (231   | ) |                          |   | (1,205 | )    |  |   | (522   | ) |  |   | (4,062 | )
|                                                                                                                                    |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Pro forma net loss                                                                                                                  |  | $                           | (2,541 | ) |                          | $ | (3,497 | )    |  | $ | (4,305 | ) |  | $ | (6,026 | )
|                                                                                                                                    |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Basic & Diluted net loss per share:                                                                                                 |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|As reported                                                                                                                         |  | $                           | (0.05  | ) |                          | $ | (0.07  | )    |  | $ | (0.09  | ) |  | $ | (0.11  | )
|                                                                                                                                    |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Pro forma                                                                                                                           |  | $                           | (0.06  | ) |                          | $ | (0.09  | )    |  | $ | (0.10  | ) |  | $ | (0.15  | )
|                                                                                                                                    |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  



Options terminate 10 years after grant
and vest over periods set by the Board of Directors at the time of grant. These vesting periods have generally been for four years, on a ratable basis, except for the grants of non-qualified stock options, which had a more accelerated vesting period
as described below.



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In July 2003, the Company granted to certain of its employees non-qualified stock options, which had
exercise prices that were below market value at the time of the grants. These options, which were granted as a retention tool to certain employees, vested on March 31, 2004. The aggregate intrinsic value of these options, totaling $1.5 million less
forfeitures of $228,000, was amortized ratably over the period from the date of grant to the vesting date and recorded as compensation expense. Of this amount, $440,000 was recognized as compensation expense in the six-month period ended June 30,
2004.



In December 2003, the Company granted to certain of its
employees non-qualified stock options, which had exercise prices that were below market value at the time of the grants. These options, which were granted in lieu of year-end bonuses, vested 50% on February 9, 2004 and the remaining 50% vested on
February 7, 2005. The aggregate intrinsic value of these options, totaling $2.7 million less forfeitures of $423,000, was amortized ratably over the period from the date of grant to the respective vesting dates and recorded as compensation expense.
Of this amount, $1,230,000 and $86,000, respectively, were amortized in the six-month periods ended June 30, 2004 and 2005.



Also in December 2003, the Company granted to certain of its employees non-qualified stock options, which had exercise prices that were below market value
at the time of the grants. These options, which were granted as a retention tool to those employees assigned to the health and life science business, vested 50% on June 30, 2004 and the remaining 50% vested on December 31, 2004. The aggregate
intrinsic value of these options, totaling $1.2 million less forfeitures of $285,000, was amortized ratably over the period from the date of grant to the respective vesting dates and recorded as compensation expense. Of this amount, $707,000 was
amortized in the six-month period ended June 30, 2004.



The
Companys calculations of the fair value of stock options were made using the Black-Scholes option pricing model with the following assumptions and resulted in the following weighted average fair value of options granted during the six months
ended June 30:



|                                                                 |  |      |            |   |      |   |         |  
|---------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ------- | -
|                                                                 |  | 2005 |            |   | 2004 |  
|Risk-free interest rates                                         |  |      | 4.05-4.3   | % |      |   | 3.9     | %
|Dividend yield                                                   |  |      |           |   |      |   |        |  
|Volatility                                                       |  |      | 70-80      | % |      |   | 105     | %
|Expected term                                                    |  |      | 6.25 years |   |      |   | 7 years |  
|Weighted average fair value of options granted during the period |  | $    | 1.08       |   |      | $ | 1.10    |  



In September 2003, the
Company granted a total of 16,215 shares of restricted common stock to its non-employee directors. The aggregate value of these restricted shares, which vested on February 5, 2004, was $22,000. Of this amount, $10,000 was recorded as compensation
expense in the six months ended June 30, 2004. In January 2004, the Company granted a total of 36,000 shares of restricted common stock to its non-employee directors. The aggregate value of these restricted shares, which vested on February 7, 2005,
was $56,000. Of this amount, $13,000 and $7,000, respectively, were recorded as compensation expense in the six month periods ended June 30, 2004 and 2005. In January 2005, the Company granted a total of 24,000 shares of restricted common stock to
its non-employee directors. The aggregate value of these restricted shares, which will vest on or about February 6, 2006, was $36,000. Of this amount, $16,000 was recorded as compensation expense in the six months ended June 30, 2005 and $20,000 was
recorded as deferred compensation in stockholders equity at June 30, 2005. And in the six months ended June 30, 2004, stock compensation charges included $43,000 in connection with extending the forfeiture date of stock options held by two
former employees.



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Short-term investments and securities held for sale:



Investments in marketable debt securities with maturities greater than 90
days and less than one year at time of purchase are classified as held-to-maturity investments and have been recorded at amortized cost. Investments in auction rate debt securities, with maturities which can be greater than one year but for which
interest rates reset in less than 90 days, are classified as securities held for sale and have been stated at fair market value.



Purchases and sales of marketable debt securities are recorded on a trade-date basis. Dividend and interest income are recognized when earned. Realized
gains and losses from the sale of marketable debt securities are determined on a specific identification basis. There were no realized gains or losses or impairments of held-to-maturity securities during the three or six month periods ended June 30,
2004 and 2005.



Short-term investments and securities held for
sale consisted of the following at June 30, 2005 and December 31, 2004:



|                                         |  |              |   |                  |   |       
|---------------------------------------- |  | ------------ | - | ---------------- | - | ------
|(Amounts in thousands)                   |  | June 30,2005 |   | December 31,2004
|Auction rate securities held-for-sale    |  | $            |  |                  | $ | 11,600
|Held-to-maturity short-term investments: |  |              |   |                  |   |       
|Corporate bonds                          |  |              |  |                  |   | 1,010 
|US Government agency securities          |  |              |  |                  |   | 2,000 
|                                         |  |              |   |                  |   |       
|                                         |  | $            |  |                  | $ | 14,610
|                                         |  |              |   |                  |   |       



Acquired Intangible Assets and
Goodwill:



Acquired intangible assets (excluding goodwill)
are amortized on a straight-line basis over their estimated useful lives and reviewed for impairment on an annual basis, or on an interim basis if an event or circumstance occurs between annual tests indicating that the assets might be impaired. The
impairment test consists of comparing the cash flows expected to be generated by the acquired intangible asset to its carrying amount. If the asset is considered to be impaired, an impairment loss is recognized in an amount by which the carrying
amount of the asset exceeds its fair value. Acquired intangible assets with indefinite useful lives will not be amortized until their lives are determined to be definite.



Goodwill is tested for impairment using a two-step approach. The first step is to compare the fair value of a reporting unit
to its carrying amount, including goodwill. If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered impaired and the second step is not required. If the fair value of the reporting unit is less than
its carrying amount, the second step of the impairment test measures the amount of the impairment loss, if any, by comparing the implied fair value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair
value, an impairment loss is recognized equal to that excess. The implied fair value of goodwill is calculated in the same manner that goodwill is calculated in a business combination, whereby the fair value of the reporting unit is allocated to all
of the assets and liabilities of that unit (including any unrecognized intangible assets), with the excess purchase price over the amounts assigned to assets and liabilities representing the implied fair



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value of goodwill. Goodwill is tested for impairment annually, or on an interim basis if an event occurs or circumstances
change that would likely reduce the fair value of a reporting unit below its carrying value.



Deferred Tax Assets:



A
deferred tax asset or liability is recorded for temporary differences in the bases of assets and liabilities for book and tax purposes and loss carry forwards based on enacted rates expected to be in effect when these temporary items are expected to
reverse. Valuation allowances are provided to the extent it is more likely than not that all or a portion of the deferred tax assets will not be realized.



Product Indemnification:



The Companys agreements with customers generally include certain provisions for indemnifying the customer against losses, expenses, and liabilities
from damages that may be awarded against the customer in the event that our products are found to infringe upon a patent, copyright, trademark, or other proprietary right of a third party. The agreements generally seek to limit the scope of remedies
for such indemnification obligations in a variety of industry-standard respects, including our right to replace an infringing product. To date, we have not had to reimburse any of our customers for any losses related to these indemnification
provisions and no claims are outstanding as of June 30, 2005. We do not expect that any significant impact on financial position or the results of operations will result from these indemnification provisions.



NOTE 3. RECLASSIFICATIONS



The Company has reclassified $11.6 million of certain auction rate
securities, for which interest rates reset in less than 90 days, but for which the underlying maturity dates are longer than 90 days, from cash and cash equivalents to short-term investments and securities held for sale in its Condensed Consolidated
Balance Sheets as of December 31, 2004. Also, amounts for net cash used in investing activities and cash and cash equivalents, beginning of period in the accompanying Condensed Consolidated Statements of Cash Flows for the six months ended June 30,
2004 have been revised to conform to the 2005 presentation.



NOTE 4. NET LOSS PER SHARE



Basic net loss per share was determined by dividing the net loss applicable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share was the same as basic net
loss per share for all periods presented since the effect of any potentially dilutive securities was excluded, as they are anti-dilutive as a result of the Companys net losses. The total numbers of common equivalent shares excluded from the
diluted loss per share calculation were 4,012,599 and 5,272,207 for the three months ended June 30, 2005 and 2004, respectively, and 4,205,966 and 5,634,516 for the six months ended June 30, 2005 and 2004, respectively.



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NOTE 5. SIGNIFICANT CUSTOMERS



The Company had certain customers which individually generated revenues
comprising a significant percentage of total revenue, as follows:



|           |  |                             |  |      |                           |  |      |   |  |      |  
|---------- |  | --------------------------- |  | ---- | ------------------------- |  | ---- | - |  | ---- | -
|           |  | Three months ended June 30, |  |      | Six months ended June 30, | 
|           |  | 2005                        |  | 2004 |                           |  | 2005 |   |  | 2004 |  
|Customer A |  | *                           |  | *    |                           |  | 13   | % |  | *    |  
|Customer B |  | *                           |  | *    |                           |  | 12   | % |  | *    |  
|Customer C |  | *                           |  | 18   | %                         |  | *    |   |  | 30   | %



The Company had
certain customers whose accounts receivable balances individually represented a significant percentage of total receivables, as follows:



|           |  |          |   |  |      |  
|---------- |  | -------- | - |  | ---- | -
|           |  | June 30, |  
|           |  | 2005     |   |  | 2004 |  
|Customer B |  | 17       | % |  | *    |  
|Customer C |  | 24       | % |  | 17   | %

---

|* | was less than 10% of the Companys total
|- | ----------------------------------------



NOTE 6. STRATEGIC RELATIONSHIP AGREEMENT



In May 2000, the Company entered into a ten-year Strategic Relationship Agreement (the Initial P&G Agreement) with The Procter &
Gamble Company (P&G), pursuant to which P&G designated the Company as its exclusive provider of purchase contract management software for its commercial products group for a period of three years. In addition, P&G has agreed
to provide the Company with certain strategic marketing and business development services over the term of the P&G Agreement. P&G also entered into an agreement to license certain software and technology from the Company.



As consideration for entering into the Initial P&G Agreement, the Company
granted to P&G a fully exercisable warrant to purchase 875,000 shares of common stock. The warrant did not require any future product purchases or service performance. The warrant, which was exercisable for a period of two years at an exercise
price of $9.00 per share, was converted into 561,960 shares of common stock via a non-cash exercise during 2000. In addition, the Company had agreed to pay P&G a royalty of up to 10% of the revenue generated from the commercial products market,
as defined. As of February 2003, no such royalties had been earned or paid.



In February 2003, the Initial P&G Agreement was amended to delete the royalty provision, in exchange for which the Company granted to P&G a fully exercisable warrant to purchase 1,000,000 shares of the
Companys common stock. The warrant is exercisable for a period of three years at an exercise price of $1.20 per share. In November 2004, April 2005 and June 2005, P&G partially exercised the warrant, acquiring an aggregate of 750,000
shares of the Companys common stock.



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NOTE 7. ACQUISITION



On April 2, 2004, the Company completed its acquisition of all of the outstanding capital stock of Pricing Analytics, Inc. (Pricing
Analytics), a California corporation located in Redwood City, California, which marketed software used to evaluate pricing strategies, for a purchase price of $1.2 million. The Pricing Analytics acquisition provided the Company with technology
that the Company believes will enhance its product offerings to its customers in both the health and life sciences and other industries segments. The merger consideration of $1.2 million consisted of $995,000 in cash, assumed liabilities of $36,000,
transaction costs of $60,000 and advance royalties of $75,000 previously paid by the Company to Pricing Analytics in 2003. The cash consideration was paid in four equal quarterly installments beginning in April 2004 with the final installment of
$248,000 paid in January 2005. The Company has consolidated the operating results of Pricing Analytics beginning on the date of acquisition.



In addition, upon achievement of certain revenue milestones through March 31, 2005, the former Pricing Analytics shareholders were entitled to additional
consideration of up to $1.8 million, payable in cash or common stock at the Companys election. Since the revenue milestones were not achieved, no additional consideration was paid or recorded in the accompanying financial statements.



The Company retained an independent appraiser for the purpose
of allocating the consideration of $1.2 million to the tangible and intangible assets acquired and liabilities assumed. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of
acquisition (amounts in thousands):



|                                    |  |      |      
|----------------------------------- |  | ---- | -----
|Acquired intangible assets          |  | $740
|In-process research and development |  |      | 290  
|Goodwill                            |  |      | 136  
|                                    |  |      |      
|Total assets acquired               |  |      | 1,166
|Less current liabilities            |  |      | 36   
|                                    |  |      |      
|Net assets acquired                 |  | $    | 1,130
|                                    |  |      |      



The $740,000 of acquired intangible
assets represents the fair value of the technology acquired, which is being amortized over a four-year life. The entire value of acquired intangible assets, in-process research and development, and goodwill was assigned to the health and life
sciences segment. The Company does not expect to deduct any portion of the goodwill for tax purposes.



The portion of the purchase price allocated to in-process research and development, totaling $290,000, was expensed upon consummation of the Pricing
Analytics acquisition. This allocation was attributable to one in-process research and development project, which consisted of the development of significant new features and functionality to an existing software product. Pricing Analytics had
achieved significant technological milestones on the project as of the acquisition date, but the project had not reached technological feasibility.



The value of the purchased in-process research and development was computed using a discount rate of 45% on the projected incremental revenue stream of
the product enhancements, net of anticipated costs and expenses. The 45% discount rate was derived based on the Companys estimated weighted average cost of capital as adjusted to reflect the additional risk inherent in product development. The
discounted cash flows were based on managements forecast of future revenue, costs of revenue and operating expenses related to the products and technologies purchased from Pricing Analytics. The determined value was then adjusted to reflect
only the value creation efforts of Pricing Analytics prior to the close of the acquisition. At the time of the acquisition, the project was approximately 35% to 40% complete. The Company



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invested approximately $135,000 in the project following acquisition. The projects development progressed, in all
material respects, consistently with the assumptions that the Company had used for estimating its fair value. The project was completed in October 2004.



NOTE 8. SEGMENT DISCLOSURE



The Company measures operating results as two reportable segments, both of which provide multiple products and services that allow manufacturers,
purchasers and intermediaries to manage their complex contracts for the purchase and sale of goods. The Companys reportable segments are strategic business units that market to separate and distinct business groups: (i) health and life
sciences, which includes pharmaceutical manufacturers, and (ii) industry solutions, which markets to all other industries. The following table reflects the results of the segments consistent with the Companys information management system.



|                                                 |  |                         |        |   |                    |   |        |              |  |   |        |   |  |   |        |  
|------------------------------------------------ |  | ----------------------- | ------ | - | ------------------ | - | ------ | ------------ |  | - | ------ | - |  | - | ------ | -
|(Amounts in thousands)                           |  | Health and LifeSciences |        |   | Industry Solutions |   |        | Undesignated |  |   | Totals |  
|At and for the three months ended June 30, 2005: |  |                         |        |   |                    |   |        |              |  |   |        |   |  |   |        |  
|                                                 |  |                         |        |  
|Revenues                                         |  | $                       | 6,066  |   |                    | $ | 2,300  |              |  | $ |       |   |  | $ | 8,366  |  
|Depreciation and amortization                    |  |                         | 394    |   |                    |   |       |              |  |   | 156    |   |  |   | 550    |  
|Segment income (loss)                            |  |                         | 97     |   |                    |   | (2,259 | )            |  |   | (156   | ) |  |   | (2,318 | )
|Segment assets                                   |  |                         | 30,278 |   |                    |   | 2,855  |              |  |   | 6,420  |   |  |   | 39,553 |  
|Expenditures for segment assets                  |  |                         | 268    |   |                    |   |       |              |  |   |       |   |  |   | 268    |  
|Goodwill                                         |  |                         | 2,716  |   |                    |   |       |              |  |   | 5,951  |   |  |   | 8,667  |  
|                                                 |  |                         |        |  
|For the six months ended June 30, 2005:          |  |                         |        |   |                    |   |        |              |  |   |        |   |  |   |        |  
|                                                 |  |                         |        |  
|Revenues                                         |  | $                       | 13,106 |   |                    | $ | 4,194  |              |  | $ |       |   |  | $ | 17,300 |  
|Depreciation and amortization                    |  |                         | 772    |   |                    |   |       |              |  |   | 313    |   |  |   | 1,085  |  
|Segment income (loss)                            |  |                         | 1,244  |   |                    |   | (4,823 | )            |  |   | (313   | ) |  |   | (3,892 | )
|Expenditures for segment assets                  |  |                         | 534    |   |                    |   |       |              |  |   |       |   |  |   | 534    |  
|                                                 |  |                         |        |  
|At and for the three months ended June 30, 2004: |  |                         |        |   |                    |   |        |              |  |   |        |   |  |   |        |  
|                                                 |  |                         |        |  
|Revenues                                         |  | $                       | 5,945  |   |                    | $ | 2,210  |              |  | $ |       |   |  | $ | 8,155  |  
|Depreciation and amortization                    |  |                         | 438    |   |                    |   | 3      |              |  |   | 157    |   |  |   | 598    |  
|Segment loss                                     |  |                         | (401   | ) |                    |   | (2,313 | )            |  |   | (157   | ) |  |   | (2,871 | )
|Segment assets                                   |  |                         | 31,926 |   |                    |   | 5,547  |              |  |   | 7,044  |   |  |   | 44,517 |  
|Expenditures for segment assets                  |  |                         | 183    |   |                    |   |       |              |  |   |       |   |  |   | 183    |  
|Goodwill                                         |  |                         | 2,716  |   |                    |   |       |              |  |   | 5,951  |   |  |   | 8,667  |  
|                                                 |  |                         |        |  
|For the six months ended June 30, 2004:          |  |                         |        |   |                    |   |        |              |  |   |        |   |  |   |        |  
|                                                 |  |                         |        |  
|Revenues                                         |  | $                       | 14,894 |   |                    | $ | 4,691  |              |  | $ |       |   |  | $ | 19,585 |  
|Depreciation and amortization                    |  |                         | 812    |   |                    |   | 15     |              |  |   | 313    |   |  |   | 1,140  |  
|Segment income (loss)                            |  |                         | 1,640  |   |                    |   | (5,734 | )            |  |   | (313   | ) |  |   | (4,407 | )
|Expenditures for segment assets                  |  |                         | 236    |   |                    |   |       |              |  |   |       |   |  |   | 236    |  



Undesignated amounts consist of
goodwill and acquired intangible asset values and related amortization amounts with respect to the Companys acquisition of Menerva Technologies, Inc.



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NOTE 9. RESTRUCTURING AND OTHER CHARGES



In 2003, the Company took several actions to reduce its operating expenses to better align its cost structure with projected
revenues and to streamline its operations in advance of a planned (and subsequently terminated) sale of its health and life sciences operation. These actions included the closing of its offices in Chicago, Illinois and Mumbai, India, and significant
downsizings of its operations in London, England and Portland, Maine. In the six months ended June 30, 2004, the Company (i) accrued cease-use lease charges of $484,000 and $180,000 in connection with the partial closing of its facilities in London,
England and Portland, Maine, respectively, (ii) accrued an additional $70,000 in lease charges related to its closed Chicago office, (iii) incurred $312,000 in severance costs for employees whose employment was terminated prior to March 31, 2004 and
(iv) recorded impairment charges of $263,000 with respect to property and equipment that were no longer in productive use. Of these amounts, $141,000 in severance costs and $21,000 in lease and equipment charges were incurred during the quarter
ended June 30, 2004. With respect to the partial closing of its London office, the Company determined the fair value of the remaining liability (net of estimated sublease rentals) on its lease at the cease-use date. No sublease assumption was
incorporated in the calculation of the cease-use lease accrual for the Portland office because the lease expired in April 2004.



In the six months ended June 30, 2005, the Company realized a net credit of $33,000 in connection with the amortization of its long-term lease
restructuring accruals for its Chicago and London facilities. This credit resulted primarily from foreign currency translation adjustments.



A rollforward of the Companys liability for restructuring and other charges is as follows:



|                                                             |  |                                 |       |  
|------------------------------------------------------------ |  | ------------------------------- | ----- | -
|(Amounts in thousands)                                       |  | Lease costsand assetimpairments |      
|Balance at December 31, 2004                                 |  | $                               | 1,341 |  
|                                                             | 
|Activity in six months ended June 30, 2005:                  |  |                                 |       |  
|Restructuring credits                                        |  |                                 | (33   | )
|Payments                                                     |  |                                 | (110  | )
|                                                             |  |                                 |       |  
|Balance at June 30, 2005                                     |  | $                               | 1,198 |  
|                                                             |  |                                 |       |  
|Current portion  included in accrued expenses               |  | $                               | 197   |  
|                                                             |  |                                 |       |  
|Noncurrent portion  included in other long-term liabilities |  | $                               | 1,001 |  
|                                                             |  |                                 |       |  



NOTE 10. VALUATION AND QUALIFYING
ACCOUNTS



A rollforward of the Companys allowance for
doubtful accounts at June 30 is as follows:



|                                 |  |      |     |   |      |   |      |  
|-------------------------------- |  | ---- | --- | - | ---- | - | ---- | -
|(Amounts in thousands)           |  | 2005 |     |   | 2004 |  
|Balance at January 1,            |  | $    | 402 |   |      | $ | 588  |  
|Provisions                       |  |      | 0   |   |      |   | 120  |  
|Write offs                       |  |      | (9  | ) |      |   | (153 | )
|Currency translation adjustments |  |      | (7  | ) |      |   | 0    |  
|                                 |  |      |     |   |      |   |      |  
|Balance at June 30,              |  | $    | 386 |   |      | $ | 555  |  
|                                 |  |      |     |   |      |   |      |  



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NOTE 11. TERMINATION OF PROPOSED MERGER WITH SELECTICA, INC.



On March 31, 2005, the shareholders of the Company voted to reject a
proposed merger among the Company, Selectica, Inc. (Selectica) and a subsidiary of Selectica. As a result, the merger agreement among the parties terminated. Under the terms of the merger agreement, Selectica would have paid $1.55 per
share in cash for all outstanding shares of the Companys common stock, for a total transaction value of approximately $70.0 million. In the six months ended June 30, 2005, the Company incurred $107,000 in legal fees and other costs related to
the proposed merger.



NOTE 12. SUBSEQUENT EVENT



On August 8, 2005, the Company announced the departure of its Chief
Executive Officer, A. Leigh Powell, and its Chief Operating Officer, Terrence M. Nicholson. Also, Yorgen Edholm was appointed President and Chief Executive Officer, and John A. Rade was appointed Chairman of the Board with certain executive powers.



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



You should read the following discussion of our financial condition and results of operations in conjunction with our financial statements and related
notes. In addition to historical information, the following discussion and other parts of this report contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated by such
forward-looking statements due to various factors, including, but not limited to, those set forth under Certain Factors That May Affect Our Future Operating Results and elsewhere in this report.



OVERVIEW



We provide software and related services that allow our clients to more effectively manage their contract-based,
business-to-business relationships through the entirety of the contract management lifecycle. We operate our business in two segments: health and life sciences and industry solutions. The health and life sciences line of business markets and sells
our products and services to companies in the life sciences industries, including pharmaceutical and medical product companies, wholesale distributors and managed care organizations. The industry solutions line of business targets all other
industries, with an emphasis on consumer products, foodservice, disposables, oil/gas/energy, consumer durables, industrial products, chemicals, apparel, and telecommunications.



Our primary products and services were originally developed to manage complex contract purchasing relationships in the
healthcare industry. Our software is currently licensed by 18 of the 20 largest world-wide pharmaceutical manufacturers, ranked according to 2004 annual pharma revenues. As the depth and breadth of our product suites have expanded, we have added
companies in the industry solutions markets to our customer base.



We have generated revenues from both products and services. Product revenues  which through mid 2001 had been principally comprised of software license fees generated from our I-many/CARS software suite and now includes licensing of
our I-many ContractSphere® Enterprise Contract
Management Product Suite, Government Pricing and Medicaid compliance software, and collection products  accounted for 20.6% of net revenues in the six months ended June 30, 2005 versus 30.4% of net revenues in the six months ended June 30,
2004. Service revenues include maintenance and support fees directly related to our licensed software products, professional service fees derived from consulting, installation, business analysis and training services related to our software products
and hosting fees. Service revenues accounted for 79.4% of net revenues in the six months ended June 30, 2005 versus 69.6% of net revenues in the six months ended June 30, 2004.



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From June 2001 through March 2004, we implemented a number of employee headcount reductions, which have
been partially offset by employee additions through acquisitions and selective hiring, and we have taken other measures to better align our cost structure with projected revenues. Our aggregate spending on sales and marketing, research and
development and general and administrative expenses has been reduced from $12.6 million in the quarter ended June 30, 2001 to $6.2 million in the quarter ended June 30, 2005. During 2003 and the first quarter of 2004, actions taken to reduce our
operating expenses included the closing of our Chicago, Illinois office, the significant downsizing of our London, England and Portland, Maine operations and selective other headcount reductions. Our total employee headcount has decreased from 358
employees at December 31, 2002 to 178 employees at June 30, 2005.



On March 31, 2005, the shareholders of the Company voted to reject a proposed merger among the Company, Selectica and a subsidiary of Selectica. As a result, the merger agreement among the parties terminated. Under the terms of the merger
agreement, Selectica would have paid $1.55 per share in cash for all outstanding shares of the Companys common stock, for a total transaction value of approximately $70.0 million.



CRITICAL ACCOUNTING POLICIES



Revenue Recognition



We generate revenues from licensing our software and providing professional services, training and maintenance and support services. Software license
revenues are attributable to the addition of new customers and the expansion or renewal of existing customer relationships through licenses covering additional users, licenses of additional software products and license renewals.



We recognize software license fees upon execution of a signed license
agreement and delivery of the software to customers, provided there are no significant post-delivery obligations, the payment is fixed or determinable and collection is probable. In multiple-element arrangements, we allocate the total fee to
professional services, training and maintenance and support services based on the fair value of those elements, which is defined as the price charged when those elements are sold separately. The residual amount is then allocated to the software
license fee. If an acceptance period is required, revenues are deferred until customer acceptance. In cases where collection is not deemed probable, we recognize the license fee as payments are received.



Service revenues include professional services, training and maintenance and
support services and out-of-pocket reimbursable expenses. Professional service revenues are recognized as the services are performed. If conditions for acceptance exist, professional service revenues are recognized upon customer acceptance. For
fixed fee professional service contracts, we provide for anticipated losses in the period in which the loss is probable and can be reasonably estimated. Training revenues are recognized as the services are provided. Included in training revenues are
registration fees received from participants in our off-site User Training Conferences.



Maintenance and customer support fees are recognized ratably over the term of the maintenance contract, which is generally twelve months. When maintenance and support is included in the total license fee, we allocate
a portion of the total fee to maintenance and support based upon the price paid by the customer when sold separately, generally as renewals in the second year.



Payments received from customers at the inception of a maintenance period are treated as deferred service revenues and recognized ratably over the
maintenance period. Payments received from customers in advance of product shipment or revenue recognition are treated as deferred product revenues and recognized when the product is shipped to the customer or when otherwise earned. Substantially
all of the amounts included in cost of revenues represent direct costs related to the delivery of professional services, training and customer support.



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In 2004, we began offering current and prospective customers the option to enter into a subscription
agreement as an alternative to our standard license contract model. The standard subscription arrangement is presently a fixed fee agreement over three or more years, covering license fees and maintenance and support, generally payable in equal
quarterly installments commencing upon execution of the agreement. Due to the extended payment terms, the installment payments are recognized as revenue ratably over the term of the subscription agreement. During the six month periods ended June 30,
2005 and 2004, we recognized $406,000 and $-0-, respectively, in revenue related to such agreements.



We account for consideration given to a customer or a reseller of our products as a reduction of revenue in certain circumstances. To the extent that
cumulative consideration earned by a customer or reseller during a reporting period exceeds revenue earned by the Company from the customer or reseller, such excess is reported as sales and marketing expense.



Allowance for Doubtful Accounts



We record provisions for doubtful accounts based on a detailed assessment of
our accounts receivable and related credit risks. In estimating the allowance for doubtful accounts, management considers the age of the accounts receivables, our historical write-off experience, the credit worthiness of customers and the economic
conditions of the customers industries and general economic conditions, among other factors. Should any of these factors change, the estimates made by management will also change, which could affect the level of the Companys future
provision for doubtful accounts. If the assumptions we used to calculate these estimates do not properly reflect future collections, there could be an impact on future reported results of operations. The provisions for doubtful accounts are included
in general and administrative expenses in the consolidated statements of operations.



Short-term investments and securities held for sale



Investments in marketable debt securities with maturities greater than 90 days and less than one year at time of purchase are classified as held-to-maturity investments and are recorded at amortized cost. Investments in auction rate debt
securities, with maturities which can be greater than one year but for which interest rates reset in less than 90 days, are classified as securities held for sale and are stated at fair market value.



Acquired Intangible Assets



Acquired intangible assets (excluding goodwill) are amortized on a
straight-line basis over their estimated useful lives and reviewed for impairment on an annual basis, or on an interim basis if an event or circumstance occurs between annual tests indicating that the assets might be impaired. The impairment test
consists of comparing the cash flows expected to be generated by the acquired intangible asset to its carrying amount. If the asset is considered to be impaired, an impairment loss will be recognized in an amount by which the carrying amount of the
asset exceeds its fair value. Acquired intangible assets with indefinite useful lives will not be amortized until their lives are determined to be definite.



Goodwill



Goodwill is tested for impairment using a two-step approach. The first step is to compare the fair value of a reporting unit to its carrying amount,
including goodwill. If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered impaired and the



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second step is not required. If the fair value of the reporting unit is less than its carrying amount, the second step of
the impairment test measures the amount of the impairment loss, if any, by comparing the implied fair value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal
to that excess. The implied fair value of goodwill is calculated in the same manner that goodwill is calculated in a business combination, whereby the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit
(including any unrecognized intangible assets), with the excess purchase price over the amounts assigned to assets and liabilities representing the implied fair value of goodwill. Goodwill is tested for impairment annually, or on an
interim basis if an event occurs or circumstances change that would likely reduce the fair value of a reporting unit below its carrying value.



Deferred Tax Assets



A deferred tax asset or liability is recorded for temporary differences in the bases of assets and liabilities for book and tax purposes and loss carry
forwards based on enacted tax rates expected to be in effect when these temporary items are expected to reverse. Valuation allowances are provided to the extent it is more likely than not that all or a portion of the deferred tax assets will not be
realized.



Product Indemnification



The Companys agreements with customers generally include certain
provisions for indemnifying the customer against losses, expenses, and liabilities from damages that may be awarded against the customer in the event that our products are found to infringe upon a patent, copyright, trademark, or other proprietary
right of a third party. The agreements generally seek to limit the scope of remedies for such indemnification obligations in a variety of industry-standard respects, including our right to replace an infringing product. To date, we have not had to
reimburse any of our customers for any losses related to these indemnification provisions and no claims are outstanding as of June 30, 2005. We do not expect that any significant impact on financial position or the results of operations will result
from these indemnification provisions.



RESULTS OF OPERATIONS



COMPARISON OF THE THREE MONTH PERIODS ENDED JUNE 30, 2005 AND 2004



NET REVENUES



Net revenues increased by $211,000, or 2.6%, to $8.4 million for the quarter ended June 30, 2005 from $8.2 million for the
quarter ended June 30, 2004. Product revenues increased by $440,000, or 42.3%, to $1.5 million for the quarter ended June 30, 2005 from the same period a year earlier, while service revenues decreased by $229,000 or 3.2%. The value of license
contracts (minimum price of $50,000) sold during the current quarter increased by 66.3% versus the second quarter of 2004, due primarily to a 50.0% increase in average selling price. Also, four of the license contracts executed in the period ended
June 30, 2005 with an aggregate discounted (i.e., net of interest and implicit maintenance) value of $2.2 million were subscription arrangements, which generated very little license revenue during the quarter. By comparison, three of the license
contracts executed in the comparable period in 2004 with an aggregate discounted value of $1.1 million were subscription or deferred arrangements, which generated no license revenue during that quarter. As we work to increase our sales in both of
our reportable segments, we believe a similar or larger proportion of our customers will place conditions (e.g., software acceptance testing) on their license purchases or will opt to enter into subscription arrangements that will require us to
defer recognition of license revenue until later reporting periods. As a result, in future reporting periods we expect recognized revenues to exclude license revenue from some of the contracts entered into in those periods but also to include larger
proportions of revenues from contracts entered into in prior reporting periods.



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Revenues derived from the industry solutions segment increased by $89,000, or 4.1%, to $2.3 million for
the quarter ended June 30, 2005 from same quarter in 2004. An increase in product revenues of $265,000, partially offset by lower professional service revenues, accounted for this increase. Also in the second quarter of 2005, revenues in the health
and life sciences segment increased by $122,000, or 2.1%, in comparison to the year earlier period. Our new products in the I-many ContractSphere® Enterprise Contract Management Product Suite, which are targeted primarily to customers in the industry solutions segment, remained in early-stage
releases, which continued to limit our ability to derive revenues from them. As this market continues to move past an early adopter stage, which currently appears to remain the general but uncertain trend, as evidenced by our recent sales results,
we anticipate corresponding, incremental improvement in demand for these products.



As a percentage of total net revenues, product revenues increased to 17.7% for the quarter ended June 30, 2005, from 12.8% for the quarter ended June 30, 2004. However, product revenues were 29.4% and 36.2%,
respectively, of total net revenues for the years ended December 31, 2004 and 2003, so current quarter product revenues were low on a relative basis. While recent product revenue levels have been depressed relative to full year 2003-2004 results,
service revenues generally had been increasing, both in absolute terms and as a percentage of total net revenues, primarily due to high utilization in our professional services business and to continued growth in our maintenance-paying, installed
customer base. But in the quarter ended June 30, 2005, professional service revenues decreased by $502,000 from the year earlier period. This decrease was attributable to (i) a high professional services revenue level in the second quarter of 2004
and (ii) the partial deferral to future periods of revenue for professional services work conducted on a substantial project during the quarter ended June 30, 2005.



COST OF REVENUES



Cost of revenues consists primarily of payroll and related costs and subcontractor costs for providing professional services and support services, and to
a lesser extent, amounts due to third parties for royalties related to integrated technology. Historically, cost of product revenues has not been a significant component of total cost of revenues. Cost of revenues decreased by $98,000, or 2.4%, to
$4.0 million for the quarter ended June 30, 2005 from the same period in 2004. This decrease is principally attributable to a $235,000 reduction in noncash compensation costs incurred pursuant to non-qualified stock options and a $163,000 decrease
in outsourcing consulting fees, partially offset by an increase in salary and benefit costs of $262,000. The decrease in noncash compensation costs resulted from non-qualified option grants becoming fully-vested during the first quarter of 2005. The
decrease in consulting fees was a direct result of the decrease in professional services revenues discussed above, consistent with our use of temporary contractors as a flexible workforce to cover short-term fluctuations in the demand for
professional services. The increase in salary and benefit costs was due primarily to an increase in average headcount of 3.5 employees and to salary increases that took effect January 1, 2005.



As a percentage of total net revenues, cost of revenues decreased to 47.4%
for the quarter ended June 30, 2005, from 49.9% for the quarter ended June 30, 2004. However, cost of revenues were 40.5% and 40.2%, respectively, of total net revenues for the years ended December 31, 2004 and 2003, so current quarter cost of
revenues were high on a relative basis. The high level of cost of revenues as a percentage of total net revenues experienced during the quarter ended June 30, 2005 relative to that experienced during the years 2003 and 2004 is mostly attributable to
the current quarters relative low level of product revenues as a percent of total revenues. Product revenues have typically generated higher margins than service revenues and are expected to do so in the foreseeable future.



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OPERATING EXPENSES



SALES AND MARKETING. Sales and marketing expenses consist primarily of payroll and related benefits for sales and marketing personnel, commissions for
sales personnel, travel costs, recruiting fees, expenses for trade shows and advertising and public relations expenses. Sales and marketing expenses were relatively flat, increasing by only $37,000, or 1.7%, to $2.2 million in the three months ended
June 30, 2005 from the same period in 2004. A $109,000 increase in commission costs, attributable to the increase in product revenue discussed above, was partially offset by an $81,000 decrease in salary costs which resulted from a reduction in
average headcount of two employees. As a percentage of total net revenues, sales and marketing expense decreased slightly to 26.0% for the quarter ended June 30, 2005 from 26.2% for the quarter ended June 30, 2004.



RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily
of payroll and related costs for development personnel and external consulting costs associated with the development of our products and services. Research and development costs, including the costs of developing computer software, are charged to
operations as they are incurred. Research and development expenses increased by $276,000, or 10.6%, to $2.9 million for the quarter ended June 30, 2005 from $2.6 million for the quarter ended June 30, 2004. This increase is primarily attributable to
a $226,000 increase in salary costs and a $139,000 increase in off-shore consulting costs, partially offset by a $172,000 decrease in noncash compensation costs incurred pursuant to non-qualified stock options. The increase in salary and benefit
costs was due primarily to an increase in average headcount of five employees and to salary increases that took effect January 1, 2005. The decrease in noncash compensation costs resulted from non-qualified option grants becoming fully-vested during
the first quarter of 2005. As a percentage of total net revenues, research and development expense increased to 34.5% for the quarter ended June 30, 2005, from 32.0% for the quarter ended June 30, 2004.



GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and related costs for personnel in our administrative, finance and human resources departments, and legal, accounting and other professional service fees. General and administrative expenses were relatively flat, decreasing by
only $39,000, or 3.3%, to $1.1 million for the quarter ended June 30, 2005 from the same period in 2004. This decrease in general and administrative expenses is primarily attributable to a $91,000 reduction in noncash compensation costs incurred
pursuant to non-qualified stock options, partially offset by certain non-recurring charges and credits. The decrease in noncash compensation costs resulted from non-qualified option grants becoming fully-vested during the first quarter of 2005. As a
percentage of total net revenues, general and administrative expenses decreased to 13.7% for the quarter ended June 30, 2005 from 14.6% for the quarter ended June 30, 2004.



DEPRECIATION. Depreciation expense decreased by $13,000, or 6%, from $220,000 in the second quarter of 2004 to $207,000 in
the second quarter of 2005. This decrease is principally attributable to a significant drop-off in the level of furniture, equipment and software additions from the years 2001 ($1.8 million) and 2002 ($933,000) to the year 2004 ($698,000) and the
six-month period ended June 30, 2005 ($534,000), the majority of these asset additions being depreciated over a three-year life.



AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS. Amortization of acquired intangible assets related to our acquisitions amounted to $343,000 in the quarter
ended June 30, 2005, which represents a 9% decrease in amortization from $378,000 recorded in the quarter ended June 30, 2004. This decrease is attributable to the intangible assets in connection with the acquisition of Vintage Software, Inc.
(Vintage) becoming fully-amortized during the first quarter of 2005.



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RESTRUCTURING AND OTHER CHARGES. In the quarter ended June 30, 2005, we recorded $6,000 in credits
related to efforts in prior quarters to streamline operations. These credits resulted from reductions in the provisions for future lease costs for the Chicago and London offices.



OTHER INCOME, NET



Other income, net, increased by $12,000, or 41%, from $29,000 in the second quarter of 2004 to $41,000 in the second quarter of 2005. A $54,000 increase
in interest income, attributable to higher average yields, was partially offset by $37,000 increase in foreign currency losses.



PROVISION FOR INCOME TAXES



We incurred operating losses for all quarters in 2004 and the first two quarters of 2005 and have consequently recorded a valuation allowance for the full
amount of our net deferred tax asset, which consists principally of our net operating loss carryforwards, as the future realization of the tax benefit is uncertain. No provision or benefit for income taxes has been recorded in the three-month
periods ended June 30, 2005 and 2004.



COMPARISON OF THE SIX MONTH PERIODS
ENDED JUNE 30, 2005 AND 2004



NET REVENUES



Net revenues decreased by $2.3 million, or 11.7%, to $17.3 million for the
six months ended June 30, 2005 from $19.6 million for the six months ended June 30, 2004. Product revenues decreased by $2.4 million, or 40.2%, to $3.6 million for the six months ended June 30, 2005 from the same period a year earlier, while service
revenues increased by $106,000 or 0.8%. The value of license contracts (minimum price of $50,000) sold during the first six months of 2005 increased by 39.8% versus the same period in 2004, due entirely to an increase in average selling price to
$290,000 from $208,000 as the number of license contracts sold was unchanged. However, product revenues recognized in the six-month period ended June 30, 2004 included the recognition of $3.4 million in license fees from a 2003 contract that had
been previously deferred, while product revenue in the six-month period ended June 30, 2005 included $1.5 million of previously deferred license fees in connection with two license transactions executed during the fourth quarter of 2004. Also, 10 of
the license contracts executed in the six months ended June 30, 2005 with an aggregate discounted value of $3.3 million were subscription arrangements, which generated only $108,000 of license revenue during the period. By comparison, three of the
license contracts executed in the comparable period in 2004 with an aggregate discounted value of $1.1 million were subscription or deferred arrangements, which generated no license revenue during that period.



Revenues derived from the industry solutions segment decreased by $497,000,
or 10.6%, to $4.2 million for the six months ended June 30, 2005 from $4.7 million for the six months ended June 30, 2004. As indicated above, our new products in the I-many ContractSphere® Enterprise Contract Management Product Suite, which are targeted primarily to customers
in the industry solutions segment, remained in early-stage releases, which continued to limit our ability to derive revenues from them. Meanwhile, revenues in the health and life sciences segment were $1.8 million lower than in the six months ended
June 30, 2004, attributable principally to the aforementioned recognition of previously deferred license revenues in both year-to-date periods, the impact of which was greater in 2004.



As a percentage of total net revenues, product revenues decreased to 20.6% for the six months ended June 30, 2005, from
30.4% for the six months ended June 30, 2004. This decrease in product revenues as a percentage of total net revenues is principally attributable to the reduction in product revenues discussed above. The increase in service revenues is attributable
to higher support revenues resulting from an increase in our billable installed customer base.



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COST OF REVENUES



Cost of revenues decreased by $198,000, or 2.5%, to $7.8 million for the six months ended June 30, 2005, from $8.0 million for the six months ended June
30, 2004. This decrease is primarily attributable to a $641,000 decrease in noncash compensation costs incurred pursuant to non-qualified stock options, partially offset by a $498,000 increases in salary and benefit costs. The increase in salary and
benefit costs is mostly due to salary increases that took effect January 1, 2005, as aggregate headcount levels in customer services and professional services increased only by an average of 1.5 employees from the prior year.



As a percentage of total net revenues, cost of revenues increased to 44.9%
for the six months ended June 30, 2005, from 40.7% for the year earlier period. This increase in cost of revenues as a percentage of total net revenues is principally attributable to the decrease in product revenues as a percent of total revenues.
Product revenues have typically generated higher margins than service revenues and are expected to do so in the foreseeable future.



OPERATING EXPENSES



SALES AND MARKETING. Sales and marketing expense decreased by $155,000, or 3.5%, to $4.2 million in the six months ended June 30, 2005 from the same
period in 2004. This decrease in sales and marketing expense is primarily attributable to a $304,000 reduction in noncash compensation costs incurred pursuant to non-qualified stock options, partially offset by higher commission costs. The decrease
in noncash compensation costs resulted from non-qualified option grants becoming fully-vested during the first quarter of 2005. As a percentage of total net revenues, sales and marketing expense increased to 24.4% for the six months ended June 30,
2005, from 22.3% for the year earlier period.



RESEARCH AND
DEVELOPMENT. Research and development expenses decreased by $188,000, or 3.1%, to $5.9 million for the six months ended June 30, 2005 from the same period in 2004. This decrease in research and development expenses is attributable to an $888,000
reduction in noncash compensation costs incurred pursuant to non-qualified stock options, partially offset by increases in off-shore consulting costs and salary expenses of $450,000 and $257,000, respectively. As a percentage of total net revenues,
research and development expense increased to 34.3% for the six months ended June 30, 2005, from 31.2% for the year earlier period.



GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by $560,000, or 19.6%, to $2.3 million for the six months ended June 30, 2005
from $2.9 million for the six months ended June 30, 2004. This decrease in general and administrative expenses is primarily attributable to a $461,000 reduction in noncash compensation costs incurred pursuant to non-qualified stock options and a
$127,000 decease in accounting and legal fees. As a percentage of total net revenues, general and administrative expenses decreased to 13.3% for the six months ended June 30, 2005 from 14.6% for the year earlier period.



DEPRECIATION. Depreciation expense decreased by $44,000, or 10%, to $387,000
in the six months ended June 30, 2005 from the same period in 2004. This decrease is principally attributable to a significant drop-off in the level of furniture, equipment and software additions from the years 2001 ($1.8 million) and 2002
($933,000) to the year 2004 ($698,000) and the six months ended June 30, 2005 ($534,000), the majority of these asset additions being depreciated over a three-year life.



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AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS. Amortization of acquired intangible assets related to our
acquisitions amounted to $698,000 in the six months ended June 30, 2005, which represents a 2% decrease in amortization from the year earlier period. The decrease in amortization attributable to Vintages acquired intangible assets becoming
fully-amortized during the first quarter of 2005 was largely offset by an increase attributable to the acquisition of Pricing Analytics in April 2004.



RESTRUCTURING AND OTHER CHARGES. In the six months ended June 30, 2005, we recorded $33,000 in credits related to efforts in prior quarters to streamline
operations. These credits resulted from reductions in the provisions for future lease costs for the Chicago and London offices.



OTHER INCOME, NET



Other income, net, increased by $12,000, or 20%, from $60,000 in the second quarter of 2004 to $72,000 in the second quarter of 2005. A $95,000 increase
in interest income, attributable to higher average yields, was partially offset by $52,000 increase in foreign currency losses and a $31,000 reduction in miscellaneous income.



PROVISION FOR INCOME TAXES



We incurred operating losses for all quarters in 2004 and the first two quarters of 2005 and have consequently recorded a valuation allowance for the full
amount of our net deferred tax asset, which consists principally of our net operating loss carryforwards, as the future realization of the tax benefit is uncertain. No provision or benefit for income taxes has been recorded in the six-month periods
ended June 30, 2005 and 2004.



LIQUIDITY AND CAPITAL RESOURCES



In 2002 and 2003, we entered into several capital lease financing
arrangements with a financial institution. Under the terms of the financings, the aggregate proceeds were deposited in a restricted bank account. At June 30, 2005, $41,000 of the remaining aggregate proceeds are restricted, all of which is
classified as current restricted cash. The non-current restricted cash balance of $646,000 at June 30, 2005 represents cash held on deposit with respect to long-term lease obligations.



At June 30, 2005, we had net working capital of $12.2 million, including cash and cash equivalents of $18.4. This compares
to a net working capital balance of $14.6 million at December 31, 2004. Also on June 30, 2005, we had no long-term or short-term debt, other than obligations under capital lease financings.



Net cash used in operating activities for the six months ended June 30, 2005
was $2.4 million, as compared to net cash used in operating activities of $3.1 million in the six months ended June 30, 2004. For the six months ended June 30, 2005, net cash used in operating activities consisted principally of (i) the net loss of
$3.9 million, as offset by non-cash items depreciation and amortization of $1.1 million and noncash stock-based compensation of $109,000, (ii) decreases in accounts payable and deferred revenue of $1.0 million and $511,000, respectively, and (iii)
an increase in prepaid expenses of $705,000, partially offset by a $2.3 million decrease in accounts receivable. The decrease in accounts payable was largely the result of timing, i.e., the balance at December 31, 2004 was unusually high relative to
prior and subsequent quarters. The $511,000 decrease in deferred revenue consisted principally of the recognition into revenue of $876,000 in previously-deferred license fees, partially offset by an increase in deferred subscription revenue. The
$705,000 increase in prepaid expenses was



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primarily attributable to $755,000 in advance royalty payments to third-party software developers. The $2.3 million
decrease in accounts receivable was principally attributable to a $2.9 million decrease in the value of non-subscription license agreements executed in the second quarter of 2005 versus the fourth quarter of 2004, partially offset by significantly
higher professional services billings during the second quarter of 2005 relative to the fourth quarter of 2004.



For the six months ended June 30, 2004, net cash used in operating activities consisted principally of the net loss of $4.4 million, as offset by non-cash
items depreciation and amortization of $1.1 million, restructuring and other charges of $1.3 million, in-process research and development of $290,000 and noncash stock-based compensation of $2.4 million, and decreases in accrued expenses and
deferred revenue of $2.4 million and $2.8 million, respectively, partially offset by a $944,000 decrease in accounts receivable. The year-to-date decrease in accrued expenses resulted largely from: (i) a net $502,000 reduction in the sales
commission accrual, a consequence of the decrease in new license deals in the second quarter of 2004 relative to the fourth quarter of 2003, (ii) a $660,000 decrease in the Companys discontinued self-insured medical claims obligation, (iii)
$780,000 in year-to-date payments against the restructuring lease and severance accruals, and (iv) a $412,000 reduction in accrued consulting fees. The $2.8 million decrease in deferred revenue was the result of the recognition into revenue of
previously-deferred license fees. The $944,000 decrease in accounts receivable was principally attributable to a 75.8% drop in product revenues in the second quarter of 2004 versus the fourth quarter of 2003.



Net cash provided by investing activities was $13.8 for the six months ended
June 30, 2005, as compared to net cash used of $665,000 for the six months ended June 30, 2004. Net cash provided by investing activities for the six months ended June 30, 2005 consisted of $14.6 million in net redemptions of short-term investments
and securities held for sale, partially offset by $534,000 in property and equipment additions and $248,000 in merger consideration paid in connection with the Pricing Analytics acquisition. Net cash used in investing activities for the six months
ended June 30, 2004 consisted primarily of $385,000 in merger consideration paid in connection with the Pricing Analytics acquisition and $236,000 in property and equipment additions. Also during this period, purchases of short-term investments and
securities held for sale of $9.4 million were nearly offset by $9.3 million in redemptions of such investments.



Net cash provided by financing activities was $920,000 in the six months ended June 30, 2005, consisting primarily of $600,000 in proceeds from warrant
exercises and $323,000 in proceeds from stock option exercises. Net cash used by financing activities was $44,000 in the six months ended June 30, 2004, comprised of $319,000 in payments on existing capital leases, partially offset by $275,000 in
proceeds from stock option exercises and the employee stock purchase plan.



We currently anticipate that our cash and cash equivalents of $18.4 million will be sufficient to meet our anticipated needs for working capital, capital expenditures, and acquisitions for at least the next 12 months.
Our future long-term capital needs will depend significantly on the rate of growth of our business, our profitability, possible acquisitions, the timing of expanded product offerings and the success of these offerings if and when they are launched.
Accordingly, any projections of future long-term cash needs and cash flows are subject to substantial uncertainty. If our current balance of cash and cash equivalents is insufficient to satisfy our long-term liquidity needs, we may seek to sell
additional equity or debt securities to raise funds, and those securities may have rights, preferences or privileges senior to those of the rights of our common stock. In connection with such a sale of stock, our stockholders may experience
dilution. In addition, we cannot be certain that additional financing will be available to us on favorable terms when required, or at all. Our current stock price may make it difficult for us to raise additional equity financing.



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CONTRACTUAL OBLIGATIONS



|                                   |  |                                           |       |                  |   |           |  |           |       |                   |   |       |  |   |      
|---------------------------------- |  | ----------------------------------------- | ----- | ---------------- | - | --------- |  | --------- | ----- | ----------------- | - | ----- |  | - | -----
|                                   |  | Payments due by Period - Amounts in $000s
|                                   |  | Total                                     |       | Less than 1 year |   | 1-3 years |  | 3-5 years |       | More than 5 years
|Long-Term Debt                     |  | $                                         |      |                  | $ |          |  | $         |      |                   | $ |      |  | $ |     
|Capital Lease Obligations          |  |                                           | 42    |                  |   | 42        |  |           |      |                   |   |      |  |   |     
|Operating Leases                   |  |                                           | 8,941 |                  |   | 1,784     |  |           | 3,296 |                   |   | 2,610 |  |   | 1,251
|Unconditional Purchase Obligations |  |                                           |      |                  |   |          |  |           |      |                   |   |      |  |   |     
|                                   |  |                                           |       |                  |   |           |  |           |       |                   |   |       |  |   |      
|Total Contractual Obligations      |  | $                                         | 8,983 |                  | $ | 1,826     |  | $         | 3,296 |                   | $ | 2,610 |  | $ | 1,251
|                                   |  |                                           |       |                  |   |           |  |           |       |                   |   |       |  |   |      

---

|Note: | Capital Lease Obligations amounts in the above table include interest.
|----- | ----------------------------------------------------------------------



CERTAIN FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS



In addition to other information in this Form 10-Q, the following factors could cause actual results to differ materially
from those indicated by forward-looking statements made in this Form 10-Q and presented elsewhere by management from time to time.



WE HAVE RECENTLY EXPERIENCED A CHANGE OF SENIOR MANAGEMENT, WHICH MAY AFFECT OUR BUSINESS, PARTICULARLY IN THE SHORT TERM



On August 8, 2005, we announced the departure of our Chief Executive
Officer and Chief Operating Officer and the appointment of a new Chairman of the Board with certain executive powers and a new President and Chief Executive Officer. Changes of this nature can create a level of uncertainty and potential disruption
to relationships with customers, prospective customers, employees and business partners, particularly in the short term. Our new leadership will need time to become more familiar with the Company and its culture. For at least the next few months,
this leadership change could have an adverse effect on our business, financial condition and results of operations.



WE WILL NEED TO GROW IN MARKETS OTHER THAN THE HEALTHCARE MARKET FOR OUR FUTURE GROWTH



We will need to be successful in our efforts to reduce our reliance on the
health and life sciences market, which has traditionally been, and continues to be, the primary source of our revenues. Revenues from our non-healthcare customers in the industry solutions segment have comprised 34.0%, 27.3%, and 24.2%,
respectively, of our consolidated revenues for the years ended December 31, 2003 and 2004 and for the six months ended June 30, 2005. The Company must continue to evolve its products and marketing strategies in order to be successful in these
markets. We have not been successful in generating the revenue we expected from these markets and we cannot assure you that we will be successful in the future. Although we have had some success in selling to markets outside of healthcare, we have
not yet demonstrated that our product offerings have significant appeal in many of the markets we are targeting.



THE BID PRICE OF OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET HAS BEEN BELOW $1.00 PER SHARE, AND IF THE BID PRICE AGAIN FALLS BELOW $1.00 PER SHARE FOR AN EXTENDED
PERIOD, OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET WHICH COULD REDUCE THE LIQUIDITY OF OUR COMMON STOCK AND ADVERSELY AFFECT OUR ABILITY TO RAISE ADDITIONAL NECESSARY CAPITAL



In April 2003 we received written notification from Nasdaq that we were not
in compliance with Nasdaq Marketplace Rule 4450(b)(4) because the closing bid price of our common stock was below $1.00 for 30 consecutive trading days. We subsequently regained compliance when the bid price of our common stock closed at $1.00 per
share or more for 10 consecutive trading days. This process occurred again in September 2004, when we received a similar notice of deficiency, and for which we regained compliance in November 2004. If the closing bid price of our common stock again
falls below $1.00 per share for 30 consecutive trading days and we do not regain compliance, we would be delisted from the Nasdaq National Market. The delisting of our common stock may result in the trading of the stock on the Nasdaq SmallCap or the
OTC



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Bulletin Board. Consequently, a delisting of our common stock from the Nasdaq National Market may reduce the liquidity of
our common stock, adversely affect our ability to raise additional necessary capital and could adversely affect our sales efforts.



WE HAVE INCURRED SUBSTANTIAL LOSSES IN RECENT YEARS AND OUR RETURN TO PROFITABILITY IS UNCERTAIN



We incurred net losses of $39.5 million in the year ended December 31, 2003, $7.0 million in the year ended December 31,
2004, and $3.9 million for the six months ended June 30, 2005, and we had an accumulated deficit at June 30, 2005 of $129.0 million. Our recent results have been affected by a number of factors that caused current and prospective customers to defer,
or otherwise not make, purchases from us, and we cannot assure you that we will not be affected by these or other factors in future periods. We cannot assure you that we will achieve sufficient revenues to become profitable in the future.



IT IS DIFFICULT FOR US TO PREDICT WHEN OR IF SALES WILL OCCUR AND WE OFTEN
INCUR SIGNIFICANT SELLING EXPENSES IN ADVANCE OF OUR RECOGNITION OF ANY RELATED REVENUE



Our clients view the purchase of our software applications and related professional services as a significant and strategic decision. As a result, clients carefully evaluate our software products and services. The
length of this evaluation process is affected by factors such as the clients need to rapidly implement a solution and whether the client is new or is extending an existing implementation. The license of our software products may also be
subject to delays if the client has lengthy internal budgeting, approval and evaluation processes which are quite common in the context of introducing large enterprise-wide technology solutions. We may incur significant selling and marketing
expenses during a clients evaluation period, including the costs of developing a full proposal and completing a rapid proof of concept or demonstration, before the client places an order with us. Clients may also initially purchase a limited
number of licenses before expanding their implementations. Larger clients may purchase our software products as part of multiple simultaneous purchasing decisions, which may result in additional unplanned administrative processing and other delays
in the recognition of our license revenues. And an increasing percentage of our customers and prospective customers seeks to negotiate license agreements that permit regular subscription payments to us over periods greater than 12 months, instead of
full payment of the license fee within the first few months after contract execution. If revenues forecasted from a significant client for a particular quarter are not realized or are delayed, as has occurred in recent quarters, we may experience an
unplanned shortfall in revenues during that quarter. This may cause our operating results to be below the expectations of public market analysts or investors, which could cause the value of our common stock to decline.



OUR FIXED COSTS HAVE LED, AND WILL CONTINUE TO LEAD, TO FLUCTUATIONS IN OPERATING RESULTS
WHICH HAVE RESULTED, AND COULD IN THE FUTURE RESULT, IN A DECLINE OF OUR STOCK PRICE



A significant percentage of our expenses, particularly personnel costs and rent, are fixed costs and are based in part on expectations of future revenues. We may be unable to reduce spending in a timely manner to
compensate for any significant fluctuations in revenues. Accordingly, shortfalls in revenues, as we experienced in recent quarters, may cause significant variations in operating results in any quarter. Our stock price has been impacted by the
failure of our quarterly results to meet the expectations of market analysts and investors, and it could decline further.



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WE HAVE MULTIPLE FACILITIES AND WE MAY EXPERIENCE DIFFICULTIES IN OPERATING FROM THESE FACILITIES



We will continue to operate out of our corporate headquarters in Edison, New
Jersey, our primary engineering office in Redwood City, California and facilities in Portland, Maine and London, England. The geographic distance between our offices makes it more difficult for our management and other employees to collaborate and
communicate with each other than if they were all located in a single facility, and, as a result, increases the strain on our managerial, operational and financial resources. Also, a significant number of our sales and professional services
employees work remotely out of home offices, which will potentially add to this strain.



WE MAY NOT BE SUCCESSFUL IN DEVELOPING OR ACQUIRING NEW TECHNOLOGIES OR BUSINESSES AND THIS COULD HINDER OUR EXPANSION EFFORTS



We intend to continue our product research and development efforts at levels similar to current expenditures and to consider additional acquisitions of or
new investments in complementary businesses, products, services or technologies. We cannot assure you that we will be successful in our product development efforts or we will be able to identify appropriate acquisition or investment candidates. Even
if we do identify suitable candidates, we cannot assure you that we will be able to make such acquisitions or investments on commercially acceptable terms. Furthermore, we may incur debt or issue equity securities to pay for any future acquisitions.
The issuance of equity securities could be dilutive to our existing stockholders and the issuance of debt could limit our available cash and accordingly restrict our activities.



WE MAY MAKE ADDITIONAL ACQUISITIONS AND WE MAY HAVE DIFFICULTY INTEGRATING THEM



Any company that we acquire will have a culture different from ours as well
as technologies, products and services that our employees will need to understand and integrate with our own. We have assimilated the employees, technologies and products of the companies that we have previously acquired and will need to do the same
with any new companies we may acquire, and that effort has been, and will likely continue to be difficult, time-consuming and may be unsuccessful. If we are not successful, our investment in the acquired entity may be impaired or lost, and even if
we are successful, the process of integrating an acquired entity may divert our attention from our core business.



IF WE DO ACQUIRE NEW TECHNOLOGIES OR BUSINESSES, OUR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED



In connection with our acquisitions, we have recorded substantial goodwill and other purchased intangible assets. In
addition, we recorded charges for write-offs of a portion of the purchase prices of acquired companies as in-process research and development. The carrying values of intangible assets and goodwill are reviewed for impairment on a periodic basis. In
the years ended December 31, 2002 and 2003, we recorded impairment charges of $13.3 million and $16.8 million, respectively, in connection with the write-off of goodwill and other purchased intangible assets. We cannot assure you that future
write-downs of any such assets will not affect future operating results.



WE
HAVE MANY COMPETITORS AND POTENTIAL COMPETITORS AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY



The market for our products and services is competitive and subject to rapid change. We encounter significant competition for the sale of our contract management software from the internal information systems
departments of existing and potential clients, software companies that target the contract management markets and professional services organizations. Our



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competitors vary in size and in the scope and breadth of products and services offered. We anticipate increased
competition for market share and pressure to reduce prices and make sales concessions, which could materially and adversely affect our revenues and margins.



Many of our existing competitors, as well as a number of potential new competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing resources than we do. Such competitors may also engage in more extensive research and development, undertake more far-reaching marketing campaigns, adopt more aggressive
pricing policies and make more attractive offers to existing and potential employees and strategic partners. Our competitors could develop products or services that are equal or superior to our solutions or that achieve greater market acceptance
than our solutions. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties. We may not be able to compete successfully, and competitive pressures may require
us to make concessions that will adversely affect our revenues and our margins, or reduce the demand for our products and services.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



INTEREST RATE RISK



The Companys exposure to market risk for changes in interest rates relate primarily to the Companys investment portfolio. The Company does not
use derivative financial instruments in its investment portfolio. The primary objective of the Companys investment activities is to preserve principal while maximizing yields without assuming significant risk. This is accomplished by investing
in diversified investments, consisting primarily of short-term investment-grade securities. Due to the nature of our investments, we believe there is no material risk exposure. A 10% change in interest rates, either positive or negative, would not
have had a significant effect on interest income in the periods ended June 30, 2004 and 2005.



As of June 30, 2005, the Companys cash and cash equivalents consisted entirely of money market and other marketable short-term investments with remaining maturities of 90 days or less when purchased and
non-interest bearing checking accounts. Investments in marketable debt securities with maturities greater than 90 days and less than one year are classified as held-to-maturity short-term investments and have been recorded at amortized cost. At June
30, 2005, the Company had no held-to-maturity investments, all such investments held at March 31, 2005 having matured during the quarter ended June 30, 2005. Under current investment guidelines, maturities on short-term investments are restricted to
one year or less. Investments in auction rate securities, with maturities which can be greater than one year but for which interest rates reset in less than 90 days, are classified as securities held for sale and have been stated at fair market
value. At June 30, 2005, the Company held no auction rate certificates, having disposed of all its holdings in such investments during the quarter ended June 30, 2005.



FOREIGN CURRENCY EXCHANGE RISK



The Company operates in certain foreign locations, where the currency used is not the U.S. dollar. However, these locations have not been, and are not
currently expected to be, significant to our consolidated financial statements. Changes in exchange rates have not had a material effect on our business.



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ITEM 4. CONTROLS AND PROCEDURES



(a) Evaluation of Disclosure Controls and Procedures. As required by Exchange Act Rule 13a-15(b), our management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, evaluated the
effectiveness of our disclosure controls and procedures as of June 30, 2005. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange
Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its
judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management does not expect that our disclosure controls or our internal controls will prevent all errors and all fraud. Based on this evaluation, our CEO
and CFO concluded that, as of June 30, 2005, our disclosure controls and procedures were effective in timely alerting them to material information required to be included in our periodic SEC filings and that information required to be disclosed by
us in these periodic filings is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and that our internal controls are effective to provide reasonable assurance that our financial
statements are fairly presented in conformity with generally accepted accounting principles.



(b) Changes in Internal Control. The Company made no material changes to its internal controls procedures in the quarter ended June 30, 2005. No change in our internal control over financial reporting occurred
during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



(b) Use of Proceeds



The
Company has continued to use the proceeds of its initial public offering in the manner and for the purposes described elsewhere in this Report on Form 10-Q.



ITEM 6. EXHIBITS



(a) The exhibits listed on the
Exhibit Index are filed herewith.



SIGNATURES



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



|                     |  |             |  |                                      
|-------------------- |  | ----------- |  | -------------------------------------
|                     |  | I-MANY, INC
|                     |  |            
|Date: August 9, 2005 |  | By:         |  | /s/ Kevin M. Harris                  
|                     |  |             |  | Kevin M. Harris                      
|                     |  |             |  | Chief Financial Officer and Treasurer
|                     |  |            
|                     |  |             |  | /s/ Kevin M. Harris                  
|                     |  |             |  | Kevin M. Harris                      
|                     |  |             |  | Chief Financial Officer              



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INDEX TO EXHIBITS



|            |  |                                                                                                                                                                             
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | DESCRIPTION                                                                                                                                                                 
|31.1        |  | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|32.1        |  | Certifications pursuant to 18 U.S.C. sec. 1350.                                                                                                                             



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