**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

**(MARK ONE)**

 

**ý****  ANNUAL REPORTPURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For thefiscal year ended: February 28, 2005**

 

**o****  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from               to               **

** **

**Commission file number 000-25249**

 

 

**INTRAWARE, INC.**

(Exactname of registrant as specified in its charter)

 
| **Delaware**                                                                                           |   | **68-0389976**                           |
|--------------------------------------------------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                                        |   | (I.R.S. Employer  Identification Number) |
|                                                                                                   |   |                                     |
| **25 Orinda Way, Orinda, California**                                                                  |   | **94563**                                |
| (Address of principal executive offices)                                                               |   | (Zip Code)                               |
|                                                                                                   |
| Registrant’s telephone number, including  area code:  **(925) 253-4500**                |
|                                                                                                   |
| Securities registered pursuant to Section 12(b) of  the Act:    **None** |
|                                                                                                   |
| Securities registered pursuant to Section 12(g) of  the Act:                                 |
| Title of Class    **Common Stock, $0.0001 par value**                              |

 

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days. Yes  ý  No  o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act). Yes  o  No  ý

 

The aggregate market value of the voting andnon-voting common equity held by non-affiliates, computed by reference to theprice at which the common equity was last sold as of the last business day ofthe registrant’s most recently completed second fiscal quarter, is $71,156,627.For purposes of this disclosure, shares of common stock held by persons whohold more than 10% of the outstanding shares of common stock and shares held byofficers and directors of the registrant, have been excluded in that suchpersons may be deemed to be affiliates. This determination is not necessarilyconclusive.

 

As of April 15, 2005, the registrant hadoutstanding 60,454,872 shares of common stock.

 

 

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# **TABLEOF CONTENTS**

 
| EXPLANATORY  NOTE | 3          |
|-------------------|------------|
|              |       |   |   |
| **PART I**   | ** ** |   | 3 |
| ** **        | ** ** |   |   |
| ITEM 1.           |       | BUSINESS | 3 |
| ITEM  2.          |       | PROPERTIES | 10 |
| ITEM 3.           |       | LEGAL PROCEEDINGS | 10 |
| ITEM  4.          |       | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS | 12 |
|              |       |   |   |
| **PART II**  | ** ** |   | 12 |
| ITEM  5.          |       | MARKET  FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER  PURCHASES OF EQUITY SECURITIES | 12 |
| ITEM 6.           |       | SELECTED FINANCIAL  DATA | 14 |
| ITEM  7.          |       | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION | 17 |
| ITEM 7A.          |       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 38 |
| ITEM 8.           |       | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA | 39 |
| ITEM 9.           |       | CHANGES IN  AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | 73 |
| ITEM 9A.          |       | CONTROLS  AND PROCEDURES | 73 |
| ITEM 9B.          |       | OTHER INFORMATION | 74 |
|              |       |   |   |
| **PART III** | ** ** |   | 75 |
| ITEM 10.          |       | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT | 75 |
| ITEM 11.          |       | EXECUTIVE  COMPENSATION | 78 |
| ITEM 12.          |       | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 82 |
| ITEM 13.          |       | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS | 86 |
| ITEM 14.          |       | PRINCIPAL  ACCOUNTING FEES AND SERVICES | 86 |
|              |       |   |   |
| **PART IV**  | ** ** |   | 87 |
| ITEM 15.          |       | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K | 87 |

 

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# **EXPLANATORY NOTE**

# ** **

This annual report on Form 10-K containsforward-looking statements (within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended) that involve risks and uncertainties. We usewords such as “anticipate,” “believe,” “plan,” “expect,” “future,” “intend” andsimilar expressions to identify forward-looking statements. Actual results andthe timing of events could differ materially from those projected in theforward-looking statements as a result of known and unknown factors, includingthe risk factors beginning on page 31 below and other factors discussedelsewhere in this annual report. We have identified many of theseforward-looking statements for your convenient reference.

 

“Intraware” and “SubscribeNet” are registeredtrademarks or service marks of Intraware. This annual report also refers to other trademarks of Intraware andtrademarks of other companies.

 

Intraware, Inc.,was incorporated in August 1996 under the laws of the State of Delaware.In this annual report, Intraware, Inc. is sometimes referred to as “theRegistrant,” “the Company,” “Intraware,” “we,” “our” and “us.” The mailingaddress for our headquarters is 25 Orinda Way, Orinda, California 94563, andour telephone number at that location is (925) 253-4500. Intrawarecan also be reached through our web site *http://www.intraware.com*.

 

# **PART I**

# ** **

**ITEM 1.****         ****BUSINESS.**

 

**Overview**

 

We launched the firstoutsourced Web-based electronic software delivery and management (ESDM)solution in 1996. Today, we are a leading provider of global ESDM services forenterprise software publishers and resellers. Our ESDM services help softwarepublishers, software resellers and other technology companies streamlinemanufacturing, distribution and support costs; develop business intelligenceabout their customers; strengthen customer retention and maintenance renewals;accelerate and document software and license key delivery for revenuerecognition purposes; and comply with U.S. export controls. Over 90% of Fortune500 companies have received access to enterprise software or licenses throughour ESDM services.

 

Wealso offer complementary services, including enterprise software sales andmarketing, license management, e-commerce, and on-demand physical fulfillmentthrough our alliances with companies including Software Spectrum, Inc.,Macrovision Corporation and Nexstra.

 

**Drivers of Demand for ESDM Services**

 

According to IDC, an information technology analysisand advisory firm, worldwide spending on electronic software distribution isexpected to grow by more than 40% annually between 2004 and 2008.(1) Thisdemand is driven by a number of factors, including:

 

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(1)  IDC, “Worldwide Electronic SoftwareDistribution 2004-2008 Forecast: Segmented Growth” (May 2004).  This is a forward-looking statement subjectto risks and uncertainties.  See “RiskFactors” beginning on page 31 below.

 

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•      *Cost Savings by SoftwareProviders.* Through ESDM, softwareproviders can significantly reduce manufacturing and distribution costsassociated with creating, duplicating and shipping CDs, diskettes andpackaging.

 

•      *Entitlement Management andLicensing.*  ESDM enables software providers and end-usersmanage software entitlements and electronically generate and deliver licenses,helping software providers maximize revenues and helping customers quickly andeasily ensure license compliance in dynamic environments.

 

•      *Tax Savings by End-Users.* A number of states exempt software licensepurchases from sales tax if the software is delivered electronically, providinga competitive advantage to software providers that are able to effect suchdelivery.

 

•      *Customer Satisfaction.* ESDM enables end-users to receive softwareand licenses within minutes after purchase or release. ESDM can also provide anonline library of an end-user’s software entitlements, as well as tools for ITdepartments to monitor and control licensing and downloads of that softwarethroughout their organizations.

 

•      *Business Intelligence.* An ESDM solution can generate reports tohelp software providers understand end-users’ use of and experience with thesoftware providers’ products, including reports that help identify keyindividual end-users, track the download frequency of different releases, andtrack the speed and quality of downloads.

 

•      *Accelerated Delivery.* Accelerated delivery of bug-fixes andpatches can shorten resolution times for software errors, viruses and securityflaws affecting end-users. Real-time online fulfillment of software sales mayalso accelerate revenue recognition for software providers.

 

•      *Regulatory Compliance.* By automatically providing third-partyconfirmation of software availability, ESDM can help software providers’ financedepartments document compliance with delivery requirements under softwarerevenue recognition rules. An ESDM service can also screen software downloadsworldwide for compliance with U.S. export controls.

 

**SubscribeNet ESDM Service**

 

Our central offering is the SubscribeNet ESDMservice. First offered in 1996, the SubscribeNet service is an integratedweb-based solution that enables software providers and their channel partners todistribute all of their software releases online, manage licensing and entitlementacross their global customer base, track and report deliveries and downloadactivity, and manage export compliance. Software providers use the SubscribeNetservice to help reduce costs associated with manufacturing and distributing CDsand packaging, automate and simplify licensing processes, provide sales taxadvantages to their end-users in certain states, increase customer retentionand maintenance renewal rates, generate data on their end-users’ use of theirsoftware, accelerate delivery of software to their end-users, and enhanceexport and revenue recognition compliance.

 

Revenuesassociated with our SubscribeNet service comprised approximately 77%, 66%, and51% of our revenues in our 2005, 2004 and 2003 fiscal years, respectively.

 

*Strategic Advantages*

 

Amongcompetitive ESDM offerings, or compared to solutions developed in-house bysoftware providers, the SubscribeNet service offers strategic advantages,including:

 

•      *Integrated Software andLicense Delivery and Management. *The SubscribeNetservice offers a single integrated solution for delivery and management of fullcatalogs of enterprise

 

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software and electroniclicenses.  Software providers canelectronically fulfill orders, manage update processes, and generate, assignand deliver licenses through a single Web interface.

 

•      *Entitlement Management.*Software providers can manage relationshipsamong the products in their catalogs, the various releases of those products,and the files that comprise each such release. Software providers can assignentitlements for any combination of those items to their customers andindividual end-users. Entitlements can be assigned in the SubscribeNet servicethrough our extended license generation solution, or directly from the softwareprovider’s order processing, customer relationship management (CRM), e-commerceor licensing system, and can be time-limited to match the duration of customermaintenance contracts.

 

•      *Technology Infrastructure*. The technology infrastructure underlyingthe SubscribeNet service is engineered to provide scalability, redundancy,platform independence and 24x7 service.

 

•      *Integration with SoftwareProvider’s Systems*. TheSubscribeNet service integrates with major enterprise resource planning (ERP),processing, and CRM systems used by software providers.

 

•      *Reporting*. The SubscribeNet service provides extensivereporting capabilities to support software providers’ internal transactionreporting requirements and to help them analyze end-user usage trends.

 

•      *Regulatory Compliance*. The SubscribeNet service provides automatedscreening and reporting to support compliance with U.S. export regulations, andprovides third-party evidence of software availability to support compliancewith software revenue recognition rules.

 

•      *Rapid Implementation*. Once the software provider’s particularrequirements are defined and its resources are allocated, our implementationmethodology enables standard SubscribeNet implementations to be completed in asfew as 21 business days.

 

•      *Channel Management. *Our Channel Manager module enables software providers to extend some orall of the benefits of the SubscribeNet service to their resellers and theirresellers’ end-users, while keeping confidential data segregated among thesoftware provider and its various resellers.

 

•      *Focus and Expertise*. For the past 8 years, Intraware hasfocused on creating ESDM solutions for the enterprise software marketplace.This focus has enabled us to develop domain expertise and technology in theESDM field that we believe differentiates us from other ESDM providers.

 

*Customers*

 

Asof April 15, 2005, 49 software providers subscribed to the SubscribeNetservice. These include companies whose main business is providing software,companies that distribute software as a secondary business, and companies thatresell software. Seven of those customers each accounted for 5% or more of ourOnline services and technology and Related party online services and technologyrevenue during our 2005 fiscal year. One of our customers, Software Spectrum, Inc.,accounted for more than 10% of our total revenue during our 2005 fiscal year(see “Risk Factors” beginning on page 31 below, and Note 2 of our “Notesto Consolidated Financial Statements” in Item 8 below).

 

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**Outsourced Sales and Marketing Services**

 

We provide contracted sales and marketing services(Sales and Marketing Services) to Software Spectrum, Inc. (“SoftwareSpectrum”) Software Spectrum is a global business-to-business software servicescompany that is one of the world’s largest software resellers and a whollyowned subsidiary of Level 3 Communications, Inc. Under our agreement withSoftware Spectrum, we act as an outsourced sales force assisting SoftwareSpectrum in its resales and marketing of third-party enterprise software, inexchange for a portion of the gross margin from those resales and reimbursementof certain costs. Currently we provide Sales and Marketing Services to SoftwareSpectrum for Sun Microsystems, Inc. Java Enterprise System and Sun ONEsoftware and for Websense, Inc. software. We also provide our SubscribeNetservice to Software Spectrum to enable it to deliver Sun software to itscustomers electronically. We describe this relationship between Intraware andSoftware Spectrum further in Note 2 of our “Notes to ConsolidatedFinancial Statements” in Item 8 below.

 

**Sales**

 

*Direct Sales of SubscribeNet ESDM Service*

 

We typically sell the SubscribeNet service on asubscription basis, charging a periodic service fee.

 

Wesell our SubscribeNet service primarily through a direct sales force dedicatedto our SubscribeNet business**.** Wehave established direct sales offices for our SubscribeNet sales at ourheadquarters in Orinda, California, and in Boston, Massachusetts. EachSubscribeNet sales representative has a territory that he or she covers throughtelecommunications and in-person sales calls. The sales cycle for theseservices is typically lengthy, as our sales efforts must target the prospectivecustomer’s senior personnel across multiple departments.

 

*Sales of SubscribeNet ESDM Service through StrategicAlliances*

 

Wemaintain a number of strategic alliances intended to complement our directsales efforts and broaden sales of our SubscribeNet service.

 

•      **Alliances with SoftwareSpectrum for SubscribeNet Service.**

 

•      *Sun Software.* Software Spectrum uses our SubscribeNet service to manage electronicdelivery of Sun software to end-users who purchase the software licenses and maintenancethrough Software Spectrum. Software Spectrum pays us a periodic SubscribeNetservice fee based on software license and maintenance sales generated throughour Sales and Marketing Services (see Note 2 of our “Notes to ConsolidatedFinancial Statements” in Item 8 below). This agreement expires in June 2005and is renewable for subsequent one-year terms. We expect but cannot guaranteethat it will be renewed this year (see “Risk Factors” beginning on page 31below).

 

•      *Other Enterprise Software.* Software Spectrum also uses our SubscribeNetsolution to manage electronic delivery of enterprise software that it resellsindependently of Intraware. Under this agreement, we are currently managingdelivery to large end-user customers under their enterprise license agreementswith Software Spectrum for software published by a leading informationtechnology company. Software Spectrum pays us a one-time SubscribeNet servicefee for each end-user customer, based on the software license and maintenancefee charged by Software Spectrum to that customer. The term of this agreementexpires in October 2005.

 

•      **Agreement withHewlett-Packard.**  Hewlett-Packard Company (“HP”) is a resellerof our SubscribeNet service through its Software Publisher Servicesdivision.  HP’s Software PublisherServices division has provided a global business process outsourcing solutionfor multiple aspects of software publishing and distribution for more than 30years.  Under our agreement, HP has theright to market and resell the SubscribeNet solution with its suite ofoutsourced services. Customers who purchase the SubscribeNet solution throughHP contract directly with HP. HP pays us for services as they are provided tocustomers. The agreement automatically renews for a one-year term in September,subject to either party’s right to cancel a renewal.  We describe the relationship between HP andIntraware further in Note 2 of our “Notes to Consolidated FinancialStatements” in Item 8 below.

 

 

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•      **Agreement with Zomax.**  ZomaxIncorporated, a leading international outsource provider of supply chainmanagement services, is a reseller of the SubscribeNet service.  Customers who purchase the SubscribeNetsolution through Zomax contract directly with Zomax. Zomax pays us for servicesas they are provided to customers. The agreement automatically renews for aone-year term in April (it renewed in April 2005), subject to eitherparty’s right to cancel a renewal.  Wedescribe the relationship between Zomax and Intraware further in Note 2 ofour “Notes to Consolidated Financial Statements” in Item 8 below.

 

•      **Referral Arrangements forSubscribeNet Sales.** We alsomaintain various other referral arrangements under which we pay fees tocompanies that refer new SubscribeNet customers to us.

 

*Sales and Marketing Services*

 

Weuse an inside sales and marketing team to provide Sales and Marketing Servicesto Software Spectrum for resale and marketing of Sun and Websense software andrelated maintenance. Inside sales representatives typically have a territorythat he or she covers using telephone, facsimile and email communications. Wealso have a marketing manager who conducts marketing programs for Sun andWebsense software. The length of sales cycles for Sun and Websense softwaretends to correspond to the dollar values of those sales. Our Sales andMarketing Services business is somewhat seasonal, with sales tending to bestronger in the non-summer months than the summer months, and strongest at theend of the calendar year.

 

Underour agreement for our provision of Sales and Marketing Services to SoftwareSpectrum, Software Spectrum is the reseller of record for Sun and Websensesoftware and maintenance, and we assist Software Spectrum in selling andmarketing that software and maintenance. We also provide our SubscribeNetservice to Software Spectrum to enable it to deliver Sun software to itscustomers electronically. As part of this arrangement, Software Spectrum paysus a percentage of the gross profit derived from its sales of Sun and Websensesoftware licenses and maintenance services, and reimburses us for our cost inmaintaining a Sales and Marketing Services team dedicated to sales of Sun andWebsense software licenses and maintenance. Software Spectrum also pays us aperiodic SubscribeNet service fee based on software license and maintenancesales generated by Intraware through our Sales and Marketing Services forSoftware Spectrum. The term of this agreement will expire in June 2005 andis renewable for subsequent one-year terms. We expect but cannot guarantee thatit will be renewed (see “Risk Factors” beginning on page 31 below).

 

*Sales Outside the United States*

 

Approximately$1.2 million of our total revenue for the year ended February 28, 2005,$0.7 million of our total revenue for the year ended February 29, 2004,and $0.4 million of our total revenue for the year ended February 28,2003, was from sales to companies based outside the United States ofAmerica.  All of this revenue wascategorized as Online services and technology revenue.  This accounted for approximately 11% of ourtotal revenue and 15% of our Online services and technology revenue for theyear ended February 28, 2005, 6% of our total revenue and 10% our Onlineservices and technology revenue for the year ended February 29, 2004, and 3%of our total revenue and 6% Online services and technology revenue for the yearended February 28, 2003.

 

*Total Annual Contract Value*

 

We track a metric for ourSubscribeNet service business, that we call “total annual contract value.”  We use this metric to approximate what thetotal ongoing annual SubscribeNet service fees would be under our existingcontracts with our customers, assuming all those contracts renewed on theircurrent terms and, in the case of variable-fee contracts, the customersmaintained the same level of fee-generating activity as they had in the priortwelve months.  (We cannot guarantee thatthose assumptions will be true, as we describe further below.)  We define “total annual contract value” as,on any given date, the aggregate annual service fees paid or expected to bepaid by our customers for services we have contracted to provide during thethen-current annual periods of the customers’ respective contracts with us. Tobe included in total annual contract value, service fees must be eithercontractually required to be paid, or expected to be paid based on a minimum12-month history of prior charges and payments that were not required bycontractual minimums.  Total annualcontract value includes amounts that have been recognized as revenue as well asamounts that may be recognized as revenue in the future.

 

As of March 31, 2005, thetotal annual contract value of our SubscribeNet service customer base was $7.9million.

 

We caution that total annualcontract value is not necessarily indicative of current revenues or of futurerevenues in any given fiscal period and should not be relied upon to assess ourfinancial condition.  In addition to the“Risk Factors” beginning on page 31 below, factors that could cause differencesbetween total annual contract value and revenues include unexpected contractterminations, reductions in customer activity, the application of our revenuerecognition policies described under “Critical Accounting Policies andEstimates: Revenue Recognition” in Item 7 (“Management’s Discussion andAnalysis of Financial Condition and Results of Operation”) and under “RevenueRecognition” in Note 1 of “Notes to Consolidated Financial Statements” in Item8 below, and the arising of any contingencies that make deferral of revenuerecognition appropriate under any given contract.  We also caution that total annual contractvalue is different from backlog.  Backlogtypically excludes amounts already recognized as revenue, while total annualcontract value may include amounts already recognized as revenue for portionsof the current annual terms of our existing SubscribeNet contracts.  In addition, total annual contract valueincludes fees paid, payable or expected for the current annual terms of ourexisting SubscribeNet contracts, even if we expect to provide the relatedservices after our current fiscal year.

 

**Marketing**

 

Our central marketing goalsare to attract and retain customers for our services. We target our marketingefforts to senior personnel across multiple departments in software companiesand other mid-sized and large corporations. We use an integrated approach oftargeted advertising; direct mail, email and online promotions; interactiveweb-based seminars, or “webinars”; event sponsorships; trade shows;brand-awareness campaigns; and regular meetings with existing customers tostimulate demand for our services, generate sales leads and maintain customerrelationships.

 

Weemploy a variety of tools to achieve our marketing goals. Our print and onlineadvertising campaigns are designed to target senior personnel across multipledepartments in software companies, and

 

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educatethem on our products and services. Our direct mail, email and online promotionsare designed to highlight specific benefits of our services and offerlimited-time incentives to enter into purchase or evaluation agreements.  In our webinars, our senior executives andother panelists who may include independent IT analysts, senior executives ofour customers and partners, and other industry experts, educate prospectivecustomers on ESDM and other topics relevant to our business. Our co-brandingwith Software Spectrum for sales of Sun software and maintenance helps uspenetrate highly qualified market segments. We also use trade shows, eventsponsorships, and regional marketing to target key audiences, expand ourcustomer base and heighten awareness of the “Intraware” brand.

 

Wealso hold user conferences and periodic meetings with our customers to educatethem on our service offerings, gather feedback from them about our services,and learn about their evolving requirements.

 

**Competition**

 

TheESDM market is rapidly evolving and intensely competitive, and we expectcompetition to increase in the future. Our primary competition comes from ourpotential customers, including software companies and other companies thatdistribute software or digital goods, who choose to develop an in-housealternative to the SubscribeNet service. However, we also face increasingcompetition from a small number of other providers of outsourced electronicsoftware delivery services. A number of these competitors have historicallyprovided related services, such as e-commerce services, replication anddistribution of physical media such as CDs, or product lifecycle managementsolutions, and relatively recently have begun to provide electronic softwaredelivery services. We believe this trend will continue as software and otherdigital goods companies convert from physical to digital distribution of theirproducts, stimulating additional demand for ESDM services.

 

Webelieve we compete effectively as a result of our early deployment of acentralized, high-capacity, web-based, customizable ESDM solution containingvaluable administrative and reporting tools. Principal competitive factorsinclude:

 

•      the performance, features and functionalityof an ESDM solution;

 

•      the comprehensiveness of the services offeredby the ESDM provider, such as integration with licensing and physicalfulfillment solutions;

 

•      the cost of a provider’s ESDM solution versusthe cost of competing ESDM solutions or the cost to a potential customer ofbuilding, deploying and maintaining an alternative service in-house;

 

•      the ESDM provider’s experience in and focuson providing ESDM services;

 

•      the ESDM provider’s track record ofsuccessful project implementations;

 

•      positive references by the ESDM provider’sexisting customers; and

 

•      the openness of an ESDM solution’sarchitecture and the ease with which it integrates with major customerrelations management, order processing and enterprise resource planning systemsused by software providers.

 

Webelieve we compete effectively as to all of these factors. We believe ourprincipal advantages include:

 

•      our relatively senior position as one of thefirst ESDM service providers;

 

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•      the depth and breadth of features andfunctionality of an ESDM solution;

 

•      our high-capacity, high-availability networkfor delivery of enterprise-class software applications rapidly and securely;

 

•      the suite of services that we offer throughalliances, including licensing, desktop deployment, and on-demand physicalfulfillment;

 

•      the price of our solution, particularlycompared with the cost to software providers of developing and maintaining analternative service in-house;

 

•      our strong track record of successful projectimplementations;

 

•      existing customers who are willing to providepositive references;

 

•      the flexibility of our solution, which iseasily customized and integrated with customers’ ERP, CRM and licensingsystems; and

 

•      our suite of administrative and reportingtools that add value for software companies and their end-users.

 

Nevertheless,we face a number of competitive challenges. A key challenge is resistance fromsoftware companies that determine, for perceived strategic reasons or based ontheir cost assessments, that they do not wish to outsource electronic softwaredelivery. Another principal challenge is our focus on ESDM, and our reliance onthird-party alliances for key ancillary services such as hosted licensegeneration and desktop deployment. While we believe our focus has enabled us tooffer a superior ESDM solution to our competitors, and our integration withbest-of-breed ancillary solutions addresses a broad set of customer needs, someprospective customers prefer this set of solutions to be supported by a singleprovider.  A third principal challenge isour small size, as some large software providers prefer to outsource servicesto larger suppliers with greater resources.

 

Inaddition, many of our competitors have longer and more profitable operatinghistories than we have. They may also have significantly greater financial andother resources, wider name recognition, and a larger installed base ofcustomers (including non-ESDM customers) than we have. They also may be able todevote greater resources to the development, promotion and sale of their productsthan we can, which would allow them to respond more quickly to new or emergingtechnologies and changes in customer requirements. In addition, many of ourcompetitors have existing relationships with divisions of our current orpotential customers, and may be able to leverage their existing relationshipsto discourage these customers from purchasing additional services or productsfrom us, or may be able to persuade these customers to replace our services orproducts with their own.

 

**Intellectual Property, Proprietary Rights and Licenses**

 

Ourfuture success depends in part on our proprietary rights and technology. Werely on a combination of patent, copyright, trademark and trade secret laws,employee and third-party nondisclosure agreements and other methods to protectour proprietary rights. Although we seek to take advantage of availableintellectual property protections, we believe that factors such as thetechnological and creative skills of our personnel, new product developments,frequent product enhancements and reliable product maintenance are moreessential to establishing and maintaining a technology leadership position.There can be no assurance that others will not develop technologies that aresimilar or superior to our technology.

 

Todate, we own three U.S. patents on electronic commerce technologies, expiringin July 2016, September 2017, and February 2018, respectively.In addition, we have four patent applications pending in

 

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theUnited States on our SubscribeNet ESDM technology. We plan to file additionalpatent applications on our SubscribeNet ESDM technology in the current fiscalyear.

 

Wehave 10 trademark registrations in the United States. Our key registered andunregistered trademarks and service marks include Intraware, SubscribeNet, TheWay Digital Goods Move, and Control Your Technology. We also hold registrationsand pending applications for a number of trademarks and service marks outsidethe United States. We are aware that certain other companies are using the name“Intraware” as a company name or as a trademark or service mark outside theUnited States. While we do not believe we have infringed any rights and we havereceived no notice of any claims of infringement from any of those companies,and we own registrations for the “Intraware” trademark in the United States andin other countries, we can make no assurance that these or other companies willnot claim superior rights to “Intraware” or other marks used in our business.

 

Wegenerally enter into confidentiality or license agreements with our employees,consultants and corporate partners, and generally control access to anddistribution of our software, documentation and other proprietary information.Despite our efforts to protect our proprietary rights, it may be possible forunauthorized parties to copy certain portions of our products or services, orreverse-engineer or obtain and use information that we regard as proprietary.There can be no assurance that the steps we take will prevent misappropriationof our technology, particularly in foreign countries where the laws may notprotect our proprietary rights as fully as do the laws of the United States.

 

Wepurchase licenses and will continue to purchase licenses for certain productsintegral to our services and products, including products which are integratedwith our software code and used with our products to provide key functionality.We cannot be assured that these third party product licenses will continue to beavailable to us on commercially reasonable terms or that we will be able tosuccessfully integrate such third party products into our solutions.

 

**Employees**

 

Asof April 15, 2005, we had 60 employees, including part-time employees.None of our employees is represented by a labor union. We have not experiencedany work stoppages and consider our relations with our employees to begood.

 

**ITEM 2.****         ****PROPERTIES.**

 

We rentapproximately 16,000 square feet of office space located in Orinda, Californiaunder a lease expiring in August 2009. We have an additional field sales office in Boston, Massachusetts.

 

**ITEM 3.****         ****LEGAL PROCEEDINGS.**

 

*In re Intraware, Inc. Initial Public OfferingSecurities Litigation*

 

InOctober 2001, we were served with a summons and complaint in a purportedsecurities class action lawsuit. On or about April 19, 2002, we wereserved with an amended complaint in this action, which is now titled *In re Intraware, Inc. Initial Public OfferingSecurities Litigation*, Civ. No. 01-9349 (SAS) (S.D.N.Y.),related to *In re Initial Public OfferingSecurities Litigation*, 21 MC 92 (SAS) (S.D.N.Y.). The amendedcomplaint is brought purportedly on behalf of all persons who purchased ourcommon stock from February 25, 1999 (the date of our initial publicoffering) through December 6, 2000. It names as defendants Intraware,three of our present and former officers and directors, and several investmentbanking firms that served as underwriters of our initial public offering. Thecomplaint alleges liability under Sections 11 and 15 of the Securities Act of1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of1934, on the grounds that the registration statement for the offerings did not

 

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disclosethat: (1) the underwriters had agreed to allow certain customers topurchase shares in the offerings in exchange for excess commissions paid to theunderwriters; and (2) the underwriters had arranged for certain customersto purchase additional shares in the aftermarket at predetermined prices. Theamended complaint also alleges that the underwriters misused their securitiesanalysts to manipulate the price of our stock. No specific damages are claimed.

 

Lawsuits containing similar allegations have beenfiled in the Southern District of New York challenging over 300 other initialpublic offerings and secondary offerings conducted in 1999 and 2000. Allof these lawsuits have beenconsolidated for pretrial purposes before United States District Court JudgeShira Scheindlin of the Southern District of New York. On July 15, 2002,an omnibus motion to dismiss was filed in the coordinated litigation on behalfof the issuer defendants, of which Intraware and its three named current andformer officers and directors are a part, on common pleadings issues. On orabout October 9, 2002, the Court entered and ordered a Stipulation ofDismissal, which dismissed the three named current and former officers anddirectors from the litigation without prejudice. On February 19, 2003, theCourt entered an order denying in part the issuer defendants’ omnibus motion todismiss, including those portions of the motion to dismiss relating toIntraware.

 

In June 2004, a stipulation of settlement forthe claims against the issuer defendants, including us, was submitted to theCourt.  The underwriter-defendants in the*In re Initial Public Offering SecuritiesLitigation* (collectively, the “underwriter-defendants”), includingthe underwriters of our initial public offering, are not parties to the stipulationof settlement.

 

The settlement provides that, in exchange for arelease of claims against the settling issuer-defendants, the insurers of allof the settling issuer-defendants will provide a surety undertaking toguarantee plaintiffs a $1 billion recovery from the non-settlingdefendants, including the underwriter-defendants.  The amount our insurers would be required topay to the plaintiffs could range from zero to approximately $3.5 million,depending on plaintiffs’ recovery from the underwriter-defendants and fromother non-settling parties. If the plaintiffs recover at least $1 billionfrom the underwriter-defendants, our insurers would have no liability forsettlement payments under the terms of the settlement. If the plaintiffsrecover less than $1 billion, we believe our insurance will likely coverour share of any payments towards satisfying plaintiffs’ $1 billionrecovery deficit.  Management estimates that its range of loss relative tothis matter is zero to $3.5 million. Presently there is no more likelypoint estimate of loss within this range. As a consequence of the uncertaintiesdescribed above regarding the amount we will ultimately be required to pay, ifany, as of February 28, 2005, we have not accrued a liability for this matter.  There is no guarantee the settlement willbecome final, as it is subject to a number of conditions, including the finalapproval of the Court.

 

*Leon Segen v. ComVest Venture Partners, LP, et al.*

 

In July 2004, a complaint was filed in theUnited States District Court for the District of Delaware, Civ. No. 04-822,against ComVest Venture Partners, LP; ComVest Management, LLC; CommonwealthAssociates Management Company, Inc.; Commonwealth Associates, LP; RMCCapital, LLC; Michael S. Falk; Robert Priddy; Travis L. Provow; KeithRosenbloom; and Intraware. The complaint describes Intraware as a nominaldefendant. The complaint alleges that, between August 2001 and January 2002,all of the defendants other than Intraware were members of a group, andtherefore should be treated as a single “person,” for purposes of Sections13(d)(3) and 16(b) of the Securities Exchange Act of 1934 (the “1934Act”).  The complaint further alleges that ComVest Venture Partners, LPand Mr. Priddy, while they and the other alleged group memberscollectively owned more than 10% of a class of our equity securities, boughtand sold our equity securities within a 6-month period and failed todisgorge to us the profits allegedly realized in those trades, therebyviolating Section 16(b) of the 1934 Act.  Mr. Falk was amember of our Board of Directors from April 2001 to May 2002 and Mr. Provowwas a member of our Board of Directors from October 2001 to May 2002. The complaint demands that ComVest Venture Partners, LP and Mr. Priddy payover to Intraware the profits they allegedly realized and retained in violationof Section 16(b) of the 1934 Act, together with interest and legalcosts. According to the complaint, the amount of those alleged profits isunknown to the plaintiff, however, the information alleged in the

 

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complaintsuggests that amount may be approximately $1.3 million. The complaint doesnot seek damages against us.  After the complaint was filed, the plaintiffand Intraware signed a stipulation acknowledging that Intraware takes noposition with respect to the claims in the action, and providing that Intrawareaccepts service of the complaint, that Intraware is not required to file ananswer or other response to the complaint, and that Intraware will otherwisehave the rights and responsibilities of a party to the action.

 

We are also subject to legal proceedings, claims andlitigation arising in the ordinary course of business. We do not expect thatthe ultimate costs to resolve these matters will have a material adverse effecton our consolidated financial position, results of operations, or cash flows.

 

**ITEM4.**          SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.

** **

None.

 

**PART II**

 
| **ITEM 5.** | **MARKET FOR THE REGISTRANT’S COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.** |
|-------------|-----------------------------------------------------------------------------------------------------------------------------|

 

To date, we have notdeclared or paid dividends on our common stock. Our Board of Directorspresently intends to retain all earnings for use in our business and thereforedoes not anticipate declaring or paying any cash dividends in the foreseeablefuture.

 

Our common stock was tradedon the Nasdaq National Market under the symbol “ITRA” from February 26,1999 until May 29, 2002. Since May 30, 2002, our common stock hastraded on the Nasdaq SmallCap Market under the symbol “ITRA.” The followingtable reflects the range of reported high and low sale prices for our commonstock for the periods indicated.

 
| ** **             | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------|------------|----------|------------|---------|------------|
|                   |       |     |       |    |       |
| For the quarter ended  |       |     |       |    |       |
| February 28, 2005 |       | $        | 1.28       |    | $          | 0.80 |   |
| November 30, 2004 |       | 1.50     |       | 0.79    |       |
| August 31, 2004   |       | 2.01     |       | 1.20    |       |
| May 31, 2004      |       | 2.18     |       | 1.60    |       |
| For the quarter ended  |       |     |       |    |       |
| February 29, 2004 |       | $        | 2.49       |    | $          | 1.56 |   |
| November 30, 2003 |       | 2.86     |       | 1.29    |       |
| August 31, 2003   |       | 1.90     |       | 1.01    |       |
| May 31, 2003      |       | 1.52     |       | 0.86    |       |

 

OnApril 15, 2005, the last reported sale price for our common stock on theNasdaq SmallCap Market was $0.52 per share. As of April 15, 2005,Intraware estimates that there were approximately 14,000 holders of record ofIntraware common stock and a substantially greater number of beneficial owners.

 

On February 23, 2005,we received a letter from The Nasdaq Stock Market indicating that, for 30consecutive business days, the bid price of our stock had closed below theminimum $1.00 per share requirement for continued listing on the NasdaqSmallCap Market and that, in accordance with NASD rules, we had 180 calendardays to regain compliance.  The letter also stated that if, at any timebefore August 22, 2005, the bid price of our stock closes at $1.00 pershare or more for a minimum of 10

 

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consecutive business days,Nasdaq will notify us that we comply with the listing requirements.  If we do not regain compliance by August 22,2005, we may be granted an additional 180-day period (until February 22,2006) to regain compliance if we meet The Nasdaq SmallCap Market initiallisting criteria other than the minimum bid price requirement.  If we donot regain compliance within the allotted compliance period (including anyextensions that may be granted by Nasdaq), Nasdaq staff will notify us that ourstock will be delisted from The Nasdaq SmallCap Market.  At that time, wewould be entitled to appeal the staff’s determination to a Nasdaq ListingQualifications Panel.

 

**EquityCompensation Plan Information**

 

The following table setsforth information, as of February 28, 2005 about equity awards under ourequity compensation plans (in thousands, except weighted average exercise priceinformation):

 
| **Plan Category**                                       | ** ** | **A  Number of Securities to be  Issued upon Exercise of  Outstanding Options** | ** ** | **B  Weighted Average  Exercise Price of  Outstanding Options** | ** ** | **C  Number of Securities  Remaining Available for  Future Issuance Under  Equity Compensation  Plans (Excluding  Securities Reflected in  Column A)** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity Compensation Plans Approved by Shareholders  (1) | ** ** | 10,293                                                                          | (2)        | $                                                               | 1.81       |                                                                                                                                                   | 4,330      | (3) |
| Equity Compensation Plans Not Approved by  Shareholders |       | 1,042                                                                           | (4)        | $                                                               | 3.67       |                                                                                                                                                   | —     |   |
|                                                    |       |                                                                            |       |                                                            |       |                                                                                                                                                   |       |
| Total                                                   |       | 11,335                                                                          |       | $                                                               | 1.98       |                                                                                                                                                   | 4,330      |   |

 

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(1)   Includes our 1996 Stock Option Plan, which provides for an annualincrease in the number of shares available for issuance under the plan equal tothe lesser of (i) 3,000,000 shares, (ii) 6% of the number ofoutstanding shares of our common stock on such date, or (iii) a lesser amountdetermined by the Board of Directors; our 1998 Director Option Plan; and our1998 Employee Stock Purchase Plan, which provides for an annual increase in thenumber of shares available for issuance under the plan equal to the lesser of (i) 400,000shares, (ii) 1% of the number of outstanding shares of our common stock onsuch date, or (iii) a lesser amount determined by the Board of Directors.

 

(2)   Includes shares of common stock issuable upon exercise of optionsgranted under our 1996 Stock Option Plan and 1998 Director Option Plan.

 

(3)   Number of securities available for future issuance includesapproximately 3,368,000 shares of common stock available for issuance under our1996 Stock Option Plan, 208,000 shares available for issuance under our 1998Director Option Plan, and approximately 754,000 shares of common stockavailable for issuance under our Employee Stock Purchase Plan. (See Note 9of our “Notes to Consolidated Financial Statements” in Item 8 below for adescription of our equity compensation plans.)

 

(4)   Includes shares of common stock to be issued upon exercise of optionsgranted under our 1999 Non-Qualified Acquisition Stock Option Plan.

 

Our Non-QualifiedAcquisition Stock Option Plan, adopted in October 1999 (the “1999 Plan”),has not been approved by our shareholders. The 1999 Plan provided for thegranting of NSOs to our

 

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employees and consultants. Officers could only receive grants under the1999 Plan in connection with their initial service to us, and Board memberscould not receive any grants under the 1999 Plan. The standard form of StockOption Agreement used under the 1999 Plan provides that the options areexercisable over a period not to exceed ten years from the date of the grant.Options granted under the 1999 Plan generally vest as to 25% of the shares oneyear after the date of grant and as to the remaining options in equal monthlyinstallments over the next 36 months. The exercise price of all optionsgranted under the 1999 Plan has been the fair market value of our common stockon the grant date, as determined by the closing price of the common stock onthe applicable Nasdaq exchange on that date.

 

Effective May 30, 2002,the day our common stock began trading on the Nasdaq SmallCap Market, we ceasedgranting options under the 1999 Plan. However, the 1999 Plan remains in effectsolely to the extent of options granted before May 30, 2002 that remainoutstanding. As of February 28, 2005, approximately 1,042,000 shares ofour common stock were reserved for issuance under the 1999 Plan, and the samenumber of shares were issuable pursuant to options outstanding under the planas of that date.

 

**ITEM 6.****         ****SELECTED FINANCIAL DATA.**

 

The following tables presentselected historical financial information for Intraware. This information hasbeen derived from our respective consolidated financial statements and notes,some of which are included elsewhere in this annual report. The followingselected financial data should be read in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” andare qualified by reference to the consolidated financial statements and notesthereto and appearing elsewhere in this annual report. The consolidated statementof operations data set forth below for the years ended February 28, 2005, February 29,2004, and February 28, 2003, and the consolidated balance sheet data at February 28,2005 and February 29, 2004, are derived from, and are qualified byreference to, the audited consolidated financial statements of Intrawareincluded elsewhere in this annual report. The consolidated statement ofoperations data for the years ended February 28, 2002 and February 28,2001, and the balance sheet data at February 28, 2003, February 28,2002, and February 28, 2001, are derived from audited consolidatedfinancial statements of Intraware which are not included or incorporated byreference in this annual report. The historical results are not necessarilyindicative of results to be expected for any future period.

 

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| ** **                                                                                                            | ** ** | **For the  Years Ended**                   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                            | ** ** | **February 28,  2005**                | ** ** | **February 29,  2004** | ** ** | **February 28,  2003** | ** ** | **February 28,  2002** | ** ** | **February 28,  2001** | ** ** |
| ** **                                                                                                            | ** ** | **(in  thousands, except per share data)** | ** ** |
|                                                                                                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| **Statement of Operations Data:**                                                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Revenues:                                                                                                             |       |                                       |       |   |   |   |   |   |   |   |   |
| Online services and technology                                                                                        |       | $                                          | 7,816      |   | $ | 6,768 |   | $ | 6,872 |   | $ | 14,015 |   | $ | 23,027 |   |
| Alliance and reimbursement                                                                                            |       | 2,431                                      |       | 3,311 |   | 4,271 |   | 2,621 |   | — |   |
| Related party online services and technology                                                                          |       | 546                                        |       | 466 |   | 277 |   | — |   | — |   |
| Software product sales                                                                                                |       | 42                                         |       | 362 |   | 2,622 |   | 36,801 |   | 98,809 |   |
|                                                                                                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Total revenues                                                                                                        |       | 10,835                                     |       | 10,907 |   | 14,042 |   | 53,437 |   | 121,836 |   |
|                                                                                                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Cost of revenues:                                                                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Online services and technology                                                                                        |       | 3,009                                      |       | 2,339 |   | 2,385 |   | 3,752 |   | 4,773 |   |
| Alliance and reimbursement                                                                                            |       | 1,523                                      |       | 1,814 |   | 2,023 |   | 1,210 |   | — |   |
| Software product sales                                                                                                |       | 37                                         |       | 307 |   | 1,972 |   | 29,304 |   | 80,417 |   |
|                                                                                                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Total cost of revenues                                                                                                |       | 4,569                                      |       | 4,460 |   | 6,380 |   | 34,266 |   | 85,190 |   |
|                                                                                                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Gross profit                                                                                                          |       | 6,266                                      |       | 6,447 |   | 7,662 |   | 19,171 |   | 36,646 |   |
|                                                                                                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Operating expenses:                                                                                                   |       |                                       |       |   |   |   |   |   |   |   |   |
| Sales and marketing                                                                                                   |       | 2,892                                      |       | 2,616 |   | 5,430 |   | 12,647 |   | 37,564 |   |
| Product development                                                                                                   |       | 1,531                                      |       | 2,733 |   | 6,184 |   | 10,119 |   | 19,632 |   |
| General and administrative                                                                                            |       | 3,767                                      |       | 3,368 |   | 3,017 |   | 6,898 |   | 20,451 |   |
| Amortization of intangibles                                                                                           |       | —                                     |       | — |   | 1,085 |   | 6,125 |   | 5,248 |   |
| Amortization of goodwill                                                                                              |       | —                                     |       | — |   | — |   | 2,397 |   | 3,297 |   |
| Restructuring                                                                                                         |       | (75                                        | )          | — |   | 1,239 |   | 2,356 |   | 2,841 |   |
| (Gain) loss on disposal of assets                                                                                     |       | 47                                         |       | (14 | ) | — |   | — |   | — |   |
| Impairment of assets                                                                                                  |       | —                                     |       | — |   | 792 |   | — |   | — |   |
| Loss on abandonment of assets                                                                                         |       | —                                     |       | — |   | 128 |   | 6,735 |   | 6,019 |   |
|                                                                                                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Total operating expenses                                                                                              |       | 8,162                                      |       | 8,703 |   | 17,875 |   | 47,277 |   | 95,052 |   |
|                                                                                                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Loss from operations                                                                                                  |       | (1,896                                     | )          | (2,256 | ) | (10,213 | ) | (28,106 | ) | (58,406 | ) |
|                                                                                                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Interest expense                                                                                                      |       | (101                                       | )          | (206 | ) | (2,650 | ) | (2,728 | ) | (660 | ) |
| Interest and other income and expenses, net                                                                           |       | 139                                        |       | 82 |   | 544 |   | (3,844 | ) | 675 |   |
| Gain on sale of Asset Management software business                                                                    |       | —                                     |       | — |   | 2,656 |   | — |   | — |   |
|                                                                                                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Net loss                                                                                                              |       | (1,858                                     | )          | (2,380 | ) | (9,663 | ) | (34,678 | ) | (58,391 | ) |
|                                                                                                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Redeemable convertible preferred stock accrued dividends, accretion  to liquidation and beneficial conversion feature |       | —                                     |       | — |   | — |   | (2,696 | ) | (10,026 | ) |
|                                                                                                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Net loss attributable to common stockholders                                                                          |       | $                                          | (1,858     | ) | $ | (2,380 | ) | $ | (9,663 | ) | $ | (37,374 | ) | $ | (68,417 | ) |
|                                                                                                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Basic and diluted net loss per share attributable to common  stockholders                                             |       | $                                          | (0.03      | ) | $ | (0.04 | ) | $ | (0.20 | ) | $ | (1.18 | ) | $ | (2.57 | ) |
|                                                                                                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Weighted average shares - basic and diluted                                                                           |       | 60,127                                     |       | 55,910 |   | 47,722 |   | 31,690 |   | 26,647 |   |
|                                                                                                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| ** **                                                                                                            | ** ** | **February 28, 2005**                 | ** ** | **February 29, 2004** | ** ** | **February 28, 2003** | ** ** | **February 28, 2002** | ** ** | **February 28, 2001** | ** ** |
| ** **                                                                                                            | ** ** | **(in thousands)**                         | ** ** |
| **Balance Sheet Data:**                                                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents and investments                                                                             |       | $                                          | 9,463      |   | $ | 11,804 |   | $ | 6,841 |   | $ | 2,979 |   | $ | 7,046 |   |
| Working capital (deficit)                                                                                             |       | 7,247                                      |       | 8,575 |   | 2,642 |   | (9,320 | ) | (7,488 | ) |
| Total assets                                                                                                          |       | 12,966                                     |       | 14,770 |   | 10,936 |   | 26,519 |   | 80,227 |   |
| Long term obligations, less current portion                                                                           |       | 342                                        |       | 766 |   | 906 |   | 2,235 |   | 3,339 |   |
| Redeemable convertible preferred stock                                                                                |       | 897                                        |       | 897 |   | 2,473 |   | 3,347 |   | 4,666 |   |
| Total stockholders’ equity                                                                                       |       | $                                          | 6,857      |   | $ | 7,590 |   | $ | 764 |   | $ | 110 |   | $ | 18,428 |   |

 

Note: Historical results ofoperations are not necessarily indicative of future results. Refer to the “RiskFactors” under Item 7 “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” for discussion of factors that may impactfuture results. Our historical results of operations reflect our acquisition ofJanus Technologies, Inc. in July 2000.

 

In our year ended February 28,2003 we adopted Statement of Financial Accounting Standards No. 142, whichrequires that assembled workforce be reclassified to goodwill and that goodwill(including assembled workforce) no longer be amortized.

 

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With respect to thecalculation of net loss per share and weighted average shares, Note 1 ofthe “Notes to Consolidated Financial Statements” in Item 8 below provides anexplanation of the determination of the weighted average shares used to computenet loss per share.

 

We have not paid cashdividends on our common stock.

 

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| **ITEM 7.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATION.** |
|-------------|-------------------------------------------------------------------------------------------------|

 

We begin Management’sDiscussion and Analysis of Financial Condition and Results of Operation(MD&A) with our overall strategy to give the reader an overview of thegoals of our business and the direction in which our business is moving. Thisis followed by a discussion of the Critical Accounting Policies and Estimatesthat we believe are important to understanding the assumptions and judgmentsincorporated in our reported financial results. In the next section, we discussour Results of Operations for our 2005 fiscal year compared to our 2004 and2003 fiscal years. We then analyze our Liquidity and Capital Resources anddiscuss relevant Recent Accounting Pronouncements.

 

This MD&A should be readin conjunction with the other sections of this Annual Report on Form 10-K,including “Item 1: Business”; “Item 6: Selected Financial Data”; and “Item 8:Financial Statements and Supplementary Data.” The various sections of thisMD&A contain a number of forward-looking statements, all of which are basedon our current expectations and could be affected by the uncertainties and riskfactors described throughout this filing and particularly in the “Risk Factors”section. Our actual results may differ materially.

 

**Overview**

 

Ourgoal is to become the de facto standardamong digital delivery solution providers. We are pursuing a three-pronged strategy to achieve this goal.First, we are working to become a profitable, cash-generating company bygrowing our SubscribeNet business and practicing stringent fiscalresponsibility.  Second, we are seekingto extend and strengthen our customer base by executing on our sales andmarketing plan and by providing exceptional customer service.  Third, we are seeking to solidify andstrengthen our technological advantage by further improving our ESDM technologysolutions through internal research and development and through alliances withadjacent technology providers.

 

We currently see a number of trends in themarketplace that are potentially important for our business. First, growth inthe macroeconomy and the technology sector have improved in the last year, butremain uneven.  In the current climate,spending by technology companies remains cautious.  Second, there appears to be an increasingpace of mergers and acquisitions in the enterprise software sector. Theseconsolidations pose both opportunities and risks for us, potentially leadingeither to growth in our contracts with those customers or to cancellation ofcustomer contracts. Third, technology companies are increasingly outsourcingoperational functions to reduce costs. Our services enable enterprise softwarecompanies to outsource key operational functions in a manner that we believe isfinancially compelling. Therefore, we may benefit from this outsourcing trend.Fourth, the use of hosted web-based applications, which in the past has beenlimited by concerns about speed, reliability and security, is now becoming moreaccepted among mainstream businesses, largely because of a desire for costsavings. This trend may benefit us because our SubscribeNet service is a hostedweb-based application.

 

Our management is focused on four key areas. Thefirst is what appears to be growing demand for electronic delivery andmanagement of enterprise software applications. We believe this presents opportunities for both acquiring new customersand increasing the value of existing customer contracts.  The second is to leverage our relationshipswith our strategic allies, including HP and Software Spectrum, to reach largercustomers.  The third is to takeadvantage of the drive toward greater efficiency among large information technologycompanies, as evidenced by the increasing consolidation in that sector, byemphasizing the cost savings that can be realized through broad adoption ofelectronic software delivery and management. The fourth area is the development of new pricing packages for ourservices that emphasize shorter sales and implementation cycles and strongprofit margins.

 

We also face a number of key risks, which aredescribed in the “Risk Factors” beginning on page 31 below.

 

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We earn revenues and generate cash principallythrough recurring service fees charged for our SubscribeNet service,professional services fees charged for customization of our SubscribeNetservice, and profit-sharing and cost reimbursement received for our sales andmarketing services. Historically, we have also raised substantial amounts ofcash through private stock placements.

 

We have incurred losses and negative cash flowsduring each fiscal year since inception. For the year ended February 28, 2005,we narrowed our net losses to approximately $1.9 million.  Despite our improvements, we continued toexperience recurring losses and negative cash flows from operations for theyear ended February 28, 2005. Under our June 2001 agreement with SoftwareSpectrum, we provide Sales and Marketing Services to Software Spectrum toassist in its resale and marketing of Sun and Websense software licenses andmaintenance. This contract accounted for more than 10% of our total revenues inour 2005 fiscal year. The term of this agreement will expire in June 2005, isrenewable for subsequent one-year terms, and may be terminated without cause byeither party on 90 days’ notice. It is possible that Software Spectrum willterminate this agreement without cause or will choose not to renew theagreement at any renewal point. Any termination or non-renewal of our agreementwith Software Spectrum, or termination of Software Spectrum’s rights to resellSun software, would likely cause a substantial and immediate decrease in ourrevenues.  We believe that the effects ofour capital financing, strategic actions implemented to improve revenue, andcost controls will be adequate to generate sufficient cash resources to fundour future operations. However, if we fail to sufficiently increase ourrevenues or control spending, our business could be materially adverselyaffected.

 

**CriticalAccounting Policies and Estimates**

 

ThisMD&A discusses our consolidated financial information, which has beenprepared in accordance with generally accepted accounting principles in theUnited States of America. In preparing this financial information, we arerequired to make estimates and assumptions affecting the reported amounts ofassets and liabilities and the disclosure of contingent assets and liabilitiesat the date of the financial information and the reported amounts of revenuesand expenses during the reporting period and related disclosures. On an ongoingbasis, we evaluate our estimates and judgments. We base our estimates and judgmentson historical experience and on various other factors believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities not readilyapparent from other sources. Actual results may differ from these estimatesunder different assumptions or conditions.

 

We consideraccounting policies related to revenue recognition, costs of deferred revenue,stock-based compensation, allowance for doubtful accounts, goodwill andintangibles, and income taxes to be critical accounting policies due to theestimation process involved in each.

 

*Revenue Recognition*

 

Werecognize revenue when all of the following conditions are met:

 

•      There ispersuasive evidence of an arrangement;

•      We haveprovided the service to the customer, made the software available for customerdownload through our website, or shipped the software to the customer;

•      We believethat collection of these fees is reasonably assured; and

•      The amountof fees to be paid by the customer is fixed or determinable.

 

Onlineservices and technology revenue results primarily from three types ofarrangements.  First, it results from sales of our SubscribeNet ESDMservice to software vendors and other companies that distribute software aspart of their business.  Second, it results from professional servicesthat we provide to customize our SubscribeNet service for customers, to convertdata for customers, and to integrate our proprietary software.  Third, itresults from the sale of our proprietary software licenses and relatedmaintenance to companies using those products internally or using thoseproducts to provide web-based services to their customers. As a result of thesale of our Asset Management software business in May 2002, we are notcurrently deriving revenue from licenses, maintenance or integration servicesfor our proprietary software; however, we may recognize such revenues in thefuture if opportunities arise to sell licenses for our proprietary softwareunderlying our SubscribeNet service and related maintenance. We sell ourSubscribeNet service, and will sell proprietary software licenses ifopportunities present themselves, primarily through our direct sales force andauthorized resellers.

 

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Allianceand reimbursement revenue primarily relates to our alliance agreement withSoftware Spectrum for sales and marketing services. This revenue consists of apercentage of the gross profit derived from Software Spectrum’s sales of thethird-party software and maintenance for which we provide sales and marketingservices, and reimbursement for the costs of maintaining a sales team dedicatedto providing sales and marketing services to Software Spectrum for thatthird-party software and maintenance. This revenue is recognized as we providethe services to Software Spectrum.

 

We derivesoftware product revenues from our past resales of licenses and maintenance formultiple business software product lines. As of July 1, 2001, we generallyno longer resell third-party software licenses and maintenance, though we stillresell licenses for third-party products complementary to our SubscribeNetservice. Since July 1, 2001, we have continued to recognize revenue fromour resale of third-party software licenses and related maintenance contractsover the life of the arrangements made priorto July 1, 2001. Vendorspecific objective evidence of fair value for the maintenance element of theresold software arrangements has been based on historical and contractualrenewal rates for maintenance. We deferred the maintenance revenue at theoutset of the arrangement and recognized it ratably over the period duringwhich the maintenance was to be provided.  This period normally commencedon the date the software was delivered and generally continued for 12 months,although certain maintenance contracts continued for longer periods.  At February 28,2005, we did not have any deferred revenue relating to software productrevenues.

 

We deferonline services and technology revenues related to our SubscribeNet ESDMservice and generally recognize them ratably over the term of the servicearrangement. Some SubscribeNet service implementations for new customersinvolve customization essential to the functionality of the service.  Inthose cases, we defer revenue recognition until the service go-live date isreached and recognize the revenue on a ratable basis over the remainingcontract term.  The go-live date is the later of the date on which the essentialfunctionality is delivered or the point at which no additional customization isrequired.  Our SubscribeNet contracts with customers typically give thecustomer a period of time (generally five days) to evaluate a SubscribeNetimplementation after we have completed it, and provide that the customer isdeemed to have accepted the implementation if it has not affirmatively rejectedit within that period.  We typically rely on such non-rejections bycustomers to indicate their acceptance of implementations.  Any subsequentindications by our customers that their implementations have not been properlycompleted could have a material adverse impact on our financial condition orresults of operations.

 

We alsosell additional professional services related to SubscribeNet agreements. Generally, these services do not provide stand-alone value to a customer, andaccordingly, we defer recognition of that revenue until the go-live date forthe professional services, similar to the manner in which we treat SubscribeNetservice revenues as discussed above.  Such professional services revenuesare recognized ratably over the longer of the remaining estimated customer lifeor the remaining contract term, commencing with the completion of theprofessional services. Estimated customer life requires that we periodicallyestimate the projected life of our existing customers, based on historicalinformation, such as customer renewal rates. Although revenues generated fromadditional professional services represent less than 5% of our overall revenuesfor the year ended February 28, 2005, any change to our estimated customerlife could have a material adverse impact on our financial condition or resultsof operations.

 

Revenuefrom transactions through authorized resellers has been recognized when thelicenses and maintenance have been resold or utilized by the reseller or whenour related obligations have been satisfied. Those transactions primarilyconsisted of resales, through our authorized resellers, of our proprietary AssetManagement software licenses and maintenance (we sold our Asset Managementsoftware business to Computer Associates International, Inc. during ourfiscal year ended February 28, 2003).  For those transactions, webased vendor specific objective evidence of fair value for the maintenanceelement of the proprietary software arrangements on historical and contractualrenewal rates for maintenance. We deferred the maintenance revenue at theoutset of the arrangement and recognized it ratably over the period duringwhich the maintenance was to be provided (generally 12 months), whichnormally commenced on the date the software was delivered.

 

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Asmentioned above, a determination that the collection of fees is reasonablyassured is a precursor to recognizing revenue. Determination of collectabilityof payments requires judgment on the part of management and includesperiodically evaluating customers’ credit (see “Allowance for Doubtful Accounts”below).

 

*Costs of Deferred Revenue*

 

Wecapitalize direct costs of revenues related to significant implementation andprofessional services contracts associated with our SubscribeNetservices.  Direct costs include compensation and payroll-related fringebenefits directly associated with the time spent on significant implementationand professional services activities.  These costs are recognized over thesame term as the associated revenue from those contracts (see “RevenueRecognition” above). Any change in our revenue recognition estimates couldresult in corresponding changes to our recognition of costs of deferredrevenues. At February 28, 2005, we had approximately $0.5 million incapitalized costs of deferred revenues.  We expense customer acquisitioncosts, including sales commissions, as incurred.

 

*Stock-based Compensation*

 

We accountfor stock-based compensation for our employees using the intrinsic value methodpresented in Accounting Principles Board (APB) No. 25, ”Accountingfor Stock Issued to Employees,” and related interpretations, and comply withthe disclosure provisions of Statement of Financial Accounting Standard (SFAS) No. 123, ”Accountingfor Stock-Based Compensation,” and with the disclosure provisions of SFAS No. 148, ”Accountingfor Stock-Based Compensation—Transition and Disclosure Amendment of SFAS No. 123.”Under APB No. 25, compensation expense is based on the difference, as ofthe date of the grant, between the fair value of our stock and the exerciseprice. For our fiscal year ended February 28, 2005, no stock-basedcompensation was recorded for stock options granted to our employees becausethe exercise price of all stock options granted to our employees was equal tothe market price of the underlying stock on the date of grant.

 

In October 2004,the Financial Accounting Standards Board (FASB) issued SFAS No. 123(Revised) “Share Based Payment” (SFAS No. 123R). The standard requirescompanies to value employee stock options and stock issued under employee stockpurchase plans using the fair value based method on the grant date and recordstock-based compensation expense. The fair value based models that companiesare allowed to use can be different from the Black-Scholes option-pricingmodel, which we currently use to calculate the pro forma effect on net incomeand earnings per share if we had applied SFAS No. 123 to employee optiongrants. Note 1 of our “Notes to Consolidated Financial Statements” in Item 8below shows what the pro forma net loss and loss per share for the fiscal yearended February 28, 2005 and February 29, 2004 would have been if wehad applied SFAS No. 123.  However, the actual impact to our resultsof operations upon adoption of the standard could materially differ from thepro forma information included in Note 1 of our “Notes to ConsolidatedFinancial Statements” in Item 8 due to differences in the option-pricing modelused, estimates and assumptions required, and options to be included in thecalculation upon adoption. The fair value based models require the input ofhighly subjective assumptions and do not necessarily provide a reliable singlemeasure of the fair value of our stock options. The Securities and ExchangeCommission has amended the deadline to adopt SFAS No. 123R; accordingly, wewill adopt the new accounting provisions in our first quarter of our fiscalyear ending February 28, 2007.

 

*Allowance for Doubtful Accounts*

 

We maintainan allowance for doubtful accounts for estimated losses from our inability tocollect required payments from our customers. When evaluating the adequacy ofthis allowance, we analyze specific accounts receivable, historical bad debts,customer credit-worthiness, current economic trends and changes in our customerpayment history.  We may need to record increases to our allowance balancesin the future.  At February 28, 2005, we have many accountsreceivable balances and one large unbilled receivable balance.  Anydispute, early contract termination or other collection issue related to thesereceivable balances could have a material adverse impact on our financialcondition or result of operations. At February 28, 2005, our unbilledreceivable balance was $0.4 million. This balance relates to our

 

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Software Spectrum agreement (see “Revenue Recognition” above). Thereare no allowances for doubtful accounts related to this balance. This estimateinvolves management’s judgment, which takes into account Software Spectrum’sprior payment history, current credit-worthiness and overall business condition.Changes in the above factors could have a material impact on actual bad debtsincurred.

 

*Goodwill and Intangibles*

 

We arerequired to regularly review all of our long-lived assets, including goodwilland other intangible assets, for impairment whenever events or changes incircumstances indicate that the carrying value may not be recoverable.  Wereview goodwill balances for impairment at least once annually and havedetermined that we have one reporting unit.  Factors we consider importantwhich could trigger an impairment review include, but are not limited to,significant underperformance relative to historical or projected futureoperating results, significant changes in the manner of use of the acquiredassets or the strategy for our overall business, significant negative industryor economic trends, a significant decline in our stock price for a sustainedperiod, and our market capitalization relative to net book value. When wedetermine that an impairment review for intangible and long-lived assets isnecessary based upon the existence of one or more of the above indicators ofimpairment, we compare the book value of such assets to the future undiscountedcash flows attributable to those assets. If the book value is greater than thefuture undiscounted cash flows, we measure any impairment based on a projecteddiscounted cash flow method using a discount rate commensurate with the riskinherent in our current business model. When we determine an impairment reviewof goodwill is necessary based on an impairment indicator or based on ourannual testing requirements, we compare the fair value of the reporting unit tothe carrying value of the reporting unit. If the carrying value of thereporting unit is greater than the fair value of the reporting unit, animpairment may be necessary. Significant judgment is required in thedevelopment of projected cash flows for these purposes, including assumptionsregarding the appropriate level of aggregation of cash flows, their term anddiscount rate as well as the underlying forecasts of expected future revenueand expense.

 

*Income Taxes*

 

Inconjunction with preparing our financial statements, we must estimate ourincome taxes in each of the jurisdictions in which we operate. This processinvolves estimating our actual current tax expense together with assessingtemporary differences resulting from differing treatment of items for tax andaccounting purposes. These differences result in deferred tax assets andliabilities. We must then assess the likelihood that our deferred tax assetswill be recovered from future taxable income and to the extent we believe thatrecovery is not likely, we must establish a valuation allowance. Given that wehave incurred losses since inception and therefore have not been required topay income taxes, we have fully reserved our deferred tax assets at February 28,2005.  In the event that we are able to realize our deferred tax assets inthe future, an adjustment to the deferred tax asset would increase income inthe period that this is determined.

 

**Results ofOperations**

 

*TotalRevenue*

 

Thefollowing table sets forth the revenue, changes in revenue and percentage oftotal revenue for the periods indicated (in thousands, except percentageamounts):

 

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| ** **                                    | ** ** | **For the Years Ended**    | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|
| ** **                                    | ** ** | **February 28, 2005** | ** ** | **February 29, 2004** | ** ** | **February 28, 2003** | ** ** |
| ** **                                    | ** ** | **Total**                  | ** ** | **Change** | ** ** | **% of  Revenue** | ** ** | **Total** | ** ** | **Change** | ** ** | **% of  Revenue** | ** ** | **Total** | ** ** | **% of  Revenue** | ** ** |
| Revenues:                                     |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Online services and technology                |       | $                          | 7,816      |   | $ | 1,048 |   | 73 | % | $ | 6,768 |   | $ | (104 | ) | 63 | % | $ | 6,872 |   | 49 | % |
| Alliance and reimbursement                    |       | 2,431                      |       | (880 | ) | 22 | % | 3,311 |   | (960 | ) | 30 | % | 4,271 |   | 30 | % |
| Related party online services and  technology |       | 546                        |       | 80 |   | 5 | % | 466 |   | 189 |   | 4 | % | 277 |   | 2 | % |
| Software product sales                        |       | 42                         |       | (320 | ) | 0 | % | 362 |   | (2,260 | ) | 3 | % | 2,622 |   | 19 | % |
| Total revenues                                |       | $                          | 10,835     |   | $ | (72 | ) |   |   | $ | 10,907 |   | $ | (3,135 | ) |   |   | $ | 14,042 |   |   |   |

 

Revenues for combined onlineservices and technology and related party online service and technology revenuefor the year ended February 28, 2005, increased from the prior year. Thisincrease was primarily due to a net increase of approximately $1.0 million inrevenue primarily recognized from five of our existing customers.  The increase in combined online services andtechnology revenue for the year ended February 28, 2004, as compared tothe year ended February 28, 2003, was primarily due to increasedSubscribeNet revenues from existing customers of approximately$1.6 million. These increases were partially offset by the decrease inrevenue from our services agreement with Sun Microsystems, Inc. of$1.4 million for the year ended February 29, 2004. We expect ourcombined online services and technology revenue and related party onlineservices and technology revenue in our first quarter of fiscal year 2006 to be slightlylower than those in our fiscal quarter ended February 28, 2005.  The previous sentence is a forward-lookingstatement and actual results could differ materially from those anticipated.

 

Alliance and reimbursementrevenue primarily relates to our alliance agreement with Software Spectrum forsales of Sun software licenses and maintenance. This revenue consists of apercentage of the gross profit derived from the sales of Sun software licensesand maintenance services, and reimbursement for the costs of maintaining asales team dedicated to selling Sun software for Software Spectrum. Thedecrease in alliance and reimbursement revenue for the year ended February 28,2005, was primarily due to a reduction of the shared gross profit derived fromthe sales of Sun software licenses and maintenance services of$0.6 million. The decrease in alliance and reimbursement revenue for theyear ended February 28, 2004, was primarily due to a reduction of theshared gross profit derived from the sales of Sun software licenses andmaintenance services of $0.7 million. We expect our alliance andreimbursement revenues in our first quarter of fiscal year 2006 to be lowerthan those in our three months ended February 28, 2005 due to seasonalityand forecasted reduced demand for Sun products. More generally, the Sunsoftware we resell through our alliance with Software Spectrum has experienceddecreased market share over the past three years, which has contributed to areduction in our alliance and reimbursement revenues, and we expect thisproduct line to experience continued pressure in the marketplace over thelonger term.

 

The decline in softwareproduct revenue for the years ended February 28, 2005 and February 29,2004, was due to our transition out of the business of reselling third-partysoftware products and related maintenance. We do not expect to recognize future revenues from our exitedthird-party resale business.  However, wemay recognize future revenues from products and services complementary to ourSubscribeNet service, which originate with other companies and are sold tocustomers through us as part of a comprehensive ESDM business solution.  The previous two sentences areforward-looking statements and actual results could differ materially fromthose anticipated.

 

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*Costs andExpenses*

 

The following table setsforth certain items from our consolidated statements of operations as apercentage of total revenue for the periods indicated (in thousands, exceptpercentage amounts):

 
| ** **                        | ** ** | **For the Years Ended**    | ** ** |
|-----------------------------------|------------|----------------------------|------------|
| ** **                        | ** ** | **February 28, 2005** | ** ** | **February 29, 2004** | ** ** | **February 28, 2003** | ** ** |
| ** **                        | ** ** | **Total**                  | ** ** | **Change** | ** ** | **% of Revenue** | ** ** | **Total** | ** ** | **Change** | ** ** | **% of Revenue** | ** ** | **Total** | ** ** | **% of Revenue** | ** ** |
| Total cost of revenues            |       | $                          | 4,569      |   | $ | 109 |   | 42 | % | $ | 4,460 |   | $ | (1,920 | ) | 41 | % | $ | 6,380 |   | 45 | % |
| Gross Profit                      |       | 6,266                      |       | (181 | ) | 58 | % | 6,447 |   | (1,215 | ) | 59 | % | 7,662 |   | 55 | % |
| Operating expenses:               |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales and marketing               |       | 2,892                      |       | 276 |   | 27 | % | 2,616 |   | (2,814 | ) | 24 | % | 5,430 |   | 39 | % |
| Product development               |       | 1,531                      |       | (1,202 | ) | 14 | % | 2,733 |   | (3,451 | ) | 25 | % | 6,184 |   | 44 | % |
| General and administrative        |       | 3,767                      |       | 399 |   | 35 | % | 3,368 |   | 351 |   | 31 | % | 3,017 |   | 21 | % |
| Amortization of intangibles       |       | —                     |       | — |   | 0 | % | — |   | (1,085 | ) | 0 | % | 1,085 |   | 8 | % |
| Restructuring                     |       | (75                        | )          | (75 | ) | -1 | % | — |   | (1,239 | ) | 0 | % | 1,239 |   | 9 | % |
| (Gain) loss on disposal of assets |       | 47                         |       | 61 |   | 0 | % | (14 | ) | (14 | ) | 0 | % | — |   | 0 | % |
| Impairment of assets              |       | —                     |       | — |   | 0 | % | — |   | (792 | ) | 0 | % | 792 |   | 6 | % |
| Loss on abandonment of assets     |       | —                     |       | — |   | 0 | % | — |   | (128 | ) | 0 | % | 128 |   | 1 | % |
| Total operating expenses          |       | $                          | 8,162      |   | $ | (541 | ) | 75 | % | $ | 8,703 |   | $ | (9,172 | ) | 80 | % | $ | 17,875 |   | 127 | % |

 

*Cost ofRevenues*

 

Total cost of revenuesremained at approximately $4.5 million for the years ended February 28,2005, and February 29, 2004, but decreased from $6.4 million for theyear ended February 28, 2003. The decreases in cost of revenues during theyear ended February 28, 2004 was primarily due to the phasing out of ourthird-party software reseller business, which resulted in a decrease of$1.7 million in cost of revenues for the year ended February 29,2004.

 

Ourgross margin decreased to 58% for the year ended February 28, 2005, from59% for the year ended February 29, 2004, and 55% for the year ended February 28,2003. The gross margin decrease for the year ended February 28, 2005, primarilyreflects the decrease we have experienced in our Alliance and reimbursementrevenues as described above.  The grossmargin increase for the year ended February 29, 2004, primarily reflectsour phasing out of our third-party software reseller business as describedabove.

 

Cost ofrevenues primarily consists of certain allocated costs related to our Internetconnectivity, assets supporting cost of revenues, and customer support, as wellas the costs of maintaining our team dedicated to helping Software Spectrumsell Sun and Websense software (Software Spectrum reimburses us for our cost ofmaintaining that team). Cost of revenues also consists of professional servicespersonnel costs and the cost of third-party products sold.  When we werein the business of directly reselling third-party software products, wepurchased those products at a discount from the third-parties’ established listprices according to standard reseller terms.  We expect total cost ofrevenues and gross profit margin percentages for the next fiscal year to bothbe slightly higher than the cost of revenues and gross profit marginpercentages for our fiscal year 2005.  The previous sentence is aforward-looking statement that is subject to risks and uncertainties. Theactual mix of sales transactions and the timing of the transactions, as well asany reduction by Sun of Software Spectrum’s and our gross margins for Sun’s maintenancerenewals, may cause our cost of revenues and gross profit margins to fluctuatematerially from those anticipated (see “Risk Factors” beginning on page 31below).

 

*Sales andMarketing Expenses*

 

Salesand marketing expenses consist primarily of employee salaries, benefits andcommissions, advertising, promotional materials and trade show expenses.

 

Theincrease in our sales and marketing expenses for the year ended February 28,2005, compared to the year ended February 29, 2004, is primarily due to anincrease of approximately $0.5 million in

 

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outside services related to marketing and advertising, which were partof our planned increase in sales and marketing expenditures.  This increase was partially offset bydecreases in payroll related expenses of approximately $0.2 million.

 

Thedecrease of our sales and marketing expenses for the year ended February 29,2004 compared to the year ended February 28, 2003, is primarily due to ourrestructuring efforts in connection with the sale of our Asset Managementsoftware business in May 2002, which reduced expenditures on salaries andmarketing, and eliminated rent on closed offices for a total of approximately$1.8 million in reduced expenses. The decrease is also attributable toreduced stock-based employee compensation expense of $0.5 million.

 

Weplan to slightly reduce our sales and marketing expenses in our fiscal yearending February 28, 2006, as compared with our fiscal year ended February 28,2005, primarily by reducing expenses associated with marketing and brandingprograms.  We plan to increase theefficiency of our marketing efforts by emphasizing lead generation throughinternal telemarketing and by leveraging existing business alliances. Theprevious two sentences are forward-looking statements and actual results coulddiffer materially from those anticipated, particularly in light of our ongoingstrategic review of our product and marketing direction.  We cannot give assurance that any new effortsto improve our marketing will result in additional sales or revenues.

 

*ProductDevelopment Expenses*

 

Productdevelopment expenses primarily consist of personnel, consulting, software andrelated maintenance, equipment depreciation expense and allocated overheadcosts. Costs related to research, design and development of products andservices have been charged to product development expense as incurred.

 

Thedecrease in our product development expenses for the year ended February 28,2005, compared to those for the year ended February 29, 2004, is dueprimarily to a decrease in software and equipment depreciation expense ofapproximately $0.7 million, as many fixed assets have become fully depreciatedduring the year.  The decrease is also due to a one-time expense ofapproximately $0.1 million related to lease buyouts that occurred during thefiscal year ended February 29, 2004.

 

Thedecrease in our product development expenses for the year ended February 29,2004, compared to those for the year ended February 28, 2003, is primarilydue to our restructuring efforts in connection with the sale of our AssetManagement software business in May 2002, which eliminated expenditures onsalaries and consulting fees for Asset Management software developmentpersonnel of $0.4 million, reduced software and related maintenance andequipment depreciation expense through the disposal or retirement of softwareand equipment of $1.7 million, and reduced stock-based employeecompensation expense of $0.3 million.

 

Weanticipate continuing to invest in additional functionality for ourSubscribeNet service and underlying proprietary software. However, we expectthose investments to fluctuate over time, and expect our product developmentexpenses to fluctuate accordingly. We expect total product developmentexpenditures to be approximately the same in fiscal year 2006 as they were infiscal year 2005. The previous sentences are forward-looking statements thatare subject to risks and uncertainties, and actual results could differmaterially from those anticipated (see “Risk Factors” beginning on page 31below). We cannot give assurance that our product development efforts willresult in new or improved products, features or functionality or that themarket will accept the improvements to existing or new products, features orfunctionality developed.

 

*Generaland Administrative Expenses*

 

Generaland administrative expenses consist primarily of compensation foradministrative and executive personnel, fees for professional services,uncollectible account activity and certain allocated overhead costs.

 

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Theincrease in our general and administrative expenses for the year ended February 28,2005, is primarily due to an increase of approximately $0.3 million in outsideconsulting services and temporary costs associated with preparation forevaluation of our internal controls to enable management to report on ourinternal control over financial reporting as required by Section 404 ofthe Sarbanes-Oxley Act of 2002.  Inaddition, we recognized a reduced recovery of $0.1 million for accountspreviously written off as described below.

 

Asignificant part of the increase in our general and administrative expenses forthe year ended February 29, 2004, is the reduction in recovery of accountspreviously written off, as compared to our higher recovery of such accountsduring the year ended February 28, 2003. During our 2001 fiscal year, wewrote off accounts that were deemed to be uncollectible at that time. However,we continued to pursue collection efforts and ultimately succeeded inrecovering amounts from that time period. During the year ended February 28,2003, we recovered approximately $1.3 million more than in the year ended February 29,2004. These decreased recoveries were partially offset by reductions in payrollrelated expenses of $0.4 million and external personnel costs and stateadministrative fees of $0.4 million for the year ended February 29, 2004.

 

Weexpect total general and administrative expenses in fiscal year 2006 toapproximate fiscal year 2005 levels. The previous sentence is a forward-lookingstatement and actual results could differ materially from those anticipated.

 

*Restructuringand Sale of Asset Management Software Business*

 

InMay 2002, we sold substantially all of the assets related to our AssetManagement software business to Computer Associates International, Inc.for approximately $9.5 million in cash. In connection with this sale, our July 2001agreement with Computer Associates for its resale of our Argis suite ofsoftware products was terminated. In addition, as part of that asset sale, weassigned to Computer Associates our May 2001 agreement with CorporateSoftware (now Software Spectrum) for its resale of our Argis suite of softwareproducts. Because of the asset sale, Software Spectrum has the right toterminate that agreement. If it does so, all of the shares subject to thewarrant that we issued to Software Spectrum in May 2001 will immediatelybecome exercisable. We recorded the fair value of the warrant as prepaiddistribution costs and were recognizing it as a reduction of revenue over thelesser of a ratable charge over the 24-month term of the agreement withSoftware Spectrum or the period it took Software Spectrum to generate revenueto Intraware of $1.6 million from Software Spectrum’s resale of our assetmanagement software. As a result of the asset sale, we recorded the remainingunamortized prepaid distribution costs of $936,000 as a reduction to revenueduring the year ended February 28, 2003.

 

We recorded the totalproceeds from the sale of $9.5 million, less the book value of transferredequipment, intangible assets, goodwill, deferred revenue, and transactioncosts, based on their respective carrying values at the sale date, as a gain onsale of assets in the year ended February 28, 2003.

 

We determined the calculationof the gain on the sale as follows (in thousands):

 
| Total consideration                                                  |   | $      | 9,500 |   |
|----------------------------------------------------------------------|--------|--------|-------|--------|
| Net book value of equipment, intangible  assets and deferred revenue |   | (6,536 | )     |
| Transaction costs                                                    |   | (308   | )     |
| Gain on sale                                                         |   | $      | 2,656 |   |

 

In connection with ourdisposition of the Asset Management software business, we announced arestructuring and workforce reduction to reduce our operating expenses. Werecorded a charge of $1.8 million relating to this restructuring and theimpairment of assets during the three months ended May 31, 2002.

 

The impairment of assetsincludes the write-off of approximately $403,000 in prepaid licenses that wereheld for resale. The restructuring charge consisted of approximately $345,000for severance and

 

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benefits relating to the involuntary termination of 14 employees whowere not hired by Computer Associates. We terminated an additional 33employees, all of whom were based in North America. These 33 terminatedemployees were all hired by Computer Associates and therefore received noseverance payments. Of the 47 terminated employees, 22 were in Sales andMarketing, 10 were in Product Development and 15 were directly involved in ourproduct support. We also closed our Pittsburgh, Pennsylvania office and varioussatellite offices.

 

We accrued for lease andrelated costs of approximately $983,000, principally pertaining to theestimated future obligations of non-cancelable lease payments for excessfacilities that were vacated due to our workforce reductions. We alsorecognized $63,000 relating to other restructuring expenses. Due to changes inmanagement’s estimates relating to the restructuring during the three monthsended August 31, 2002, we recognized an additional expense of $106,000 pertainingto the estimated future obligations of non-cancelable lease payments for excessfacilities that were vacated due to our workforce reductions. In addition, wedid not incur projected severance and benefits of $106,000 and reduced thereserve accordingly. During the three months ended February 28, 2003, weagreed with the landlord to terminate our Pittsburgh, Pennsylvania lease andrealized a savings of approximately $152,000 that would otherwise have beenpayable as rent under the lease.

 

In our December 2000restructuring, we closed our Fremont, California office and assigned our leaseto a new tenant while acting as guarantor for that tenant. In May 2002,the new tenant defaulted on its lease. During the three months ended November 30,2002, we made a cash payment of approximately $214,000 to terminate this lease.

 

The following table setsforth an analysis of the components of the restructuring and impairment ofassets charges recorded in the first quarter of fiscal year 2003 and subsequentadjustments and payments made against the reserve (in thousands):

 
| ** **                                | ** ** | **Severance and  benefits** | ** ** | **Excess lease  and  related costs** | ** ** | **Impairment of  assets** | ** ** | **Other costs** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|--------------------------------------|------------|---------------------------|------------|-----------------|------------|-----------|------------|
| May 23, 2002 restructuring           |       | $                           | 345        |                                 | $          | 983                       |       | $               | 403        |      | $          | 63 |   | $ | 1,794 |   |
|                                      |       |                        |       |                                 |       |                      |       |            |       |      |       |
| Cash paid                                 |       | (239                        | )          | (858                                 | )          | —                    |       | —          |       | (1,097    | )          |
| Non-cash charges                          |       | —                      |       | (69                                  | )          | (403                      | )          | (63             | )          | (535      | )          |
| Provision adjustment                      |       | (106                        | )          | (46                                  | )          | —                    |       | —          |       | (152      | )          |
| Reserve balance at February 28, 2003 |       | —                      |       | 10                                   |       | —                    |       | —          |       | 10        |       |
|                                      |       |                        |       |                                 |       |                      |       |            |       |      |       |
| Cash paid                                 |       | —                      |       | (10                                  | )          | —                    |       | —          |       | (10       | )          |
|                                      |       |                        |       |                                 |       |                      |       |            |       |      |       |
| Reserve balance at February 29, 2004 |       | $                           | —     |                                 | $          | —                    |       | $               | —     |      | $          | — |   | $ | — |   |

 

As of February 29,2004, we have settled all liabilities associated with our May 2002restructuring and the sale of our Asset Management software business, subjectto the ongoing indemnification obligation discussed in Note 5 to our “Notesto Consolidated Financial Statements” in Item 8 below.

 

Duringthe year ended February 28, 2005, we realized a payroll tax refund foroverpaid payroll taxes of approximately $75,000.  These overpaid payrolltaxes related to supplemental unemployment compensation benefits forinvoluntarily terminated employees during our restructuring events in December 2000,August 2001 and May 2002.  As of February 28, 2005, webelieve all transactions relating to past restructuring events have beenrecognized.

 

*InterestExpense*

 

For the year ended February 28,2005, interest expense was $0.1 million, a decrease from $0.2 millionfor the year ended February 29, 2004, and a decrease from$2.7 million for the year ended

 

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February 28, 2003.

 

Interestexpense primarily relates to obligations under capital leases and notespayable.

 

Thedecrease in interest expense for the year ended February 28, 2005 and February 29,2004, is primarily due to the reduction and elimination of the principalbalance on our capital lease obligations.  In August 2003, wereplaced certain capital leases with a note payable bearing a lower interestrate (see Note 8 to our “Notes to Consolidated Financial Statements” in Item 8below, and “Liquidity and Capital Resources” below).

 

*Interestand Other Income and Expenses, Net*

 

For the year ended February 28,2005, interest and other income and expenses, net was a $139,000 credit, anincrease from an $82,000 credit for the year ended February 29, 2004, anddecrease from a $544,000 credit for the year ended February 28, 2003.

 

Interest and other incomeand expenses, net primarily relates to interest earned on our investmentbalances.  The increase in interest and other income and expenses, net forthe year ended February 28, 2005, is primarily the result of increasedrate of return on our cash balances from the prior year. The increase ininterest and other income and expenses, net for the year ended February 29,2004, is primarily due to the fact that we did not incur any credits to adjustthe warrants we issued in connection with our August 31 and September 20,2001, debt issuances, and our May 24, 2002, common stock financing to fairvalue.  During the year ended February 28,2003, we recognized a credit of $0.5 million to adjust warrants to fair value.

 

*IncomeTaxes*

 

From inception throughFebruary 28, 2005, we incurred net losses for federal and state tax purposesand have not recognized any tax provision or benefit.  As of February 28, 2005, we had approximately$88 million of federal and $47 million of state net operating losscarryforwards available to offset future taxable income, which expire invarying amounts between fiscal year 2006 and 2025. The Tax Reform Act of 1986limits the use of net operating losses and tax credit carryforwards in certaincircumstances where changes occur in the stock ownership of a company. Becauseof cumulative ownership changes in the past, the federal and state losscarryforwards have been reduced by the amount of the net operating losscarryforwards that will expire. Because of these cumulative ownership changes,federal loss carry forwards totaling approximately $44 million and state losscarry forwards totaling approximately $22 million are subject to limitation. AtFebruary 28, 2005, $44 million and $25 million of federal and state netoperating losses, respectively, are available without limitation to offsetfuture taxable income. Should there be a change of ownership in the future, theavailable net operating losses may be further limited.  Given our limited operating history, lossesincurred to date and the difficulty in accurately forecasting our futureresults, management does not believe that the realization of the relateddeferred income tax asset meets the criteria required by generally acceptedaccounting principles. Accordingly, we have recorded a 100% valuationallowance. (See Note 4 to our “Notes to Consolidated Financial Statements”in Item 8 below.)

 

**Liquidityand Capital Resources**

 

The following table presentsour liquidity position at the end of our fiscal years 2005 and 2004 (inthousands):

 
| ** **                                | ** ** | **For the Years Ended**     | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **February 28,  2005** | ** ** | **February 29,  2004** | ** ** |
|                                      |       |                        |       |   |   |
| Cash and cash equivalents                 |       | $                           | 9,463      |   | $ | 11,804 |   |
| Working capital                           |       | $                           | 7,247      |   | $ | 8,575 |   |
| Net cash used in operating activities     |       | $                           | (2,290     | ) | $ | (1,455 | ) |
| Net cash provided by financing activities |       | $                           | 461        |   | $ | 6,979 |   |
| Net cash used in investing activities     |       | $                           | (512       | ) | $ | (561 | ) |

 

Duringthe year ended February 28, 2005 we used $2.3 million in cash tosupport our operations,

 

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up from $1.4 million used in the prior fiscal year. This increase wasprimarily due to approximately $0.6 million in additional marketing relatedactivities and approximately $0.2 million in payments made for outsideconsulting services costs associated with preparation for evaluation of ourinternal controls as described above. Our overall net cash used in operating activities primarily resultedfrom our net loss for the year and the timing of our payments to vendors andreceipts from customers.  The majority ofour operating costs continue to relate to employee payroll and related expenditures.  The net cash used in operations primarilycame from our existing cash and cash equivalents, and partially from theproceeds we received upon the exercise of stock options and warrants and salesof stock under our employee stock purchase plan.  We expect to continue to improve our cashused in operations by increasing our billings to customers as more end-usersare added to our SubscribeNet service. The previous sentence is a forward-looking statement that is subject torisks and uncertainties, and actual results could differ materially from thoseanticipated (see “Risk Factors” beginning on page 31 below). Our abilityto improve our uses of cash and generate positive cash flows in future periodswill largely depend on our ability to increase the number of customers of ourSubscribeNet service while increasing existing subscriptions through strongcontract renewals. It is also important for us to increase our current level ofsales through our Software Spectrum sales alliance, and continue to control ouroperational and customer support costs in future periods.

 

Ournet cash provided by financing activities was approximately $0.5million for the year ended February 28, 2005.  Most of thisamount came from the issuance of approximately 0.9 million shares of commonstock pursuant to warrant and stock option exercises and employee stockpurchases for approximately $1.1 million. In addition we made draws on our existing equipment advance agreement inthe amount of $0.4 million (see below).  The proceeds from these stockissuances were offset by payments on our notes payable of approximately $1.1million (see below).

 

Asof February 28, 2005, we carry an agreement with a bank under which wepreviously issued a note payable for proceeds of approximately$2.0 million and obtained access to $500,000 for equipment advances. Thenote payable bears an annual interest rate of the greater of 1% in excess ofthe bank’s prime rate (5.5% at February 28, 2005) or 5.25%. In August 2004,the initial equipment advance agreement, with a balance of $360,000, becamepayable over two years with the same interest rate as the note payablementioned previously.  Also, in August 2004,we entered into second equipment advance agreement which allows us to draw upto $500,000, through August 2005, for equipment purchases at the sameinterest rate that applies to the note payable. After August 2005, the second equipment advance will become payableover two years with the same interest rate as the first equipment advance.

 

Underthe agreement for the note payable and equipment advance agreements, allborrowings are collateralized by a senior security interest in substantiallyall of our assets. The agreement also requires us to comply with financialcovenants, with which we complied as of February 28, 2005. The agreement furtherrestricts us from incurring or assuming additional indebtedness outside ofthese note payable and equipment advances, excluding trade payables and certainother liabilities incurred in the ordinary course of business.

 

Ournet cash used in investing activities during the year ended February 28,2005, included $0.5 million for our purchase of fixed assets. Weoriginally paid for these equipment purchases from our cash and cashequivalents, but later drew down $0.4 million under the above-mentioned equipmentadvance agreements to finance these purchases. We used these fixed assetpurchases primarily to upgrade and expand our SubscribeNet infrastructure andcorporate information systems. We expect to continue to use and renew ourequipment advances to finance additional fixed asset purchases.

 

Webelieve our existing cash and cash equivalents, together with any cashgenerated from operations, will be sufficient to fund our operating activities,capital expenditures and financing arrangements for the foreseeable future.However, if our SubscribeNet business fails to grow significantly or declinesfrom its current level, we could be forced to seek additional capital to fundour operations.  Such additional capitalmay not be available on reasonable terms, if at all, especially if we are stillout of compliance with the Nasdaq $1 minimum bid price requirement at the timewe are seeking to raise capital.

 

AtFebruary 28, 2005, we did not have any other relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities,

 

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which would have been established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limitedpurposes. As such, we are not materially exposed to any financing, liquidity,market or credit risk that could arise if we had engaged in such relationships.

 

The following tablesummarizes our debt and lease obligations at February 28, 2005, and theeffect such obligations are expected to have on our liquidity and cash flow infuture periods (in thousands). This table provides information through our yearending February 29, 2008, as we do not have any debt or lease obligationsbeyond that point.

 
| ** **       | ** ** | **Payments due by period** | ** ** |
|------------------|------------|----------------------------|------------|
| ** **       | ** ** | **2006**                   | ** ** | **2007** | ** ** | **2008** | ** ** | **Total** | ** ** |
| Long-term  debt  |       | $                          | 857        |   | $ | 263 |   | $ | 95 |   | $ | 1,215 | (a) |
| Operating leases |       | 287                        |       | 2 |   | 1 |   | 290 | (b) |
|             |       | $                          | 1,144      |   | $ | 265 |   | $ | 96 |   | $ | 1,505 |   |

 

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(a)   This amount includes approximately $46,000 in interest.

 

(b)   This amount excludes approximately $281,000, $569,000, $579,000,$597,000, and $300,000 per year for the periods of 2006 through 2010, whichwould become due and payable if we do not exercise our right to exit ouroperating lease for our Orinda office.

 

As of February 28,2005, our Series A redeemable convertible preferred stock entitled itsholders to a liquidation preference of $1.0 million in the event ofIntraware’s liquidation.

 

**RecentAccounting Pronouncements**

 

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InDecember 2004, the FASB issued SFAS No. 123 (Revised 2004) “Share-BasedPayment” (“SFAS No. 123R”). SFAS No. 123R addresses all forms ofshare-based payment (“SBP”) awards, including shares issued under employeestock purchase plans, stock options, restricted stock and stock appreciationrights. SFAS No. 123R will require us to expense SBP awards withcompensation cost for SBP transactions measured at fair value. The FASBoriginally stated a preference for a lattice model because it believed that alattice model more fully captures the unique characteristics of employee stockoptions in the estimate of fair value, as compared to the Black-Scholes modelwhich we currently use for our footnote disclosure. The FASB decided to removeits explicit preference for a lattice model and not require a specificvaluation methodology. The Securities and Exchange Commission (“SEC”) hasamended the deadline to adopt SFAS 123R. Accordingly, we will be required toadopt the new accounting provisions beginning in our first quarter of ourfiscal year ending February 28, 2007. In addition, the SEC, in March 2005,issued Staff Accounting Bulletin No. 107 (“SAB 107”).  SAB 107 provides guidance regarding theinteraction between SFAS No. 123R and SEC rules and regulations.  We expect the adoption of SFAS No.123Rand SAB 107 will have a material adverse impact on our results of operationsand loss per share.  We are currently inthe process of evaluating the extent of such impact.

 

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**RISK FACTORS**

 

Youshould carefully consider the risks described below before making a decision toinvest in our common stock. The risks and uncertainties described below are notthe only ones facing Intraware. Additional risks and uncertainties not presentlyknown to us or that we do not currently believe are important to an investormay also harm our business operations. If any of the events, contingencies,circumstances or conditions described in the following risks actually occur,our business, financial condition or our results of operations could beseriously harmed. If that occurs, the trading price of our common stock coulddecline, and you may lose part or all of your investment.

 

**Revenues to us under our Sales and Marketing Servicesarrangement with Software Spectrum are likely to decline over the long term.Also, any termination of our relationship with Software Spectrum in the nearterm, without an adequate replacement, would cause a substantial decrease inour revenues.**

 

Underour June 2001 agreement with Software Spectrum, we provide Sales andMarketing Services to Software Spectrum to assist in its resale and marketingof Sun and Websense software licenses and maintenance. Software Spectrum shareswith us a portion of its gross profit from resales of Sun and Websense softwarelicenses and maintenance, and reimburses us for a substantial portion of ourcost of maintaining a team dedicated to sales and marketing of that softwareand maintenance. This contract accounted for substantially all of our Allianceand reimbursement revenues, a significant portion of our Online services andtechnology revenues, and more than 10% of our total revenues in our 2005 fiscalyear. While this agreement covers resales of Sun and Websense software andmaintenance, most of the sales under the agreement are of Sun software andmaintenance.  In recent years, sales and market share of those Sunsoftware product lines have generally declined.  If this trend continues,revenues to us under this contract are likely to decrease over the long term. Inaddition, Sun may decrease the amount of gross profit it allows SoftwareSpectrum to retain from customer renewals of Sun software maintenance, whichwould in turn reduce the amount of gross profit we would receive from suchmaintenance renewals.  Currently most ofour Alliance and reimbursement revenues and a portion of our Onlineservices and technology revenuesare derived from Sun maintenance renewals.  Additionally, the term of that agreement willexpire in June 2005, is renewable for subsequent one-year terms, and maybe terminated without cause by either party on 90 days’ notice. It is possiblethat Software Spectrum will terminate this agreement without cause or willchoose not to renew the agreement at any renewal point. It is also possiblethat Sun and/or Websense will choose to stop permitting Software Spectrum toresell their software. Any termination or non-renewal of our agreement withSoftware Spectrum, or termination of Software Spectrum’s rights to resell Sun software,would likely cause a substantial and immediate decrease in our revenues.

 

**The loss of one or more of our key customers or partnerscould cause our revenue growth to slow or cause our revenues to decline.**

 

Asubstantial amount of the revenues from our SubscribeNet service come from arelatively small number of companies. These include software providers to whomwe provide our SubscribeNet service, as well as Software Spectrum, to whom weprovide both our SubscribeNet service and sales and marketing services. Ourcontracts with most of these companies are subject to renewal or cancellationannually. If any of these companies elected to cancel their agreements with us,our revenue growth would likely slow or our revenues might decline.Either of these typesof events could reduce our sales through loss of existing customers, or reduceour margins through increased price competition.

 

**Mergers and acquisitions in the technology sector could harmus by causing cancellation of customer contracts where our customers areacquired, or by strengthening our competitors.**

 

Inrecent years, there has been an increase in mergers and acquisitions amongtechnology companies.  This trend posesrisks for us.  First, our customers aretechnology companies, and any acquisitions of our customers could lead tocancellation of our contracts with those customers by the acquiringcompanies.  This recently occurred whenOracle Corporation notified us of its cancellation of our contract with ourcustomer PeopleSoft, Inc., after Oracle acquired PeopleSoft. (Thiscontract accounted for less than 3% of our total annual revenues for our 2005fiscal year.) Second, our competitors also are technology companies.  Any acquisitions of other companies by ourcompetitors, or acquisitions of our competitors by other companies, are likelyto result in stronger companies competing against us.

 

**Our prospective customers may delay purchasing, and our newcustomers may delay implementing, our SubscribeNet service while they assesstheir internal controls in preparation for compliance with Section 404 ofthe Sarbanes-Oxley Act of 2002.  This maydelay our revenue growth.**

 

Section 404of the Sarbanes-Oxley Act of 2002 requires most publicly traded companies toinclude in their annual reports an assessment by management of the companies’internal control structures and procedures for financial reporting, and anattestation by the companies’ independent registered public accounting

 

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firmsof that management assessment. To comply with this new requirement, many publiccompanies are preparing detailed documentation of their information technology(“IT”) systems supporting their internal control structures andprocedures.  To minimize their risk of error, these companies may bereluctant to add new IT systems until their Section 404 assessments arecomplete and have been filed with the SEC as part of their annualreports.  As a result, prospective purchasers of our SubscribeNet servicemay delay completing their purchases of the service, and new SubscribeNetcustomers may delay implementing the service, while they complete the Section 404assessments over the next several months.  This could, in turn, causedelays in new sales of our SubscribeNet service and/or delays in recognition ofrevenue from recent sales of our service.

 

**We have a history of losses and negative cash flow, and wehave yet to achieve sustained profitability or positive cash flow.**

 

Wehave incurred significant losses since we were formed in 1996, and have yet toachieve sustained profitability or positive cash flow. As of February 28,2005, we had an accumulated deficit of approximately $156 million. Also,with the exception of our quarter ended November 30, 2002, we have notachieved positive cash flow from operations since our formation in 1996. Ouroperating history makes it difficult to evaluate whether or when we will beable to achieve sustained profitability or positive cash flow in the future.

 

**Competition from other digital delivery service providers,and potential customers’ development of their own digital delivery systems,could limit our revenue growth and reduce our gross margins.**

 

Themarket for selling digital delivery services is highly competitive.  Someof our competitors have longer operating histories, greater financial,technical, marketing and other resources, broader product and serviceofferings, better name recognition, and a larger installed base of customersthan we do. Some of our competitors also have well-established relationshipswith our potential customers and with third-party information technology orconsulting firms that help market our competitors’ services. We expectcompetition to intensify as current competitors expand and improve theirservice offerings and new competitors enter the market. In addition, ourcurrent and potential customers are primarily information technology companieswith strong software development expertise. When considering their alternativesfor implementing a system for electronic delivery of software or license keys,these companies sometimes elect to develop such systems in-house. While webelieve our competitive position is strong against both external competitorsand in-house development, we have at times experienced reduced prices, reducedgross margins and lost sales as a result of such competitive factors. Suchcompetition is likely to intensify, which could limit the growth of ourrevenues or gross margins.

 

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**Although our subscription-based sales model for ourSubscribeNet service limits the volatility of our Online services andtechnology revenue, other factors may cause our operating results, andtherefore our stock price, to fluctuate.**

 

OurSubscribeNet service fees, which comprise most of our Online services andtechnology revenues, are recognized ratably over contract terms of generallyone year, thereby limiting the quarter-to-quarter volatility of those revenues. Nevertheless, certain factors may cause our Online services andtechnology revenues to fluctuate.  In addition, our Alliance andreimbursement revenues and overall operating results are subject to substantialquarterly and annual fluctuation.  In addition to the other risk factorsdescribed in this section, factors that could cause such fluctuation include:

 

•      Fluctuations in demand for the software weresell jointly with Software Spectrum, which is the basis for most of ourAlliance and reimbursement revenue and a portion of our Online servicesand technology revenue;

 

•      Deferral of SubscribeNet revenuerecognition due to delays by customers in implementing the SubscribeNetservice, due to new sales involving extensive implementations, or due tocontract modifications adding future deliverables;

 

•      Lengthening of the sales cycle for ourSubscribeNet service due to macroeconomic or other factors;

 

•      Actual events, circumstances, outcomes,and amounts differing from judgments, assumptions, and estimates used indetermining the values of certain assets (including the amounts of relatedvaluation allowances), liabilities and other items reflected in ourconsolidated financial statements or unaudited interim consolidated financialinformation; and

 

•      Changes in accounting rules, such asrecording expenses for employee stock option grants.

 

Asa consequence, operating results for a particular future period are difficultto predict, and prior results are not necessarily indicative of results to beexpected in future periods. Any of the foregoing factors, or any other factorsdiscussed elsewhere herein, could have a material adverse effect on ourbusiness, results of operations, or financial condition that could adverselyaffect our stock price.

 

**If thebid price of our stock does not close at or above $1.00 for 10 consecutivebusiness days before August 22, 2005, or before February 22, 2006 ifour compliance period is extended, our stock may be delisted from the NasdaqSmallCap Market.**

 

On February 23, 2005,we received a letter from The Nasdaq Stock Market indicating that, for 30consecutive business days, the bid price of our stock had closed below theminimum $1.00 per share requirement for continued listing on the NasdaqSmallCap Market and that, in accordance with NASD rules, we had 180 calendardays to regain compliance.  The letter also stated that if, at any timebefore August 22, 2005, the bid price of our stock closes at $1.00 pershare or more for a minimum of 10 consecutive business days, Nasdaq will notifyus that we comply with the listing requirements.  If we do not regain compliance by August 22,2005, we may be granted an additional 180-day period (until February 22,2006) to regain compliance if we meet The Nasdaq SmallCap Market initiallisting criteria other than the minimum bid price requirement.  If we do notregain compliance within the allotted compliance period (including anyextensions that may be granted by Nasdaq), Nasdaq staff will notify us that ourstock will be delisted from The Nasdaq SmallCap Market.  At thattime,  we would be entitled to appeal the staff’s determination to aNasdaq Listing Qualifications Panel. We are currently reviewing whatactions we should take to regain compliance with the minimum bid price rule.

 

If our stock were delisted,it would become harder to buy and sell. Further, our stock could thenpotentially be subject to what are known as the “penny stock”

 

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rules, which place additional requirements on broker-dealerswho sell or make a market in such securities. Consequently, if we were removedfrom the Nasdaq SmallCap Market, the ability or willingness of broker-dealersto sell or make a market in our stock might decline. As a result, it couldbecome more difficult for our shareholders to sell their shares of our stock.

 

**The market for our technology delivery model and hosteddigital delivery services is immature and volatile, and if it does not developor develops more slowly than we expect, our business will be harmed.**

 

Themarket for hosted digital delivery services is relatively new and unproven, andit is uncertain whether these services will achieve and sustain high levels ofdemand and market acceptance. Our success will depend to a substantial extenton the willingness of software companies, large and small, to increase theiruse of hosted digital delivery services. Many software companies have investedsubstantial personnel and financial resources to develop their own digitaldelivery systems and therefore may be reluctant or unwilling to migrate to aremotely hosted service. In addition, some software companies have adoptedautomatic update, or “phone home,” technology for delivering software updates,whereby an end-user’s computer automatically contacts the software company’sserver to check whether updates are available and, if so, downloads andinstalls those updates.  This method for delivering software updates couldbe viewed by our potential and existing customers as an alternative to ourdigital delivery technology, and therefore any increased adoption of this automaticupdate technology could hurt our business and results of operations. Further,some software companies may be reluctant to use hosted digital deliveryservices because they are concerned about the security capabilities of theseservices. If software companies do not perceive the benefits of hosted digitaldelivery services, then the market for these services may develop more slowlythan we expect, which would significantly adversely affect our operatingresults. In addition, in this unproven market, we have limited insight intotrends that may develop and affect our business. We may make errors inpredicting and reacting to relevant business trends, which could harm ourbusiness.

 

**The technological and functional requirements we must meet tostay competitive are subject to rapid change. If we are unable to quickly adaptto these changes and meet the demands of our current and potential customers,we will likely lose sales and market share and our revenue growth will belimited.**

 

Wemarket primarily to software providers, who generally demand that a servicelike ours meet high technological and functional standards. To remaincompetitive in this market and meet the demands of current and prospectivecustomers, we must continually adapt and upgrade our technology andfunctionality. If we do not respond quickly enough to changing industrystandards or the demands of customers and potential customers, we will likelylose sales and market share to competitors and our growth prospects will belimited. In addition, we could incur substantial costs to modify our servicesor infrastructure in order to adapt to changing standards and demands. If weincur such costs but our sales failto increase commensurately, we may not be able to achieve sustainedprofitability and positive operating cash flow.

 

**Defects in our SubscribeNet service could diminish demand forthe service and subject us to substantial liability.**

 

Becauseour service is complex, it may have errors or defects that users identify afterthey begin using it, which could harm our reputation and our business.Internet-based services frequently contain undetected errors when firstintroduced or when new versions or enhancements are released. Despite takingprecautions to avoid errors, we have from time to time found defects in ourservice and new errors in our existing service may be detected in the future.Since our customers use our service for important aspects of their business,any errors, defects or other performance problems with our service could hurt ourreputation and may damage our customers’ businesses. If that occurs, customerscould elect not to renew their agreements with us, could be eligible forcredits under our service level agreements, and could delay or withhold paymentto us.  We could also lose future sales, or customers may make warrantyclaims against us, which could result in an increase in our provision fordoubtful accounts, an increase in collection cycles for accounts receivable orthe expense and risk of litigation.

 

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**Interruptions or delays in service from our third-party Webhosting facilities could impair the delivery of our service and harm ourbusiness.**

 

Weprovide our service through computer hardware that is currently located in athird-party Web hosting facilities in Santa Clara, California operated bySAVVIS Communications, and in Ireland operated by Data Electronics. We do notcontrol the operation of these facilities, and they are subject to damage orinterruption from earthquakes, floods, fires, power loss, telecommunicationsfailures and similar events. While physical security measures are in place,they are also subject to break-ins, sabotage, intentional acts of vandalism andsimilar misconduct. Despite precautions taken at the facilities, the occurrenceof a natural disaster, a decision to close a facility without adequate noticeor other unanticipated problems at a facility could result in lengthyinterruptions in our service. In addition, the failure by either facility toprovide our required data communications capacity could result in interruptionsin our service. We have an agreement with SBC E-Services, an affiliate of SBCCommunications, Inc., to provide access to a geographically remotedisaster recovery facility that would provide us access to hardware, softwareand Internet connectivity in the event the SAVVIS facility becomes unavailable.Even with this disaster recovery arrangement, however, our service would beinterrupted during the transition. Any damage to, or failure of, our systemscould result in interruptions in our service. Interruptions in our service mayreduce our revenue, cause us to issue credits or pay penalties, cause customersto terminate their subscriptions and adversely affect our renewal rates. Ourbusiness will be harmed if our customers and potential customers believe ourservice is unreliable.

 

**Viruses may hinder acceptance of Internet-based digitaldelivery, which could in turn limit our revenue growth.**

 

Theproliferation of software viruses is a key risk that could inhibit acceptanceby information technology professionals of Web-based delivery of digital goods. Any well-publicized transmission of a computer virus by us or anothercompany using digital delivery could deter information technology professionalsfrom using and deter software providers from outsourcing digital delivery,thereby adversely affecting our business. Our SubscribeNet service enables ourcustomers to upload their software products directly onto our systems for downloadingby their end-users. Our systems automatically scan our customers’ softwareproducts for known computer viruses on an ongoing basis while they are on oursystems. However, it is possible that, in spite of those periodic virus scans,our system could transmit the virus to one or more end-users. Any such virustransmission could result in disputes, litigation and negative publicity thatcould adversely affect our business.

 

**If our security measures are breached and unauthorized accessis obtained to a customer’s data, our service may be perceived as not beingsecure and customers may curtail or stop using our service.**

 

Ourservice involves the storage and transmission of customers’ proprietaryinformation, and security breaches could expose us to a risk of loss of thisinformation, litigation and possible liability. If our security measures arebreached as a result of third-party action, employee error, malfeasance orotherwise, and, as a result, someone obtains unauthorized access to one of ourcustomers’ data, our reputation will be damaged, our business may suffer and wecould incur significant liability. Because techniques used to obtainunauthorized access or to sabotage systems change frequently and generally arenot recognized until launched against a target, we may be unable to anticipatethese techniques or to implement adequate preventative measures. If an actualor perceived breach of our security occurs, the market perception of theeffectiveness of our security measures could be harmed and we could lose salesand customers.

 

**We may raise additional capital to fund acquisitions, productdevelopment or general operations. Any such capital financing would dilute ourshareholders’ investments.**

 

Wemay raise additional capital in the future through private or public offeringsof stock, or through other means. The purposes of any such financing would beto increase our cash reserves for potential use in acquiring other businesses,product development activities, funding our operations and

 

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generallystrengthening our balance sheet. Any such additional financing would likelydilute the investments of our current shareholders.

 

**Additional government regulations may harm demand for ourservices and increase our costs of doing business.**

 

Ourbusiness has benefited from the tax laws of states in which purchases ofsoftware licenses are not taxable if the software is received onlyelectronically. Some states currently experiencing revenue shortfalls are consideringwhether to change their laws to broaden the taxability of transactions executedover the Internet. Any new imposition of taxes on sales of software licenses,where the software is received electronically, could substantially harm demandfor our services and thereby materially adversely affect our business,operating results and financial condition. We have also benefited fromimplementing our services in Ireland, which offers tax advantages to softwarecompanies distributing their software from Ireland to other European countries.Any regulatory change in Ireland or elsewhere that diminishes those advantagescould harm our business. Other changes in government regulations, in areas suchas privacy and export compliance, could also require us to implement changes inour services or operations that increase our cost of doing business and therebyhurt our financial performance.

 

**Claims by third parties for intellectual propertyinfringement could force us to stop selling our services, force us to pay royalties,and force us to indemnify our customers.**

 

Ourbusiness involves a high risk that we will be the target of intellectualproperty infringement claims.  These claims could take a number of forms,including:

 

•      Claims by other technology companies allegingthat current or future components of our digital delivery service or relatedservices infringe their intellectual property rights;

 

•      Claims by our customers’ competitorsalleging that our customers’ software, which we store and electronicallydeliver for our customers, infringes those competitors’ intellectual propertyrights (our customers would typically be required to defend and indemnify usagainst such claims, but the claims could nevertheless disrupt our business);or

 

•      Claims by our customers that we deliveredtheir software to unauthorized third parties, thereby infringing our customers’intellectual property rights.

 

Industryconsolidation is increasing the risk that we will become a target of the typesof claims described in the first two bullets above.  Consolidation amongcompanies providing digital delivery, licensing, e-commerce and relatedtechnologies is resulting in more direct competition among the survivingcompanies in that segment, heightening the risk of intellectual property infringementclaims among thosecompanies,including us.  Similarly, consolidation in the enterprise softwareindustry heightens the risk of intellectual property infringement claims amongthe companies remaining in that industry, including most of our customers.

 

Theseintellectual property claims could be made for patent, copyright or trademarkinfringement or for misappropriation of trade secrets.  They could be madedirectly against us, or indirectly through our contractual indemnificationobligations to our customers and channel partners.  Any claims couldresult in costly litigation and be time-consuming to defend, divert management’sattention and resources, or cause delays in releasing new or upgrading existingservices. Royalty or licensing agreements, if required, may be available onlyon onerous terms, if at all.  Although we carry general liabilityinsurance, our insurance may not cover all potential claims or may not beadequate to protect us from all liability that may be imposed.

 

Webelieve we own the rights in, or have the required rights to use, ourSubscribeNet technology.  However, there can be no assurance that thistechnology does not infringe the rights of third parties.  In addition, wetake steps to verify that end-users who download our customers’ softwarethrough our SubscribeNet service are entitled to deploy and use that software.However, there can be no assurance that

 

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thisverification procedure will help us defend against claims by, or protect usagainst liability to, our customers whose software is downloaded.

 

Weare aware that certain other companies are using the name “Intraware” as acompany name or as a trademark or service mark. While we have received nonotice of any claims of trademark infringement from any of those companies, wecannot assure you that these companies may not claim superior rights to “Intraware”or to other marks we use.

 

**If our export compliance system fails to prevent unauthorizedexports of our customers’ software, we could be sanctioned by the U.S.government.**

 

Throughour SubscribeNet service we globally distribute software containing highencryption and other features restricted by U.S. laws and regulations fromexportation to certain countries, types of recipients, and specific end-users.Our SubscribeNet solution incorporates automated procedures to help ensure thatthe software we deliver electronically is not downloaded in violation of U.S.export laws and regulations. However, these procedures may not preventunauthorized exports of restricted software in every case. If an unauthorizedexport of software occurs through the SubscribeNet service and the U.S.government determines that we violated the U.S. export laws or regulations, wecould be sanctioned under those laws or regulations. Sanctions include fines,suspension or revocation of export privileges, and imprisonment.

 

**If our key personnel left the company, our productdevelopment, sales, and corporate management could suffer.**

 

Ourfuture success depends upon the continued service of our executive officers andother key technology, sales, marketing and support personnel. None of ourofficers or key employees is bound by an employment agreement for any specificterm. If we lost the services of one or more of our key employees, or if one ormore of our executive officers or key employees decided to join a competitor orotherwise compete directly or indirectly with us, this could have a significantadverse effect on our business.

 

**Financial Accounting Standards Board (“FASB”)’s adoption ofStatement 123 (Revised 2004) will cause, and changes to existingaccounting pronouncements or taxation rules or practices may cause,adverse revenue fluctuations and affect our reported results of operations andhow we conduct our business.**

 

In October 2004,FASB adopted Statement 123 (Revised 2004), “Share-Based Payment,” which willrequire us to measure compensation costs for all stock based compensation(including stock options and our employee stock purchase plan) at fair valueand take a compensation charge equal to that value.  The SEC has amended the deadline to adopt SFASNo. 123R.  As a result, we will berequired to adopt the provisions of SFAS No. 123R during the first quarter ofour fiscal year ending February 28, 2007. Also, a change in accounting pronouncements or taxation rules orpractices can have a significant effect on our reported results and may evenaffect our reporting of transactions completed before the change is effective.Other new accounting pronouncements or taxation rules and varyinginterpretations of accounting pronouncements or taxation practice have occurredand may occur in the future. This change to existing rules, future changes, ifany, or the questioning of current practices may adversely affect our reportedfinancial results or the way we conduct our business.

 

**Recent legislation, especially the Sarbanes Oxley Act of2002, requires that we evaluate our internal controls, and while we believethat we currently have adequate internal control procedures in place, thisexercise has no precedent available by which to measure the adequacy of ourcompliance, and in addition it may also cause our operating expenses toincrease.**

 

TheSarbanes-Oxley Act of 2002, the California Disclosure Act and newly proposed orenacted rules and regulations of the SEC and the National Association ofSecurities Dealers impose new duties on us and our executives, directors,attorneys and independent accountants. In order to comply with theSarbanes-Oxley Act and such new rules and regulations, we are evaluatingour internal controls systems to allow management to report on, and ourindependent registered public accounting firm to attest to, our internalcontrols. We are performing the system and process evaluation and testing (andany necessary

 

37

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remediation)required in an effort to comply with the management certification and independentregistered public accounting firm attestation requirements of Section 404of the Sarbanes-Oxley Act. As a result, we are incurring additional expensesand diversion of management’s time and we may be required to hire additionalpersonnel as well as to use additional outside legal, accounting and advisoryservices. Any of these developments could materially increase our operatingexpenses and accordingly reduce our net income or increase our net losses.While we anticipate being able to fully implement the requirements relating tointernal controls and all other aspects of Section 404 in a timelyfashion, we cannot be certain as to the outcome of our testing and resultingremediation actions or the impact of the same on our operations since there isno precedent available by which to measure compliance adequacy. If we are notable to implement the requirements of Section 404 in a timely manner orwith adequate compliance, we may be subject to sanctions or investigation byregulatory authorities, such as the SEC or The Nasdaq Stock Market and ourreputation may be harmed. Any such action could adversely affect our financialresults and the market price of our common stock.

 

Moreover,our management, including our CEO and CFO, does not expect that our disclosurecontrols or our internal controls will prevent all error and all fraud. Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. Our disclosure controls or procedures can be circumvented by theindividual acts of some persons, by collusion of two or more people or bymanagement override of the control. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

 

**If we acquire any companies or technologies in the future,they could prove difficult to integrate, disrupt our business, dilutestockholder value and adversely affect our operating results.**

 

Wemay acquire or make investments in complementary companies, services andtechnologies in the future. We are considerably smaller now than we were whenwe made our past acquisitions, and therefore any new acquisitions orinvestments could be more disruptive to our organization than in the past.Acquisitions and investments involve numerous risks, including:

 

•      difficulties in integrating operations,technologies, services and personnel;

 

•      diversion of financial and managerialresources from existing operations;

 

•      risk of entering new markets;

 

•      potential write-offs of acquired assets;

 

•      potential loss of key employees;

 

•      inability to generate sufficient revenueto offset acquisition or investment costs; and

 

•      delays in customer purchases due touncertainty.

 

Inaddition, if we finance acquisitions by issuing convertible debt or equitysecurities, our existing stockholders may be diluted which could affect themarket price of our stock. As a result, if we fail to properly evaluate andexecute acquisitions or investments, our business and prospects may beseriously harmed.

 

**ITEM 7A****.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

At the end of fiscal year2005, we had cash and cash equivalents of $9.5 million. We have not usedderivative financial instruments in our investment portfolio during fiscal year2005. We place our

 

38

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investments with highquality issuers, by policy, in an effort to limit the amount of credit exposureto any one issue or issuer.  All of oursales are in United States Dollars.

 

Our exposure to market riskfor changes in interest rates relates primarily to our cash and cashequivalents portfolio.  The effect ofchanges in interest rates of +/-10% over a six-month horizon would not have amaterial effect on the fair value of the portfolio.  Any declines in interest rates over time will,however, reduce our interest income.

 

**ITEM8**.          FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.

 

**Index**

 
| ** **                                               | **Page** |
|----------------------------------------------------------|----------|
| Report  of Independent Registered Public Accounting Firm | 40       |
| Consolidated Balance Sheets                              | 41       |
| Consolidated  Statements of Operations                   | 42       |
| Consolidated  Statement of Stockholders’ Equity     | 43       |
| Consolidated  Statements of Cash Flows                   | 44       |
| Notes to  Consolidated Financial Statements              | 45       |

 

39

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**Report ofPricewaterhouse LLP, Independent Registered Public Accounting Firm**

 

**Report of Independent Registered Public Accounting Firm**

 

To the Board ofDirectors and Stockholders

of Intraware,Inc:

 

In ouropinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of operations, of shareholders’ equity and of cashflows present fairly, in all material respects, the financial position ofIntraware, Inc. and its subsidiaries at February 28, 2005 and February 29,2004, and the results of their operations and their cash flows for each of thethree years in the period ended February 28, 2005 in conformity with accountingprinciples generally accepted in the United States of America.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.  Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

PricewaterhouseCoopersLLP

 

San Jose,California

April 15, 2005

 

40

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**INTRAWARE, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(in thousands, except for per share amounts)**

 
| ** **                                                                                                                                                                                                   | ** ** | **February 28,  2005** | ** ** | **February 29,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                   | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                              |       |                        |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                    |       | $                           | 9,463      |                        | $          | 11,804 |   |
| Accounts receivable, net                                                                                                                                                                                     |       | 1,765                       |       | 1,462                       |       |
| Cost of deferred revenue and prepaid  licenses and services                                                                                                                                                  |       | 404                         |       | 214                         |       |
| Other current assets                                                                                                                                                                                         |       | 321                         |       | 317                         |       |
| Total current assets                                                                                                                                                                                         |       | 11,953                      |       | 13,797                      |       |
| Cost of deferred revenue, less current  portion                                                                                                                                                              |       | 70                          |       | 43                          |       |
| Property and equipment, net                                                                                                                                                                                  |       | 863                         |       | 897                         |       |
| Other assets                                                                                                                                                                                                 |       | 80                          |       | 33                          |       |
| Total assets                                                                                                                                                                                                 |       | $                           | 12,966     |                        | $          | 14,770 |   |
|                                                                                                                                                                                                         |       |                        |       |                        |       |
| **LIABILITIES, REDEEMABLE CONVERTIBLE  PREFERRED STOCK & STOCKHOLDERS’ EQUITY**                                                                                                                | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                                                                         |       |                        |       |                        |       |
| Notes payable                                                                                                                                                                                                |       | $                           | 823        |                        | $          | 1,034 |   |
| Accounts payable                                                                                                                                                                                             |       | 464                         |       | 577                         |       |
| Accrued liabilities                                                                                                                                                                                          |       | 967                         |       | 928                         |       |
| Deferred revenue                                                                                                                                                                                             |       | 2,450                       |       | 2,035                       |       |
| Related party deferred revenue                                                                                                                                                                               |       | 2                           |       | 648                         |       |
| Total current liabilities                                                                                                                                                                                    |       | 4,706                       |       | 5,222                       |       |
| Deferred revenue, less current portion                                                                                                                                                                       |       | 164                         |       | 295                         |       |
| Notes payable, less current portion                                                                                                                                                                          |       | 342                         |       | 766                         |       |
| Total liabilities                                                                                                                                                                                            |       | 5,212                       |       | 6,283                       |       |
| Commitments and contingencies (Note 5)                                                                                                                                                                       |       |                        |       |                        |       |
| Redeemable convertible preferred stock;  $0.0001 par value; 10,000 shares authorized:                                                                                                                        |       |                        |       |                        |       |
| Series A; 552 shares issued and  outstanding at February 28, 2005 and February 29, 2004, (aggregate  liquidation preference of $1,000 at February 28, 2005 and  February 29, 2004). |       | 897                         |       | 897                         |       |
| Total redeemable convertible preferred  stock                                                                                                                                                                |       | 897                         |       | 897                         |       |
| Stockholders’ equity:                                                                                                                                                                                   |       |                        |       |                        |       |
| Common stock; $0.0001 par value; 250,000  shares authorized; 60,447 and 59,504 shares issued and outstanding at  February 28, 2005 and February 29, 2004, respectively.                            |       | 6                           |       | 6                           |       |
| Additional paid-in-capital                                                                                                                                                                                   |       | 163,168                     |       | 162,043                     |       |
| Accumulated deficit                                                                                                                                                                                          |       | (156,317                    | )          | (154,459                    | )          |
| Total stockholders’ equity                                                                                                                                                                              |       | 6,857                       |       | 7,590                       |       |
| Total liabilities, redeemable convertible  preferred stock and stockholders’ equity                                                                                                                     |       | $                           | 12,966     |                        | $          | 14,770 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

41

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**INTRAWARE, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except for per share amounts)**

 
| ** **                                          | ** ** | **For the Years Ended**    | ** ** |
|-----------------------------------------------------|------------|----------------------------|------------|
| ** **                                          | ** ** | **February 28, 2005** | ** ** | **February 29, 2004** | ** ** | **February 28, 2003** | ** ** |
|                                                |       |                       |       |   |   |   |   |
| Revenues:                                           |       |                       |       |   |   |   |   |
| Online services and technology                      |       | $                          | 7,816      |   | $ | 6,768 |   | $ | 6,872 |   |
| Alliance and reimbursement                          |       | 2,431                      |       | 3,311 |   | 4,271 |   |
| Related party online services and  technology       |       | 546                        |       | 466 |   | 277 |   |
| Software product sales                              |       | 42                         |       | 362 |   | 2,622 |   |
| Total revenues                                      |       | 10,835                     |       | 10,907 |   | 14,042 |   |
| Cost of revenues:                                   |       |                       |       |   |   |   |   |
| Online services and technology                      |       | 3,009                      |       | 2,339 |   | 2,385 |   |
| Alliance and reimbursement                          |       | 1,523                      |       | 1,814 |   | 2,023 |   |
| Software product sales                              |       | 37                         |       | 307 |   | 1,972 |   |
| Total cost of revenues                              |       | 4,569                      |       | 4,460 |   | 6,380 |   |
| Gross profit                                        |       | 6,266                      |       | 6,447 |   | 7,662 |   |
| Operating expenses:                                 |       |                       |       |   |   |   |   |
| Sales and marketing                                 |       | 2,892                      |       | 2,616 |   | 5,430 |   |
| Product development                                 |       | 1,531                      |       | 2,733 |   | 6,184 |   |
| General and administrative                          |       | 3,767                      |       | 3,368 |   | 3,017 |   |
| Restructuring                                       |       | (75                        | )          | — |   | 1,239 |   |
| (Gain) loss on disposal of assets                   |       | 47                         |       | (14 | ) | — |   |
| Amortization of intangibles                         |       | —                     |       | — |   | 1,085 |   |
| Impairment of assets                                |       | —                     |       | — |   | 792 |   |
| Loss on abandonment of assets                       |       | —                     |       | — |   | 128 |   |
| Total operating expenses                            |       | 8,162                      |       | 8,703 |   | 17,875 |   |
| Loss from operations                                |       | (1,896                     | )          | (2,256 | ) | (10,213 | ) |
| Interest expense                                    |       | (101                       | )          | (206 | ) | (2,650 | ) |
| Interest and other income and expenses, net         |       | 139                        |       | 82 |   | 544 |   |
| Gain on sale of Asset Management software  business |       | —                     |       | — |   | 2,656 |   |
| Net loss                                            |       | $                          | (1,858     | ) | $ | (2,380 | ) | $ | (9,663 | ) |
| Basic and diluted net loss per share                |       | $                          | (0.03      | ) | $ | (0.04 | ) | $ | (0.20 | ) |
| Weighted average shares - basic and diluted         |       | 60,127                     |       | 55,910 |   | 47,722 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

42

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**INTRAWARE, INC.**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**(in thousands)**

 
| ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Unearned  Stock-Based  Compensation** | ** ** | **Accumulated  Deficit** | ** ** | **Stockholders’  Equity** | ** ** | **Comprehensive  Loss** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------------------------------|------------|-----------------------------------------|------------|--------------------------|------------|--------------------------------|------------|-------------------------|------------|
| **Common Stock**                                                                    |
| **Shares**                                                                          | ** ** | **Amount** |
| Balance at February 28, 2002                                                   |       | 40,447     |       | $          | 4          |                             | $          | 144,140                                 |       | $                        | (1,618     | )                              | $          | (142,416                | )          | $ | 110 |   |   |   |
| Exercise of stock options and warrants, net  of repurchase of unvested common stock |       | 399        |       | —     |       | 389                              |       | —                                  |       | —                   |       | 389                            |       |                    |       |
| Issuance of common stock for employee stock  purchase program                       |       | 214        |       | —     |       | 139                              |       | —                                  |       | —                   |       | 139                            |       |                    |       |
| Deferred stock-based compensation for  forfeited options                            |       | —     |       | —     |       | (544                             | )          | 544                                     |       | —                   |       | —                         |       |                    |       |
| Issuance of common stock with warrants, net  of issuance costs of $727              |       | 8,738      |       | 1          |       | 5,840                            |       | —                                  |       | —                   |       | 5,841                          |       |                    |       |
| Conversion of notes payable to common  stock, net of issuance costs of $210         |       | 1,300      |       | —     |       | 1,078                            |       | —                                  |       | —                   |       | 1,078                          |       |                    |       |
| Reclassification of warrants to equity                                              |       | —     |       | —     |       | 891                              |       | —                                  |       | —                   |       | 891                            |       |                    |       |
| Amortization of unearned stock-based  compensation                                  |       | —     |       | —     |       | —                           |       | 1,042                                   |       | —                   |       | 1,042                          |       |                    |       |
| Conversion of preferred stock into common  stock                                    |       | 1,003      |       | —     |       | 874                              |       | —                                  |       | —                   |       | 874                            |       |                    |       |
| Options issued for services                                                         |       | —     |       | —     |       | 63                               |       | —                                  |       | —                   |       | 63                             |       |                    |       |
| Net loss                                                                            |       | —     |       | —     |       | —                           |       | —                                  |       | (9,663                   | )          | (9,663                         | )          | $                       | (9,663     | ) |
| Other comprehensive loss                                                            |       |       |       |       |       |                             |       |                                    |       |                     |       |                           |       | —                  |       |
| Total comprehensive loss                                                            |       |       |       |       |       |                             |       |                                    |       |                     |       |                           |       | $                       | (9,663     | ) |
|                                                                                |       |       |       |       |       |                             |       |                                    |       |                     |       |                           |       |                    |       |
| Balance at February 28, 2003                                                   |       | 52,101     |       | 5          |       | 152,870                          |       | (32                                     | )          | (152,079                 | )          | 764                            |       |                    |       |
| Exercise of stock options                                                           |       | 1,317      |       | —     |       | 1,309                            |       | —                                  |       | —                   |       | 1,309                          |       |                    |       |
| Issuance of common stock for employee stock  purchase program                       |       | 183        |       | —     |       | 125                              |       | —                                  |       | —                   |       | 125                            |       |                    |       |
| Issuance of common stock, net of issuance  costs of $89                             |       | 4,000      |       | 1          |       | 6,111                            |       | —                                  |       | —                   |       | 6,112                          |       |                    |       |
| Amortization of unearned stock-based  compensation                                  |       | —     |       | —     |       | —                           |       | 28                                      |       | —                   |       | 28                             |       |                    |       |
| Deferred stock-based compensation for  options forfeited                            |       | —     |       | —     |       | (4                               | )          | 4                                       |       | —                   |       | —                         |       |                    |       |
| Issuance of warrant to purchase common  stock in connection with note payable       |       | —     |       | —     |       | 46                               |       | —                                  |       | —                   |       | 46                             |       |                    |       |
| Conversion of preferred stock and warrants  into common stock                       |       | 1,903      |       | —     |       | 1,586                            |       | —                                  |       | —                   |       | 1,586                          |       |                    |       |
| Net loss                                                                            |       | —     |       | —     |       | —                           |       | —                                  |       | (2,380                   | )          | (2,380                         | )          | $                       | (2,380     | ) |
| Other comprehensive loss                                                            |       |       |       |       |       |                             |       |                                    |       |                     |       |                           |       | —                  |       |
| Total comprehensive loss                                                            |       |       |       |       |       |                             |       |                                    |       |                     |       |                           |       | $                       | (2,380     | ) |
|                                                                                |       |       |       |       |       |                             |       |                                    |       |                     |       |                           |       |                    |       |
| Balance at February 29, 2004                                                   |       | 59,504     |       | 6          |       | 162,043                          |       | —                                  |       | (154,459                 | )          | 7,590                          |       |                    |       |
| Exercise of stock options                                                           |       | 401        |       | —     |       | 404                              |       | —                                  |       | —                   |       | 404                            |       |                    |       |
| Issuance of common stock for employee stock  purchase program                       |       | 195        |       | —     |       | 230                              |       | —                                  |       | —                   |       | 230                            |       |                    |       |
| Conversion of warrants into common stock                                            |       | 347        |       | —     |       | 491                              |       | —                                  |       | —                   |       | 491                            |       |                    |       |
| Net loss                                                                            |       | —     |       | —     |       | —                           |       | —                                  |       | (1,858                   | )          | (1,858                         | )          | $                       | (1,858     | ) |
| Other comprehensive loss                                                            |       |       |       |       |       |                             |       |                                    |       |                     |       |                           |       | —                  |       |
| Total comprehensive loss                                                            |       |       |       |       |       |                             |       |                                    |       |                     |       |                           |       | $                       | (1,858     | ) |
|                                                                                |       |       |       |       |       |                             |       |                                    |       |                     |       |                           |       |                    |       |
| Balance at February 28, 2005                                                   |       | 60,447     |       | $          | 6          |                             | $          | 163,168                                 |       | $                        | —     |                           | $          | (156,317                | )          | $ | 6,857 |   |   |   |
|                                                                                     |            |            |            |            |            |                                  |            |                                         |            |                          |            |                                |            |                         |            |  |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

43

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**INTRAWARE, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

 
| ** **                                                                   | ** ** | **For the Years Ended**    | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                   | ** ** | **February 28, 2005** | ** ** | **February 29, 2004** | ** ** | **February 28, 2003** | ** ** |
| Cash flows from operating activities:                                        |       |                       |       |   |   |   |   |
| Net loss                                                                     |       | $                          | (1,858     | ) | $ | (2,380 | ) | $ | (9,663 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                       |       |   |   |   |   |
| Depreciation and amortization                                                |       | 591                        |       | 1,580 |   | 3,830 |   |
| Amortization of goodwill and intangibles                                     |       | —                     |       | — |   | 1,085 |   |
| Amortization of unearned compensation                                        |       | —                     |       | 28 |   | 1,042 |   |
| Provision for (reduction of) doubtful  accounts                              |       | (23                        | )          | (73 | ) | 28 |   |
| Loss (gain) on sale of fixed assets                                          |       | 47                         |       | (14 | ) | (1 | ) |
| Gain on sale of Asset Management software  business                          |       | —                     |       | — |   | (2,656 | ) |
| Warrants adjustment to fair value                                            |       | —                     |       | — |   | (460 | ) |
| Amortization of discount on note payable                                     |       | 21                         |       | 22 |   | 1,845 |   |
| Impairment of assets                                                         |       | —                     |       | — |   | 792 |   |
| Loss on abandonment of assets                                                |       | —                     |       | — |   | 128 |   |
| Amortization of warrant charge offset  against revenue                       |       | —                     |       | — |   | 936 |   |
| Options to purchase common stock issued for  services                        |       | —                     |       | — |   | 63 |   |
| Changes in assets and liabilities:                                           |       |                       |       |   |   |   |   |
| Accounts receivable                                                          |       | (280                       | )          | 132 |   | 1,168 |   |
| Prepaid licenses, services and cost of deferred  revenue                     |       | (217                       | )          | 109 |   | 2,679 |   |
| Other assets                                                                 |       | (43                        | )          | (1 | ) | 1,595 |   |
| Accounts payable                                                             |       | (205                       | )          | (149 | ) | (5,247 | ) |
| Accrued liabilities                                                          |       | 39                         |       | (261 | ) | (466 | ) |
| Deferred revenue                                                             |       | 284                        |       | (348 | ) | (1,897 | ) |
| Related party deferred revenue                                               |       | (646                       | )          | (100 | ) | — |   |
| Net cash used in operating activities                                        |       | (2,290                     | )          | (1,455 | ) | (5,199 | ) |
| Cash flows from investing activities:                                        |       |                       |       |   |   |   |   |
| Purchase of property and equipment                                           |       | (514                       | )          | (575 | ) | (554 | ) |
| Proceeds from sale of Asset Management  software business                    |       | —                     |       | — |   | 9,500 |   |
| Proceeds from sale of fixed assets                                           |       | 2                          |       | 14 |   | 7 |   |
| Net cash provided by (used in) investment  activities                        |       | (512                       | )          | (561 | ) | 8,953 |   |
|                                                                         |       |                       |       |   |   |   |   |
| Cash flows from financing activities:                                        |       |                       |       |   |   |   |   |
| Proceeds from notes and warrants, net of  issuance costs                     |       | 426                        |       | 2,237 |   | — |   |
| Principal payments on notes payable                                          |       | (1,082                     | )          | (413 | ) | (5,700 | ) |
| Proceeds from common stock and warrants,  net of issuance costs              |       | 1,117                      |       | 7,556 |   | 7,404 |   |
| Principal payments on capital lease  obligations                             |       | —                     |       | (2,401 | ) | (1,596 | ) |
| Net cash provided by financing activities                                    |       | 461                        |       | 6,979 |   | 108 |   |
| Net increase (decrease) in cash and cash  equivalents                        |       | (2,341                     | )          | 4,963 |   | 3,862 |   |
| Cash and cash equivalents at beginning of  the year                          |       | 11,804                     |       | 6,841 |   | 2,979 |   |
| Cash and cash equivalents at end of the  year                                |       | $                          | 9,463      |   | $ | 11,804 |   | $ | 6,841 |   |
|                                                                         |       |                       |       |   |   |   |   |
| Supplemental disclosure of cash flow  information:                           |       |                       |       |   |   |   |   |
| Cash paid for interest                                                       |       | $                          | 82         |   | $ | 177 |   | $ | 501 |   |
| Supplemental non-cash activity:                                              |       |                       |       |   |   |   |   |
| Property and equipment leases                                                |       | $                          | —     |   | $ | — |   | $ | 16 |   |
| Common stock issued for preferred stock  conversion and warrant exercises    |       | $                          | —     |   | $ | 1,575 |   | $ | 874 |   |
| Reclassification of warrants to equity                                       |       | $                          | —     |   | $ | — |   | $ | 891 |   |
| Notes payable converted to common stock and  warrants                        |       | $                          | —     |   | $ | — |   | $ | 1,078 |   |
| Purchases of property and equipment in  accounts payable                     |       | $                          | 92         |   | $ | 43 |   | $ | — |   |
| Issuance of warrants to purchase common  stock                               |       | $                          | —     |   | $ | 46 |   | $ | — |   |
| Shareholder receivable for common stock  purchases                           |       | $                          | 8          |   | $ | — |   | $ | — |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**INTRAWARE, INC.**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1.                DESCRIPTION OF BUSINESS ANDSIGNIFICANT ACCOUNTING POLICIES**

 

**Overview**

 

We were incorporated inDelaware on August 14, 1996. We are a leading provider of ESDM solutions.Our ESDM solutions help software publishers reduce operational and supportcosts, increase customer satisfaction and retention, accelerate and strengthenthe software revenue recognition processes, and comply with U.S. export regulations.We also offer complementary products and services, including enterprisesoftware sales and marketing, and global web-based content caching anddelivery.

 

We have incurred losses andnegative cash flows during each fiscal year since inception. For the year endedFebruary 28, 2005, we narrowed our net losses to approximately $1.9million.  Despite our improvements, wecontinued to experience recurring losses and negative cash flows fromoperations for the year ended February 28, 2005. Under our June 2001 agreementwith Software Spectrum, we provide Sales and Marketing Services to SoftwareSpectrum to assist in its resale and marketing of Sun and Websense softwarelicenses and maintenance. This contract accounted for more than 10% of ourtotal revenues in our 2005 fiscal year. The term of this agreement will expirein June 2005, is renewable for subsequent one-year terms, and may be terminatedwithout cause by either party on 90 days’ notice. It is possible that SoftwareSpectrum will terminate this agreement without cause or will choose not torenew the agreement at any renewal point. Any termination or non-renewal of ouragreement with Software Spectrum, or termination of Software Spectrum’s rightsto resell Sun software, would likely cause a substantial and immediate decreasein our revenues.  We believe that theeffects of our capital financing, strategic actions implemented to improverevenue, and cost controls will be adequate to generate sufficient cash resourcesto fund our future operations. However, if we fail to sufficiently increase ourrevenues or control spending, our business could be materially adverselyaffected.

 

**Principlesof Consolidation**

 

These consolidated financialstatements include our accounts and those of our wholly owned subsidiariesIntraware Canada, Inc. and Intraware Europe Limited. IntrawareCanada, Inc. was dissolved effective March 5, 2003. We haveeliminated all significant inter-company balances and transactions.

 

**Use ofEstimates**

 

The preparation ofconsolidated financial statements in conformity with generally acceptedaccounting principles in the United States of America requires management tomake estimates and assumptions that affect the amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and reported amounts of revenues andexpenses during the reporting period. Actual results could differ from thoseestimates.

 

**Cash, CashEquivalents and Short-Term Investments**

 

We consider all highlyliquid investments with an original maturity of three months or less whenpurchased to be cash equivalents.

 

We classify all of ourinvestments which are not cash and cash equivalents as “available-for-sale” andcarry them at fair market value. Changes in fair market value are recorded as acomponent of other comprehensive income until realized. Realized gains andlosses are determined based on the specific identification method and arereflected in interest and other income and expenses, net and any unrealizedgains and losses are reflected on the statement of stockholders’ equity asother comprehensive income/loss.

 

As of February 28, 2005and February 29, 2004, all of our investments were classified as cashequivalents.

 

**Concentrationof Credit Risk**

 

Financial instruments thatpotentially subject us to a concentration of credit risk consist of cash andcash equivalents and accounts receivable. Cash and cash equivalents aredeposited with high credit

 

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quality financialinstitutions. Deposits in these financial institutions may exceed the amount ofinsurance, if any, provided on such deposits. Our accounts receivable arederived from revenue earned from customers located primarily in the UnitedStates of America. We perform ongoing credit evaluations of our customers’financial condition and, generally, require no collateral from our customers.We maintain an allowance for doubtful accounts receivable based upon ourhistorical experience and the expected collectability of all accountsreceivable. We review our allowances by assessing individual accountsreceivable balances over a specific aging and/or amount, and all other balanceson an aggregate basis, based on historical collection experience.

 

For the years endedFebruary 28, 2005 and February 29, 2004, transactions with SoftwareSpectrum, Inc. accounted for approximately 30% and 41% of our totalrevenues, respectively. For the year ended February 28, 2003, twocustomers, Software Spectrum, Inc. and Sun Microsystems, Inc.accounted for approximately 33% and 18% of our revenues, respectively. For theyears ended February 28, 2005, February 29, 2004 andFebruary 28, 2003, no other customers accounted for more than 10% of theour total revenues. At February 28, 2005, two customers, SoftwareSpectrum, Inc. and Progress Software Corporation, accounted for 21% and10% of our accounts receivable balance, respectively. At February 29,2004, two customers, Software Spectrum, Inc. and Progress SoftwareCorporation, accounted for 39% and 15% of our accounts receivable balance,respectively.

 

**Fair Valueof Financial Instruments**

 

Our financial instruments,including cash and cash equivalents, accounts receivable, and accounts payable,are carried at cost, which approximates their fair value because of theshort-term maturity of these instruments. The reported amounts of bank borrowingsapproximate fair value due to the market value interest rate that these debtsbear.

 

**ForeignCurrency Translation**

 

The functional currency ofour foreign subsidiaries is the local currency. The financial statements ofthese subsidiaries are translated to United States dollars using period-endrates of exchange for assets and liabilities, and average rates of exchange forthe year for revenues and expenses. Translation gains (losses) are recorded inaccumulated other comprehensive loss as a component of stockholders’ equity andwere not significant during the periods presented. Net gains and lossesresulting from foreign exchange transactions are included in interest and otherincome and expenses, net and were not significant during the periods presented.

 

**Propertyand Equipment**

 

Property and equipment arestated at cost less accumulated depreciation and amortization. Equipment undercapital lease is capitalized at the present value of the future minimum leasepayments. We provide for depreciation and amortization by charges to expense,which are sufficient to recover the cost of the assets over their estimateduseful lives on a straight-line basis. Leasehold improvements and assetsacquired pursuant to capital leases are amortized over the lesser of the leaseterm or the estimated useful life of the improvement. Depreciation andamortization periods by principal classifications are as follows:

 
| Furniture and office equipment  |   | 5 years   |   |
|---------------------------------|--------|-----------|--------|
| Computer equipment and software |   | 3 years   |   |
| Leasehold improvements          |   | 1-5 years |   |

 

When assets are sold orotherwise disposed of, the cost and accumulated depreciation and amortizationare removed from the asset and accumulated depreciation and amortizationaccounts, respectively. Upon the disposition of property and equipment, theaccumulated depreciation and amortization is deducted from the original costand any gain or loss on that sale or disposal is credited or charged tooperating expenses.  For the years endedFebruary 28, 2005 and February 29, 2004, we recognized a gain/(loss)of ($47,000) and $14,000 on the disposal of assets, respectively.

 

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Maintenance, repairs, andminor renewals are charged to expense as incurred.

 

Expenditures thatsubstantially increase an asset’s useful life are capitalized.

 

**Long-LivedAssets**

 

We account for impairmentsof tangible long-lived assets in accordance with the provisions of Statement onFinancial Accounting Standards (SFAS) No. 144, “Accounting for Impairmentor Disposal of Long-Lived Assets.” An impairment review is performed wheneverevents or changes in circumstances indicate that the carrying value may not berecoverable. No such changes in circumstances have occurred to date. Factors weconsider important which could trigger an impairment review include, but arenot limited to, significant underperformance relative to historical orprojected future operating results, significant changes in the manner of use ofthe acquired assets or the strategy for our overall business, significantnegative industry or economic trends, a significant decline in our stock pricefor a sustained period, and our market capitalization relative to net bookvalue. When we determine that an impairment review is necessary based upon theexistence of one or more of the above indicators of impairment, we compare thebook value of such assets to the future undiscounted cash flows attributed tothose assets. If the book value is greater than the future undiscounted cashflows, we measure any impairment based on a projected discounted cash flowmethod using a discount rate commensurate with the risk inherent in our currentbusiness model.

 

**Goodwilland Intangible Assets**

 

Intangible assets arecarried at cost less accumulated amortization. Intangible assets are amortizedon a straight-line basis over the economic lives of the respective assets,generally one and a half to four years.

 

In accordance with Statementof Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and otherIntangible Assets,” goodwill amortization was discontinued as of March 1,2002, and $1.2 million of intangibles relating to assembled workforce wassubsumed into goodwill. SFAS 142 requires that goodwill be tested forimpairment at the reporting unit level (operating segment or one level below anoperating segment) on an annual basis and between annual tests in certaincircumstances. The performance of the test involves a two-step process. Thefirst step of the impairment test involves comparing the fair value of ourreporting units with the reporting unit’s carrying amount, including goodwill.If the carrying amount of our reporting units exceeds the reporting unit’s fairvalue, we perform the second step of the goodwill impairment test to determinethe amount of impairment loss. The second step of the goodwill impairment testinvolves comparing the implied fair value of our reporting unit’s goodwill withthe carrying amount of that goodwill. We completed our first phase impairmentanalysis during the quarter ended May 31, 2002, and found no instances ofimpairment. There were no goodwill or intangibles recorded at February 28,2005 and February 29, 2004, due to the inclusion of the remaining goodwillbalance in the determination of the gain on sale of our Asset Managementsoftware business during the quarter ended May 31, 2002 (seeNote 10).

 

The changes in the carryingamount of goodwill during year ended February 28, 2003, were as follows(in thousands):

 
| Balance at March 1, 2002                                                                                 |   | $      | 6,979  |   |
|---------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Goodwill included in the determination of  the gain related to the sale of Asset Management software business |   | (6,979 | )      |
| Balance as of February 28, 2003                                                                          |   | $      | — |   |

 

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**RevenueRecognition**

 

Online services andtechnology revenue results primarily from three types of arrangements. First, it results from sales of our SubscribeNet ESDM service to softwarevendors and other companies that distribute software as part of theirbusiness.  Second, it results from professional services that we provideto customize our SubscribeNet service for customers, to convert data forcustomers, and to integrate our proprietary software.  Third, it resultsfrom the sale of our proprietary software licenses and related maintenance tocompanies using those products internally or using those products to provideweb-based services to their customers. As a result of the sale of our AssetManagement software business in May 2002, we are not currently derivingrevenue from licenses, maintenance or integration services for our proprietarysoftware; however, we may recognize such revenues in the future ifopportunities arise to sell licenses for our proprietary software underlying ourSubscribeNet service and related maintenance. We sell our SubscribeNet service,and will sell proprietary software licenses if opportunities presentthemselves, primarily through our direct sales force and authorized resellers.

 

Alliance and reimbursementrevenue primarily relates to our alliance agreement with Software Spectrum forsales and marketing services. This revenue consists of a percentage of thegross profit derived from Software Spectrum’s sales of the third-party softwareand maintenance for which we provide sales and marketing services, andreimbursement for the costs of maintaining a sales team dedicated to providingsales and marketing services to Software Spectrum for that third-party softwareand maintenance. This revenue is recognized as we provide the services toSoftware Spectrum.

 

We derive software productrevenues from our past resales of licenses and maintenance for multiplebusiness software product lines. As of July 1, 2001, we generally nolonger resell third-party software licenses and maintenance, though we stillresell licenses for third-party products complementary to our SubscribeNetservice. Since July 1, 2001, we have continued to recognize revenue fromour resale of third-party software licenses and related maintenance contractsover the life of the arrangements made prior to July 1, 2001. Vendorspecific objective evidence of fair value for the maintenance element of theresold software arrangements has been based on historical and contractualrenewal rates for maintenance. We deferred the maintenance revenue at theoutset of the arrangement and recognized it ratably over the period duringwhich the maintenance was to be provided.  This period normally commencedon the date the software was delivered and generally continued for 12 months,although certain maintenance contracts continued for longer periods.  AtFebruary 28, 2005, we did not have any deferred revenue relating tosoftware product revenues.

 

We defer online services andtechnology revenues related to our SubscribeNet ESDM service and generallyrecognize them ratably over the term of the service arrangement. SomeSubscribeNet service implementations for new customers involve customizationessential to the functionality of the service.  In those cases, we defer revenuerecognition until the service go-live date is reached and recognize the revenueon a ratable basis over the remaining contract term.  The go-live date isthe later of the date on which the essential functionality is delivered or thepoint at which no additional customization is required.  Our SubscribeNetcontracts with customers typically give the customer a period of time(generally five days) to evaluate a SubscribeNet implementation after we havecompleted it, and provide that the customer is deemed to have accepted theimplementation if it has not affirmatively rejected it within thatperiod.  We typically rely on such non-rejections by customers to indicatetheir acceptance of implementations.  Any subsequent indications by ourcustomers that their implementations have not been properly completed couldhave a material adverse impact on our financial condition or results ofoperations.

 

We also sell additionalprofessional services related to SubscribeNet agreements.  Generally,these services do not provide stand-alone value to a customer, and accordingly,we defer recognition of that revenue until the go-live date for theprofessional services, similar to the manner in which we treat SubscribeNetservice revenues as discussed above.  Such professional services revenuesare recognized ratably over the longer of the remaining estimated customer lifeor the remaining contract term, commencing with the completion of theprofessional services. Estimated customer life requires that we periodicallyestimate the projected life of our existing customers, based on historicalinformation, such as

 

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customer renewal rates. Since revenues generated fromadditional professional services represent less than 5% of our overall revenuesfor the year ended February 28, 2005, any change to our estimated customerlife is unlikely to have a material adverse impact on our financial conditionor results of operations.

 

We recognize revenue whenall of the following conditions are met:

 

•      There is persuasive evidence of an arrangement;

 

•      We have provided the service to the customer, made the softwareavailable for customer download through our website, or shipped the software tothe customer;

 

•      We believe that collection of these fees is reasonably assured;and

 

•      The amount of fees to be paid by the customer is fixed ordeterminable.

 

Revenue from transactionsthrough authorized resellers has been recognized when the licenses andmaintenance have been resold or utilized by the reseller or when our relatedobligations have been satisfied. Those transactions primarily consisted ofresales, through our authorized resellers, of our proprietary Asset Managementsoftware licenses and maintenance (we sold our Asset Management softwarebusiness to Computer Associates International, Inc. during our fiscal yearended February 28, 2003, see Note 10).  For those transactions, webased vendor specific objective evidence of fair value for the maintenanceelement of the proprietary software arrangements on historical and contractualrenewal rates for maintenance. We deferred the maintenance revenue at theoutset of the arrangement and recognized it ratably over the period duringwhich the maintenance was to be provided (generally 12 months), whichnormally commenced on the date the software was delivered.

 

**DeferredRevenue**

 

Deferred revenue consistsprimarily of billings or payments received in advance of revenue recognitionfrom the sale of ESDM services, software licenses, software maintenance, andsoftware research and evaluation services. Such revenue is recognized asrevenue recognition criteria are met.

 

**Costs ofDeferred Revenue**

 

We capitalize direct costsof revenues related to significant implementation and professional servicescontracts associated with our SubscribeNet services.  Direct costs includecompensation and payroll-related fringe benefits directly related to the timespent on significant implementation and professional services activities. These costs are recognized over the same term as the associated revenue fromthose contracts (see “Revenue Recognition” above). Any change in our revenuerecognition estimates could result in corresponding changes to our recognitionof costs of deferred revenues. At February 28, 2005, we had approximately$0.5 million in capitalized costs of deferred revenues.  We expensecustomer acquisition costs, including sales commissions, as incurred.

 

**CapitalizedSoftware**

 

During fiscal year 2000, weadopted Statement of Position (“SOP”) 98-1, “Accounting for the Costs ofComputer Software Developed or Obtained for Internal Use,” which requires thatcertain costs for the development of internal use software should becapitalized, including the costs of coding, software configuration, upgradesand enhancements. Product development costs include costs incurred by us todevelop, enhance and manage our website and online services.

 

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In our fiscal year 2003, weimplemented a plan to sell licenses for our proprietary software underlying ourSubscribeNet service. Such development costs are being accounted for inaccordance with SFAS No. 86, “Accounting for the Costs of ComputerSoftware to be Sold, Leased, or Otherwise Marketed,” under which certainsoftware development costs incurred subsequent to the establishment oftechnological feasibility are capitalized and amortized over the estimatedlives of the related products. Technological feasibility is established uponcompletion of a working model. Development costs incurred subsequent to theestablishment of technological feasibility have not been significant, and allsoftware development costs have been charged to product development expense inthe accompanying consolidated statements of operations.

 

**AdvertisingExpense**

 

We utilize online seminarsknown as “webinars,” print and online advertising, trade shows, direct mail,online promotions and regional marketing development to expand product andbrand awareness in the information technology professional community. Alladvertising costs are expensed as incurred. Advertising costs amounted toapproximately $488,000 for the year ended February 28, 2005, $188,000 forthe year ended February 29, 2004, and $357,000 for the year endedFebruary 28, 2003.

 

**Stock-BasedCompensation**

 

We account for stock-basedemployee compensation arrangements in accordance with provisions of AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” (“APB No. 25”) and its related interpretations and comply withthe disclosure provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation” and related SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure.” Under APB No. 25, compensationexpense is based on the difference, if any, on the date of the grant betweenthe fair value of our stock and the exercise price of the option. We accountfor equity instruments issued to non-employees in accordance with theprovisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”) 96-18, “Accountingfor Equity Instruments That Are Issued to Other Than Employees for Acquiring,or in conjunction with Selling Goods or Services.”

 

The following tableillustrates the effect on net loss and net loss per share if we had applied thefair value recognition provisions of SFAS No. 123, to stock-based employeecompensation (in thousands, except per share data).

 
| ** **                                                                                                       | ** ** | **For the year ended,**     | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                       | ** ** | **February 28,  2005** | ** ** | **February 29,  2004** | ** ** | **February 28,  2003** | ** ** |
|                                                                                                             |       |                        |       |   |   |   |   |
| Net loss as reported                                                                                             |       | $                           | (1,858     | ) | $ | (2,380 | ) | $ | (9,663 | ) |
| Add: unearned stock-based compensation  expense included in reported net loss                                    |       | —                      |       | 28 |   | 1,042 |   |
| Deduct: total stock-based employee  compensation expense determined under fair value based method for all awards |       | (3,154                      | )          | (3,588 | ) | (4,674 | ) |
|                                                                                                             |       |                        |       |   |   |   |   |
| Pro forma                                                                                                        |       | $                           | (5,012     | ) | $ | (5,940 | ) | $ | (13,295 | ) |
|                                                                                                             |       |                        |       |   |   |   |   |
| Net loss per share — basic and diluted                                                                      |       |                        |       |   |   |   |   |
| As reported                                                                                                      |       | $                           | (0.03      | ) | $ | (0.04 | ) | $ | (0.20 | ) |
|                                                                                                             |       |                        |       |   |   |   |   |
| Pro forma                                                                                                        |       | $                           | (0.08      | ) | $ | (0.11 | ) | $ | (0.28 | ) |

 

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We calculated the fair valueand value of each option grant on the date of grant during the years endedFebruary 28, 2005, February 29, 2004, and February 28, 2003,respectively, using the Black-Scholes option pricing model as prescribed bySFAS No. 123 using the following assumptions:

 
| ** **                | ** ** | **For the year ended,**    | ** ** |
|---------------------------|------------|----------------------------|------------|
| ** **                | ** ** | **February 28, 2005** | ** ** | **February 29, 2004** | ** ** | **February 28, 2003** | ** ** |
| Risk-free interest rates  |       | 2.00 - 3.77                | %          | 1.51 - 3.37 | % | 2.48 - 4.44 | % |
| Expected lives (in years) |       | 4                          |       | 4 |   | 4 |   |
| Dividend yield            |       | 0                          | %          | 0 | % | 0 | % |
| Expected volatility       |       | 99                         | %          | 130 | % | 142 | % |

 

We calculated the fair valueof the stock issued under the employee stock purchase plan for the years endedFebruary 28, 2005, February 29, 2004, and February 28, 2003,respectively, using the Black-Scholes option pricing model as prescribed bySFAS No. 123 using the following assumptions:

 
| ** **                 | ** ** | **For the year ended,**    | ** ** |
|----------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **February 28, 2005** | ** ** | **February 29, 2004** | ** ** | **February 28, 2003** | ** ** |
| Risk-free interest rates   |       | 1.12 - 1.99                | %          | 1.01 - 1.22 | % | 1.64 - 1.96 | % |
| Expected lives (in months) |       | 6                          |       | 6 |   | 6 |   |
| Dividend yield             |       | 0                          | %          | 0 | % | 0 | % |
| Expected volatility        |       | 64 - 79                    | %          | 58 - 102 | % | 120 - 151 | % |

 

**IncomeTaxes**

 

Income taxes are accountedfor using an asset and liability approach, which requires the recognition oftaxes payable or refundable for the current year and deferred tax liabilitiesand assets for the future tax consequences of events that have been recognizedin our consolidated financial statements or tax returns. The measurement ofcurrent and deferred tax liabilities and assets are based on provisions of theenacted tax law; the effects of future changes in tax laws or rates are notanticipated. The measurement of deferred tax assets is reduced by a valuationallowance, if necessary, by the amount of any tax benefits that, based on availableevidence, are not expected to be realized.

 

**Net LossPer Share**

 

Basic net loss per commonshare is computed by dividing the net loss for the period by the weightedaverage number of common shares outstanding during the period excluding sharessubject to repurchase. The terms of our redeemable convertible preferred stockinclude the right to participate in dividends declared to common stockholders. Ourredeemable convertible preferred stock does not have a contractual obligationto share in the losses in any given period. As a result, this participatingsecurity will not be allocated any losses in the periods of net losses, butwill be allocated in the periods of net income using the two-class method. Thetwo-class method is an earnings allocation formula that determines earnings pershare for each class of common stock and participating securities according todividends declared or accumulated and participation rights in undistributedearnings.  Under the two-class method,net income is reduced by the amount of dividends declared in the current periodfor each class of stock and by the contractual amounts of dividends that mustbe paid for the current period.  Theremaining earnings are then allocated to common stock and participatingsecurities to the extent that each security may share in earnings as if all ofthe earnings for the period had been distributed.  The total earnings allocated to each securityare determined by adding together the amounts allocated for dividends and theamounts allocated for a participation feature. The total earnings allocated to each security are then divided by thenumber of outstanding shares of the security to which the earnings areallocated to determine the earnings per share. 

 

Diluted net loss per shareis computed by dividing the net loss for the period by the weighted averagenumber of common and potential common shares outstanding during the period ifthe effect is dilutive. Potential common shares are composed of common stocksubject to repurchase rights and incremental shares of common stock issuableupon the exercise of stock options and warrants and upon the conversion ofpreferred stock. The dilutive effect of outstanding stock options andwarrants is computed using the treasury stock method.

 

The following table setsforth the computation of basic and diluted net loss per share as well assecurities not included in the diluted net loss per share calculation becauseto do so would be antidilutive:

 

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| ** **                                                        | ** ** | **For the Years Ended**                      | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                        | ** ** | **February 28, 2005**                   | ** ** | **February 29, 2004** | ** ** | **February 28, 2003** | ** ** |
| ** **                                                        | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Numerator:                                                        |       |                                         |       |   |   |   |   |
| Net loss                                                          |       | $                                            | (1,858     | ) | $ | (2,380 | ) | $ | (9,663 | ) |
|                                                              |       |                                         |       |   |   |   |   |
| Denominator:                                                      |       |                                         |       |   |   |   |   |
| Weighted average shares                                           |       | 60,127                                       |       | 55,910 |   | 47,723 |   |
| Weighted average unvested common shares  subject to repurchase    |       | —                                       |       | — |   | (1 | ) |
| Denominator for basic and diluted  calculation                    |       | 60,127                                       |       | 55,910 |   | 47,722 |   |
|                                                              |       |                                         |       |   |   |   |   |
| Basic and diluted net loss per share                              |       | $                                            | (0.03      | ) | $ | (0.04 | ) | $ | (0.20 | ) |
|                                                              |       |                                         |       |   |   |   |   |
| Antidilutive securities not included in  weighted average shares: |       |                                         |       |   |   |   |   |
| Redeemable convertible preferred stock                            |       | 552                                          |       | 552 |   | 1,886 |   |
| Warrants to purchase common stock                                 |       | 1,592                                        |       | 2,215 |   | 3,556 |   |
| Options to purchase common stock                                  |       | 11,335                                       |       | 9,340 |   | 8,335 |   |
|                                                              |       |                                         |       |   |   |   |   |
|                                                              |       | 13,479                                       |       | 12,107 |   | 13,777 |   |

 

**ComprehensiveLoss**

 

We comply with SFASNo. 130, “Reporting Comprehensive Income.” SFAS No. 130 requires thatall items recognized under accounting standards as components of comprehensiveearnings be reported in an annual financial statement that is displayed withthe same prominence as other annual financial statements. Comprehensive losshas been included in the Statement of Stockholders’ Equity for all periodspresented.

 

**RecentAccounting Pronouncements**

 

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InDecember 2004, the FASB issued SFAS No. 123 (Revised 2004) “Share-BasedPayment” (“SFAS No. 123R”). SFAS No. 123R addresses all forms ofshare-based payment (“SBP”) awards, including shares issued under employeestock purchase plans, stock options, restricted stock and stock appreciationrights. SFAS No. 123R will require us to expense SBP awards withcompensation cost for SBP transactions measured at fair value. The FASBoriginally stated a preference for a lattice model because it believed that alattice model more fully captures the unique characteristics of employee stockoptions in the estimate of fair value, as compared to the Black-Scholes modelwhich we currently use for our footnote disclosure. The FASB decided to removeits explicit preference for a lattice model and not require a specificvaluation methodology. The Securities and Exchange Commission (“SEC”) hasamended the deadline to adopt SFAS No. 123R.  As a result, we will be required to adopt thenew accounting provisions beginning in our first quarter of our fiscal yearending February 28, 2007. In addition, the SEC, in March 2005, issuedStaff Accounting Bulletin No. 107 (“SAB 107”).  SAB 107 provides guidance regarding theinteraction between SFAS No. 123R and SEC rules and regulations.  We expect the adoption of SFAS No. 123R andSAB 107 will have a material adverse impact on our results of operations andloss per share. We are currently in the process of evaluating the extent ofsuch impact.

 

**Reclassification**

 

Certain prior year amountshave been reclassified to conform to the current year presentation. Thesereclassifications did not change previously reported net loss, stockholders’equity or cash flow.

 

**NOTE 2.                ALLIANCES**

 

**Provision of Salesand Marketing Services to Software Spectrum for Resale of Third-Party Software**

 

Prior to June 2001, weresold Sun Microsystems, Inc. (“Sun”) Internet-related applicationsoftware (marketed under the brands “Sun/Netscape Alliance” and “iPlanet”) and relatedmaintenance services to end-users in North America under an agreement betweenus and Sun.  In June 2001, we signed an agreement with SoftwareSpectrum under which we transferred to Software Spectrum our Sun softwareresale business, including our agreement with Sun for resale of Sun softwareand maintenance services.  Software Spectrum assumed primaryresponsibility for resale of Sun software and related maintenance under itsagreement with Sun (which has since been replaced by an agreement between SoftwareSpectrum and Sun’s distributor).  We continue to assist Software Spectrumin its sales and marketing of the Sun software currently marketed under thebrands “Sun ONE” and “Java Enterprise System,” as well as related maintenance,and also provide our SubscribeNet service to Software Spectrum to enable it todeliver that Sun software to its customers electronically. As part of thisarrangement, Software Spectrum pays us a percentage of the gross profit derivedfrom its sales of Sun software licenses and maintenance services, andreimburses us for up to a set amount of our costs in maintaining a teamdedicated to sales of Sun software licenses and maintenance (included in theAlliance and reimbursement revenue line on our consolidated statements of operations). The June 2001 agreement with Software Spectrum was part of our transitionout of the business of generally reselling third-party software. At the time weannounced this agreement, we also ceased reselling all third-party software excepta limited number of products that were complementary to our SubscribeNetservice.

 

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In December 2003, weamended our June 2001 agreement with Software Spectrum to add Websensesoftware to the set of products that Software Spectrum and Intraware jointlyresell under that agreement. Under these arrangements, Software Spectrum paysus a percentage of the gross profit derived from our joint sales of Websensesoftware licenses and maintenance services (included in the Alliance andreimbursement revenue line on our consolidated statements of operations).

 

The current term of thisagreement with Software Spectrum runs until June 30, 2005.  Eitherparty may terminate the agreement without cause on 90 days’ prior written notice. Any termination of our relationship with Software Spectrum without an adequatereplacement would cause a substantial and immediate decrease in our revenues.

 

**Resale ofSubscribeNet Service by Zomax Incorporated**

 

On August 12, 2002, weentered into a strategic alliance agreement (the “Strategic Alliance Agreement”)with Zomax Incorporated (“Zomax”), an international outsource provider ofprocess management services.  The Strategic Alliance Agreement providedfor Zomax’ marketing and resale of our SubscribeNet ESDM service to its globalcustomer base.  Under the Strategic Alliance Agreement, Zomax was requiredto pay a minimum license fee totaling $15 million to us over 10 years, subjectto some conditions, including Zomax’ right to cancel the agreement at any timewith one year’s notice.  The annual minimum license fee was based on agraduated scale, beginning with $0.5 million in the first year of the agreementand escalating to $2.2 million in the final year of the agreement.  Theagreement also provided for Zomax’ payment to us of non-refundable quarterlyservice fees, based on sales of the SubscribeNet service by Zomax, over theterm of the agreement.  Under the agreement, our SubscribeNet service wastheonly electronic software delivery solution Zomax waspermitted to sell and Zomax was the only supply chain management outsourcingindustry company we could authorize to resell our SubscribeNet service. In accordance with the agreement, Zomax made a $1 million prepayment to us onSeptember 3, 2002, to be applied against future fees.  The StrategicAlliance Agreement also provided for Zomax’ payment to us of fees for anyreferrals by us to Zomax of potential customers for Zomax’ services whichresulted in completed sales.  Lastly, we reimbursed Zomax for one-half ofthe base salary of a product sales manager, up to a maximum amount.

 

On the day we entered intothe Strategic Alliance Agreement, we also completed a private placement ofapproximately 6.1 million shares of our common stock to Zomax for grossproceeds of approximately $5.0 million.  Upon completion of that privateplacement, Zomax held approximately 12% of our outstanding common stock. On September 18, 2003, we filed an amended registration statement toregister the resale of the common stock issued to Zomax.  The SEC declaredthat registration statement effective on September 25, 2003.

 

On August 29, 2003,Intraware and Zomax amended the Strategic Alliance Agreement to: (1) allowZomax to terminate the agreement as of August 12, 2004, or as of any datethereafter, with or without cause, by delivery of 30 days prior written notice;(2) accelerate the due date of the payment of $0.4 million by Zomax to usfor the second year of the agreement; and (3) reduce the minimum licensefee for the third year of the agreement, which was to begin August 12,2004, from $1.0 million to $0.6 million if Zomax had not terminated theagreement before then.  During the three months ended November 30,2003, and in accordance with that amendment, we received $0.4 million fromZomax, all of which was recorded as deferred revenue at February 29, 2004,and was to be applied to future services.

 

On April 30, 2004,Zomax and Intraware mutually terminated the Strategic Alliance Agreement andentered into a new reseller agreement (the “Zomax Reseller Agreement”). TheZomax Reseller Agreement allows Zomax to resell our SubscribeNet service. Zomaxwill pay us fees, to be determined on a case-by-case basis, for each resale ofthe SubscribeNet service.  Under the Zomax Reseller Agreement, Zomax doesnot pay minimum annual license fees to us. The term of the Zomax ResellerAgreement is one year, subject to automatic annual renewal for one-yearperiods. Each party has the right to terminate the Zomax Reseller Agreementwithout cause upon 60 days’ notice.

 

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As part of the terminationof the Strategic Alliance Agreement, Zomax and Intraware are not subject toexclusivity requirements or restrictions on sales to other companies. In addition,in consideration for Zomax’ termination of the Strategic Alliance Agreement inMay 2004, we refunded approximately $0.1 million of the $0.4 millionprepayment for future services paid by Zomax to us during the three monthsended November 30, 2003.  The remaining deferred revenue balance ofapproximately $0.4 million at April 30, 2004, was recognized as revenueduring the three months ended May 31, 2004, given that we no longer hadany obligations under the Strategic Alliance Agreement.

 

During the yearsended February 28, 2005, February 29, 2004, and February 28, 2003, werecognized $0.5 million, $0.5 million, and $0.3 million of revenue,respectively, in connection with this arrangement.  These amounts are classified as Related partyonline services and technology revenue. 

 

**Resale ofSubscribeNet Service by Hewlett-Packard Company**

 

In September 2004, weentered into an agreement with Hewlett-Packard Company (“HP”) for its resale ofour SubscribeNet service through HP’s Software Publisher Services division (the“HP Reseller Agreement”).  Under the HP Reseller Agreement, HP pays usservice fees based on its resales of the SubscribeNet service.  The termof the HP Reseller Agreement is one year, subject to automatic annual renewalfor one-year periods. Each party has the right to terminate the HP ResellerAgreement without cause upon 120 days’ notice. To date, no revenue hasbeen recognized under the HP Reseller Agreement.

 

**NOTE 3.                BALANCE SHEET COMPONENTS**

 
| ** **                      | ** ** | **February 28, 2005** | ** ** | **February 29, 2004** | ** ** |
|---------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **(in thousands)**         | ** ** |
|                            |       |                       |       |                       |       |
| Accounts receivable, net:       |       |                       |       |                       |       |
| Accounts receivable             |       | $                          | 1,778      |                       | $          | 1,498 |   |
| Allowance for doubtful accounts |       | (13                        | )          | (36                        | )          |
|                            |       |                       |       |                       |       |
|                            |       | $                          | 1,765      |                       | $          | 1,462 |   |

 

For the years endedFebruary 28, 2005, February 29, 2004 and February 28, 2003, weprovided for an increase/(decrease) in allowance for doubtful accounts ofapproximately ($23,000), $9,000, ($53,000), respectively, and wrote-offaccounts receivable against the allowance for doubtful accounts ofapproximately zero, $1,000, and $80,000, respectively. In addition, atFebruary 28, 2005 we had one large unbilled accounts receivable balance relatedto our Software Spectrum agreement (see Note 2) of approximately $0.4 million.

 
| ** **                                       | ** ** | **February 28, 2005** | ** ** | **February 29, 2004** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                       | ** ** | **(in thousands)**         | ** ** |
|                                             |       |                       |       |                       |       |
| Property and equipment, net:                     |       |                       |       |                       |       |
| Computer equipment and software                  |       | $                          | 6,016      |                       | $          | 8,637 |   |
| Furniture and office equipment                   |       | 930                        |       | 974                        |       |
| Leasehold improvements                           |       | 69                         |       | 55                         |       |
|                                             |       |                       |       |                       |       |
|                                             |       | 7,015                      |       | 9,666                      |       |
| Less: accumulated depreciation and  amortization |       | (6,152                     | )          | (8,769                     | )          |
|                                             |       |                       |       |                       |       |
|                                             |       | $                          | 863        |                       | $          | 897 |   |
|                                             |       |                       |       |                       |       |
| Accrued liabilities:                             |       |                       |       |                       |       |
| Accrued compensation and benefits                |       | $                          | 548        |                       | $          | 553 |   |
| Accrued professional services                    |       | 253                        |       | 133                        |       |
| Customer deposits                                |       | —                     |       | 27                         |       |
| Other                                            |       | 166                        |       | 215                        |       |
|                                             |       |                       |       |                       |       |
|                                             |       | $                          | 967        |                       | $          | 928 |   |

 

For the yearsended February 28, 2005, February 29, 2004, and February 28, 2003, depreciationand amortization expense of property and equipment was $0.6 million, $1.6million, and $3.8 million, respectively. Total assets acquired under capital lease at February 28, 2005, February29, 2004, and February 28, 2003, totaled zero, zero, and $4.3 million,respectively.  Accumulated depreciationunder capital leases totaled zero, zero, and $3.7 million, for the years endedFebruary 28, 2005, February 29, 2004, and February 28, 2003, respectively.

 

Substantiallyall of our assets are collateralized by our Bank Notes Payable and EquipmentAdvance Agreements (SeeNote 8).

 

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**NOTE 4.                INCOME TAXES**

 

As of February 28, 2005, we had approximately $88million of federal and $47 million of state net operating loss carryforwardsavailable to offset future taxable income, which expire in varying amountsbetween fiscal year 2006 and 2025. The Tax Reform Act of 1986 limits the use ofnet operating losses and tax credit carryforwards in certain circumstanceswhere changes occur in the stock ownership of a company. Because ofcumulative ownership changes in the past, the federal and state losscarryforwards have been reduced by the amount of the net operating losscarryforwards that will expire. Because of these cumulative ownership changes,federal loss carry forwards totaling approximately $44 million and state losscarry forwards totaling approximately $22 million are subject to limitation. AtFebruary 28, 2005, $44 million and $25 million of federal and state netoperating losses, respectively, are available without limitation to offsetfuture taxable income. Should there be a change of ownership in the future, theavailable net operating losses may be further limited.

 

As of February 28, 2005, we had approximately $957,000and $751,000 of federal and state research and development creditcarryforwards, respectively. These federal credits will expire in various yearsthrough fiscal year 2022 if not utilized. The California credits can be carriedforward indefinitely.

 

Based upon our limited operating history and lossesincurred to date, management does not believe the realization of the relateddeferred tax assets meets the recognition criteria required by generallyaccepted accounting principles, and accordingly, a full valuation allowance hasbeen recorded to reduce the carrying value of the deferred tax assets to zero.Changes in our valuation allowance for the fiscal years 2005 and 2004 wereapproximately $1 million.  Approximately$4.2 million of the valuation allowance relates to stock option deductionsthat, if recognized, will be recorded as a credit to shareholders’ equity.

 

Net deferred assets arecomposed of the following (in thousands):

 
| ** **                       | ** ** | **February 28, 2005** | ** ** | **February 29, 2004** | ** ** |
|----------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Deferred tax assets:             |       |                  |       |                  |       |
| Net operating loss carryforwards |       | $                     | 32,571     |                  | $          | 31,748 |   |
| Fixed asset basis difference     |       | 191                   |       | 321                   |       |
| Research and development credits |       | 1,453                 |       | 1,453                 |       |
| Accruals and reserves            |       | 332                   |       | 236                   |       |
| Total deferred tax assets        |       | 34,547                |       | 33,758                |       |
| Valuation allowance              |       | (34,547               | )          | (33,758               | )          |
| Total deferred tax assets        |       | $                     | —     |                  | $          | — |   |

 

The provision for incometaxes is different than the amount computed using the applicable statutoryfederal income tax rate with the difference for the year summarized below:

 
| ** **                                    | ** ** | **February 28, 2005** | ** ** | **February 29, 2004** | ** ** | **February 28, 2003** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| Provision computed at federal statutory  rate |       | -34.00                     | %          | -34.00                     | %          | -34.00                     | %          |
| State taxes, net of federal benefit           |       | 0.00                       | %          | 0.00                       | %          | 0.00                       | %          |
| Amortization of goodwill                      |       | 0.00                       | %          | 0.00                       | %          | 3.85                       | %          |
| Impairment of goodwill                        |       | 0.00                       | %          | 0.00                       | %          | 26.50                      | %          |
| Amortization of deferred compensation         |       | 0.00                       | %          | 0.40                       | %          | 3.69                       | %          |
| Other                                         |       | 0.00                       | %          | 0.87                       | %          | -1.39                      | %          |
| Change in valuation allowance                 |       | 34.00                      | %          | 32.73                      | %          | 1.35                       | %          |
| Provision for income taxes                    |       | 0.00                       | %          | 0.00                       | %          | 0.00                       | %          |

 

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**NOTE 5.                COMMITMENTS AND CONTINGENCIES**

 

**Operating Leasesand Noncancelable Debt**

 

We lease our officefacilities and certain equipment under noncancelable operating lease agreements,which expire at various dates through our fiscal year ending 2006. The leasesrequire that we pay all costs of maintenance, utilities, insurance and taxes.Rent expense under these leases totaled

 

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approximately$0.5 million, $0.5 million, and $0.9 million during the yearsended February 28, 2005 and February 29, 2004 and February 28,2003, respectively.

 

In addition, we sublease aportion of our facilities in Orinda, California. As a result, we receivedapproximately $63,000 in sublease payments during the year endedFebruary 28, 2005, which has been offset against rent expense.

 

Future minimum paymentsunder all noncancelable debt and operating leases at February 28, 2005,are as follows (in thousands):

 
| **Year Ending February 28,**   | ** ** | **Long-term  Debt** | ** ** | **Operating  Leases** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|---------------------|------------|-----------------------|------------|-----------|------------|
|                                |       |                |       |                  |       |      |       |
| 2006                                |       | $                   | 857        |                  | $          | 287       |       | $ | 1,144 |   |
| 2007                                |       | 263                 |       | 2                     |       | 265       |       |
| 2008                                |       | 95                  |       | 1                     |       | 96        |       |
| Total  minimum payments             |       | 1,215               |       | $                     | 290        |      | $          | 1,505 |   |
| Less: amounts representing interest |       | (47                 | )          |                  |       |      |       |
| Total principal balance             |       | $                   | 1,168      |                  |       |      |       |   |   |   |

 

The operating leases on thetable above do not include approximately $281,000, $569,000, $579,000,$597,000, and $300,000 per year for the periods of 2006 through 2010, whichwould become due and payable if we do not exercise our right to exit ouroperating lease for our Orinda office.

 

**Indemnifications**

 

Inthe course of our business, we have given indemnities and made commitments andguarantees under which we may be required to make payments. These indemnitiesinclude:

 

•*      Intellectual Property Indemnities to Customers and Resellers.*Our customer and reseller agreements for ourSubscribeNet service typically contain provisions that indemnify our customersor resellers for damages and costs resulting from claims alleging that ourservices infringe the intellectual property rights of a third party. We havealso entered into software license agreements indemnifying the licensees fordamages and costs resulting from claims alleging that the software infringes third-partyintellectual property rights. The duration of these indemnities is typicallyunlimited. Our potential payments under these indemnities are in some caseslimited (e.g., to the fees paid to us under the contract or to another amount)and are in other cases unlimited. Where we have given such indemnities forthird-party software licenses that we resold, we have typically receivedsimilar indemnities from the software publishers. We plan to continue to enterinto SubscribeNet service agreements with customers and resellers, to continueto license software, and to continue to provide industry-standard indemnitiesto our service customers, resellers and licensees.

 

•      *IntellectualProperty Indemnity to Acquiror of Asset Management Business.*In the May 2002 sale of our AssetManagement software business to Computer Associates International, Inc.,we agreed to indemnify Computer Associates for damages and costs incurred by itin connection with claims alleging that the software and technology we sold tothem infringes the intellectual property rights of third parties. Thisindemnity will remain in effect until May 2007. Our maximum potentialpayment under this indemnity is $9.5 million.

 

•      *Indemnitiesto Private Investors.*Inour private placements of stock, we have made representations and warranties tothe investors and placement agents, and have agreed to

 

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indemnifythem for any damages and costs they incur as a result of our breach of thoserepresentations and warranties. We also have signed registration rightsagreements with private investors under which we indemnify them for damagesthey incur as a result of any material misstatements or omissions in ourregistration statements, and pay penalties in the event we fail to maintain theeffectiveness of registration statements. The duration of our indemnities toour investors under the respective stock and warrant purchase agreements rangesfrom one to two years from the respective closing dates, other than thepurchase agreements for our June 2000 warrants and our January 2001Series A Preferred Stock, which provide for indemnities of unlimitedduration. Our indemnities to our investors under the respective registrationrights agreements expire upon termination of our registration obligations,which is typically the date the securities may be sold under Rule 144(k)under the Securities Act of 1933. Our potential payments under theseindemnities are unlimited.

 

•      *Indemnitiesto Directors and Officers.*We indemnify our directors and officers for damages and costs incurredin the performance of their duties, to the extent permitted by Delaware law.The duration of, and our potential payments under, these indemnities areunlimited, subject to Delaware law.

 

Wehave historically received only a very limited number of requests forindemnification under these agreements and have not been required to makematerial payments under them. Accordingly, we believe that the fair value ofeach of these indemnification agreements is minimal and therefore have notrecorded a liability related to these indemnification provisions.

 

**Legal Proceedings**

 

*In re Intraware, Inc. Initial Public OfferingSecurities Litigation*

 

InOctober 2001, we were served with a summons and complaint in a purportedsecurities class action lawsuit. On or about April 19, 2002, we wereserved with an amended complaint in this action, which is now titled *In re Intraware, Inc. Initial Public OfferingSecurities Litigation*, Civ. No. 01-9349 (SAS) (S.D.N.Y.), relatedto *In re Initial Public Offering SecuritiesLitigation*, 21 MC 92 (SAS) (S.D.N.Y.). The amended complaint isbrought purportedly on behalf of all persons who purchased our common stockfrom February 25, 1999 (the date of our initial public offering) throughDecember 6, 2000. It names as defendants Intraware, three of our presentand former officers and directors, and several investment banking firms thatserved as underwriters of our initial public offering. The complaint allegesliability under Sections 11 and 15 of the Securities Act of 1933 and Sections10(b) and 20(a) of the Securities Exchange Act of 1934, on thegrounds that the registration statement for the offerings did not disclosethat: (1) the underwriters had agreed to allow certain customers topurchase shares in the offerings in exchange for excess commissions paid to theunderwriters; and (2) the underwriters had arranged for certain customersto purchase additional shares in the aftermarket at predetermined prices. Theamended complaint also alleges that the underwriters misused their securitiesanalysts to manipulate the price of our stock. No specific damages are claimed.

 

Lawsuitscontaining similar allegations have been filed in the Southern District of NewYork challenging over 300 other initial public offerings and secondaryofferings conducted in 1999 and 2000. All of these lawsuits have beenconsolidated for pretrial purposes before United States District Court JudgeShira Scheindlin of the Southern District of New York. On July 15, 2002,an omnibus motion to dismiss was filed in the coordinated litigation on behalfof the issuer defendants, of which Intraware and its three named current andformer officers and directors are a part, on common pleadings issues. On orabout October 9, 2002, the Court entered and ordered a Stipulation ofDismissal, which dismissed the three named current and former officers anddirectors from the litigation without prejudice. On February 19, 2003, theCourt entered an order denying in part the issuer defendants’ omnibus motion todismiss, including those portions of the motion to dismiss relating toIntraware. No discovery has been served on us to date.

 

InJune 2004, a stipulation of settlement for the claims against the issuerdefendants, including us, was submitted to the Court.  The underwriter-defendants in the *In re Initial Public Offering Securities*

 

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*Litigation* (collectively, the “underwriter-defendants”), including theunderwriters of our initial public offering, are not parties to the stipulationof settlement.

 

Thesettlement provides that, in exchange for a release of claims against thesettling issuer-defendants, the insurers of all of the settlingissuer-defendants will provide a surety undertaking to guarantee plaintiffs a$1 billion recovery from the non-settling defendants, including theunderwriter-defendants.  The amount ourinsurers would be required to pay to the plaintiffs could range from zero toapproximately $3.5 million, depending on plaintiffs’ recovery from theunderwriter-defendants and from other non-settling parties. If the plaintiffsrecover at least $1 billion from the underwriter-defendants, our insurerswould have no liability for settlement payments under the terms of the settlement.If the plaintiffs recover less than $1 billion, we believe our insurancewill likely cover our share of any payments towards satisfying plaintiffs’$1 billion recovery deficit.  Management estimates that its range ofloss relative to this matter is zero to $3.5 million. Presently there isno more likely point estimate of loss within this range. As a consequence ofthe uncertainties described above regarding the amount we will ultimately berequired to pay, if any, as of February 28, 2005, we have not accrued aliability for this matter.  There is noguarantee the settlement will become final, as it is subject to a number ofconditions, including the final approval of the Court.

 

*Leon Segen v. ComVest Venture Partners, LP, et al.*

 

InJuly 2004, a complaint was filed in the United States District Court forthe District of Delaware, Civ. No. 04-822, against ComVest VenturePartners, LP; ComVest Management, LLC; Commonwealth Associates ManagementCompany, Inc.; Commonwealth Associates, LP; RMC Capital, LLC; Michael S.Falk; Robert Priddy; Travis L. Provow; Keith Rosenbloom; and Intraware. Thecomplaint describes Intraware as a nominal defendant. The complaint allegesthat, between August 2001 and January 2002, all of the defendantsother than Intraware were members of a group, and therefore should be treatedas a single “person,” for purposes of Sections 13(d)(3) and 16(b) ofthe Securities Exchange Act of 1934 (the “1934 Act”).  The complaintfurther alleges that ComVest Venture Partners, LP and Mr. Priddy, whilethey and the other alleged group members collectively owned more than 10% of aclass of our equity securities, bought and sold our equity securities within a6-month period and failed to disgorge to us the profits allegedly realized inthose trades, thereby violating Section 16(b) of the 1934 Act. Mr. Falk was a member of our Board of Directors from April 2001 toMay 2002 and Mr. Provow was a member of our Board of Directors fromOctober 2001 to May 2002.  The complaint demands that ComVestVenture Partners, LP and Mr. Priddy pay over to Intraware the profits theyallegedly realized and retained in violation of Section 16(b) of the1934 Act, together with interest and legal costs. According to the complaint,the amount of those alleged profits is unknown to the plaintiff, however, theinformation alleged in thecomplaintsuggests that amount may be approximately $1.3 million. The complaint doesnot seek damages against us.  After the complaint was filed, the plaintiffand Intraware signed a stipulation acknowledging that Intraware takes noposition with respect to the claims in the action, and providing that Intrawareaccepts service of the complaint, that Intraware is not required to file ananswer or other response to the complaint, and that Intraware will otherwisehave the rights and responsibilities of a party to the action.

 

Weare also subject to legal proceedings, claims and litigation arising in theordinary course of business. We do not expect that the ultimate costs toresolve these matters will have a material adverse effect on our consolidatedfinancial position, results of operations, or cash flows.

 

**NOTE 6.                REDEEMABLE CONVERTIBLE PREFERREDSTOCK**

 

We are authorized, subjectto limitations prescribed by Delaware law, to provide for the issuance ofpreferred stock in one or more series, to establish from time to time thenumber of shares included within each series, to fix the rights, preferencesand privileges of the shares of each wholly unissued series and anyqualifications, limitations or restrictions thereon, and to increase ordecrease the number of shares of any such series (but not below the number ofshares of such series then outstanding) without any further vote or action bythe stockholders. Redeemable Convertible Preferred Stock (Preferred Stock)activity was as follows (in thousands):

 

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| ** **                                                  | ** ** | **Preferred Stock** | ** ** |
|-------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                  | ** ** | **Shares**          | ** ** | **Amount** | ** ** |
| Balance at February 28, 2002                                |       | 1,658               |       | $ | 3,347 |   |
| Conversion of Series A Preferred Stock into  common stock   |       | (248                | )          | (404 | ) |
| Conversion of Series B-1 Preferred Stock  into common stock |       | (63                 | )          | (470 | ) |
| Balance at February 28, 2003                                |       | 1,347               |       | 2,473 |   |
| Conversion of Series A Preferred Stock into  common stock   |       | (746                | )          | (1,212 | ) |
| Conversion of Series B-1 Preferred Stock  into common stock |       | (49                 | )          | (364 | ) |
| Balance at February 29, 2004                                |       | 552                 |       | 897 |   |
| No activity                                                 |       | —              |       | — |   |
| Balance at February 28, 2005                                |       | 552                 |       | $ | 897 |   |

 

**Series A**

 

On January 16, 2001, weraised $5.2 million in financing through the sale of a new class ofSeries A Preferred Stock and warrants to investors. Under the terms ofthis financing, we issued an aggregate of 2,872,922 shares of Series A PreferredStock at a per share price of $1.81 and warrants to purchase 287,284 shares ofcommon stock at an exercise price of $1.99, or 110% of the purchase price ofthe Series A Preferred Stock. The warrants expired January 16, 2005, whichwas four years from the issuance date. The purchase price for the Series APreferred Stock was the average closing price of our common stock during theten trading-day period ending January 11, 2001, plus a 15% premium. Eachshare of Series A Preferred Stock is convertible into one share of commonstock at the election of the holder and entitles the holder to a liquidationpreference equal to the amount of the original investment, in the event ofliquidation, winding-up or our dissolution. The Series A Preferred Stockdoes not have a dividend; however, the stockholders do participate in dividendsdeclared to common stockholders. No common dividends have been declared duringthe years ended February 28, 2005 and February 29, 2004 and February 28,2003. The Series A Preferred Stock is not subject to adjustments to theconversion ratio, except for proportional adjustments in the event of a splitor combination of the common stock. The holders of the Series A PreferredStock vote together with other classes, with each share of Series APreferred Stock having the number of votes equal to the number of shares ofcommon stock into which the Series A Preferred Stock could be converted.Proceeds from this financing were allocated based on relative fair values ofthe Series A Preferred Stock and warrants issued.

 

As part of our agreementwith the Series A Preferred Stock purchasers, we filed with the SEC aregistration statement to register the resale of the common stock issuable uponconversion of the Series A Preferred Stock and upon exercise of thewarrants.  The SEC declared thatregistration statement effective on October 4, 2002.

 

At February 28, 2005,552,000 shares of Series A Preferred Stock remained outstanding.

 

**Series B-1**

 

On April 2, 2001, weentered into an agreement to sell a new class of Series B Preferred Stock andwarrants to institutional and individual investors. Under the terms of thisfinancing, we issued an aggregate of 360,000 shares of Series B Preferred Stockfor aggregate gross proceeds of $3.6 million and net proceeds of$3.2 million, after fees and expenses. We also issued warrants to purchase720,000 shares of our common stock with an exercise price of $1.125 per share,which was the closing bid price of our common stock on the trading day prior tothe closing of the financing. The warrants provided for their expiration sevenyears from the issuance date. Each share of Series B Preferred Stock wasconvertible into ten shares of common stock at the

 

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election of the holder and entitled the holder to a liquidationpreference equal to the amount of the original investment, in the event of aliquidation, winding-up or our dissolution. The Preferred Stock carriedanti-dilution protection requiring a full adjustment of the conversion price toany lower price at which we sold stock to investors during the three monthsfollowing the closing, and carried a weighted-average adjustment of theconversion price based on any sale of stock by us to investors during thesubsequent nine-month period. The Preferred Stock did not carry a dividend;however the stockholders were entitled to participate in dividends declared to commonstockholders. No dividends were declared during the years ended February 28, 2005and February 29, 2004 and February 28, 2003. The new class of Series BPreferred Stock entitled its holders to elect a member of our Board ofDirectors. The holders of the Series B Preferred Stock voted together withother classes with each share of Series B Preferred Stock having thenumber of votes equal to the number of shares of common stock into which theSeries B Preferred Stock could be converted.

 

Proceeds from this financingwere allocated to the Series B Preferred Stock and warrants issued based ontheir relative fair values. Since the Series B Preferred Stock was immediatelyconvertible upon issuance we recognized a deemed dividend for the discount of SeriesB Preferred Stock created by a beneficial conversion feature amounting to$1.1 million upon the issuance of the Series B Preferred Stock. Thisamount was calculated based on the difference between the accounting conversionprice of the Series B Preferred Stock and the fair market value of the commonstock at the time of commitment to purchase the Series B Preferred Stock.

 

In connection with the debtfinancing that we completed on September 20, 2001, all of the Series BPreferred Stock was exchanged for a new class of Series B-1 Preferred Stock,and the Series B Preferred Stock was eliminated as a class. The new Series B-1Preferred Stock carried substantially the same rights, privileges andpreferences as the eliminated Series B Preferred Stock. The exchange was effectedprimarily to enable us to issue debt as part of the debt financing that weclosed on August 31, 2001 and September 20, 2001 (see Note 8).The terms of the Series B Preferred Stock prohibited us from issuing debt, butthe terms of the Series B-1 Preferred Stock permitted us to issue debt with theconsent of the holders of a majority of the Series B-1 Preferred Stock.

 

We recognized an additionaldeemed dividend of approximately $687,000 on August 31, 2001, based on theadjustment of the conversion price of the Series B-1 Preferred Stock under itsanti-dilution protections. This deemed dividend was related to the initialclosing of our debt financing, with a commitment to issue warrants, onAugust 31, 2001 (see Note 8). As a result of the anti-dilutionprotections, the Series B-1 Preferred Stock was adjusted to be convertible into4.2 million shares of our common stock, and the associated common stockwarrants were adjusted to be exercisable for 849,322 shares of our common stockat an exercise price of $0.95 per share.

 

On September 20, 2001,we recognized another deemed dividend of approximately $880,000. This deemeddividend is related to the second closing of our debt financing onSeptember 20, 2001 (see Note 8). As a result of the anti-dilutionprotections, the Series B-1 Preferred Stock was adjusted to be convertible into4.3 million shares of our common stock, and the associated warrants wereadjusted to be exercisable for 866,879 shares of our common stock at anexercise price of $0.93 per share.

 

As part of our agreementwith the Series B-1 Preferred Stock purchasers, we filed with the SEC aregistration statement to register the resale of the common stock issuable uponconversion of the Series B-1 Preferred Stock and upon exercise of thewarrants.  The SEC declared thatregistration statement effective on October 4, 2002.

 

At February 28, 2005 andFebruary 29, 2004, all shares of the Series B-1 Preferred Stock had beenconverted.

 

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**NOTE 7.                COMMON STOCK**

 

Our Certificate ofIncorporation, as amended, authorizes us to issue 250 million shares of$0.0001 par value common stock.  Inaddition, our Board of Directors may, at its discretion, declare dividends tostockholders.  To date, we have notdeclared or paid dividends on our common stock.  Our Board of Directors presently intends toretain all earnings for use in our business and therefore does not anticipatedeclaring or paying any cash dividends in the foreseeable future.

 

On May 24, 2002, wecompleted a private placement of our common stock and warrants to purchase ourcommon stock to institutional and individual investors. Under the terms of thefinancing, we issued an aggregate of 3,940,000 shares of common stock, andwarrants to purchase 788,000 shares of our common stock with an exercise priceof $1.19 per share, for aggregate gross proceeds of $3.9 million,including $2.6 million in cash and $1.3 million in cancelledindebtedness. The $1.19 per share exercise price of the warrants was theaverage closing sale price of our common stock on the five trading dayspreceding the closing date. The warrants issued to the investors expire fouryears from the issuance date. In addition to paying the placement agent a cashfee of $231,400 and reimbursing it for approximately $70,000 in expenses, wealso issued to the placement agent and its designee warrants to purchase anaggregate of 310,200 shares of common stock at an exercise price of $1.00 pershare, and warrants to purchase an aggregate of 62,040 shares of common stockat an exercise price of $1.19 per share. These warrants were valued at a fairvalue of $421,000 at May 24, 2002 and were accounted for as issuancecosts. The warrants issued to the placement agent and its designee expire fiveyears from the issuance date. All $1.19 warrants carry anti-dilution protectionrequiring a weighted-average adjustment of the exercise price and of the numberof shares issuable upon exercise of the warrants for certain sales of stock byus at less than $1.19 per share during the 12 months following theclosing; however, in accordance with NASD Marketplace Rules, we committed notto sell shares of our stock that would lead to an anti-dilution adjustmentrequiring us to issue a number of shares exceeding 19.9% of our then-currenttotal common shares outstanding, without obtaining stockholder approval. Aspart of this transaction, we incurred approximately $126,000 in legal,accounting and other costs.

 

As part of our agreementwith the investors, we filed with the SEC a registration statement to registerthe resale of the common stock we issued in the private placement and thecommon stock issuable upon exercise of the warrants.  The SEC declared that registration statementeffective on June 26, 2002.

 

Cash proceeds from thisfinancing were allocated first to the fair value of the warrants associatedwith the transaction in the amount of $1.3 million and the remainingbalance, net of issuance costs, of $0.9 million to the common stock.Proceeds related to the cancelled indebtedness were accounted for as aneffective conversion and were converted to common stock at their carrying valueof $1.1 million.

 

The warrants were classifiedas a liability during the time that the associated underlying common stock wasunregistered, as we were obligated to register that common stock as well as thecommon stock issuable upon exercise of the warrants, and our ability to performthat obligation was assumed to be outside our control. During each accountingperiod that the warrants were classified as liabilities, the warrants wereadjusted to their fair value. On June 26, 2002, as described above, theregistration statement was declared effective and at that time the warrants,with a value of approximately $891,000, were reclassified as permanent equity.

 

During the year endedFebruary 28, 2003, we recorded a net credit of approximately $378,000, to interestand other income and expenses, net to adjust the carrying amount of thewarrants issued on May 24, 2002, to fair value.

 

The May 24, 2002,common stock financing resulted in anti-dilution adjustments to the warrantsissued in connection with our issuance of redeemable convertible preferredstock on June 30, 2000. The exercise price of the warrants issued inconnection with our preferred stock on June 30, 2000, was adjusted from$1.54 to $1.50.

 

On August 12, 2002, wecompleted a private placement of common stock to Zomax Incorporated. Under theterms of the financing, we issued an aggregate of approximately6.1 million shares of common stock for aggregate gross proceeds ofapproximately $5.0 million. As part of this transaction, we incurredapproximately $89,000 in legal, accounting and other costs. Concurrent withthat agreement, we entered

 

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into a strategic alliance agreement with Zomax (see Note 2). As ofFebruary 28, 2005, Zomax held approximately 5% of our outstanding common stock.

 

As part of the agreementwith Zomax, we filed with the SEC a registration statement to register theresale of the common stock issued to Zomax. The SEC declared that registration statement effective on September 23,2003.

 

The August 12, 2002,common stock financing resulted in anti-dilution adjustments to the warrantsissued in connection with our issuance of redeemable convertible preferredstock on June 30, 2000. The exercise price of the warrants issued inconnection with our preferred stock on June 30, 2000, was adjusted from$1.50 to $1.43.

 

In addition, theAugust 12, 2002 common stock financing resulted in an anti-dilutionadjustment to the exercise price of the warrants issued in connection with ourMay 24, 2002 common stock financing and an increase in the number ofshares of common stock issuable upon exercise of those warrants. The exerciseprice of the warrants was adjusted from $1.19 to $1.07. The number of shares issuableupon exercise of the warrants increased from 850,040 to 944,565.

 

On September 9, 2003,we completed a private placement of common stock to investment funds andaccounts managed by Apex Capital, LLC. Under the terms of the financing, weissued 4.0 million shares of common stock at a price of $1.55 per sharefor gross proceeds of $6.2 million. This purchase price representsapproximately a 24% discount from the closing price of our common stock onSeptember 9, 2003. As part of this transaction, we incurred and expect toincur approximately $89,000 in legal, accounting, and other costs. Includingshares previously acquired on the open market, as of September 9, 2003,investment funds and accounts managed by Apex Capital, LLC held approximately9% of our outstanding common stock.

 

As part of the agreementwith Zomax, we agreed to file with the SEC a registration statement to registerthe resale of the common stock issued to the investors.  The SEC declared that registration statementeffective on November 3, 2003.

 

The September 9, 2003,common stock financing resulted in anti-dilution adjustments to the warrantsissued in connection with our issuance of redeemable convertible preferredstock on June 30, 2000. The exercise price of the warrants issued in connectionwith our preferred stock on June 30, 2000, was adjusted from $1.43 to$1.41.

 

As of February 28, 2005 andFebruary 29, 2004, there were no shares of outstanding common stocksubject to repurchase.

 

As of February 28, 2005, thefollowing table summarizes the terms of our outstanding warrants to purchasecommon stock (in thousands, except per share amounts):

 

| **Issuance Date** | ** ** | **Number of Shares** | ** ** | **Exercise Price** | ** ** | **Expiration Date** | ** **   |
|-------------------|------------|----------------------|------------|--------------------|------------|---------------------|--------------|
| May 21, 2001      |       | 800                  |       | $                  | 1.71       |                | May 21, 2011 |   |
| May 24, 2002      |       | 676                  |       | 1.00               |       | May 24, 2006        |         |
| May 24, 2002      |       | 74                   |       | 1.07               |       | May 24, 2006        |         |
| August 1,  2003   |       | 42                   |       | 1.19               |       | August 1, 2010      |         |
|              |       | 1,592                |       |               |       |                |         |
|                   |            |                      |            |                    |            |                     |              |  |

 

**NOTE 8.                NOTES PAYABLE**

 

**InvestorNotes Payable**

 

On August 31, 2001, weissued promissory notes and committed to issue warrants in a private

 

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placement to a group of institutional and individual investors, foraggregate gross proceeds of $6.15 million. Our net receipts from thefinancing were approximately $5.6 million after fees to the placement agent,Commonwealth Associates, L.P. (“Commonwealth”), of $307,500 and expenses ofapproximately $223,000. The promissory notes bore annual interest of 8%,payable quarterly beginning six months after issuance, and were secured by asenior security interest in substantially all of our assets. The promissorynotes restricted us from issuing common stock dividends. The promissory noteswere convertible, at the option of the note holder, into the type of securitiesoffered in our next private round of equity financing, at that round’s price.This could have resulted in the recognition of a contingent beneficialconversion feature. The notes were due in full on August 31, 2002. Thenote holders also received warrants to purchase 6.15 million shares of ourcommon stock at an exercise price of $0.01 per share. In accordance with NASDMarketplace Rule 4350(i)(1)(D), warrants exceeding an aggregate of5,600,000 shares of our common stock (approximately 19.7% of our outstandingcommon stock) were not exercisable until we received stockholder approval. Wereceived stockholder approval on November 27, 2001. In addition, we issuedcommon stock warrants to Commonwealth equal in number to 10% of the warrantsissued to the investors. We entered into binding agreements on August 31,2001, to issue these warrants to the note holders and Commonwealth. We issuedthese warrants on September 24, 2001, in accordance with Nasdaq’sapplication of NASD Marketplace Rules as described below.

 

Michael Falk, who was amember of our Board of Directors from April 2001 until May 9, 2002,was Chairman and Chief Executive Officer of Commonwealth Associates GroupHoldings, L.L.C. Commonwealth Associates Group Holdings, L.L.C. wholly ownedCommonwealth Management, L.L.C., the general partner of CommonwealthAssociates, L.P.

 

Commonwealth AssociatesGroup Holdings, L.L.C. wholly owned ComVest Management, LLC, which was thegeneral partner of ComVest Venture Partners, L.P. Michael Falk was a manager ofComVest Management, L.L.C. ComVest Venture Partners purchased 250,000 shares ofour common stock and a warrant for 50,000 shares of our common stock for$250,000 in our May 2002 financing.

 

We allocated the proceedsfrom the August 31, 2001 financing based on the relative fair values ofthe promissory notes and warrants issued. The warrants were classified as aliability as they contain registration rights, which are assumed to be outsideour control. Warrants classified as liabilities were adjusted to their fairvalue each accounting period.

 

On September 20, 2001,we issued additional promissory notes and committed to issue additionalwarrants to another group of institutional and individual investors foraggregate gross proceeds of $850,000. Our net receipts from the financing wereapproximately $779,500 after fees to Commonwealth of $42,500 and expenses ofapproximately $28,000. The note holders also received warrants to purchase850,000 shares of our common stock at an exercise price of $0.01 per share. Inaddition, we issued common stock warrants to Commonwealth equal in number to10% of the warrants issued to the investors. These notes carried the same termsas the promissory notes referred to above. We entered into binding agreementson September 20, 2001, to issue these additional warrants to the noteholders and Commonwealth. We issued these warrants on September 24, 2001,in accordance with Nasdaq’s application of NASD Marketplace Rules as describedbelow.

 

During the year endedFebruary 28, 2002, we recorded a net charge of approximately $4.0 millionto other expense to adjust the carrying amount of the warrants issued onAugust 31 and September 20, 2001, to fair value.

 

We agreed to file with theSEC a registration statement for the resale of the common stock issuable uponexercise of the warrants, and if the notes are ultimately converted into orexchanged for equity, any common stock issuable as a result of such conversionor exchange. That registration statement was declared effective by the SEC onJune 14, 2002.

 

The notes were repayable byus at any time and would have matured early if we were acquired or underwent achange of control.

 

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On November 27, 2001,as part of the financings, we held a special stockholder meeting and obtainedstockholder approval for the exercise of warrants exceeding an aggregate of5.6 million shares of our common stock (approximately 19.7% of ouroutstanding common stock). In addition we obtained stockholder approval for thepotential conversion of the notes into the same type of securities issued by usin our next capital-raising private placement of equity securities.

 

In connection with this debtfinancing, our Board of Directors created a new seat on the Board and appointedto that seat Harold Blue, who was designated by Commonwealth. Michael S. Falk,who is an officer of Commonwealth, was also a member of the Board of Directorsduring the 2002 fiscal year. Mr. Falk is also indirectly affiliated withone of the purchasers of notes and warrants in the financings. Because of theserelationships, as well as the quantity of warrants issued and the price of thewarrants, Nasdaq’s application of NASD Marketplace Rules would have required usto obtain stockholder approval before issuing the warrants. However, Nasdaqgranted us an exception from the stockholder approval rule. In keeping withNasdaq’s determination, we gave our stockholders 10 days prior writtennotice of this exception before issuing the warrants. We gave this notice onSeptember 14, 2001, and issued the warrants on September 24, 2001.

 

During the year endedFebruary 28, 2002, warrants associated with the issuance of the promissorynotes were exercised for 7.5 million shares of our common stock, with anaggregate market value of approximately $7.2 million at the exercise date.Approximately 7.4 million shares of our common stock were issued pursuantto these warrant exercises, after deducting shares withheld as payment of theexercise price. During the year ended February 28, 2003, warrants associatedwith the issuance of the promissory notes were exercised for 200,000 shares ofour common stock, with an aggregate market value of approximately $267,000 atthe exercise date. Approximately 200,000 shares of our common stock were issuedpursuant to these warrant exercises.

 

In May 2002, followingthe asset sale and private placement described in Notes 7 and 10, we repaid$5.7 million of the $7.0 million principal amount of the promissorynotes that we had issued in August and September 2001. As part of thisrepayment, we were required to accrete the portion of carrying amount of thepromissory notes relating to the repayment to its full value. This resulted ina charge of approximately $973,000, which is included in interest and otherincome and expenses, net. The remaining $1.3 million in principal amountof those promissory notes was effectively converted into the private placementof common stock and warrants described in Note 7.

 

**Bank NotesPayable and Equipment Advance Agreements**

 

In August 2003, weissued a note payable to Silicon Valley Bank for proceeds of approximately $2.0million.  The note bears an annual interest rate of the greater of 5.25%or 1.00% above the bank’s prime rate (5.50% at February 28, 2005).  Theinterest rate on the note payable at February 28, 2005, was 6.50%.  Thenote is payable in fixed monthly principal installments plus interest throughSeptember 2005.  In connection with the note payable, we issued awarrant to purchase 41,730 shares of our common stock at an exercise price of$1.19 per share.  The warrant was immediately exercisable and expires inAugust 2010.  We estimated the allocated fair value of such warrantat approximately $46,000, using the Black-Scholes valuation model with thefollowing assumptions: expected volatility of 136%, risk-free interest rate of4.01%, expected life of seven years and no dividends.  The value of thewarrant was recorded as a debt discount and is being amortized as interestexpense using the effective interest method over the life of the note payable. For the year ended February 28, 2005, interest expense related to suchwarrant amounted to approximately $21,000.  The unamortized balance ofapproximately $3,000 at February 28, 2005, is presented as a discount againstthe principal balance of the note payable outstanding.  As of February 28,2005, the warrants had not been exercised.

 

In August 2003, we alsoentered into an equipment advance agreement with Silicon Valley Bank. Theequipment advance bears annual interest at the greater of 5.50% or 1.00% abovethe bank’s prime rate.  The agreement provided for borrowings of up to$500,000 through August 2004 and was limited to equipment purchases. As of February 28, 2005, we had borrowed approximately $363,000 under thisagreement and the interest rate at that date was 6.50%.  Monthly paymentsof interest only were payable

 

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through August 1, 2004, after which fixed monthly principalinstallments plus interest will be made through August 2006.

 

In September 2004, weentered into another equipment advance agreement with Silicon ValleyBank.  This new equipment advance bears annual interest at the greater of5.50% or 1.00% above the bank’s prime rate.  This equipment advance allowsus to borrow up to $500,000 through August 1, 2005, solely to financeequipment purchases.  As of February 28, 2005, we had borrowedapproximately $317,000 under this agreement and the interest rate at that datewas 6.50%.  Monthly payments of interest only are payable through August 2005,after which fixed monthly principal installments plus interest will be madethrough August 2007.

 

All of this debt iscollateralized by a senior security interest in substantially all of ourassets.  We are also required to maintain compliance with certainfinancial covenants, with all of which we were in compliance at February 28,2005.

 

Scheduled maturities of debtat February 28, 2005 are as follows (in thousands):

 

| Years ending:     |   |   |   |
|-------------------|--------|--------|--------|
| February 28, 2006 |   | $      | 826    |   |
| February 28, 2007 |   | 249    |   |
| February 28, 2008 |   | 93     |   |
|              |   | $      | 1,168  |   |

 

**NOTE 9.                EMPLOYEE BENEFIT PLANS**

 

**401(k) SavingsPlan**

 

We have a savings plan (the “SavingsPlan”) that qualifies as a defined contribution arrangement underSection 401(a), 401(k) and 501(a) of the Internal Revenue Code. Under theSavings Plan, participating employees may defer a percentage (not to exceed20%) of their eligible pretax earnings up to the Internal Revenue Service’sannual contribution limit. All of our employees on the United States payrollare eligible to participate in the Plan. We will determine our contributions,if any, to the Savings Plan based on our current profits and/or retainedearnings, however, we have not made any contributions to the Savings Plan sinceits inception.

 

**1996 StockOption Plan**

 

In October 1996, weadopted the 1996 Stock Option Plan (the “1996 Plan”). The 1996 Plan providesfor the granting of stock options to our employees and consultants. Optionsgranted under the 1996 Plan may be either incentive stock options ornonqualified stock options. Incentive stock options (that is, options intendedto qualify as incentive stock options under the Internal Revenue Code, or “ISOs”)may be granted only to our employees (including directors who are alsoemployees). Nonstatutory stock options (that is, options not intended toqualify as incentive stock options under the Internal Revenue Code, or “NSOs”)may be granted to our employees and consultants. At February 28, 2005, we hadreserved approximately 3.4 million shares of common stock for issuanceunder the 1996 Plan. The shares reserved are subject to annual increases equalto the lesser of (a) 3,000,000 shares, (b) 6% of the outstandingshares on such date, or (c) a lesser amount determined by the Board.

 

The 1996 Plan provides thatthe options shall be exercisable over a period not to exceed ten years from thedate of the grant; however, in the case of an ISO granted to a person owningmore than 10% of the combined voting power of all classes of our stock, theterm of the option will be five years from the date of the grant. The initialgrant by us to an employee under this plan generally vests as to 25% of theshares one year after the date of the grant, and as to the remaining shares inequal monthly installments over the following 36 months. Subsequentgrants by us to that employee under this plan generally vest as to 12.5% of theshares 6 months after the date of the grant, and as to the remainingshares in equal monthly

 

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installments over the following 42 months.

 

Under the 1996 Plan, theexercise price of an option may not be less than 100% of the fair market valueof the shares on the date of grant as determined by the Board of Directors;however, the exercise price of an ISO or NSO granted to a 10% shareholder maynot be less than 110% of the fair market value of the shares on the date ofgrant.

 

The 1996 Plan expires inOctober 2006.

 

**1998Director Option Plan**

 

In December 1998, weadopted the 1998 Director Option Plan (the “Director Plan”), which becameeffective in February 1999. The Director Plan provides for the granting ofstock options to Board members who are not employees of Intraware. We havereserved approximately 208,000 shares of common stock for issuance under theDirector Plan at February 28, 2005. The option grants under the Director Planare automatic and nondiscretionary, and the exercise price of the options mustbe 100% of the fair market value of the common stock on the date of grant. Wedetermine fair market value by the closing price of the common stock on Nasdaqon the grant date. Each eligible Board member is granted an option to purchase15,000 shares (“First Option”) on the date such person first becomes adirector. Immediately following each annual meeting of stockholders, eacheligible Board member is automatically granted an additional option to purchase7,500 shares (“Subsequent Option”) if such director has served continuously asa member of the Board for at least the preceding six months. The Director Planprovides that the options shall be exercisable over a period not to exceed tenyears from the date of the grant; however, the options terminate 3 monthsfollowing the date the director ceases to be a member of the Board(12 months if the director ceased to be a Board member because of death ordisability). First Options vest as to 12.5% of the shares 6 months afterthe grant date and as to remaining shares in equal installments over the next42 months provided the optionee continues as a member of the Board. SubsequentOptions vest as to 25% of the shares 6 months after the grant date and asto the remaining shares in equal installments over the next 18 months.

 

The 1998 Director Planexpires in December 2008.

 

**1999Non-Qualified Acquisition Stock Option Plan**

 

In October 1999, weadopted the Non-Qualified Acquisition Stock Option Plan (the “1999 Plan”). The1999 Plan provides for the granting of NSOs to our employees and consultants.Officers may only receive grants under the 1999 Plan in connection with their initialservice to us, and Board members may not receive any grants under the 1999Plan. We reserved 3,500,000 shares of common stock for issuance under the 1999Plan at the time of its adoption. The standard form of Stock Option Agreementused under the 1999 Plan provides that the options are exercisable over aperiod not to exceed ten years from the date of the grant. Options grantedunder the 1999 Plan generally vest as to 25% of the shares one year after thedate of grant and as to the remaining options in equal monthly installmentsover the next 36 months. The exercise price of all options granted underthe 1999 Plan has been the fair market value of our common stock on the grantdate, as determined by the closing price of the common stock on Nasdaq on thatdate. During the year ended February 28, 2003, we ceased issuing optionsfrom this plan. All remaining options available for grant were removed from theplan at that time.

 

The 1999 Plan expires inOctober 2009.

 

**EmployeeStock Purchase Plan**

 

In December 1998, theBoard adopted the 1998 Employee Stock Purchase Plan (the “Purchase Plan”),which became effective February 1999. The Purchase Plan reserves 600,000shares of common stock for issuance thereunder. On each March 1 beginningin 2000, the aggregate number of shares reserved for issuance under thePurchase Plan is increased automatically to the lesser of 400,000 shares, 1% ofthe outstanding shares on such date, or a lesser amount determined by the Boardof Directors. Employees

 

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generally are eligible to participate in the Purchase Plan if they arecustomarily employed by us for more than 20 hours per week and more thanfive months in a calendar year and are not (and would not become as a result ofbeing granted an option under the Purchase Plan) 5% stockholders. Under thePurchase Plan, eligible employees select a rate of payroll deduction up to 15%of their W-2 cash compensation subject to certain maximum purchase limitations.Each offering period has a maximum duration of two years and consists of foursix-month purchase periods. Depending on the effective date, the first purchaseperiod is approximately six months long. Offering Periods and purchase periodsthereafter begin on April 15 and October 15. The price at which thecommon stock is purchased under the Purchase Plan is 85% of the lesser of thefair market value of our common stock on the first day of the applicableoffering period or on the last day of that purchase period.

 

**SelectedInformation Regarding all Stock Option Plans**

 

The following tablesummarizes all stock option activity (in thousands, except per share amounts):

 

| ** **                       | ** ** | ** **    | ** ** | **Options Outstanding** | ** ** |
|----------------------------------|------------|---------------|------------|-------------------------|------------|
| ** **                       | ** ** | ** **    | ** ** | ** **              | ** ** | **Weighted** | ** ** |
| ** **                       | ** ** | **Options**   | ** ** | ** **              | ** ** | **Average** | ** ** |
| ** **                       | ** ** | **Available** | ** ** | **Number of**           | ** ** | **Exercise** | ** ** |
| ** **                       | ** ** | **For Grant** | ** ** | **Options**             | ** ** | **Price** | ** ** |
| **Balance at February 28, 2002** |       | 1,357         |       | 9,298                   |       | $ | 7.84 |   |
| Shares authorized                |       | 2,427         |       | —                  |       | — |   |
| Plan shares expired              |       | (2,172        | )          | —                  |       | — |   |
| Options granted at fair value    |       | (2,603        | )          | 2,603                   |       | 0.83 |   |
| Options exercised                |       | —        |       | (199                    | )          | 0.60 |   |
| Options canceled                 |       | 3,367         |       | (3,367                  | )          | 6.21 |   |
| **Balance at February 28, 2003** |       | 2,376         |       | 8,335                   |       | 2.57 |   |
| Shares authorized                |       | 3,000         |       | —                  |       | — |   |
| Plan shares expired              |       | (49           | )          | —                  |       | — |   |
| Options granted at fair value    |       | (3,760        | )          | 3,760                   |       | 1.37 |   |
| Options exercised                |       | —        |       | (1,317                  | )          | 0.99 |   |
| Options canceled                 |       | 1,438         |       | (1,438                  | )          | 3.20 |   |
| **Balance at February 29, 2004** |       | 3,005         |       | 9,340                   |       | 2.21 |   |
| Shares authorized                |       | 3,000         |       | —                  |       | — |   |
| Plan shares expired              |       | (33           | )          | —                  |       | — |   |
| Options granted at fair value    |       | (2,950        | )          | 2,950                   |       | 1.39 |   |
| Options exercised                |       | —        |       | (401                    | )          | 1.01 |   |
| Options canceled                 |       | 554           |       | (554                    | )          | 3.29 |   |
| **Balance at February 28, 2005** |       | 3,576         |       | 11,335                  |       | 1.98 |   |
|                                  |            |               |            |                         |            |  |  |  |

 

At February 28, 2005,February 29, 2004 and February 28, 2003, approximately 6.2 million,4.2 million, and 3.5 million options were exercisable at a weightedaverage exercise price per share of $2.56, $3.33, and $2.57, respectively.

 

The following tablesummarizes the information about all stock options outstanding and exercisableas of February 28, 2005 (in thousands, except per share amounts and years):

 

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| ** **                    | ** ** | **Options Outstanding at February 28, 2005** | ** ** | **Options Vested** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|--------------------|------------|
| ** **                    | ** ** | ** **                                   | ** ** | **Weighted**       | ** ** | ** ** | ** ** | **and Exercisable at** | ** ** |
| ** **                    | ** ** | ** **                                   | ** ** | **Average**        | ** ** | ** ** | ** ** | **February 28, 2005** | ** ** |
| ** **                    | ** ** | ** **                                   | ** ** | **Remaining**      | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                    | ** ** | **Number**                                   | ** ** | **Contractual**    | ** ** | **Average** | ** ** | **Number** | ** ** | **Average** | ** ** |
| **Range of  Exercise Prices** | ** ** | **Outstanding**                              | ** ** | **Life**           | ** ** | **Exercise  Price** | ** ** | **Outstanding** | ** ** | **Exercise  Price** | ** ** |
| $  0.01  - 0.77     |       |                                         | 2,500      |               | 7.04       |   | $ | 0.66 |   | 1,689 |   | $ | 0.62 |   |
| 0.80 - 1.12                   |       |                                         | 1,830      |               | 7.56       |   | 0.89 |   | 1,375 |   | 0.90 |   |
| 1.16 - 1.39                   |       |                                         | 1,844      |               | 8.50       |   | 1.16 |   | 681 |   | 1.16 |   |
| 1.41 - 1.41                   |       |                                         | 2,337      |               | 9.43       |   | 1.41 |   | 296 |   | 1.41 |   |
| 1.45 - 2.11                   |       |                                         | 1,387      |               | 6.01       |   | 1.79 |   | 1,156 |   | 1.78 |   |
| 2.19 - 73.00                  |       |                                         | 1,437      |               | 7.33       |   | 7.85 |   | 1,011 |   | 10.24 |   |
|                          |       |                                         |       |               |       |   |   |   |   |   |   |   |
|                          |       |                                         | 11,335     |               | 7.77       |   | 1.98 |   | 6,208 |   | 2.56 |   |
|                               |            |                                              |            |                    |            |  |  |  |  |  |  |  |  |  |

 

As of February 28, 2005, wehad change of control severance agreements with six of our employees, five ofwhom were executive officers. The agreements provide that if we experience achange of control, and the employee is involuntarily terminated without causewithin twelve months following the change of control or the announcement ofsuch change of control, we will provide additional vesting of unvested stockoptions, in addition to any vesting acceleration provided under the 1996 StockOption Plan.  Two of the agreementsprovide for one year of additional vesting of unvested stock options and fourof the agreements provide for immediate vesting of all of the employee’sunvested stock options.

 

These agreements weremodifications to the terms of the original grants, and create a new measurementdate for the shares affected. Any additional compensation charge will be takenwhen and if the officers achieve a benefit from the change (i.e., if a changein control or termination occurs). Under these agreements, approximately1.3 million shares were modified, resulting in a contingent additionalmaximum compensation charge of approximately $1.2 million at February 28, 2005.The recognition of the compensation charge, if any, depends on whether theemployee ultimately retains an option award that would have been otherwiseforfeited under the option or award’s original vesting terms.

 

In January 2002, weissued options to purchase 150,000 shares of common stock, at an exercise priceof $1.99 per share, to a consultant in consideration for services rendered. Theoptions vested monthly over 12 months and expire in 5 years. Theoptions were valued using the Black-Scholes option pricing model. The monthlyBlack-Scholes valuation was based on a volatility between 144% and 156%,risk-free interest rates between 2.76% and 4.34%, a 5 year life, and azero dividend yield. The fair value of the options totaled approximately$169,000 over their vesting period and was recorded in general andadministrative expense.

 

**Unearned Stock-BasedCompensation**

 

In connection with ouracquisition of Janus Technologies, Inc. during the year endedFebruary 28, 2001, we recognized unearned compensation totaling$1.5 million, which was being amortized over the vesting periods of therelated options. Amortization expense related to all stock-based compensationrecognized during the years ended February 28, 2005, February 29, 2004 andFebruary 28, 2003, totaled approximately zero, $28,000, and$1.0 million, respectively.

 

**NOTE 10.              ASSET SALE**

 

In May 2002, we soldsubstantially all of the assets related to our Asset Management softwarebusiness to Computer Associates International, Inc. for approximately$9.5 million in cash. In connection

 

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with this sale, our July 2001 agreement with Computer Associatesfor its resale of our Argis suite of software products was terminated. Inaddition, as part of that asset sale, we assigned to Computer Associates ourMay 2001 agreement with Corporate Software (now Software Spectrum) for itsresale of our Argis suite of software products. Because of the asset sale,Software Spectrum has the right to terminate that agreement. If it does so, allof the shares subject to the warrant that we issued to Corporate Software inMay 2001 will immediately become exercisable. The fair value of thewarrant had been recorded as prepaid distribution costs and was beingrecognized as a reduction of revenue over the lesser of a ratable charge overthe 24-month term of the agreement with Corporate Software or the period ittook Corporate Software to generate revenue to Intraware of $1.6 millionfrom Corporate Software’s resale of our asset management software. As noadditional revenue would be generated for us under this distribution agreement,the remaining unamortized prepaid distribution costs of $936,000 were recordedas a reduction to revenue during the year ended February 28, 2003.

 

The total proceeds from thesale of $9.5 million, less the book value of transferred equipment,intangible assets including goodwill, deferred revenue, and transaction costs,based on their respective carrying values at the sale date, were recorded as again on sale of assets in the year ended February 28, 2003.

 

We determinedthe calculation of the gain on sale as follows (in thousands):

 
| Total Consideration                                                  |   | $      | 9,500 |   |
|----------------------------------------------------------------------|--------|--------|-------|--------|
| Net book value of equipment, intangible  assets and deferred revenue |   | (6,536 | )     |
| Transaction costs                                                    |   | (308   | )     |
| Gain on sale                                                         |   | $      | 2,656 |   |

 

In connection with ourdisposition of the Asset Management software business, we announced arestructuring and workforce reduction to reduce our operating expenses.

 

We recorded a charge of$1.8 million relating to this restructuring and the impairment of assetsduring the three months ended May 31, 2002.

 

The impairment of assetsincludes the write-off of approximately $403,000 in prepaid licenses that wereheld for resale. The restructuring charge consisted of approximately $345,000for severance and benefits relating to the involuntary termination of 14employees who were not hired by Computer Associates. We terminated anadditional 33 employees, all of whom were based in North America. These 33terminated employees were all hired by Computer Associates and thereforereceived no severance payments. Of the 47 terminated employees, 22 were in Salesand Marketing, 10 were in Product Development and 15 were directly involved inour product support. We also closed our Pittsburgh, Pennsylvania office andvarious satellite offices.

 

We accrued for lease andrelated costs of approximately $983,000, principally pertaining to theestimated future obligations of non-cancelable lease payments for excessfacilities that were vacated due to our reductions in work force. We alsorecognized $63,000 relating to other restructuring expenses. Due to changes inmanagement’s estimates relating to the restructuring during the three monthsended August 31, 2002, we recognized an additional expense of $106,000pertaining to the estimated future obligations of non-cancelable lease paymentsfor excess facilities that were vacated due to our reductions in work force. Inaddition, we did not incur projected severance and benefits of $106,000 andreduced the reserve accordingly. During the three months endedFebruary 28, 2003, we terminated our Pittsburgh, Pennsylvania lease andrealized a savings of approximately $152,000 in rent that would otherwise havebeen payable, and which was included in the restructuring line item on theconsolidated statement of operations.

 

In our December 2000restructuring, we closed our Fremont, California office and assigned our leaseto a new tenant while acting as guarantor for that tenant. In May 2002,the new tenant defaulted on its lease. During the three months endedNovember 30, 2002, we made a cash payment of approximately

 

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$214,000 to terminate this lease.

 

The following table setsforth an analysis of the components of the restructuring and impairment ofassets charges recorded in our year ended February 29, 2004, and subsequentadjustments and payments made against the reserve (in thousands):

 
| ** **                           | ** ** | **Severance and**

**benefits** | ** ** | **Excess lease and  related costs** | ** ** | **Impairment of  assets** | ** ** | **Other costs** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|---------------------------|------------|-----------------|------------|-----------|------------|
|                                 |       |                            |       |                                |       |                      |       |            |       |      |       |
| May 23, 2002 restructuring           |       | $                               | 345        |                                | $          | 983                       |       | $               | 403        |      | $          | 63 |   | $ | 1,794 |   |
|                                 |       |                            |       |                                |       |                      |       |            |       |      |       |
| Cash paid                            |       | (239                            | )          | (858                                | )          | —                    |       | —          |       | (1,097    | )          |
| Non-cash charges                     |       | —                          |       | (69                                 | )          | (403                      | )          | (63             | )          | (535      | )          |
| Provision adjustment                 |       | (106                            | )          | (46                                 | )          | —                    |       | —          |       | (152      | )          |
| Reserve balance at February 28, 2003 |       | —                          |       | 10                                  |       | —                    |       | —          |       | 10        |       |
|                                 |       |                            |       |                                |       |                      |       |            |       |      |       |
| Cash paid                            |       | —                          |       | (10                                 | )          | —                    |       | —          |       | (10       | )          |
|                                 |       |                            |       |                                |       |                      |       |            |       |      |       |
| Reserve balance at February 29, 2004 |       | $                               | —     |                                | $          | —                    |       | $               | —     |      | $          | — |   | $ | — |   |

 

As of February 28, 2005, wehave settled all liabilities associated with the May 2002 restructuringand the sale of the Asset Management software business, subject to the ongoingindemnification obligation discussed in Note 5.

 

**NOTE 11.              RESTRUCTURING**

 

During the year endedFebruary 28, 2005 we realized a payroll tax refund for overpaid payroll taxesof approximately $75,000.  These overpaid payroll taxes related tosupplemental unemployment compensation benefits for involuntarily terminatedemployees during our restructuring events in December 2000,August 2001 and May 2002.  As of February 28, 2005 we believe alltransactions relating to past restructuring events have been recognized.

 

**NOTE 12.              SEGMENT AND GEOGRAPHIC INFORMATION**

 

During the years ended February 28, 2005, February 29, 2004 andFebruary 28, 2003, we operated in a single business segment providing onlinepurchasing and delivery services for business software.  The geographic distributions of our revenues wereas follows (in thousands):

 

| ** **    | ** ** | **For the Year Ended** | ** ** |
|---------------|------------|------------------------|------------|
| ** **    | ** ** | **February 28, 2005**  | ** ** | **February 29, 2004** | ** ** | **February 28, 2003** | ** ** |
| Revenue:      |       |                   |       |   |   |   |   |   |   |   |
| North America |       | $                      | 9,602      |   | $ | 10,212 |   | $ | 13,607 |   |
| Europe        |       | 1,233                  |       | 695 |   | 435 |   |
|          |       |                   |       |   |   |   |   |
| Total         |       | $                      | 10,835     |   | $ | 10,907 |   | $ | 14,042 |   |

 

Our assets areprimarily located in the United States of America and not allocated to anyspecific region.  We do not producereports for, or measure the performance of, our geographic regions on anyasset-based metrics.  However, thegeographic revenues listed above have been categorized in accordance with theregion in which the customer is based. Total revenue for North America, primarily relates to revenue within theUnited States.

 

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**SUPPLEMENTARYDATA**

 

The following table setsforth selected unaudited quarterly information for our last eight fiscalquarters (in thousands, except per share amounts). We believe all necessaryadjustments (which consisted only of normal recurring adjustments) have beenincluded in the amounts stated below to state fairly the results of suchperiods when read in conjunction with the consolidated financial statements andrelated notes included elsewhere herein.

 
| ** **                                         | ** ** | **For the quarter ended** | ** ** |
|----------------------------------------------------|------------|---------------------------|------------|
| ** **                                         | ** ** | **Feb. 28  2005**         | ** ** | **Nov. 30,  2004** | ** ** | **Aug. 31,  2004** | ** ** | **May 31,  2004** | ** ** |
| Revenue                                            |       | $                         | 2,865      |   | $ | 2,529 |   | $ | 2,594 |   | $ | 2,847 |   |
| Gross profit                                       |       | 1,562                     |       | 1,378 |   | 1,474 |   | 1,852 |   |
| Loss from operations                               |       | (352                      | )          | (793 | ) | (659 | ) | (92 | ) |
| Net loss                                           |       | (327                      | )          | (767 | ) | (659 | ) | (105 | ) |
| Basic and diluted net loss per share               |       | $                         | (0.01      | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.00 | ) |
| Weighted average shares - basic and fully  diluted |       | 60,420                    |       | 60,361 |   | 60,119 |   | 59,617 |   |

 
| ** **                                       | ** ** | **For the quarter ended** | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|
| ** **                                       | ** ** | **Feb. 29  2004**         | ** ** | **Nov. 30,  2003** | ** ** | **Aug. 31,  2003** | ** ** | **May 31,  2003** | ** ** |
| Revenue                                          |       | $                         | 3,043      |   | $ | 2,526 |   | $ | 2,525 |   | $ | 2,813 |   |
| Gross profit                                     |       | 1,948                     |       | 1,499 |   | 1,400 |   | 1,600 |   |
| Income (loss) from operations                    |       | 20                        |       | (479 | ) | (943 | ) | (854 | ) |
| Net income (loss)                                |       | 19                        |       | (498 | ) | (992 | ) | (909 | ) |
| Basic and diluted (earnings) net loss per  share |       | $                         | 0.00       |   | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) |
| Weighted average shares - basic                  |       | 59,489                    |       | 58,491 |   | 53,526 |   | 52,202 |   |
| Weighted average shares - fully diluted          |       | 64,499                    |       | 58,491 |   | 53,526 |   | 52,202 |   |

 

The quarter ended February 29,2004 includes the application of a credit from a vendor relating to internetexpenses of approximately $0.1 million. The credit was issued inrelationship to a renegotiation and correction of fees charged to us during ourfiscal year 2004 and was recorded as a reduction to cost of revenues andoperating expenses.

 
| **ITEM 9****.** | ** ** | **CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.** |
|-----------------|------------|--------------------------------------------------------------------------------------------|

 

None.

 
| **ITEM 9A****.** | ** ** | **CONTROLS AND PROCEDURES.** |
|------------------|------------|------------------------------|

 

(a)           *Evaluation of DisclosureControls and Procedures*. Ourprincipal executive officer and principal financial officer, after evaluatingthe effectiveness of our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934(the “Exchange Act”)) as of February 28, 2005, have concluded that ourdisclosure controls and procedures are effective based on their evaluation ofthe controls and procedures required by paragraph (b) of the Exchange ActRules 13a-15 or 15d-15.

 

Since we are not yet anaccelerated filer, we are not currently required to comply with Section 404 (*Management Assessment of Internal Controls*) of theSarbanes-Oxley Act of 2002.  We are inthe process of implementing what we believe will be sufficient internal controlstructures and procedures for our financial reporting such that our managementcan provide the required certifications as to these structures

 

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and procedures in our Annual Report on Form 10-K for our fiscal yearending February 28, 2006.

 

(b)           *Changes in InternalControls over Financial Reporting*. No changes in our internal control over financial reportingidentified in connection with the evaluation required by paragraph (d) ofExchange Act Rules 13a-15 or 15d-15 occurred during our last fiscal quarterthat have materially affected or are reasonably likely to materially affect,our internal control over financial reporting.

 

**ITEM 9B****.               OTHERINFORMATION.**

 

Not applicable.

 

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# **PART III**

# ** **

**ITEM 10****.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

**Directors**

 

OurBoard of Directors currently has six members, who are divided among threeclasses with overlapping three year terms. Our Board also currently has onevacancy.  Below is information on ourdirectors, as of April 15, 2005.

 
| ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | **Year Current** | ** ** | **Independent/**          | ** ** | **Chair and Committee**                                                                                                    | ** ** |
|-----------------------|------------|------------|------------|------------|------------|------------------|------------|---------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| **Name**              | ** ** | **Age**    | ** ** | **Class**  | ** ** | **Term Ends**    | ** ** | **Not Independent†** | ** ** | **Assignments**                                                                                                            | ** ** |
| ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | ** **                | ** ** | ** **                                                                                                                 | ** ** |
| Peter H. Jackson      |       | 46         |       | III        |       | 2007             |       | Not Independent           |       | Chairman of  the Board.                                                                                                    |       |
|                  |       |       |       |       |       |             |       |                      |       |                                                                                                                       |       |
| Mark B. Hoffman       |       | 58         |       | III        |       | 2007             |       | Independent               |       |                                                                                                                       |       |
|                  |       |       |       |       |       |             |       |                      |       |                                                                                                                       |       |
| Brendan A. McLoughlin |       | 66         |       | II         |       | 2006             |       | Independent               |       | Chairman,  Compensation Committee. Member, Audit, Nominating and Corporate Governance,  and Special Litigation committees. |       |
|                  |       |       |       |       |       |             |       |                      |       |                                                                                                                       |       |
| Raymond L. Ocampo Jr. |       | 52         |       | II         |       | 2006             |       | Independent               |       | Chairman,  Nominating and Corporate Governance and Special Litigation committees.  Member, Compensation Committee.         |       |
|                  |       |       |       |       |       |             |       |                      |       |                                                                                                                       |       |
| Peter F. Pervere      |       | 58         |       | I          |       | 2005             |       | Independent               |       | Chairman,  Audit Committee. Member, Compensation Committee.                                                                |       |
|                  |       |       |       |       |       |             |       |                      |       |                                                                                                                       |       |
| Bradley M. Shuster    |       | 50         |       | I          |       | 2005             |       | Independent               |       | Member,  Audit Committee.                                                                                                  |       |

 

----

**†****         **Independence is determined in accordance with the applicable rules ofThe Nasdaq Stock Market and the Securities and Exchange Commission.

 

***Peter H. Jackson*** co-founded Intraware in August 1996 asPresident, Chief Executive Officer and a member of the Board of Directors.  While continuing as a member of the Board ofDirectors, he assumed the title of Chief Executive Officer in December 2000;President and Chief Executive Officer in September 2002; and Chairman, ChiefExecutive Officer and President in November 2003.  Prior to joining Intraware, he served asfounder and President of Granite Computer Products, Inc., a corporate computerhardware reseller and services provider; President and Chief Operating Officerof Dataflex Corporation, a value-added reseller of computer hardware andservices; and Vice President of Vanstar Corporation, a computer hardware andservices company.  Mr. Jackson holdsan A.B. in History from the University of California, Berkeley.

 

***Mark B. Hoffman*** has served as a member of our Board ofDirectors since August 1996. He was Chairman of our Board untilNovember 2003. From September 1996 until October 2004,Mr. Hoffman served as Chairman of the Board of Directors and ChiefExecutive Officer of Commerce One, Inc., an e-commerce procurement andsupplier-management solutions company. Commerce One, Inc. filed a voluntarypetition for relief under Chapter 11 of the United States Bankruptcy Code inOctober 2004.  Prior to joining CommerceOne, Mr. Hoffman served as Chief Executive Officer and President ofSybase, Inc., a

 

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company he co-founded in 1984. Prior to Sybase, Mr. Hoffman’sexperience includes management positions at Britton Lee, a manufacturer ofdatabase machines, and at Amdahl Corporation. Mr. Hoffman holds an M.B.A.from the University of Arizona and a B.S. in Engineering from the U.S. MilitaryAcademy.

 

***Brendan A. McLoughlin*** has served as a member of our Board ofDirectors since July 2002. He is a member of the Audit Committee, theNominating and Corporate Governance Committee and the Special LitigationCommittee, and is the Chairman of the Compensation Committee. FromSeptember 1998 to April 2001, Mr. McLoughlin served as SeniorVice President of Sales at Navigation Technologies Corporation, a databasesoftware company. From August 1997 to June 1998 he served as SeniorVice President of Sales for Fujitsu Personal Computer Company, and fromSeptember 1996 to July 1997 he served as Senior Vice President ofWorld-Wide Sales at Vision Tek Corporation, a 3D graphic accelerator company.From May 1993 to August 1996, he served as Senior Vice President ofWorld-Wide Sales at Dataflex Corporation, a value-added reseller of computerhardware and services. From 1983 to 1993, Mr. McLoughlin held variousmanagement positions at Compaq Computer Corporation, including Vice Presidentof North American Corporate Sales. From 1968 to 1983, he held various positionsat IBM Corporation. Mr. McLoughlin holds a B.A. in Business Administrationfrom Belmont Abbey College and has completed executive management courses atHarvard University Business School and the University of Pennsylvania WhartonSchool of Business.

 

***Raymond L. Ocampo Jr.*** has served as a member of our Board ofDirectors since November 2003. He is a member of the CompensationCommittee, and is the Chairman of the Nominating and Corporate GovernanceCommittee and of the Special Litigation Committee. He has been a member of theboard of directors of the Berkeley Center for Law & Technology sinceJanuary 2000 and served as Executive Director from August 1997through December 1999. Mr. Ocampo has been since April 2004 thePresident and Chief Executive Officer of Samurai Surfer LLC, a consulting andinvestment company. Mr. Ocampo was Senior Vice President, General Counseland Secretary at Oracle Corporation from September 1990 until his retirementin November 1996. He held other senior positions in Oracle’s LegalDepartment between July 1986 and September 1990. Mr. Ocampo is amember of the board of directors of CytoGenix, Inc., KeynoteSystems, Inc., The PMI Group, Inc. and VitalStream Holdings, Inc.,and previously served on the board of directors of Vantive Corporation. Heholds a B.A. from the University of California, Los Angeles and a J.D. fromBoalt Hall School of Law at the University of California, Berkeley.

 

***Peter F. Pervere*** has served as a member of our Board ofDirectors since March 2003. He is the Chairman of the Audit Committee andis a member of the Compensation Committee. From April 1997 untilFebruary 2000, Mr. Pervere served as Vice President and ChiefFinancial Officer and from February 2000 to May 2002 he served asSenior Vice President and Chief Financial Officer of Commerce One, Inc.From 1987 to April 1997, Mr. Pervere was at Sybase, Inc.,serving as Vice President and Corporate Controller from 1991 to 1997. Prior tojoining Sybase, Mr. Pervere served for five years on the auditing staff,including three years as an audit manager, at the accounting firm ofErnst & Young LLP. He is a member of the Board of Directors of DigitalImpact, Inc., a provider of integrated digital marketing solutions forenterprises. Mr. Pervere holds a B.A. degree in History from StanfordUniversity.

 

***Bradley M. Shuster*** has served as a member of our Board ofDirectors since May 2004. He is a member of the Audit Committee. SinceJanuary 1, 2003, Mr. Shuster has served as President, Internationaland Strategic Investments of The PMI Group and President and Chief ExecutiveOfficer of PMI Capital Corporation. From February 1999 toDecember 2002, he served as Executive Vice President Corporate Developmentof The PMI Group and PMI Mortgage Insurance Co. From 1995 toFebruary 1999, he served as Senior Vice President, Treasurer and ChiefInvestment Officer of the PMI Group and PMI Mortgage Insurance Co. Prior tojoining PMI, he was an audit partner with the accounting firm ofDeloitte & Touche LLP, where he was employed from January 1978 toJuly 1995. Mr. Shuster holds a B.S. degree from the University ofCalifornia, Berkeley and an M.B.A. from the University of California, LosAngeles.

 

TheBoard has a standing Audit Committee established in accordance with the SecuritiesExchange Act of 1934, the members of which are identified above.  The Board has determined that Mr.

 

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Pervereis an audit committee financial expert for purposes of applicable SEC rules,and that Mr. Pervere meets the independence standards for auditcommittee members under applicable SEC and Nasdaq Stock Market rules.

 

**ExecutiveOfficers**

 

Asof April 15, 2005, our executive officers were:

 
| **Name**             | ** ** | **Age** | ** ** | **Position**                                           |
|----------------------|------------|---------|------------|--------------------------------------------------------|
| Peter  H. Jackson    |       | 46      |       | Chairman,  Chief Executive Officer and President.      |
|                 |       |    |       |                                                   |
| Richard  J. Northing |       | 40      |       | Executive  Vice President and Chief Operating Officer. |
|                 |       |    |       |                                                   |
| Wendy  A. Nieto      |       | 40      |       | Executive  Vice President and Chief Financial Officer. |
|                 |       |    |       |                                                   |
| John  J. Moss        |       | 42      |       | Senior  Vice President and General Counsel.            |

 

***Peter H. Jackson*** co-founded Intraware in August 1996 asPresident, Chief Executive Officer and a member of the Board of Directors.  While continuing as a member of the Board ofDirectors, he assumed the title of Chief Executive Officer in December 2000;President and Chief Executive Officer in September 2002; and Chairman, ChiefExecutive Officer and President in November 2003.  Prior to joining Intraware, he served asfounder and President of Granite Computer Products, Inc., a corporate computerhardware reseller and services provider; President and Chief Operating Officerof Dataflex Corporation, a value-added reseller of computer hardware andservices; and Vice President of Vanstar Corporation, a computer hardware andservices company.  Mr. Jackson holdsan A.B. in History from the University of California, Berkeley.

 

***Richard J. Northing*** joined us as Project Manager inMay 1999. He became Director of Project Management in October 1999,Senior Director of Project Management in May 2000, Vice President ofTechnology and Operations in March 2001, Senior Vice President ofTechnology and Operations in February 2005, and Executive Vice President and ChiefOperating Officer in March 2005.  Priorto joining Intraware, he held senior consulting positions at Accenture and atElectronic Data Systems Corporation. Dr. Northing holds a B.Sc. from theUniversity of Liverpool, U.K., and a D.Phil from Oxford University, U.K.

 

***Wendy A. Nieto*** joined us in April of 2000 as Controller.She became Vice President of Finance in August 2001, Chief FinancialOfficer and Senior Vice President of Finance in April 2002, ChiefFinancial Officer and Executive Vice President of Technology and Operations inAugust 2003, and Executive Vice President and Chief Financial Officer in March2005. Prior to joining Intraware, she was Director of Finance at ChironCorporation, a biotechnology company. A Certified Public Accountant,Mrs. Nieto was also employed by various accounting firms. Mrs. Nietoholds a B.S. from California State University, Hayward and an M.B.A. from St.Mary’s University.

 

***John J. Moss*** joined us as General Counsel inOctober 1999.  He became VicePresident and General Counsel in August 2001, and Senior Vice President andGeneral Counsel in February 2005.  Priorto joining Intraware, he served as Deputy General Counsel of Barra, Inc.,Corporate Counsel of Oracle Corporation, and an associate at the law firm ofGraham & James. Mr. Moss holds a J.D. from Stanford University,an M.A. in International Economics from the Johns Hopkins School of AdvancedInternational Studies, and a B.A. from Sarah Lawrence College.

 

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**Code ofEthics**

 

Ourwebsite (www.intraware.com/company/corp_governance/index.html) containsIntraware’s Code of Ethics, which applies to our directors, executive officersand employees. Any amendment to the Code of Ethics that applies to ourdirectors or executive officers will be disclosed on our website, and anywaiver of the Code of Ethics for directors or executive officers may be madeonly by our Board of Directors or the Audit Committee and will be disclosed onour website.

 

**Section16(a) Beneficial Ownership Reporting Compliance**

 

Section 16(a)of the Securities and Exchange Act of 1934, as amended, requires our directorsand executive officers, and persons who own more than 10% of our common stock,to file reports with the SEC regarding their ownership and changes in ownershipof our securities.  Based solely on our review of those filed reports, webelieve that all of those persons complied with the applicable filingrequirements with respect to our fiscal year ended February 28, 2005, except asfollows:

 

OnFebruary 4, 2004, Passport Management LLC (“Passport”) became a holder of 10%of our common stock.  Passport reportedthis event in a Form 3 filed with the SEC on June 28, 2004.  Between February 4 and June 22, 2004,Passport made 69 purchases for an aggregate of 1,946,773 shares of our commonstock, and 25 sales for an aggregate of 1,093,142 shares of our common stock,in transactions that were reported on Forms 4 filed with the SEC on July 7 and8, 2004.  Between October 19 and December31, 2004, Passport made 12 sales for an aggregate of 495,700 shares of ourcommon stock in transactions that were reported on a Form 5 filed with the SECon February 15, 2005.

 

OnMarch 12, 2004, John J. Moss received an employee stock option grant for 10,000shares of our common stock, in a transaction that was reported on a Form 4filed with the SEC on March 30, 2004.

 

OnApril 14, 2004, Peter H. Jackson purchased 5,000 shares of our common stockpursuant to our Employee Stock Purchase Plan, in a transaction that wasreported on a Form 4 filed with the SEC on April 22, 2004.

 

**ITEM 11****.       EXECUTIVE COMPENSATION**

 

**SummaryCompensation Table**

 

Thefollowing table shows for the fiscal years ended February 28, 2005, February29, 2004, and February 28, 2003 the compensation of our Chief ExecutiveOfficer, our four other most highly compensated executive officers for the mostrecent fiscal year, and two other individuals who would have been among thefour most highly compensated if they had been officers as of February 28, 2005.

 

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| ** **                             | ** ** | ** ** | ** ** | ** **              | ** ** | ** **     | ** ** | ** **       | ** ** | **Long-term**    | ** ** |
|----------------------------------------|------------|------------|------------|-------------------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **              | ** ** | ** **     | ** ** | ** **       | ** ** | **Compensation** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | ** **              | ** ** | ** **     | ** ** | ** **       | ** ** | **Awards**       | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Securities** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | ** **              | ** ** | ** **     | ** ** | **Other Annual** | ** ** | **Underlying**   | ** ** |
| **Name and Principal Position**        | ** ** | **Year**   | ** ** | **Salary**              | ** ** | **Bonus**      | ** ** | **Compensation** | ** ** | **Options (#)**  | ** ** |
| Peter H. Jackson                       |       | 2005       |       | $                       | 300,200    |           | $          | —           |       | $                | —     |   | 500,000 |   |
| Chairman, Chief Executive Officer, and |       | 2004       |       | $                       | 300,400    |           | $          | —           |       | $                | —     |   | 1,750,000 |   |
| President                              |       | 2003       |       | $                       | 289,147    |           | $          | 15,000           |       | $                | —     |   | 200,000 |   |
|                                   |       |       |       |                    |       |           |       |             |       |             |       |
| Richard J. Northing                    |       | 2005       |       | $                       | 170,000    |           | $          | 15,500           | (1)   | $                | —     |   | 250,000 |   |
| Executive Vice President and           |       | 2004       |       | $                       | 165,000    |           | $          | 200              |       | $                | —     |   | 95,000 |   |
| Chief Operating Officer (2)            |       | 2003       |       | $                       | 162,938    |           | $          | 3,750            |       | $                | —     |   | 60,000 |   |
|                                   |       |       |       |                    |       |           |       |             |       |             |       |
| Wendy A. Nieto                         |       | 2005       |       | $                       | 180,000    |           | $          | —           |       | $                | —     |   | 250,000 |   |
| Executive Vice President and           |       | 2004       |       | $                       | 150,000    |           | $          | 1,147            |       | $                | —     |   | 250,000 |   |
| Chief Financial Officer (3)            |       | 2003       |       | $                       | 144,325    |           | $          | 2,500            |       | $                | —     |   | 150,000 |   |
|                                   |       |       |       |                    |       |           |       |             |       |             |       |
| John J. Moss                           |       | 2005       |       | $                       | 170,000    |           | $          | 11,250           | (4)        | $                | —     |   | 185,000 |   |
| Senior Vice President and General      |       | 2004       |       | $                       | 156,000    |           | $          | 1,147            |       | $                | —     |   | 95,000 |   |
| Counsel (5)                            |       | 2003       |       | $                       | 154,050    |           | $          | 5,063            |       | $                | —     |   | 150,000 |   |
|                                   |       |       |       |                    |       |           |       |             |       |             |       |
| Justin M. Benson                       |       | 2005       |       | $                       | 262,296    | (6)            | $          | —           |       | $                | 4,422      |   | 60,000 |   |
| Vice President of Sales and            |       | 2004       |       | $                       | 146,364    | (6)            | $          | —           |       | $                | —     |   | 160,000 |   |
| Marketing (7)                          |       | 2003       |       | $                       | 185,926    | (6)            | $          | —           |       | $                | —     |   | 40,000 |   |
|                                   |       |       |       |                    |       |           |       |             |       |             |       |
| Michael A. Price                       |       | 2005       |       | $                       | 193,896    | (6)            | $          | —           |       | $                | —     |   | 59,000 |   |
| Senior Director of Business            |       | 2004       |       | $                       | 159,763    | (6)            | $          | —           |       | $                | —     |   | 60,000 |   |
| Development                            |       | 2003       |       | $                       | 143,275    | (6)            | $          | —           |       | $                | —     |   | 40,000 |   |
|                                   |       |       |       |                    |       |           |       |             |       |             |       |
| David L. Dunlap (8)                    |       | 2005       |       | $                       | 212,859    | (6)            | $          | —           |       | $                | —     |   | 250,000 |   |
| Sales Advisor                          |       | 2004       |       | $                       | 161,147    | (6)            | $          | —           |       | $                | —     |   | 250,000 |   |
|                                   |       | 2003       |       | $                       | 173,000    | (6)            | $          | —           |       | $                | —     |   | 150,000 |   |

 

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(1)   Includes$7,500 in bonus earned in fiscal year 2005 and paid in fiscal year 2006.

 

(2)   Dr.Northing was Vice President of Technology and Operations at the end of our lastfiscal year and became Chief Operating Officer on March 30, 2005.

 

(3)   Mrs.Nieto was Chief Financial Officer and Executive Vice President of Technologyand Operations at the end of our last fiscal year and became Executive VicePresident and Chief Financial Officer on March 30, 2005.

 

(4)   Includes$11,250 in bonus earned in fiscal year 2005 and paid in fiscal year 2006.

 

(5)   Mr. Mosswas Vice President and General Counsel at the end of our last fiscal year andbecame Senior Vice President and General Counsel on March 3, 2005.

 

(6)   Includessales commissions.

 

(7)   Mr.Benson was Regional Vice President of Sales at the end of our last fiscal yearand became Vice President of Sales and Marketing on March 30, 2005.

 

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(8)   Mr.Dunlap was Executive Vice President of Sales and Marketing at the end of ourlast fiscal year and became Senior Sales Advisor on March 30, 2005.

 

**OptionsGranted During the Last Fiscal Year**

 

The following table setsforth information regarding stock options granted during our last fiscal year,including the potential realizable value over the ten-year term of the options,based on assumed rates of stock appreciation of 5% and 10% compounded annually,for the people named in the Summary Compensation Table above. These assumedrates of appreciation comply with applicable SEC rules and do not represent orestimate our future stock price. Actual gains, if any, on stock optionexercises will depend on the future prices of our common stock.

 
| ** **          | ** ** | **Individual Grants**                          | ** ** |
|---------------------|------------|------------------------------------------------|------------|
| ** **          | ** ** | **Number of  Securities  Underlying  Options** | ** ** | **Percent of  Total Options  Granted to  Employees In  Last** | ** ** | **Exercise  Price** | ** ** | **Expiration** | ** ** | **Potential Realizable Value at  Assumed Annual Rates of Stock  Price Appreciation for Option  Term** | ** ** |
| **Name**            | ** ** | **Granted (#)**                                | ** ** | **Fiscal Year** | ** ** | **($/share)** | ** ** | **Date** | ** ** | **5%** | ** ** | **10%** | ** ** |
| Peter H. Jackson    |       | 500,000                                        |       | 16.94 | % | $ | 1.41 |   | 8/3/2014 |   | $ | 443,371 |   | $ | 1,123,588 |   |
|                |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Richard J. Northing |       | 100,000                                        |       | 3.39 | % | $ | 1.41 |   | 8/3/2014 |   | $ | 88,674 |   | $ | 224,718 |   |
|                |       | 150,000                                        |       | 5.08 | % | $ | 0.86 |   | 2/24/2015 |   | $ | 81,127 |   | $ | 205,593 |   |
|                |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Wendy A. Nieto      |       | 250,000                                        |       | 8.47 | % | $ | 1.41 |   | 8/3/2014 |   | $ | 221,685 |   | $ | 561,794 |   |
|                |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| John J. Moss        |       | 10,000                                         |       | 0.34 | % | $ | 1.85 |   | 3/11/2014 |   | $ | 11,635 |   | $ | 29,484 |   |
|                |       | 100,000                                        |       | 3.39 | % | $ | 1.41 |   | 8/3/2014 |   | $ | 88,674 |   | $ | 224,718 |   |
|                |       | 75,000                                         |       | 2.54 | % | $ | 0.86 |   | 2/24/2015 |   | $ | 40,564 |   | $ | 102,796 |   |
|                |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Justin M. Benson    |       | 60,000                                         |       | 2.03 | % | $ | 1.41 |   | 8/3/2014 |   | $ | 53,204 |   | $ | 134,831 |   |
|                |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Michael A. Price    |       | 10,000                                         |       | 0.34 | % | $ | 1.85 |   | 3/11/2014 |   | $ | 11,635 |   | $ | 29,484 |   |
|                |       | 45,000                                         |       | 1.52 | % | $ | 1.41 |   | 8/3/2014 |   | $ | 39,903 |   | $ | 101,123 |   |
|                |       | 2,000                                          |       | 0.07 | % | $ | 1.12 |   | 11/14/2014 |   | $ | 1,409 |   | $ | 3,570 |   |
|                |       | 2,000                                          |       | 0.07 | % | $ | 1.16 |   | 11/29/2014 |   | $ | 1,459 |   | $ | 3,697 |   |
|                |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| David L. Dunlap     |       | 250,000                                        |       | 8.47 | % | $ | 1.41 |   | 8/3/2014 |   | $ | 221,685 |   | $ | 561,794 |   |
|                     |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**AggregateOption Exercises During Last Fiscal Year and Fiscal Year End Option Values**

 

The following table setsforth information regarding option exercises for the fiscal year ended February28, 2005, and exercisable and unexercisable options held as of February 28,2005, for the people named in the Summary Compensation Table. The “Value ofUnexercised In-the-Money Options at February 28, 2005” is based on a value of$0.86 per share (the closing price of our common stock on February 28, 2005,the last trading day of our fiscal year), less the per share exercise price ofthe option, multiplied by the number of shares issued upon exercise of theoption. All options were granted under our 1996 Stock Option Plan.  Initial grants under that plan vest as to 25%of the shares one year after the grant date and as to remaining shares ratablyover the next 36 months. Subsequent grants generally vest as to

 

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12.5% of the shares 6 monthsafter the grant date and as to the remaining shares ratably over the next 42months.

 
| ** **          | ** ** | **Shares**      | ** ** | ** **   | ** ** | **Number of Securities  Underlying  Unexercised Options at** | ** ** | **Value of Unexercised  In-the-Money Options at** | ** ** |
|---------------------|------------|-----------------|------------|--------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **          | ** ** | **Acquired on** | ** ** | **Value**    | ** ** | **February 28, 2005 (#)**                                    | ** ** | **February 28, 2005**                             | ** ** |
| **Name**            | ** ** | **Exercise**    | ** ** | **Realized** | ** ** | **Exercisable**                                              | ** ** | **Unexercisable**                                 | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Peter H. Jackson    |       | —          |       | —       |       | 2,449,998                                                    |       | 1,250,002                                         |       | $ | 212,050 |   | $ | 47,150 |   |
| Richard J. Northing |       | 10,500          |       | $            | 11,215     |                                                         | 151,375    |                                              | 324,375    |   | $ | 3,930 |   | $ | 2,325 |   |
| Wendy A. Nieto      |       | —          |       | —       |       | 351,455                                                      |       | 442,920                                           |       | $ | 11,937 |   | $ | 5,763 |   |
| John J. Moss        |       | 5,000           |       | $            | 6,150      |                                                         | 337,496    |                                              | 297,504    |   | $ | 11,487 |   | $ | 5,763 |   |
| Michael A. Price    |       | —          |       | —       |       | 108,749                                                      |       | 107,751                                           |       | $ | 3,200 |   | $ | 1,600 |   |
| Justin M. Benson    |       | —          |       | —       |       | 138,159                                                      |       | 180,483                                           |       | $ | 2,500 |   | $ | 1,550 |   |
| David L. Dunlap     |       | 60,000          |       | $            | 54,921     |                                                         | 387,080    |                                              | 442,920    |   | $ | 9,012 |   | $ | 5,763 |   |
|                     |            |                 |            |              |            |                                                              |            |                                                   |            |  |  |  |  |  |  |  |  |

 

**Compensationof Directors**

 

Ournon-employee directors receive the following cash compensation:

 

•      For Board membership:

 

•      The Chairman receives an annual retainerof $7,500 if he or she is a non-employee director.

 

•      Each other non-employee director receivesan annual retainer of $5,000.

 

•      Each non-employee director receives a $500fee per Board meeting attended, up to a maximum of $4,000 in total Boardmeeting fees per fiscal year.

 

•      For Audit Committee membership:

 

•      The Chairman receives an annual retainerof $6,000.

 

•      Each other Committee member receives anannual retainer of $4,000.

 

•      Each Committee member receives a $500 feeper Committee meeting attended, up to a maximum of $3,000 in total AuditCommittee meeting fees per fiscal year.

 

•      For membership on each other standingBoard committee (excluding special or temporary committees):

 

•      The chairman receives an annual retainerof $4,500.

 

•      Each other committee member receives anannual retainer of $3,000.

 

•      Each committee member receives a $500 feeper committee meeting attended, up to a maximum of $2,000 in total committeemeeting fees per fiscal year.

 

Inaddition, we reimburse non-employee directors for their reasonableout-of-pocket expenses incurred in attending Board and committee meetings.

 

Non-employeedirectors also receive automatic, nondiscretionary stock option grants at thetime they become directors and annually thereafter, under our 1998 DirectorOption Plan. Under this plan, a director receives an option grant for 15,000shares on the date of election to the Board, and receives an option grant for7,500 shares each year thereafter on the date of the annual meeting ofstockholders if the director has served on the Board for six months before theannual meeting. The initial grant vests over four

 

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years, 12.5% of the shares vesting six months after the grant date andthe balance vesting monthly in equal installments thereafter. Each subsequentgrant vests over two years, 25% of the shares vesting six months after thegrant date and the balance vesting monthly in equal installments thereafter.The exercise price of each grant is the fair market value of the stock on thedate of the grant. A copy of this plan is attached as an exhibit to ourRegistration Statement on Form S-8 filed with the SEC on January 18,2001.

 

Ouremployee directors receive no compensation for their service as directors.

 

**Employment Contracts and Termination of Employmentand Change-in-Control Arrangements**

 

Wehave also entered into a change of control severance agreement with each of ourexecutive officers. The agreements provide that if there is a change of controlof Intraware, and any of the executive officers is terminated without causewithin twelve months following the change of control or the announcement ofsuch change of control, Intraware will provide to the terminated executiveofficer:

 

•      a cash payment equal to 50% of his or herannual salary plus a pro rata portion of his or her annual target bonus;

 

•      100% of his or her health, dental and lifeinsurance, including benefits paid to any dependents, through the earlier ofsix months from the date of his or her termination or the date he or she firstbecomes covered by another employer’s group health, dental or life insuranceplans providing comparable benefits and coverage; and

 

•      full vesting of all unvested stockoptions.

 

**Compensation Committee Interlocks and Insider Participation**

 

Thefollowing members of our Board of Directors served on the CompensationCommittee of the Board during our last fiscal year:  Brendan A. McLoughlin, Chairman; Raymond L.Ocampo Jr.; and Peter F. Pervere.  Nomembers of our Compensation Committee serves or has served on the board ofdirectors or compensation committee of another entity that has one or moremembers serving on our Board of Directors or Compensation Committee.

 

**ITEM 12****.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

**Security Ownership of Certain Beneficial Owners**

 

Thetable below contains information about beneficial ownership of our common stockand our Series A Preferred Stock as of April 15, 2005 (except as otherwisenoted) by each person or entity who is known by us to own beneficially morethan 5% percent of that class of our stock. This table is based on informationprovided to us or filed with the SEC by these stockholders. Beneficialownership is determined in accordance with the rules of the SEC. Except asotherwise indicated, and subject to applicable community property laws, thepersons named in the table have sole voting and investment power with respectto all shares shown as beneficially owned. Applicable percentage ownership inthe following table is based on 60,454,872 shares of our common stock and552,486 shares of our Series A Preferred Stock (which is convertible intothe same number of shares of our common stock) outstanding as of April 15, 2005.

 

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| **Title of Class** | ** ** | **Name and Address**                                                                             | ** ** | **Number of Shares  Beneficially Owned** | ** ** | **Nature of  Beneficial  Ownership** | ** ** | **Percent of  Class** | ** ** |
|--------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
|               |       |                                                                                             |       |                                     |       |                                 |       |                  |       |
| Common             |       | John H.  Burbank III(1)  402 Jackson Street, San Francisco, CA 94111                             |       | 6,828,818                                |       | Indirect(1)                          |       | 11.3                  | %          |
|               |       |                                                                                             |       |                                     |       |                                 |       |                  |       |
| Common             |       | Passport  Capital, LLC(1)  402 Jackson Street, San Francisco, CA 94111                           |       | 6,828,818                                |       | Indirect(1)                          |       | 11.3                  |       |
|               |       |                                                                                             |       |                                     |       |                                 |       |                  |       |
| Common             |       | Passport  Holdings, LLC(1)  402 Jackson Street, San Francisco, CA 94111                          |       | 6,828,818                                |       | Indirect(1)                          |       | 11.3                  |       |
|               |       |                                                                                             |       |                                     |       |                                 |       |                  |       |
| Common             |       | Passport  Management, LLC(1)  402 Jackson Street, San Francisco, CA 94111                        |       | 6,828,818                                |       | Indirect(1)                          |       | 11.3                  |       |
|               |       |                                                                                             |       |                                     |       |                                 |       |                  |       |
| Common             |       | WM Advisors,  Inc.(2)  1201 Third Avenue, 22nd Floor, Seattle, WA 98101                          |       | 6,511,013                                |       | Direct                               |       | 10.7                  |       |
|               |       |                                                                                             |       |                                     |       |                                 |       |                  |       |
| Common             |       | Sanford J.  Colen(3)  c/o Apex Capital, LLC, 25 Orinda Way, Orinda, CA 94563                     |       | 5,845,000                                |       | Indirect(3)                          |       | 9.6                   |       |
|               |       |                                                                                             |       |                                     |       |                                 |       |                  |       |
| Common             |       | Apex Capital,  LLC(3)  25 Orinda Way, Orinda, CA 94563                                           |       | 5,775,000                                |       | Indirect(3)                          |       | 9.5                   |       |
|               |       |                                                                                             |       |                                     |       |                                 |       |                  |       |
| Common             |       | Passport  Master Fund, LP(1)  402 Jackson Street, San Francisco, CA 94111                        |       | 3,989,558                                |       | Direct                               |       | 7.4                   |       |
|               |       |                                                                                             |       |                                     |       |                                 |       |                  |       |
| Common             |       | Zomax  Incorporated(4)  5353 Nathan Lane, Plymouth, MN 55442                                     |       | 3,097,561                                |       | Direct                               |       | 5.2                   |       |
|               |       |                                                                                             |       |                                     |       |                                 |       |                  |       |
| Series A Preferred |       | Mark B.  Hoffman(5)  c/o Intraware, Inc., 25 Orinda Way, Orinda, CA 94563                        |       | 276,243                                  |       | Direct                               |       | 50.0                  |       |
|               |       |                                                                                             |       |                                     |       |                                 |       |                  |       |
| Series A Preferred |       | George M.  Drysdale(6)  c/o Drysdale Enterprises, 177 Bovet Road, Suite 600, San Mateo, CA 94402 |       | 276,243                                  |       | Direct                               |       | 50.0                  |       |
|               |       |                                                                                             |       |                                     |       |                                 |       |                  |       |
| Series A Preferred |       | Drysdale  Partners  c/o Drysdale Enterprises, 177 Bovet Road, Suite 600, San Mateo, CA 94402     |       | 138,121                                  |       | Direct                               |       | 25.0                  |       |

 

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(1)   John H.Burbank III is the sole managing member of Passport Capital, LLC; PassportCapital, LLC is the sole managing member of Passport Holdings, LLC and PassportManagement, LLC.  Passport Holdings, LLCis the general partner of Passport Master Fund, LP and Passport Master Fund II,LP.  Passport Management, LLC is theinvestment manager to Passport Master Fund, LP and Passport Master Fund II,LP.  As a result, each of PassportManagement, LLC, Passport Holdings, LLC, Passport Capital, LLC and Mr. Burbankmay be considered to share the power to vote or direct the vote of, and thepower to dispose or direct the disposition of, the shares owned of record by PassportMaster Fund, LP and Passport Master Fund II, LP.  The information herein regarding Mr. Burbank,Passport Capital, LLC, Passport Holdings, LLC, Passport Management, LLC, andPassport Master Fund, LP is based on a Schedule 13G/A filed by them andPassport Master Fund II, LP with the SEC on February 15, 2005.

 

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(2)   Theinformation herein regarding WM Advisors, Inc. is based on a Schedule 13G filedby it with the SEC on March 4, 2005.

 

(3)   ApexCapital, LLC is a registered investment adviser whose clients have the right toreceive or the power to direct the receipt of dividends from, or the proceedsfrom the sale of, the shares. Sanford J. Colen is the manager of Apex Capital,LLC. The information herein regarding Apex Capital, LLC and Mr. Colen isbased on a Schedule 13G filed by them with the SEC on February 17,2004.

 

(4)   The information herein regarding ZomaxIncorporated is based on an amendment to Schedule 13D filed by ZomaxIncorporated with the SEC on May 21, 2004.

 

(5)   Mr. Hoffman is a member of our Board ofDirectors.

 

(6)   Includes 138,121 shares of Series APreferred Stock held directly by Mr. Drysdale, and 138,121 shares ofSeries A Preferred Stock held by Drysdale Partners, of whichMr. Drysdale is a beneficial owner.

 

**Security Ownership of Management**

 

Thetable below contains information about beneficial ownership of our common stockand our Series A Preferred Stock (which is convertible into our commonstock on a one-for-one basis) as of April 15, 2005 (except as otherwise noted)by (i) each of our directors, (ii) our Chief Executive Officer, ourother four executive officers as of the end of our last fiscal year, and twoother employees who would have been among the four most highly compensatedexecutive officers if they had been executive officers as of February 28, 2005,and (iii) all of our directors and executive officers as a group. Thistable is based on information provided to us or filed with the SEC by ourdirectors and executive officers. Except as otherwise indicated, and subject toapplicable community property laws, the persons named in the table have solevoting and investment power with respect to all shares shown as beneficiallyowned. Applicable percentage ownership in the following table is based on  60,454,872shares of our common stock and 552,486 shares of our Series A PreferredStock (which is convertible into the same number of shares of our common stock)outstanding as of April 15, 2005.

 
| ** **                                          | ** ** | **Class of Stock**                        | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                          | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Both Classes Combined (1)** | ** ** |
| ** **                                          | ** ** | **Common**                                | ** ** | **Series A Preferred** | ** ** | **Aggregate** | ** ** | **Percent** | ** ** |
| **Name(2)**                                         | ** ** | **No. of Shares  Beneficially  Owned(3)** | ** ** | **Percent  of  Class** | ** ** | **No. of Shares  Beneficially  Owned(3)** | ** ** | **Percent  of  Class** | ** ** | **No. of Shares  Beneficially  Owned(3)** | ** ** | **of Both  Classes  Combined** | ** ** |
|                                                |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Peter H. Jackson                                    |       | 3,167,090                                 | (4)        | 5.2 | % | — |   | * |   | 3,052,090 |   | 5.2 | % |
| Mark B. Hoffman                                     |       | 822,574                                   | (5)        | 1.4 |   | 276,243 |   | 50.0 | % | 1,129,067 |   | 1.8 |   |
| David L. Dunlap                                     |       | 421,038                                   | (6)        |   | * | — |   |   | * | 421,038 |   |   | * |
| Wendy A. Nieto                                      |       | 388,301                                   | (7)        |   | * | — |   |   | * | 388,301 |   |   | * |
| John J. Moss                                        |       | 374,939                                   | (8)        |   | * | — |   |   | * | 374,939 |   |   | * |
| Michael A. Price                                    |       | 189,969                                   | (9)        |   | * | — |   |   | * | 189,969 |   |   | * |
| Richard J. Northing                                 |       | 179,813                                   | (10)       |   | * | — |   |   | * | 179,813 |   |   | * |
| Justin M. Benson                                    |       | 156,343                                   | (11)       |   | * | — |   |   | * | 156,343 |   |   | * |
| Raymond L. Ocampo Jr.                               |       | 46,246                                    | (12)       |   | * | — |   |   | * | 46,246 |   |   | * |
| Brendan A. McLoughlin                               |       | 20,732                                    | (13)       |   | * | — |   |   | * | 20,732 |   |   | * |
| Peter F. Pervere                                    |       | 18,125                                    | (14)       |   | * | — |   |   | * | 18,125 |   |   | * |
| Bradley M. Shuster                                  |       | 9,062                                     | (15)       |   | * | — |   |   | * | 9,062 |   |   | * |
| All directors and officers as a group (10  Persons) |       | 5,447,920                                 | (16)       | 9.0 |   | 276,243 |   | 50 |   | 5,724,163 |   | 9.4 |   |

 

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*          Less than 1% of the outstanding shares of theclass or classes of stock.

 

(1)       “Aggregate No. of Shares Beneficially Owned”is the aggregate number of shares of our common stock and Series APreferred Stock beneficially owned by the named director or officer or by thegroup. “Percent of Both Classes Combined” is the percentage of all outstandingshares of our common stock and Series A Preferred Stock beneficially ownedby the named director or officer or by the group.

 

(2)       The address for each beneficial owner is c/oIntraware, Inc., 25 Orinda Way, Orinda, CA 94563.

 

(3)       The nature of all beneficial ownership isdirect except as otherwise indicated in a footnote.

 

(4)       Includes 511,950 shares of common stock helddirectly by Mr. Jackson and 2,644,790 shares of common stock issuable toMr. Jackson upon exercise of stock options exercisable within 60 daysof April 15, 2005. Also includes 2,100 shares of common stock held as custodianand 75 shares of common stock held as guardian by Mr. Jackson for DrewJackson, 1,800 shares of common stock held as custodian and 200 shares ofcommon stock held as guardian by Mr. Jackson for Connor Jackson, 3,000shares of common stock held as custodian and 75 shares of common stock held asguardian by Mr. Jackson for Lindsey Jackson, and 2,700 shares of commonstock held as custodian and 400 shares of common stock held as guardian byMr. Jackson for Brett Jackson.

 

(5)       Includes 705,387 shares of common stock heldby Mr. Hoffman, and 117,187 shares of common stock issuable toMr. Hoffman upon exercise of stock options exercisable within 60 daysof April 15, 2005.

 

(6)       Includes 421,038 shares of common stockissuable to Mr. Dunlap upon exercise of stock options exercisable within60 days of April 15, 2005.

 

(7)       Includes2,888 shares of common stock held by Mrs. Nieto, and 385,413 shares ofcommon stock issuable to Mrs. Nieto upon exercise of stock optionsexercisable within 60 days of April 15, 2005.

 

(8)       Includes4,007 shares of common stock held by Mr. Moss, and 370,932 shares ofcommon stock issuable to Mr. Moss upon exercise of stock optionsexercisable within 60 days of April 15, 2005.

 

(9)       Includes66,971 shares of common stock held by Mr. Price, and 122,998 shares ofcommon stock issuable to Mr. Price upon exercise of stock optionsexercisable within 60 days of April 15, 2005.

 

(10)     Includes 6,668 shares of common stock held byDr. Northing, and 173,145 shares of common stock issuable toDr. Northing upon exercise of stock options exercisable within60 days of April 15, 2005.

 

(11)     Includes2,000 shares of common stock held by Mr. Benson, and 154,343 shares ofcommon stock issuable to Mr. Benson upon exercise of stock optionsexercisable within 60 days of April 15, 2005.

 

(12)     Includes37,184 shares of common stock held by Mr. Ocampo, and 9,062 shares of commonstock issuable to Mr. Ocampo upon exercise of stock options exercisablewithin 60 days of April 15, 2005.

 

(13)     Includes420 shares of common stock held by Mr. McLoughlin, and 20,312 shares ofcommon stock issuable to Mr. McLoughlin upon exercise of stock optionsexercisable within 60 days of April 15, 2005.

 

(14)     Includes 18,125 shares of common stockissuable to Mr. Pervere upon exercise of stock options exercisable within60 days of April 15, 2005.

 

(15)     Includes5,000 shares of common stock held by Mr. Shuster, and 4,062 shares ofcommon stock issuable to Mr. Shuster upon exercise of stock optionsexercisable within 60 days of April 15, 2005.

 

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(16)     Includesan aggregate of 1,273,504 shares of common stock held directly and 10,350shares of common stock held indirectly by our directors and executive officersas of April 15, 2005. Also includes an aggregate of 4,164,066 shares of commonstock issuable to our directors and officers upon exercise of stock optionsexercisable within 60 days of April 15, 2005.  This group does not include Mr. Benson or Mr.Price, neither of whom was a director or executive officer as of the end of ourlast fiscal year.

 

Seethe information contained under the heading “Equity Compensation PlanInformation” in Item 5 above regarding shares authorized for issuance underequity compensation plans approved by stockholders and not approved bystockholders. For descriptions of our equity compensation plans, including the1999 Non-Qualified Acquisition Stock Option Plan, which has not been approvedby stockholders, see “Equity Compensation Plan Information” in Item 5 above and“Note 9: Employee Benefit Plans” in the “Notes to Consolidated FinancialStatements” in Item 8 above.

 

**ITEM 13****.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

On April 30, 2004, Intrawareand Zomax Incorporated terminated our August 12, 2002 Strategic AllianceAgreement and entered into a Reseller Agreement. The Reseller Agreement allowsZomax to resell our SubscribeNet electronic software delivery and managementservice, for fees to be determined on a case-by-case basis. Unlike theStrategic Alliance Agreement, the Reseller Agreement does not require Zomax topay minimum annual license fees to us. The term of the Reseller Agreement isone year, subject to automatic annual renewal for one-year periods and a mutualright to terminate the agreement without cause upon 60 days’ notice. As part ofthe termination of the Strategic Alliance Agreement, Zomax and Intraware are nolonger subject to exclusivity requirements or restrictions on sales to othercompanies, and Zomax no longer has the right to designate a member of orobserver to our Board of Directors, or to participate in future Intrawarecommon stock placements. In consideration for Zomax’ termination of the StrategicAlliance Agreement, we agreed to refund $115,000 of a $400,000 prepayment madeby Zomax to us in October 2003. At the time the Strategic Alliance Agreementwas terminated and the Reseller Agreement was entered into, Zomax held between11% and 12% of our outstanding common stock.

 

**ITEM 14****.       PRINCIPALACCOUNTING FEES AND SERVICES**

 

The following table setsforth the fees paid or accrued for services provided by PricewaterhouseCoopers,LLP, our independent registered public accounting firm, for each of our lasttwo fiscal years:

 

| ** **             | ** ** | **For the Year Ended** | ** ** |
|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **February 28, 2005**  | ** ** | **February 29, 2004** | ** ** |
| Audit Fees (1)         |       | $                      | 329,000    |   | $ | 307,135 |   |
| Audit Related Fees (2) |       | —                 |       | 30,000 |   |
| Tax Fees (3)           |       | —                 |       | 9,369 |   |
| All Other Fees (4)     |       | —                 |       | 2,800 |   |
| **Total**              |       | $                      | 329,000    |   | $ | 349,304 |   |

 

----

(1)   “Audit Fees” consisted of fees billed byPricewaterhouseCoopers for the audit of our annual financial statements, forreview of financial statements included in our Forms 10-Q, for review of ourForms S-3 and 8-K, and other services that are normally provided by independentaccountants in connection with statutory and regulatory filings.

 

86

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(2)   “Audit-Related Fees” consisted of fees billedby PricewaterhouseCoopers for research, consultation and advice regardingaccounting treatment for corporate and commercial transactions in accordancewith applicable financial accounting and reporting standards, and consultationand advice regarding SEC staff comments on our reports under the SecuritiesExchange Act of 1934, as amended.

 

(3)   “Tax Fees” consisted of fees billed byPricewaterhouseCoopers for consultation concerning sales and international taxmatters related to electronic software delivery, and for preparation and filingof annual returns for our non-operating subsidiary in the United Kingdom.

 

(4)   “All Other Fees” consisted of fees billed byPricewaterhouseCoopers for our subscription to PricewaterhouseCoopers’ onlinelibrary of accounting and assurance literature.

 

The Charter for the AuditCommittee of our Board provides that the committee is responsible forpre-approving audit and non-audit services provided to Intraware by ourindependent registered public accounting firm, or subsequently approvingnon-audit services in those circumstances where a subsequent approval isnecessary and permissible.

 

# **PART IV**

# ** **

**ITEM 15****.       EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES**

 

**(a)           1.             FinancialStatements**

 

The following financialstatements are filed as a part of this report:

 

| ** **                                               | **Page** |
|----------------------------------------------------------|----------|
|                                                     |     |
| Report  of Independent Registered Public Accounting Firm | 40       |
| Consolidated Balance Sheets                              | 41       |
| Consolidated  Statements of Operations                   | 42       |
| Consolidated  Statement of Stockholders’ Equity     | 43       |
| Consolidated  Statements of Cash Flows                   | 44       |
| Notes to  Consolidated Financial Statements              | 45       |

 

**2.             Financial Statement Schedules**

 

All Schedules are omitted asthe required information is inapplicable or the information is presented in theConsolidated Financial Statements or Notes to Consolidated Financial Statementsunder Item 8 of this Annual Report on Form 10-K.

 

**3.             Exhibits**

 

| **Exhibit Number** | ** ** | ** **                                                                                                                                                                                                                        |
|--------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **         | ** ** | ** **                                                                                                                                                                                                                        |
| 2                  | (1)        | Asset  Purchase Agreement dated as of May 15, 2002 by and between Intraware, Inc.  and Computer Associates International, Inc. (the Registrant agrees to furnish  a copy of any omitted schedule to the Commission upon request). |
|               |       |                                                                                                                                                                                                                              |
| 3(i).1             | (2)        | Amended  and Restated Certificate of Incorporation of Intraware, Inc.                                                                                                                                                             |
|               |       |                                                                                                                                                                                                                              |
| 3(i).2             | (2)        | Certificate  of Designations, Preferences and Rights of Series A Convertible Preferred  Stock.                                                                                                                                    |

 

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| 3(ii)  | (4)    | Amended  and Restated Bylaws of Intraware, Inc.                                                                                                  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                             |
| 4.1    | (5)    | Specimen  Common Stock Certificate.                                                                                                              |
|   |   |                                                                                                                                             |
| 4.2    | (6)    | Form  of Warrant issued in connection with the June 2000 sale of Series A, B and C  Convertible Preferred Stock.                                 |
|   |   |                                                                                                                                             |
| 4.3    | (7)    | Form  of Warrant issued in connection with the January 2001 sale of Series A  Convertible Preferred Stock.                                       |
|   |   |                                                                                                                                             |
| 4.4    | (8)    | Warrant  issued to CorpSoft, Inc. in May 2001.                                                                                                   |
|   |   |                                                                                                                                             |
| 4.5    | (9)    | Warrant  Agreement dated May 24, 2002 between Intraware, Inc. and Commonwealth  Associates, L.P. and Form of Investor Warrant Certificate.       |
|   |   |                                                                                                                                             |
| 4.6    | (9)    | Form  of Placement Agent Warrant with $1.00 exercise price.                                                                                      |
|   |   |                                                                                                                                             |
| 4.7    | (9)    | Form  of Placement Agent Warrant with $1.19 exercise price.                                                                                      |
|   |   |                                                                                                                                             |
| 4.8    | (19)   | Warrant  to Purchase Common Stock dated August 1, 2003, issued to Silicon Valley Bank.                                                           |
|   |   |                                                                                                                                             |
| 10.1   | (10)*  | Form  of Indemnification Agreement between Intraware and each of its directors and  executive officers.                                          |
|   |   |                                                                                                                                             |
| 10.2   | (11)*  | 1996  Stock Option Plan, as amended, and form of agreements thereunder.                                                                          |
|   |   |                                                                                                                                             |
| 10.3   | (12)*  | 1998  Employee Stock Purchase Plan and form of agreements thereunder.                                                                            |
|   |   |                                                                                                                                             |
| 10.4   | (11)*  | 1998  Director Option Plan and form of agreements thereunder.                                                                                    |
|   |   |                                                                                                                                             |
| 10.5   | (13)   | 1999  Non-Qualified Acquisition Stock Option Plan and form of agreements  thereunder.                                                            |
|   |   |                                                                                                                                             |
| 10.6   | (10)   | Sleepy  Hollow Investment Company Office Lease made August 23, 1996 between Sleepy  Hollow Investment Company and Intraware.                     |
|   |   |                                                                                                                                             |
| 10.7   | (10)   | First  Amendment to the Lease for Intraware entered into as of May 5, 1997 by and  between Intraware and Sleepy Hollow Investment Company I.     |
|   |   |                                                                                                                                             |
| 10.8   | (10)   | Second  Amendment to the Lease for Intraware entered into as of March 31, 1998 by and  between Intraware and Sleepy Hollow Investment Company I. |
|   |   |                                                                                                                                             |
| 10.9   | (6)    | Securities  Purchase Agreement dated as of June 29, 2000 by and among Intraware and the  investors listed on the Schedule of Buyers.             |
|   |   |                                                                                                                                             |
| 10.10  | (14)   | Form  of Redemption and Amendment Agreement, dated as of January 10, 2001, by and  among Intraware and the investors set forth therein.          |
|   |   |                                                                                                                                             |
| 10.11  | (14)   | Registration  Rights Agreement dated as of January 10, 2001, by and among Intraware and the  investors set forth therein.                        |
|   |   |                                                                                                                                             |
| 10.12  | (7)    | Preferred  Stock and Warrant Purchase Agreement, dated January 12, 2001, by and among  Intraware and the investors set forth therein.            |
|   |   |                                                                                                                                             |
| 10.13  | (7)    | Registration  Rights Agreement, dated January 12, 2001, by and among Intraware and the  investors set forth therein.                             |

 

88

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| 10.14  | (15)*  | Form  of Change of Control Severance Agreement between Intraware, Inc. and each  executive officer of Intraware.                                                  |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                              |
| 10.15  | (4)+   | Sales  Alliance Agreement dated June 28, 2001 between CorpSoft, Inc. and Intraware,  Inc.                                                                         |
|   |   |                                                                                                                                                              |
| 10.16  | (9)    | Form  of Subscription Agreement, dated May 24, 2002 by and among Intraware, Inc.  and the investors named therein.                                                |
|   |   |                                                                                                                                                              |
| 10.17  | (9)    | Form  of Registration Rights Agreement, dated May 24, 2002 by and among Intraware,  Inc., Commonwealth Associates, L.P. and the investors named therein.          |
|   |   |                                                                                                                                                              |
| 10.18  | (9)    | Placement  Agency Agreement, dated May 10, 2002 by and between Intraware, Inc. and  Commonwealth Associates, L.P.                                                 |
|   |   |                                                                                                                                                              |
| 10.19  | (16)   | Form  of Registration Rights Agreement, dated August 12, 2002, by and between  Intraware, Inc. and Zomax Incorporated.                                            |
|   |   |                                                                                                                                                              |
| 10.20  | (16)   | Form  of Common Stock Purchase Agreement, dated August 12, 2002, by and between  Intraware, Inc. and Zomax Incorporated.                                          |
|   |   |                                                                                                                                                              |
| 10.21  | (17)+  | Amendment  One to Sales Alliance Agreement dated June 28, 2001 between Intraware, Inc.  and Software Spectrum, Inc. (as successor-in-interest to CorpSoft, Inc.). |
|   |   |                                                                                                                                                              |
| 10.22  | (18)   | Loan  and Security Agreement dated August 1, 2003 between Silicon Valley Bank and  Intraware, Inc.                                                                |
|   |   |                                                                                                                                                              |
| 10.23  | (18)   | Negative  Pledge Agreement dated August 1, 2003 between Silicon Valley Bank and  Intraware, Inc.                                                                  |
|   |   |                                                                                                                                                              |
| 10.24  | (19)   | Form  of Registration Rights Agreement, dated September 9, 2003, by and among  Intraware, Inc. and the investors set forth therein.                               |
|   |   |                                                                                                                                                              |
| 10.25  | (19)   | Form  of Common Stock Purchase Agreement, dated September 9, 2003, by and among  Intraware, Inc. and the investors set forth therein.                             |
|   |   |                                                                                                                                                              |
| 10.26  | (20)   | Amendment  Two to Sales Alliance Agreement dated June 28, 2001 between Intraware, Inc.  and Software Spectrum, Inc. (as successor-in-interest CorpSoft, Inc.).    |
|   |   |                                                                                                                                                              |
| 10.27  | (21)   | Amendment  Three to Sales Alliance Agreement dated June 28, 2001 between Intraware, Inc.  and Software Spectrum, Inc. (as successor-in-interest CorpSoft, Inc.).  |
|   |   |                                                                                                                                                              |
| 10.28  | (22)   | Loan  Modification Agreement dated September 20, 2004 between Silicon Valley Bank  and Intraware, Inc.                                                            |
|   |   |                                                                                                                                                              |
| 10.29  | (22)   | Form of Stock Option Agreement under 1996 Stock  Option Plan (Initial Grant)                                                                                      |
|   |   |                                                                                                                                                              |
| 10.30  | (22)   | Form of Stock Option Agreement under 1996 Stock  Option Plan (Subsequent Grant)                                                                                   |
|   |   |                                                                                                                                                              |
| 10.31  | (22)   | Form of Stock Option Agreement under 1998 Director  Option Plan (Initial Grant)                                                                                   |
|   |   |                                                                                                                                                              |
| 10.32  | (22)   | Form of Stock Option Agreement under 1998 Director  Option Plan (Subsequent Grant)                                                                                |
|   |   |                                                                                                                                                              |
| 10.33  | (23)   | Loan Modification Agreement dated February 28, 2005  between Silicon Valley Bank and Intraware, Inc.                                                              |

 

89

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| 10.34  | *      | Letter  Regarding Bonus for John J. Moss for Completion of Sarbanes-Oxley Section 404  Milestones                                                    |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                 |
| 10.35  | *      | Letter  Regarding Bonus for Richard J. Northing for Completion of Sarbanes-Oxley  Section 404 Milestones                                             |
|   |   |                                                                                                                                                 |
| 10.36  | *      | Form  of Amendment One to Change of Control Severance Agreement between Intraware,  Inc. and each executive officer of Intraware.                    |
|   |   |                                                                                                                                                 |
| 10.37  | *+     | Compensation Agreement dated March 30, 2005 between Intraware, Inc.  and Richard J. Northing                                                         |
|   |   |                                                                                                                                                 |
| 10.38  | *      | Employment Agreement dated April 20, 2005 between Intraware, Inc. and  David L. Dunlap                                                               |
|   |   |                                                                                                                                                 |
| 11     |   | Statement  Setting Forth the Computation of Per Share Earnings. See Note 1 to our “Notes  to Consolidated Financial Statements” in Item 8. |
|   |   |                                                                                                                                                 |
| 23.1   |   | Consent  of Independent Registered Public Accounting Firm.                                                                                           |
|   |   |                                                                                                                                                 |
| 24     |   | Power  of Attorney (see page 96).                                                                                                                    |
|   |   |                                                                                                                                                 |
| 31.1   |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act-Peter H. Jackson.                                                                   |
|   |   |                                                                                                                                                 |
| 31.2   |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act-Wendy A. Nieto.                                                                     |
|   |   |                                                                                                                                                 |
| 32.1   |   | Certification  pursuant to Section 906 of the Sarbanes-Oxley Act.                                                                                    |

 

----

*          Indicates management contract or compensatoryplan or arrangement.

 

+          Confidential treatment has been requested forcertain portions of this exhibit.

 

(1)       Incorporated by reference to Intraware’sCurrent Report on Form 8-K dated May 23, 2002 (FileNo. 000-25249) and filed with the Securities and Exchange Commission onMay 31, 2002.

 

(2)       Incorporated by reference to Intraware’sCurrent Report on Form 8-K dated April 2, 2001 (FileNo. 000-25249) and filed with the SEC on April 13, 2001.

 

(3)       Incorporated by reference to Intraware’sCurrent Report on Form 8-K dated August 31, 2001 (FileNo. 000-25249) and filed with the SEC on September 21, 2001.

 

(4)       Incorporated by reference to Intraware’sQuarterly Report on Form 10-Q for the Quarter ended August 31, 2004(File No. 000-25249), filed with the SEC on October 15, 2004.

 

(5)       Incorporated by reference to AmendmentNo. 2 to Intraware’s Registration Statement on Form S-1 (FileNo. 333-69261), filed with the SEC on January 29, 1999.

 

(6)       Incorporated by reference to Intraware’sCurrent Report on Form 8-K dated June 29, 2000 (FileNo. 000-25249), filed with the SEC on July 3, 2000.

 

(7)       Incorporated by reference to Intraware’sCurrent Report on Form 8-K dated January 12, 2001 (FileNo. 000-25249), filed with the SEC on January 23, 2001.

 

(8)       Incorporated by reference to Intraware’sAnnual Report on Form 10-K for the Year ended February 28, 2002 (FileNo. 000-25249), filed with the SEC on May 29, 2002.

 

(9)       Incorporatedby reference to Intraware’s Registration Statement on Form S-3 (FileNo. 333-90442), filed with the SEC on June 13, 2002.

 

(10)     Incorporated by reference to Intraware’sRegistration Statement on Form S-1 (333-69261), filed with the SEC onDecember 18, 1998.

 

(11)     Incorporated by reference to Intraware’sRegistration Statement on Form S-8 (File No. 333-53902), filed withthe SEC on January 18, 2001.

 

90

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(12)     Incorporated by reference to Intraware’sRegistration Statement on Form S-8 (File No. 333-74209), filed withthe SEC on March 10, 1999.

 

(13)     Incorporated by reference to Intraware’sRegistration Statement on Form S-8 (File No. 333-93823), filed withthe SEC on December 30, 1999.

 

(14)     Incorporated by reference to Intraware’sCurrent Report on Form 8-K dated January 12, 2001 (FileNo. 000-25249) and filed with the SEC on January 16, 2001.

 

(15)     Incorporated by reference to Intraware’sQuarterly Report on Form 10-Q for the Quarter ended May 31, 2001(File No. 000-25249), filed with the SEC on July 13, 2001.

 

(16)     Incorporated by reference to Intraware’sCurrent Report on Form 8-K dated August 12, 2002 (FileNo. 000-25249), filed with the SEC on September 11, 2002.

 

(17)     Incorporated by reference to Intraware’sQuarterly Report on Form 10-Q for the Quarter ended May 31, 2003(File No. 000-25249), filed with the SEC on July 15, 2003.

 

(18)     Incorporated by reference to Intraware’sQuarterly Report on Form 10-Q for the Quarter ended August 31, 2003(File No. 000-25249), filed with the SEC on October 15, 2003.

 

(19)     Incorporated by reference to Intraware’sCurrent Report on Form 8-K dated September 9, 2003 (FileNo. 000-25249), filed with the SEC on September 12, 2003.

 

(20)     Incorporatedby reference to Intraware’s Annual Report on Form 10-K for the Year endedFebruary 29, 2004 (File No. 000-25249), filed with the SEC on May 5, 2004,as amended by Amendment No. 1 on Form 10-K/A filed with the SEC on October 4,2004.

 

(21)     Incorporatedby reference to Intraware’s Quarterly Report on Form 10-Q for the Quarterended August 31, 2004 (File No. 000-25249), filed with the SEC onOctober 15, 2004.

 

(22)     Incorporatedby reference to Intraware’s Quarterly Report on Form 10-Q for the Quarterended November 30, 2004 (File No. 000-25249), filed with the SEC onJanuary 14, 2005.

 

(23)     Incorporatedby reference to Intraware’s Current Report on Form 8-K dated February 28,2005 (File No. 000-25249), filed with the SEC on March 4, 2005.

 

91

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**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Act of 1933, as amended, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
| ** **             | **INTRAWARE, INC.** |
|------------------------|--------------------------|
| ** **             | ** **               |
|                   | By:                      | /s/  PETER H. JACKSON |   |
| Dated:  April 22, 2005 |                     |   |   |
|                   |                     | Peter H. Jackson*Chairman,*  *Chief Executive Officer and  President* |   |

 

 

KNOW ALL PERSONS BY THESEPRESENT, that each person whose signature appears below constitutes andappoints Peter H. Jackson and Wendy A. Nieto, his or her attorney-in-fact, eachwith the power of substitution, for him or her in any and all capacities, tosign any amendments to this annual report on Form 10-K, and to file the same,with exhibits thereto and other documents in connection therewith, with theSecurities and Exchange Commission, hereby ratifying and conforming all thatsaid attorney-in-fact, or his substitute or substitutes, may do or cause to bedone by virtue hereof.

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and onthe dates indicated.

 
| **Signature**                  | ** ** | **Capacity in Which Signed**                         | ** ** | **Date**       |
|--------------------------------|------------|------------------------------------------------------|------------|----------------|
| ** **                     | ** ** | ** **                                           | ** ** | ** **     |
| /s/ PETER H. JACKSON      |       | Chairman,  Chief Executive Officer and               |       | April 22, 2005 |
| (**Peter H. Jackson**)         |       | President  (Principal Executive Officer)             |       |           |
|                           |       |                                                 |       |           |
| /s/ WENDY A. NIETO        |       | Executive Vice President and Chief Financial Officer |       | April 22, 2005 |
| (**Wendy A. Nieto**)           |       | (Principal  Financial and Accounting Officer)        |       |           |
|                           |       |                                                 |       |           |
|                           |       |                                                 |       |           |
| /s/ MARK B. HOFFMAN       |       | Director                                             |       | April 22, 2005 |
| (**Mark B. Hoffman**)          |       |                                                 |       |           |
|                           |       |                                                 |       |           |
| /s/ BRENDAN A. MCLOUGHLIN |       | Director                                             |       | April 22, 2005 |
| (**Brendan A. McLoughlin**)    |       |                                                 |       |           |
|                           |       |                                                 |       |           |
| /s/ RAYMOND L. OCAMPO JR. |       | Director                                             |       | April 22, 2005 |
| (**Raymond L. Ocampo Jr.**)    | ** ** | ** **                                           | ** ** | ** **     |
|                           |       |                                                 |       |           |
| /s/ PETER F. PERVERE      |       | Director                                             |       | April 22, 2005 |
| (**Peter F. Pervere**)         |       |                                                 |       |           |
|                           |       |                                                 |       |           |
| /s/ BRADLEY M. SHUSTER         |       | Director                                             |       | April 22, 2005 |
| **(Bradley M. Shuster)**       |       |                                                 |       |           |

 

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