##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



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

For the quarterly period ended March 31, 2006

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

I-MANY,
INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|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 a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ̈Accelerated Filer  x    Non-Accelerated Filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ̈No  x

On May 3, 2006, 47,443,196 shares of the registrants common
stock, $.0001 par value, were issued and outstanding.



---



---

##### Table of Contents

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 in Part II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q, as well as generally in this Form 10-Q. 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.



2



---

##### 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 March 31, 2006 and December 31, 2005                   |  | 4   
|         |  |                                                                                                   
|         |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005 |  | 5   
|         |  |                                                                                                   
|         |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 |  | 6   
|         |  |                                                                                                   
|         |  | Notes to Condensed Consolidated Financial Statements                                               |  | 7   
|         |  |                                                                                                   
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 15  
|         |  |                                                                                                   
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 25  
|         |  |                                                                                                   
|Item 4.  |  | Controls and Procedures                                                                            |  | 25  
|         |  |                                                                                                   
|PART II. |  | OTHER INFORMATION                                                                                  |  |     
|         |  |                                                                                                   
|Item 1A  |  | Risk Factors                                                                                       |  | 26  
|         |  |                                                                                                   
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                        |  | 30  
|         |  |                                                                                                   
|Item 6.  |  | Exhibits                                                                                           |  | 30  
|         |  |                                                                                                   
|         |  | Signatures                                                                                         |  | 31  
|         |  |                                                                                                   
|         |  | Index to Exhibits                                                                                  |  | 32  



3



---

##### Table of Contents

PART I. UNAUDITED FINANCIAL INFORMATION



|ITEM 1. | UNAUDITED FINANCIAL STATEMENTS
|------- | ------------------------------

I-MANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share-related amounts)



|                                                                                                                |  |               |          |   |                  |   |          |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                |  | March 31,2006 |          |   | December 31,2005 |  
|ASSETS                                                                                                          |  |               |          |   |                  |   |          |  
|Current assets:                                                                                                 |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                       |  | $             | 17,184   |   |                  | $ | 16,805   |  
|Accounts receivable, net of allowance                                                                           |  |               | 7,163    |   |                  |   | 9,577    |  
|Prepaid expenses and other current assets                                                                       |  |               | 1,021    |   |                  |   | 845      |  
|                                                                                                                |  |               |          |   |                  |   |          |  
|Total current assets                                                                                            |  |               | 25,368   |   |                  |   | 27,227   |  
|Property and equipment, net                                                                                     |  |               | 1,227    |   |                  |   | 1,188    |  
|Restricted cash                                                                                                 |  |               | 557      |   |                  |   | 555      |  
|Other assets                                                                                                    |  |               | 126      |   |                  |   | 122      |  
|Acquired intangible assets, net                                                                                 |  |               | 370      |   |                  |   | 713      |  
|Goodwill                                                                                                        |  |               | 8,667    |   |                  |   | 8,667    |  
|                                                                                                                |  |               |          |   |                  |   |          |  
|Total assets                                                                                                    |  | $             | 36,315   |   |                  | $ | 38,472   |  
|                                                                                                                |  |               |          |   |                  |   |          |  
|LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITY                                                |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                            |  |               |          |   |                  |   |          |  
|Accounts payable                                                                                                |  | $             | 1,586    |   |                  | $ | 1,520    |  
|Accrued expenses                                                                                                |  |               | 3,560    |   |                  |   | 4,098    |  
|Current portion of deferred revenue                                                                             |  |               | 13,290   |   |                  |   | 12,194   |  
|Current portion of capital lease obligations                                                                    |  |               | 8        |   |                  |   | 8        |  
|                                                                                                                |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                       |  |               | 18,444   |   |                  |   | 17,820   |  
|Deferred revenue, net of current portion                                                                        |  |               | 943      |   |                  |   | 1,242    |  
|Capital lease obligations, net of current portion                                                               |  |               | 12       |   |                  |   | 13       |  
|Other long-term liabilities                                                                                     |  |               | 975      |   |                  |   | 1,041    |  
|                                                                                                                |  |               |          |   |                  |   |          |  
|Total liabilities                                                                                               |  |               | 20,374   |   |                  |   | 20,116   |  
|                                                                                                                |  |               |          |   |                  |   |          |  
|Series A redeemable convertible preferred stock, $.01 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  47,358,554 and 46,823,585 shares at March 31, 2006 and December 31, 2005, respectively |  |               | 5        |   |                  |   | 5        |  
|Additional paid-in capital                                                                                      |  |               | 155,126  |   |                  |   | 153,215  |  
|Deferred stock-based compensation                                                                               |  |               | (1,741   | ) |                  |   | (448     | )
|Accumulated other comprehensive income                                                                          |  |               | 1        |   |                  |   | 4        |  
|Accumulated deficit                                                                                             |  |               | (137,450 | ) |                  |   | (134,420 | )
|                                                                                                                |  |               |          |   |                  |   |          |  
|Total stockholders equity                                                                                      |  |               | 15,941   |   |                  |   | 18,356   |  
|                                                                                                                |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                      |  | $             | 36,315   |   |                  | $ | 38,472   |  
|                                                                                                                |  |               |          |   |                  |   |          |  

See notes to condensed consolidated financial statements.



4



---

##### Table of Contents

I-MANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)



|                                            |  |                              |        |   |      |   |        |  
|------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                            |  | Three months ended March 31, |       
|                                            |  | 2006                         |        |   | 2005 |  
|Net revenues:                               |  |                              |        |   |      |   |        |  
|Product                                     |  | $                            | 1,570  |   |      | $ | 2,077  |  
|Services                                    |  |                              | 6,048  |   |      |   | 6,857  |  
|                                            |  |                              |        |   |      |   |        |  
|Total net revenues                          |  |                              | 7,618  |   |      |   | 8,934  |  
|Operating expenses:                         |  |                              |        |   |      |   |        |  
|Cost of third-party technology              |  |                              | 77     |   |      |   | 10     |  
|Cost of services                            |  |                              | 3,817  |   |      |   | 3,792  |  
|Amortization of acquired intangible assets  |  |                              | 343    |   |      |   | 355    |  
|Sales and marketing                         |  |                              | 2,073  |   |      |   | 2,039  |  
|Research and development                    |  |                              | 2,978  |   |      |   | 3,046  |  
|General and administrative                  |  |                              | 1,313  |   |      |   | 1,144  |  
|Depreciation                                |  |                              | 171    |   |      |   | 180    |  
|Restructuring and other charges (credits)   |  |                              | 8      |   |      |   | (27    | )
|                                            |  |                              |        |   |      |   |        |  
|Total operating expenses                    |  |                              | 10,780 |   |      |   | 10,539 |  
|                                            |  |                              |        |   |      |   |        |  
|Loss from operations                        |  |                              | (3,162 | ) |      |   | (1,605 | )
|Other income, net                           |  |                              | 132    |   |      |   | 31     |  
|                                            |  |                              |        |   |      |   |        |  
|Net loss                                    |  | $                            | (3,030 | ) |      | $ | (1,574 | )
|                                            |  |                              |        |   |      |   |        |  
|Basic and diluted net loss per common share |  | $                            | (0.06  | ) |      | $ | (0.04  | )
|                                            |  |                              |        |   |      |   |        |  
|Weighted average shares outstanding         |  |                              | 46,676 |   |      |   | 42,863 |  
|                                            |  |                              |        |   |      |   |        |  

See notes to condensed consolidated financial statements.



5



---

##### Table of Contents

I-MANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                            |  |                              |        |   |      |   |        |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                            |  | Three Months Ended March 31, |       
|                                                                            |  | 2006                         |        |   | 2005 |  
|Cash Flows from Operating Activities:                                       |  |                              |        |   |      |   |        |  
|Net loss                                                                    |  | $                            | (3,030 | ) |      | $ | (1,574 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                              |        |   |      |   |        |  
|Depreciation and amortization                                               |  |                              | 514    |   |      |   | 535    |  
|Restructuring and other charges (credits)                                   |  |                              | 8      |   |      |   | (27    | )
|Amortization of deferred stock-based compensation                           |  |                              | 257    |   |      |   | 102    |  
|Changes in operating assets and liabilities, net of acquisitions:           |  |                              |        |   |      |   |        |  
|Restricted cash                                                             |  |                              | (2     | ) |      |   | 92     |  
|Accounts receivable                                                         |  |                              | 2,412  |   |      |   | 2,087  |  
|Prepaid expense and other current assets                                    |  |                              | (176   | ) |      |   | (359   | )
|Accounts payable                                                            |  |                              | 66     |   |      |   | (640   | )
|Accrued expenses and other liabilities                                      |  |                              | (601   | ) |      |   | (452   | )
|Deferred revenue                                                            |  |                              | 797    |   |      |   | (1,520 | )
|Deferred rent                                                               |  |                              | (12    | ) |      |   | (35    | )
|Other assets                                                                |  |                              | (4     | ) |      |   | 5      |  
|                                                                            |  |                              |        |   |      |   |        |  
|Net cash provided by (used in) operating activities                         |  |                              | 229    |   |      |   | (1,786 | )
|                                                                            |  |                              |        |   |      |   |        |  
|Cash Flows from Investing Activities:                                       |  |                              |        |   |      |   |        |  
|Purchases of property and equipment                                         |  |                              | (210   | ) |      |   | (266   | )
|Cash paid to acquire Pricing Analytics, Inc.                                |  |                              |       |   |      |   | (248   | )
|Purchases of short-term investments and securities held for sale            |  |                              |       |   |      |   | (2,694 | )
|Redemptions of short-term investments and securities held for sale          |  |                              |       |   |      |   | 2,650  |  
|                                                                            |  |                              |        |   |      |   |        |  
|Net cash used in investing activities                                       |  |                              | (210   | ) |      |   | (558   | )
|                                                                            |  |                              |        |   |      |   |        |  
|Cash Flows from Financing Activities:                                       |  |                              |        |   |      |   |        |  
|Payments on capital lease obligations                                       |  |                              | (1     | ) |      |   | (84    | )
|Proceeds from exercise of stock options                                     |  |                              | 61     |   |      |   | 118    |  
|Proceeds from exercise of common stock warrant                              |  |                              | 300    |   |      |   |       |  
|                                                                            |  |                              |        |   |      |   |        |  
|Net cash provided by financing activities                                   |  |                              | 360    |   |      |   | 34     |  
|                                                                            |  |                              |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                        |  |                              | 379    |   |      |   | (2,310 | )
|Cash and cash equivalents, beginning of period                              |  |                              | 16,805 |   |      |   | 6,098  |  
|                                                                            |  |                              |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                    |  | $                            | 17,184 |   |      | $ | 3,788  |  
|                                                                            |  |                              |        |   |      |   |        |  
|Supplemental Disclosure of Cash Flow Information:                           |  |                              |        |   |      |   |        |  
|Cash paid during the period for interest                                    |  | $                            |       |   |      | $ | 3      |  
|                                                                            |  |                              |        |   |      |   |        |  

See notes to condensed consolidated financial statements.



6



---

##### 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, 2005 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 ended March 31, 2006 may not be indicative of the results
that may be expected for the year ending December 31, 2006, or for any other period.

NOTE 2. SIGNIFICANT ACCOUNTING
POLICIES

Revenue Recognition:

The
Company recognizes revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, and SOP 98-9, Software Revenue Recognition, with Respect to Certain Arrangements. 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. 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. 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. In cases where significant production or customization is required prior to attaining technological feasibility of the software, license fees are recognized on a percentage-of-completion basis and are credited to research and
development expenses as a funded development arrangement. After the software attains technological feasibility, recognizable license fees are reported as product revenue.

During the third quarter of 2005, the Company became aware of certain defects in the then-current version of one of its software products, which was first shipped to customers in the fourth quarter of 2004. These
defects, which were not identified in pre-release product testing, affected the performance of the software for a portion of the Companys customers depending on each customers particular implementation environment and its intended use of
the software. Because certain concessions have been made to customers in connection with these defects, the Company has generally not recognized revenue from sales of this software product and related implementation services beginning in the third
quarter of 2005, except in those cases in which it was determined that the customer was not likely to be affected by the known, unresolved software defects. In April 2006, the Company issued a new minor release of the software, in which it is
believed that all known performance defects have been resolved. Also, the Company plans to issue a new major release of the software in June 2006 for those customers which have delayed their implementations to receive the new version of the product.
The Company intends to continue deferring revenue in connection with license sales and implementation services for this software product until it has been demonstrated at customer sites that the new releases of the software are



7



---

##### Table of Contents

free of significant performance defects. As of March 31, 2006 and December 31, 2005, the Company has reversed and deferred $1.8 million and $1.6
million, respectively, of otherwise-recognizable license and professional service revenue, based in part on its estimate of the fair value of concessions to be made until the remaining defect is resolved, and partly on its determination that license
fees were not fixed and determinable because of the possibility of future concessions.

Service revenues include professional services,
training, maintenance and support services and reimbursable out-of-pocket 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 support fees are recognized ratably over the term of the service period, 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.

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, unspecified new product releases and maintenance and support, generally payable in equal quarterly installments commencing upon execution of the agreement. The Company recognizes all revenue from subscription based arrangements ratably
over the term of the subscription agreement commencing upon delivery of the initial product.

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 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.

Stock-based Compensation:

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (FAS) No. 123 (revised 2004) (FAS
123(R)), Share-based Payment. Under FAS 123(R), the Company measures and records the compensation cost of employee and director services received in exchange for stock option grants and other equity awards based on the grant-date
fair value of the awards. The values of the portions of the awards that are ultimately expected to vest are recognized as expense over the requisite service periods. The Company accounts for stock options and awards granted to non-employees other
than directors using the fair-value method, as prescribed by FAS No. 123, Accounting for Stock-based Compensation.

The
Company is also required to establish the value of an additional paid-in capital pool in connection with the tax impacts related to employee share-based compensation awards for which compensation costs were reflected in our pro forma disclosures
required under FAS No. 123. The Company has not yet completed the calculation of this pool, which is not required to be determined until the fourth quarter of 2006, but the Company believes there will be no impact on our financial position or
results of operations from this calculation.



8



---

##### Table of Contents

Under the fair-value method, compensation associated with equity awards 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 employee and director awards is generally the date of grant. The measurement date for awards granted
to non-employees other than directors is generally the date that performance of certain services is complete.

The following table
summarizes the components of stock-based compensation expense for the three month periods ended March 31, 2006 and 2005:



|                                                   |  |      |     |      |   |    
|-------------------------------------------------- |  | ---- | --- | ---- | - | ---
|(Amounts in thousands)                             |  | 2006 |     | 2005
|Pre-2006 stock option grants                       |  | $    | 170 |      | $ |   
|Post-2005 stock option grants                      |  |      | 10  |      |   |   
|Restricted stock grants to directors and employees |  |      | 61  |      |   | 16 
|Employee stock purchase plan                       |  |      | 16  |      |   |   
|Non-qualified stock option grants to employees     |  |      |    |      |   | 86 
|                                                   |  |      |     |      |   |    
|Total stock-based compensation expense             |  | $    | 257 |      | $ | 102
|                                                   |  |      |     |      |   |    

As of March 31, 2006, unamortized compensation cost, net of estimated forfeitures, related to
nonvested stock options and nonvested restricted shares granted under the various stock incentive plans amounted to $1.2 million and $534,000, respectively. These costs are expected to be amortized over weighted average periods of 1.2 years and 1.0
years, respectively.

The Company has four current stock incentive plans: (i) the 2000 Non-Employee Director Stock Option Plan, which
provides for the granting of annual (25,000-share) and new hire (62,500-share) non-qualified stock options to non-employee directors, (ii) the 2001 Employee Stock Option Plan, which provides for grants in the form on non-qualified stock
options, with not more than 25,000 shares to be issued in the aggregate to officers of directors of the Company, and (iii) the 2001 and 2003 Stock Incentive Plans, both of which are shareholder-approved plans and provide for the grant of
incentive stock options and other equity awards to the Companys employees, directors and consultants. The company also has an employee stock purchase plan that allows employees to purchase stock at a 15% discount to market prices subject to
certain limitations. Participation is optional and enrollment periods are every six months.

The following table summarizes total common
shares available for future grants of stock options and other equity awards at March 31, 2006:



|
|



|                                             |  |          
|-------------------------------------------- |  | ---------
|2000 Non-Employee Director Stock Option Plan |  | 162,500  
|2001 Employee Stock Option Plan              |  | 1,129,805
|2001 Stock Incentive Plan                    |  | 2,886,378
|2003 Stock Incentive Plan                    |  | 1,623,132
|                                             |  |          
|Total available for future grant             |  | 5,801,815
|                                             |  |          

Option awards are generally granted with an exercise price equal to the market price of the
Companys common stock at the date of grant. Stock options expire 10 years after grant and vest over periods set by the Board of Directors at the time of grant. Generally, option awards vest ratably over four years for employee grants and over
three years for grants to directors. Certain stock option awards provide for accelerated vesting if there is a change in control.

The
Companys estimates of the fair value of stock option grants, including valuations for pre-2006 grant pro forma calculations, were made using the Black-Scholes option pricing model



9



---

##### Table of Contents

with the following assumptions and resulted in the following weighted average grant-date fair values of options granted during the three months ended
March 31:



|                                                                            |  |      |           |   |      |   |      |  
|--------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | ---- | -
|                                                                            |  | 2006 |           |   | 2005 |  
|Risk-free interest rates                                                    |  |      | 4.86      | % |      |   | 4.30 | %
|Dividend yield                                                              |  |      |          |   |      |   |     |  
|Expected volatility                                                         |  |      | 70        | % |      |   | 80   | %
|Expected term (in years)                                                    |  |      | 5.75-6.25 |   |      |   | 6.25 |  
|Weighted average grant-date fair value of options granted during the period |  | $    | 1.04      |   |      | $ | 1.07 |  

The Company uses historical volatility of the Companys common stock to estimate expected volatility. The
expected term of options granted is estimated to be equal to the average of the contractual life of the options and the grants average vesting period. The risk-free interest rate is derived quarterly from the published US Treasury yield curve,
based on expected term, in effect as of the last day of the period.

The Company adopted FAS 123(R) using the modified prospective method,
pursuant to which the Companys financial statement for prior reporting periods have not been adjusted to include compensation cost calculated under the fair-value method. Prior to 2006, the Company used the intrinsic value method to measure
compensation expense associated with the grants of stock options to employees and directors. Had the Company used the fair-value-based method to measure compensation related to such stock option awards, reported loss and loss per share would have
been as follows for the three month period ended March 31, 2005:



|                                                                                                                                    |  |    |       |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | -- | ----- | -
|(Amounts in thousands, except per share data)                                                                                       | 
|Net loss, as reported                                                                                                               |  | ($ | 1,574 | )
|Add: stock-based compensation recorded                                                                                              |  |    | 102   |  
|Deduct: total stock-based employee compensation determined under fair value based method for all awards, net of related tax
effects |  |    | (434  | )
|                                                                                                                                    |  |    |       |  
|Pro forma net loss                                                                                                                  |  | ($ | 1,906 | )
|                                                                                                                                    |  |    |       |  
|Basic and diluted loss per share:                                                                                                   |  |    |       |  
|As reported                                                                                                                         |  | ($ | 0.04  | )
|                                                                                                                                    |  |    |       |  
|Pro forma                                                                                                                           |  | ($ | 0.04  | )
|                                                                                                                                    |  |    |       |  



10



---

##### Table of Contents

The following table summarizes stock option activity under all of the Companys stock option plans
for the three month period ended March 31, 2006:



|                                 |  |                  |   |  |                                 |       |                                         |           |                               |   |      
|-------------------------------- |  | ---------------- | - |  | ------------------------------- | ----- | --------------------------------------- | --------- | ----------------------------- | - | -----
|                                 |  | Number of Shares |   |  | Weighted Average Exercise Price |       | WeightedAverageRemainingContractualTerm |           | AggregateIntrinsicValue($000)
|Outstanding at December 31, 2005 |  | 5,655,090        |   |  | $                               | 1.867 |                                         |           |                               |   |      
|Granted                          |  | 382,000          |   |  |                                 | 1.533 |                                         |           |                               |   |      
|Exercised                        |  | (177,109         | ) |  |                                 | 0.381 |                                         |           |                               |   |      
|Canceled                         |  | (504,100         | ) |  |                                 | 2.066 |                                         |           |                               |   |      
|                                 |  |                  |   |  |                                 |       |                                         |           |                               |   |      
|Outstanding at March 31, 2006    |  | 5,355,881        |   |  | $                               | 1.876 |                                         | 7.7 years |                               | $ | 2,646
|                                 |  |                  |   |  |                                 |       |                                         |           |                               |   |      
|Exercisable at March 31, 2006    |  | 3,014,904        |   |  | $                               | 2.153 |                                         | 7.3 years |                               | $ | 2,386
|                                 |  |                  |   |  |                                 |       |                                         |           |                               |   |      

The total intrinsic value of stock options exercised during the three-month periods ended March 31, 2006 and
2005 was $204,000 and $513,000, respectively.

A summary of the status of the Companys nonvested restricted shares as of
March 31, 2006, and changes during the three months ended March 31, 2006, is presented below:



|                               |  |                  |   |  |                                        |      
|------------------------------ |  | ---------------- | - |  | -------------------------------------- | -----
|                               |  | Number of Shares |   |  | Weighted Average Grant-Date Fair Value
|Nonvested at December 31, 2005 |  | 352,036          |   |  | $                                      | 1.480
|Granted                        |  | 122,860          |   |  |                                        | 1.459
|Vested                         |  | (16,000          | ) |  |                                        | 1.490
|Forfeited                      |  | (15,000          | ) |  |                                        | 1.600
|                               |  |                  |   |  |                                        |      
|Nonvested at March 31, 2006    |  | 443,896          |   |  | $                                      | 1.470
|                               |  |                  |   |  |                                        |      

The total fair value of restricted shares which vested during the three months ended March 31, 2006 and 2005
was $24,000 and $57,000, respectively.

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.



11



---

##### Table of Contents

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 at least 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 were outstanding as of March 31, 2006 and December 31, 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. 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 1,660,236 and 4,397,615, respectively, for the three months ended March 31, 2006 and 2005.

NOTE 4. SIGNIFICANT CUSTOMERS

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



|           |  |                             |   |  |      |  
|---------- |  | --------------------------- | - |  | ---- | -
|           |  | Three monthsended March 31, |  
|           |  | 2006                        |   |  | 2005 |  
|Customer A |  | 10                          | % |  | *    |  
|Customer B |  | *                           |   |  | 18   | %
|Customer C |  | *                           |   |  | 15   | %



12



---

##### Table of Contents

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



|           |  |           |   |  |      |  
|---------- |  | --------- | - |  | ---- | -
|           |  | March 31, |  
|           |  | 2006      |   |  | 2005 |  
|Customer B |  | 15        | % |  | *    |  
|Customer C |  | *         |   |  | 17   | %
|Customer D |  | 11        | % |  | *    |  
|Customer E |  | *         |   |  | 24   | %

---

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

NOTE 5. 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 was 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. In February 2006, P&G exercised the
remaining 250,000 shares of the warrant.

NOTE 6. SEGMENT DISCLOSURE

The Company measures operating results as two reportable segments, each 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. These segments are consistent with how management establishes strategic goals, allocates resources and evaluates performance. The accounting policies
of the segments are the same as those described in the summary of significant accounting policies. The Companys reportable segments are strategic business units that market to separate and distinct industry groups: (i) health and life
sciences, which includes pharmaceutical manufacturers, and (ii) industry solutions, which comprises all other industries. The following tables reflect the results of the segments consistent with the Companys management system.



13



---

##### Table of Contents

|                                                  |  |                         |        |                   |   |        |              |  |   |        |   |  |   |        |  
|------------------------------------------------- |  | ----------------------- | ------ | ----------------- | - | ------ | ------------ |  | - | ------ | - |  | - | ------ | -
|(Amounts in thousands)                            |  | Health and LifeSciences |        | IndustrySolutions |   |        | Undesignated |  |   | Totals |  
|                                                  |  |                         |        |                  
|At and for the three months ended March 31, 2006: |  |                         |        |                   |   |        |              |  |   |        |   |  |   |        |  
|Revenues                                          |  | $                       | 5,801  |                   | $ | 1,817  |              |  | $ |       |   |  | $ | 7,618  |  
|Segment income (loss)                             |  |                         | 9      |                   |   | (2,883 | )            |  |   | (156   | ) |  |   | (3,030 | )
|Segment assets                                    |  |                         | 26,513 |                   |   | 3,851  |              |  |   | 5,951  |   |  |   | 36,315 |  
|Goodwill                                          |  |                         | 2,716  |                   |   |       |              |  |   | 5,951  |   |  |   | 8,667  |  
|                                                  |  |                         |        |                  
|At and for the three months ended March 31, 2005: |  |                         |        |                   |   |        |              |  |   |        |   |  |   |        |  
|                                                  |  |                         |        |                  
|Revenues                                          |  | $                       | 7,040  |                   | $ | 1,894  |              |  | $ |       |   |  | $ | 8,934  |  
|Segment income (loss)                             |  |                         | 1,147  |                   |   | (2,565 | )            |  |   | (156   | ) |  |   | (1,574 | )
|Segment assets                                    |  |                         | 30,034 |                   |   | 3,188  |              |  |   | 6,576  |   |  |   | 39,798 |  
|Goodwill                                          |  |                         | 2,716  |                   |   |       |              |  |   | 5,951  |   |  |   | 8,667  |  

For segment reporting purposes, unallocated amounts consist of goodwill and acquired intangible
asset values and related amortization amounts with respect to the 2002 acquisition of Menerva Technologies, Inc. Interest revenue, interest expense, other significant non-cash items, income tax expense or benefit, and unusual items that are
attributable to the segments do not have a significant effect on the financial results of the segments. In performing the annual goodwill impairment test, all goodwill is assigned to the reportable segments.

NOTE 9. RESTRUCTURING AND OTHER CHARGES

In 2003 and 2004, the Company took several actions to reduce its operating expenses in order 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 office in Chicago, Illinois and the partial closing of its facility in London, England. With respect to the Chicago and London office
closings, the Company had determined the fair value of the remaining liabilities of the unused space (net of estimated sublease rentals) for each lease as of the respective cease-use dates.

In the quarters ended March 31, 2006 and 2005, the Company realized a charge of $8,000 and a credit of $27,000, respectively, in connection with the
amortization of its long-term lease restructuring accruals for its Chicago and London facilities.

A rollforward of the Companys
accrued liability for restructuring and other charges, consisting entirely of lease costs, is as follows:



|                                                             |  |   |       |  
|------------------------------------------------------------ |  | - | ----- | -
|(Amounts in thousands)                                       |  |   |      
|Balance at December 31, 2005                                 |  | $ | 1,119 |  
|Activity in three months ended March 31, 2006:               |  |   |       |  
|Restructuring charge                                         |  |   | 8     |  
|Payments net of sublease receipts                            |  |   | (40   | )
|                                                             |  |   |       |  
|Balance at March 31, 2006                                    |  | $ | 1,087 |  
|                                                             |  |   |       |  
|Current portion  included in accrued expenses               |  | $ | 240   |  
|                                                             |  |   |       |  
|Noncurrent portion  included in other long-term liabilities |  | $ | 847   |  
|                                                             |  |   |       |  



14



---

##### Table of Contents

NOTE 10. VALUATION AND QUALIFYING ACCOUNTS

A rollforward of the Companys allowance for doubtful accounts at March 31 is as follows:



|                                 |  |      |     |   |      |   |     |  
|-------------------------------- |  | ---- | --- | - | ---- | - | --- | -
|(Amounts in thousands)           |  | 2006 |     |   | 2005 |  
|Balance at January 1,            |  | $    | 525 |   |      | $ | 402 |  
|Write offs                       |  |      | (85 | ) |      |   | (25 | )
|Currency translation adjustments |  |      |    |   |      |   | (4  | )
|                                 |  |      |     |   |      |   |     |  
|Balance at March 31,             |  | $    | 440 |   |      | $ | 373 |  
|                                 |  |      |     |   |      |   |     |  

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 three months ended March 31, 2005, the Company incurred $43,000 in legal fees and other costs related to the proposed merger.



|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 Risk Factors in Part II, Item 1A, 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



15



---

##### Table of Contents

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 from our Enterprise Contract Management Software Suites
accounted for 20.6% of net revenues in the three months ended March 31, 2006 and 23.2% of net revenues in the three months ended March 31, 2005. 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 three months
ended March 31, 2006 and 76.8% of net revenues in the three months ended March 31, 2005.

After having implemented a number of
employee headcount reductions and office downsizings during the period June 2001 through March 2004, our aggregate quarterly spending on cost of products and services, sales and marketing, research and development and general and administrative
expenses has remained fairly steady  ranging from $9.6 million to $11.1 million since the first quarter of 2004. Out total employee headcount has decreased slightly from 170 at March 31, 2004 to 163 at March 31, 2006.

In August 2005, the Company announced the departure of its Chief Executive Officer, A. Leigh Powell, and its Chief Operating Officer, Terrence M.
Nicholson. In connection with the resignation of these executives, we incurred $350,000 in future severance and benefit costs in 2005. Also, Yorgen Edholm was appointed Acting President and Chief Executive Officer, and John A. Rade was appointed
Chairman of the Board of Directors with certain executive powers. In February 2006, Mr. Edholm resigned as Acting President and Chief Executive Officer while remaining on the Board of Directors, and Mr. Rade assumed his role as Acting
President and Chief Executive Officer on an interim basis. Each of our Acting Chief Executive Officers was a member of the Board of Directors prior to his appointment and remains a member.

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. In cases where significant production or customization is required prior to attaining technological
feasibility of the software, license fees are recognized on a percentage-of-completion basis and are credited to research and development expenses as a funded development arrangement. After the software attains technological feasibility,
recognizable license fees are reported as product revenue.

During the third quarter of 2005, we became aware of certain defects in the
then-current version of one of our software products, which was first shipped to customers in the fourth quarter



16



---

##### Table of Contents

of 2004. These defects, which were not identified in pre-release product testing, affected the performance of the software for a portion of our customers
depending on each customers particular implementation environment and its intended use of the software. Because certain concessions have been made to customers in connection with these defects, we have generally not recognized revenue from
sales of this software product and related implementation services beginning in the third quarter of 2005, except in those cases in which it was determined that the customer was not likely to be affected by the known, unresolved software defects. In
April 2006, we issued a new minor release of the software, in which it is believed that all known performance defects have been resolved. Also, we plan to issue a new major release of the software in June 2006 for those customers which have delayed
their implementations to receive the new version of the product. We intend to continue deferring revenue in connection with license sales and implementation services for this software product until it has been demonstrated at customer sites that the
new releases of the software are free of significant performance defects. As of March 31, 2006 and December 31, 2005, we have reversed and deferred $1.8 million and $1.6 million, respectively, of otherwise-recognizable license and
professional service revenue, based in part on our estimate of the fair value of concessions to be made until the remaining defect is resolved, and partly on our determination that license fees were not fixed and determinable because of the
possibility of future concessions.

Service revenues include professional services, training and maintenance and support services and
reimbursable out-of-pocket 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.

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 to five years, covering license fees, unspecified new product releases
and maintenance and support, generally payable in equal quarterly installments commencing upon execution of the agreement. Most of the subscription arrangements entered into with customers have included one of a variety of conversion options that
take effect after expiration of the contractual subscription term, such as (i) automatic conversion to a perpetual license, (ii) conversion to a perpetual license after two years of additional subscription payments, or (iii) payment
of a perpetual option fee. We recognize all revenue from subscription based arrangements ratably over the term of the subscription agreement commencing upon delivery of the initial product. Subscription arrangements constitute a growing proportion
of our new licenses, and we anticipate that this growth will continue in 2006. During the three month periods ended March 31, 2006 and 2005, we recognized $480,000 and $138,000, respectively, in product revenue related to such agreements. See
the reconciliation table that follows under Results of Operations  Comparison of the Three Month Periods Ended March 31, 2006 and 2005  Net Revenues in this Item 2.



17



---

##### Table of Contents

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.

Stock-based Compensation:

We
measure and record the compensation cost of employee and director services received in exchange for stock option grants and other equity awards based on the grant-date fair value of the awards. Under the fair-value method, compensation associated
with equity awards 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 employee and director awards is generally the date of
grant. The values of the portions of the awards that are ultimately expected to vest are recognized as expense over the requisite service periods.

The Company accounts for stock options and awards granted to non-employees other than directors using the fair-value method. The measurement date for awards granted to non-employees other than directors is generally the date that
performance of certain services is complete.

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 our 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.

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 will consist 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
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



18



---

##### Table of Contents

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 at least 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

Our agreements with customers generally include certain provisions obligating us to indemnify 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 were outstanding as of
March 31, 2006. We do not expect that any significant impact on financial position or the results of operations will result from these indemnification provisions.

Research and Development Costs

Research and development costs are charged to operations as incurred.
Based on our product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general
release have not been material. As such, all software development costs incurred to date have been expensed as incurred.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTH PERIODS ENDED MARCH 31, 2006 AND 2005

NET
REVENUES

Net revenues decreased by $1.3 million, or 14.7%, to $7.6 million for the quarter ended March 31, 2006 from $8.9 million for
the quarter ended March 31, 2005. Product revenues decreased by $507,000, or 24.4%, to $1.6 million for the quarter ended March 31, 2006 from the same period a year earlier, while service revenues decreased by $809,000 or 11.8% to $6.0
million. As indicated in the table below, the gross value of license contracts sold during the first quarter of 2006 increased by $2.2 million, or 121.0%, versus the first quarter of 2005, due to a 68% increase in the gross average selling price and
an increase in the number of license transactions (minimum value of $50,000) from 6 to 8. However, most of the revenue from the license transactions executed in the first three months of 2006 was deferred to future reporting periods. As we work to
increase our sales in both of our reportable segments, we believe that a significant proportion of future license contracts will likewise be subscription arrangements or will have conditions, such as software acceptance testing, resulting in
deferral of license revenue recognition to later reporting periods. As a result, in future reporting periods we expect recognized



19



---

##### Table of Contents

revenues to exclude much of the license revenue generated from contracts entered into in those periods but also to include larger proportions of revenues
from contracts entered into in prior reporting periods.

Reconciliation of Gross Value of License Transactions to Reportable Product
Revenue



|                                                                                       |  |                           |       |          |   |         |  |         |       |         |   |       |  |   |      
|-------------------------------------------------------------------------------------- |  | ------------------------- | ----- | -------- | - | ------- |  | ------- | ----- | ------- | - | ----- |  | - | -----
|                                                                                       |  | Three Months Period ended
|                                                                                       |  | 3/31/06                   |       | 12/31/05 |   | 9/30/05 |  | 6/30/05 |       | 3/31/05
|                                                                                       |  | (AMOUNTS IN THOUSANDS)   
|Gross value of license contracts sold:                                                 |  |                           |       |          |   |         |  |         |       |         |   |       |  |   |      
|Health and Life Sciences                                                               |  | $                         | 3,457 |          | $ | 3,912   |  | $       | 1,346 |         | $ | 4,649 |  | $ | 1,535
|Industry Solutions                                                                     |  |                           | 546   |          |   | 155     |  |         | 1,559 |         |   | 592   |  |   | 276  
|                                                                                       |  |                           |       |          |   |         |  |         |       |         |   |       |  |   |      
|                                                                                       |  |                           | 4,003 |          |   | 4,067   |  |         | 2,905 |         |   | 5,241 |  |   | 1,811
|Add product revenue recorded in current period from contracts sold in prior periods:   |  |                           |       |          |   |         |  |         |       |         |   |       |  |   |      
|Health and Life Sciences - subscriptions                                               |  |                           | 461   |          |   | 326     |  |         | 239   |         |   | 223   |  |   | 138  
|Health and Life Sciences - other deferrals                                             |  |                           |      |          |   |        |  |         |      |         |   |      |  |   | 1,476
|Industry Solutions - subscriptions                                                     |  |                           | 19    |          |   | 35      |  |         |      |         |   |      |  |   |     
|                                                                                       |  |                           |       |          |   |         |  |         |       |         |   |       |  |   |      
|                                                                                       |  |                           | 480   |          |   | 361     |  |         | 239   |         |   | 223   |  |   | 1,614
|Less value of license contracts sold in current period and deferred to future periods: |  |                           |       |          |   |         |  |         |       |         |   |       |  |   |      
|Health and Life Sciences                                                               |  |                           | 2,382 |          |   | 2,221   |  |         | 1,041 |         |   | 3,892 |  |   | 1,310
|Industry Solutions                                                                     |  |                           | 531   |          |   | 52      |  |         | 1,536 |         |   | 92    |  |   | 38   
|                                                                                       |  |                           |       |          |   |         |  |         |       |         |   |       |  |   |      
|                                                                                       |  |                           | 2,913 |          |   | 2,273   |  |         | 2,577 |         |   | 3,984 |  |   | 1,348
|                                                                                       |  |                           |       |          |   |         |  |         |       |         |   |       |  |   |      
|Product revenue recorded:                                                              |  |                           |       |          |   |         |  |         |       |         |   |       |  |   |      
|Health and Life Sciences                                                               |  |                           | 1,536 |          |   | 2,017   |  |         | 544   |         |   | 980   |  |   | 1,839
|Industry Solutions                                                                     |  |                           | 34    |          |   | 138     |  |         | 23    |         |   | 500   |  |   | 238  
|                                                                                       |  |                           |       |          |   |         |  |         |       |         |   |       |  |   |      
|                                                                                       |  | $                         | 1,570 |          | $ | 2,155   |  | $       | 567   |         | $ | 1,480 |  | $ | 2,077
|                                                                                       |  |                           |       |          |   |         |  |         |       |         |   |       |  |   |      

The above financial information is provided as additional information and is not in accordance
with or an alternative to generally accepted accounting principles, or GAAP. We believe its inclusion can enhance an overall understanding of our past operational performance and also our prospects for the future. This reconciliation of product
revenues is made with the intent of providing a more complete understanding of our revenue performance, as opposed to GAAP revenue results, which do not include the impact of newly-executed subscription agreements and other deferred revenue
arrangements that are material to the ongoing performance of our business. This information quantifies the various components comprising current revenue, which in each period consists of revenues from licenses sold in current periods plus product
revenue recorded in the current period from contracts sold in prior periods, less the value of license contracts sold in the current period that is not yet recognizable. Included in the gross value of license contracts sold amounts are license and
first year maintenance and support fees, and non-cancelable subscription fee obligations that are not currently recognizable as product revenue upon execution of the license agreement because all the requirements for revenue recognition (see
Critical Accounting Policies above) are not present, such as the presence of extended payment terms, future software deliverables, or customer acceptance provisions. This definition has been updated from previous quarters to include the
value of first year maintenance and support obligations. This provides a better comparison between license and subscription values as subscription commitments include maintenance and support over the term of the commitment. The gross value of
license contracts sold also includes amounts that are not yet contractually billable to the customer and any such unbilled amounts are not yet reflected in deferred revenues on our consolidated balance sheet. Management uses this information as a
basis for planning and forecasting core business activity in future periods and believes it is useful in understanding our results of operations. The presentation of this additional revenue information is not meant to be considered in isolation or
as a substitute for revenues reported in accordance with GAAP in the United States.



20



---

##### Table of Contents

Revenues derived from the industry solutions segment decreased by $76,000, or 4.0%, to $1.8 million for
the quarter ended March 31, 2006 versus the same quarter in 2005, with this decrease comprised of a $204,000, or 85.7%, decrease in product revenues that was partially offset by a $128,000, or 7.7%, increase in service revenues. As indicated in
the above table, the gross values of license contracts sold in this segment during the quarters ended March 31, 2006 and December 31, 2005 were less than in both of the two previous quarters. We believe this decrease in license sales is
primarily attributable to a significant drop off in sales execution in the past six months and does not indicate a market trend. The recent sales results notwithstanding, we believe there is evidence of increasing demand for our new products in the
Enterprise Contract Management Product Suite, which are targeted primarily to customers in the industry solutions segment but are also gaining acceptance in the health and life sciences segment. However, these new products are still in early-stage
releases, which continues to limit our ability to derive consistent revenues from them and to increase revenues in general. In the three months ended March 31, 2006, we also deferred product and service revenues from certain customers with
especially complex implementations of these new products. Until these new products have demonstrated a consistent record of performance in those installations, we intend to continue deferring revenue as appropriate.

Total net revenues derived from the health and life sciences segment decreased by $1.2 million, or 17.6%, to $5.8 million for the quarter ended
March 31, 2006 from $7.0 million in the year earlier period. Decreases in this segments professional services revenues and product revenues of $1.2 million and $303,000, respectively, were partially offset by a $273,000 increase in
maintenance and support revenues. As indicated in the table above, the gross value of license contracts sold in this segment during the first quarter of 2006 increased by $1.9 million, or 125.2%, relative to first quarter of 2005, although this
increase was not reflected in revenues because of the deferral of most of the current periods transaction license revenue to future periods. Subscription arrangements constitute a growing proportion of our new license arrangements, and the
proportion of revenue from new licenses that must be deferred to future periods is thus increasing, which in the short-term has a negative impact on current-quarter GAAP revenue.

Overall service revenues decreased by $809,000, or 11.8% to $6.0 million in the three months ended March 31, 2006 versus $6.9 million in the year
earlier period. This decrease was attributable to a $1.1 million, or 29.2%, decrease in professional services revenues, caused by reduced demand for consulting services, primarily in the health and life sciences segment, partially offset by a
$267,000, or 9.6%, increase in maintenance and support revenues, which was attributable to continued growth in our maintenance-paying, installed customer base across both segments.

OPERATING EXPENSES

COST OF
THIRD PARTY TECHNOLOGY. Cost of third party technology, which consists of amounts due to third parties for royalties related to integrated technology, has not been significant historically. Cost of third party technology increased by $67,000 to
$77,000 for the three months ended March 31, 2006 from $10,000 in the year earlier period. This increase is partly attributable to the prior year balance being unusually low due to $33,000 in royalty credits. Also, during the third quarter of
2005 we began to amortize certain prepaid royalty charges at the rate of $29,000 quarterly in anticipation of these prepayments expiring unused when the royalty agreement expires in November 2006.

COST OF SERVICES. Cost of services consists primarily of payroll and related costs and subcontractor fees for providing professional services and
maintenance and support services. Cost of services were essentially unchanged, increasing by only $25,000, or 0.7%, to $3.8 million for the quarter ended March 31, 2006 from the year earlier period. As a direct consequence of the



21



---

##### Table of Contents

reduction in professional services revenues discussed above, expenses in the professional services division decreased by $379,000 during the first quarter of
2006 relative to the year earlier period, mostly in salary and related costs as average headcount was reduced by 9 employees. Meanwhile, client service expenses increased by $394,000 as the Companys installed, maintenance-paying customer base
continued to grow. Also, noncash stock compensation costs increased by $89,000 relative to the year earlier period, most of this increase being attributable to the adoption of FAS 123(R). As a percentage of service revenues, cost of services
increased to 63.1% for the quarter ended March 31, 2006 from 55.3% for the quarter ended March 31, 2005.

AMORTIZATION OF
ACQUIRED INTANGIBLE ASSETS. Amortization of acquired intangibles related to our acquisitions amounted to $343,000 in the quarter ended March 31, 2006, which represents a 3% decrease in amortization from $355,000 recorded in the quarter ended
March 31, 2005. This small decrease is attributable to the acquired intangible assets in connection with the 2001 acquisition of Vintage Software, Inc. becoming fully depreciated in the first quarter of 2005.

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 essentially unchanged from the prior year, increasing by only $34,000, or 1.7%, to $2.1 million
in the three months ended March 31, 2006. Noncash stock compensation costs, resulting from the adoption of FAS 123(R), accounted for $21,000 of this increase. As a percentage of total net revenues, sales and marketing expense increased to 27.2%
for the quarter ended March 31, 2006 from 22.8% for the quarter ended March 31, 2005.

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 decreased slightly by $68,000, or 2.2%, to $3.0 million for the quarter ended March 31, 2006 versus the year earlier period. This
decrease in research and development expenses was primarily attributable to a $342,000 funded development credit and a $230,000 decrease in salary costs resulting from an average headcount reduction of eight employees, partially offset by a $555,000
increase in largely off-shore consulting costs, reflecting an increase in the level of outsourcing of development work to cheaper offshore resources. As a percentage of total net revenues, research and development expense increased to 39.1% for the
quarter ended March 31, 2006, from 34.1% for the quarter ended March 31, 2005.

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
increased by $169,000, or 14.8%, to $1.3 million for the quarter ended March 31, 2006 from $1.1 million for the quarter ended March 31, 2005. This increase in general and administrative expenses was primarily attributable to a $90,000
increase in accounting expenses, due to higher than expected audit fees in connection with the audit of our 2005 financial statements, and $53,000 in director noncash stock compensation costs, resulting mostly from the adoption of FAS 123(R). As a
percentage of total net revenues, general and administrative expenses increased to 17.2% for the quarter ended March 31, 2006 from 12.8% for the quarter ended March 31, 2005.

DEPRECIATION. Depreciation expense decreased by $9,000, or 5%, from $180,000 in the first quarter of 2005 to $171,000 in the first quarter of 2006. This
decrease is principally attributable to a reduction in the level of furniture, equipment and software additions from the



22



---

##### Table of Contents

year 2002 ($933,000) to the year 2005 ($684,000), the majority of these asset additions being depreciated over a three-year life.

RESTRUCTURING AND OTHER CHARGES. In the quarter ended March 31, 2006, we recorded $8,000 in charges related to efforts in prior quarters to
streamline operations. This charge represents the amortization of the discount incorporated in the initial restructuring provisions for future lease costs in connection with the Chicago and London office downsizings.

OTHER INCOME, NET

Other
income, net, increased by $101,000, or 325%, in the quarter ended March 31, 2006 as compared to the quarter ended March 31, 2005. This increase was principally comprised of a $55,000 increase in interest income, attributable to higher
average yields, a $31,000 decrease in foreign currency transaction losses, and a $20,000 decrease in state franchise tax payments.

PROVISION FOR INCOME TAXES

We incurred operating losses for all quarters in 2005 and the first quarter of 2006 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 March 31, 2006 and 2005.

LIQUIDITY AND CAPITAL
RESOURCES

At March 31, 2006, we had net working capital of $6.9 million, including cash and cash equivalents of $17.2 million. This
compares to a net working capital balance of $9.4 million at December 31, 2005. Also on March 31, 2006, we had no long-term or short-term debt, other than obligations under capital lease financings. The non-current restricted cash balance
of $557,000 at March 31, 2006 represents cash amounts held on deposit as security on two long-term real property lease obligations.

Net cash provided by operating activities for the three months ended March 31, 2006 was $229,000, as compared to net cash used in operating activities of $1.8 million in the three months ended March 31, 2005. For the three months
ended March 31, 2006, net cash provided by operating activities consisted principally of a $2.4 million decrease in accounts receivable and a $797,000 increase in deferred revenue, mostly offset by our net loss of $3.0 million  as reduced
by non-cash items depreciation and amortization of $514,000 and stock-based compensation of $257,000  and a $601,000 decrease in accrued expenses. The $2.4 million decrease in accounts receivable was principally attributable to
(i) improved collections experience, (ii) a $1.3 million decrease in maintenance and support renewal billings, and (iii) a $1.2 million decrease in perpetual license billings during the quarter ended versus March 31, 2006 versus
the immediately preceding quarter. Because a significant portion of our customers request a calendar year billing cycle for maintenance and support renewals regardless of the anniversary date of their license agreement, maintenance and support
renewal invoicing volume is generally higher in the fourth quarter each year. The $797,000 increase in deferred revenue is mostly attributable to the deferral of $552,000 in perpetual license fees from deals closed in the first quarter of 2006
because of contractual acceptance provisions, and also to the continued increase in unearned subscription billings. The $601,000 decrease in accrued expenses is primarily due to reductions in the accruals for unpaid salaries, bonuses and severance
as of March 31, 2006 versus December 31, 2005.



23



---

##### Table of Contents

For the three months ended March 31, 2005, net cash used in operating activities consisted
principally of the net loss of $1.6 million, as offset by non-cash items depreciation and amortization of $535,000 and stock-based compensation of $102,000, and decreases in deferred revenue, accounts payable and accrued expenses of $1.5 million,
$640,000 and $452,000, respectively, partially offset by a $2.1 million decrease in accounts receivable. The $1.5 million decrease in deferred revenue consisted principally of (i) a $923,000 decrease in deferred maintenance and support,
attributable to fewer renewals in the quarter ended March 31 relative to the balance of the year and (ii) the recognition into revenue of $766,000 in previously-deferred license and subscription fees. Also, reductions in prepaid
professional service fees were essentially offset by a $591,000 increase in deferred subscription fees in connection with newly-executed subscription agreements. 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 quarters. The decrease in accrued expenses resulted largely from payouts of year end bonuses and the final payment in connection with the acquisition of Pricing Analytics, Inc. The $2.1
million decrease in accounts receivable was principally attributable to a $3.4 million decrease in the value of license agreements executed in the first quarter of 2005 versus the fourth quarter of 2004, partially offset by significantly higher
professional services billings during the quarter.

Net cash used in investing activities was $210,000 for the three months ended
March 31, 2006 and $558,000 for the three months ended March 31, 2005. Net cash used in investing activities for the three months ended March 31, 2006 consisted of property and equipment additions. Net cash used in investing
activities for the three months ended March 31, 2005 consisted principally of $266,000 in property and equipment additions and $248,000 in merger consideration paid with respect to the Pricing Analytics acquisition. And purchases of short-term
investments and securities held for sale of $2.7 million were nearly offset by $2.6 million in redemptions of such investments.

Net cash
provided by financing activities was $360,000 in the three months ended March 31, 2006, consisting principally of $300,000 and $61,000, respectively, in proceeds from warrant and stock option exercises. Net cash provided by financing activities
was $34,000 in the three months ended March 31, 2005, consisting of $118,000 in proceeds from stock option exercises, partially offset by payments of $84,000 on existing capital leases.

We currently anticipate that our cash and cash equivalents of $17.2 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
a sale of stock, our stockholders would 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.



24



---

##### Table of Contents

CONTRACTUAL OBLIGATIONS



|                              |  |                                           |       |                  |   |           |  |           |       |                   |   |       |  |   |    
|----------------------------- |  | ----------------------------------------- | ----- | ---------------- | - | --------- |  | --------- | ----- | ----------------- | - | ----- |  | - | ---
|                              |  | Payments due by Period - Amounts in $000s
|                              |  | Total                                     |       | Less than 1 year |   | 1-3 years |  | 3-5 years |       | More than 5 years
|Capital Lease Obligations     |  | $                                         | 24    |                  | $ | 10        |  | $         | 10    |                   | $ | 4     |  | $ |   
|Operating Leases              |  |                                           | 7,446 |                  |   | 1,758     |  |           | 3,321 |                   |   | 1,939 |  |   | 428
|Severance Obligations         |  |                                           | 51    |                  |   | 51        |  |           |      |                   |   |      |  |   |   
|                              |  |                                           |       |                  |   |           |  |           |       |                   |   |       |  |   |    
|Total Contractual Obligations |  | $                                         | 7,521 |                  | $ | 1,819     |  | $         | 3,331 |                   | $ | 1,943 |  | $ | 428
|                              |  |                                           |       |                  |   |           |  |           |       |                   |   |       |  |   |    

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



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

INTEREST RATE RISK

Our exposure to market risk for changes in interest rates relates primarily to our
investment portfolio. We do not use derivative financial instruments in our investment portfolio. The primary objective of our 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 quarters ended March 31, 2006 and 2005.

At
March 31, 2006, our cash and cash equivalents consisted entirely of money market 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 are recorded at amortized cost. 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 available for sale securities and have been stated at fair market
value. At March 31, 2006, we held no auction rate certificates, having disposed of all our holdings in such investments during 2005.

FOREIGN CURRENCY EXCHANGE RISK

We operate 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.



|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 March 31, 2006. 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



25



---

##### Table of Contents

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. Based on this evaluation, our CEO and CFO concluded that, as of
March 31, 2006, 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. No change in our
internal control over financial reporting occurred during the quarter ended March 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



|ITEM 1A. | RISK FACTORS
|-------- | ------------

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 EXPERIENCED CHANGES OF SENIOR MANAGEMENT IN 2005 AND 2006, WHICH MAY AFFECT OUR BUSINESS, PARTICULARLY IN THE SHORT TERM

In August 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 Acting President and Chief Executive Officer. In February 2006, our Acting President and Chief Executive Officer resigned, and our Chairman of the Board assumed his duties on an interim basis. Each of our
Acting Chief Executive Officers was and remains a member of the Board of Directors. The Board of Directors is currently conducting a search for a permanent 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 several quarters, this leadership change could have an adverse effect on our business, financial condition and results of operations.



26



---

##### Table of Contents

WE MAY NEED TO GROW IN MARKETS OTHER THAN THE HEALTH AND LIFE SCIENCES MARKET FOR OUR FUTURE GROWTH

To be successful, we intend to reduce our reliance on the health and life sciences market, which has traditionally been the primary source of our
revenues. Revenues from our non-health and life sciences customers have comprised 27.3%, 24.4% and 23.9%, respectively, of our consolidated revenues for the years ended December 31, 2004 and 2005 and the quarter ended March 31, 2006. We
have not been successful in generating the revenue growth we expected from these markets and we cannot assure you that we will be successful in the future.

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

We incurred net losses $7.3
million in the year ended December 31, 2004, $9.3 million in the year ended December 31, 2005 and $3.0 million in the quarter ended March 31, 2006, and we had an accumulated deficit at March 31, 2006 of $137.4 million. Our recent
results have been impacted 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.

WE MAY NOT BE ABLE TO ACCURATELY PREDICT THE MIX OF
SUBSCRIPTION LICENSES VERSUS PERPETUAL LICENSES, AND THIS COULD AFFECT OUR SHORT-TERM REVENUE AND CASH POSITIONS.

Our customers have shown a growing
interest in licensing our software on a subscription basis, which results in deferral of payments and revenues that would otherwise be reportable if a traditional perpetual license were executed. Our revenue forecasts and internal budgets
are based, in part, on our best assumptions about the mix of future subscription licenses versus perpetual licenses. If we enter into a larger proportion of subscription agreements than planned, we may experience an
unplanned shortfall in revenues or cash 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.

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. 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 or cash during



27



---

##### Table of Contents

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 INABILITY TO PREDICT REVENUE AND 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.

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

Despite our intentions to reduce our product research and development efforts to levels more customary for our industry,
in the near term we may find it necessary to continue our product research and development efforts at levels similar to current expenditures. We may also 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 that 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 and 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 past, we have recorded impairment charges in connection with the write-off of goodwill and other acquired intangible assets.
We cannot assure you that future write-downs of any such assets will not affect future operating results.



28



---

##### Table of Contents

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 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.

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, 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 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 MULTIPLE FACILITIES AND WE MAY EXPERIENCE DIFFICULTIES IN OPERATING FROM THESE
DIFFERENT LOCATIONS

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.



29



---

##### Table of Contents

WE MAY NOT BE SUCCESSFUL IN RETAINING AND ATTRACTING TALENTED AND KEY EMPLOYEES

We depend on the services of our senior management and key technical personnel. The loss of the services of key employees, and the inability to attract
new employees to fill crucial roles, could have a material adverse effect on our business, financial condition and results of operations.

OUR EFFORTS TO
PROTECT OUR INTELLECTUAL PROPERTY MAY NOT BE FULLY EFFECTIVE, AND WE MAY INADVERTENTLY INFRINGE ON THE INTELLECTUAL PROPERTY OF OTHERS

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain the use of information that we regard as proprietary. In addition, the laws of some foreign countries do
not protect our proprietary rights to as great an extent as do the laws of the United States. We cannot assure investors that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop
similar technology.

We are not aware that any of our products infringe the proprietary rights of third parties. We cannot assure
investors, however, that third parties will not claim infringement by us with respect to current or future products. We expect that software product developers will increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could have a material adverse effect upon our business, operating results
and financial condition.



|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.
|--- | ------------------------------------------------------------



30



---

##### Table of Contents

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: May 9, 2006 |  | By: |  | /s/ Kevin M. Harris
|                  |  |     |  |                     |  | Kevin M. Harris                      
|                  |  |     |  |                     |  | Chief Financial Officer and Treasurer
|                  |  |    
|                  |  |     |  | /s/ Kevin M. Harris
|                  |  |     |  |                     |  | Kevin M. Harris                      
|                  |  |     |  |                     |  | Chief Financial Officer              



31



---

##### Table of Contents

INDEX TO EXHIBITS



|            |  |                                                                                                                                                                             
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | DESCRIPTION                                                                                                                                                                 
|            | 
|10.1*       |  | Summary of Terms of 2006 Executive Management Bonus Plans                                                                                                                   
|            | 
|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.                                                                                                                             



|* | Management contract or compensation plan or arrangement
|- | -------------------------------------------------------



32