UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

|(MARK ONE)                                                       |                                                                                          
|---------------------------------------------------------------- | -----------------------------------------------------------------------------------------
|ý                                                                | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended: February 29, 2004                    
|o                                                                | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                                to

Commission file number 000-25249

GRAPHIC

INTRAWARE, INC.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of
incorporation or organization)    |  | 68-0389976(I.R.S. Employer
Identification Number)
|------------------------------------------------------------------------- |  | -------------------------------------------------
|25 Orinda Way, Orinda, California(Address of principal executive offices) |  | 94563(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 ClassCommon Stock, $0.0001 par value

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

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which
the common equity was last sold as of the last business day of the registrant's most recently completed second fiscal quarter, is $63,547,726.74. For purposes of this disclosure, shares of common
stock held by persons who hold more than 10% of the outstanding shares of common stock and shares held by officers and directors of the registrant, have been excluded in that such persons may be
deemed to be affiliates. This determination is not necessarily conclusive.

As
of April 20, 2004, the registrant had outstanding 59,691,122 shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the 2004 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Annual Report.



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TABLE OF CONTENTS

EXPLANATORY
NOTE

|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.                                  |  | 11
|PART II  |  |                                                                                       |  | 11
|ITEM 5.  |  | MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.            |  | 11
|ITEM 6.  |  | SELECTED FINANCIAL DATA.                                                              |  | 13
|ITEM 7.  |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. |  | 16
|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.                           |  | 36
|ITEM 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.                                          |  | 36
|ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |  | 75
|ITEM 9A. |  | CONTROLS AND PROCEDURES.                                                              |  | 75
|PART III |  |                                                                                       |  | 76
|ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.                                   |  | 76
|ITEM 11. |  | EXECUTIVE COMPENSATION.                                                               |  | 77
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.                       |  | 77
|ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.                                       |  | 77
|ITEM 14. |  | PRINCIPAL ACCOUNTING FEES AND SERVICES.                                               |  | 77
|PART IV  |  |                                                                                       |  | 78
|ITEM 15. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.                      |  | 78

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EXPLANATORY NOTE

This annual report on Form 10-K contains forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended) that involve risks and uncertainties. We use words such as "anticipate," "believe," "plan," "expect," "future,"
"intend" and similar expressions to identify forward-looking statements. Actual results and the timing of events could differ materially from those projected in the forward-looking statements as a
result of known and unknown factors, including the risk factors beginning on page 32 below and other factors discussed elsewhere in this annual report. We have identified many of these
forward-looking statements for your convenient reference.

"Intraware,"
"SubscribeNet," and "Control Your Technology" are registered trademarks or service marks of Intraware. This annual report also refers to other trademarks of Intraware and
trademarks 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 "the
Registrant," "the Company," "Intraware," "we," "our" and "us." The mailing address for our headquarters is 25 Orinda Way, Orinda, California 94563, and our telephone number at that location is
(925) 253-4500. Intraware can also be reached at our web sitehttp://www.intraware.com.

PART I

ITEM 1. BUSINESS.

Overview

We launched the first outsourced Web-based electronic software delivery and management (ESDM) solution in 1996. Today, we are a leading provider of
global ESDM services for the enterprise software industry. Our ESDM services help software publishers streamline manufacturing, distribution and support costs; develop business intelligence about
their customers; strengthen customer retention and maintenance renewals; accelerate and document software delivery for revenue recognition purposes; and comply with U.S. export controls.

We
also offer complementary services, including enterprise software sales and marketing, digital rights management, and automatic desktop update management and deployment, through our
alliances with companies including Software Spectrum, Inc., Macrovision Corporation and InstallShield Software Corporation.

Drivers of Demand for ESDM Services

According to IDC, an information technology analysis and advisory firm, worldwide spending on electronic software delivery is expected to grow by more than 40%
annually between 2003 and 2006.(1) This demand is driven by a number of factors, including:



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SubscribeNet ESDM Service

Our central offering is the SubscribeNet ESDM service. First offered in 1996, the SubscribeNet service is an integrated web-based solution that
enables software providers to distribute all of their software releases online, manage entitlements across their global customer base, track and report deliveries and download activity, and manage
export compliance. Software providers use the SubscribeNet service to help reduce costs associated with manufacturing and distributing CDs and packaging, provide sales tax advantages to their
end-users in certain states, increase customer retention and maintenance renewal rates, generate data on their end-users' use
of their software, accelerate delivery of software to their end-users, and enhance export and revenue recognition compliance.

Revenues
associated with our SubscribeNet service comprised approximately 66%, 52% and 14% of our revenues in our 2004, 2003 and 2002 fiscal years, respectively.

Strategic Advantages

Among competitive ESDM offerings, or compared to solutions developed in-house by software providers, the SubscribeNet service offers strategic
advantages, including:



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Entitlement Management

Central to the SubscribeNet service is its entitlement management capability. This capability enables software providers to manage relationships among the
products on their price lists, the various releases of those products, and the files that comprise each such release. Software providers can assign entitlements for any combination of those items to
their customers and individual end-users. Entitlements can be assigned in the SubscribeNet service directly from the software provider's order processing, CRM or e-commerce
system, and can be time-limited to match the duration of customer maintenance contracts.

Customers

As of April 20, 2004, 40 software providers subscribed to the SubscribeNet service. These include companies whose main business is providing software,
companies that distribute software as a secondary business, and companies that resell software. Six of those customers each accounted for 5% or more of our Online services and technology and Related
party online services and technology revenue during our 2004 fiscal year. One of our customers, Software Spectrum, Inc., accounted for more than 10% of our total revenue during our 2004 fiscal
year (see "Risk Factors" beginning on page 32 below, and Note 2 of our "Notes to Consolidated Financial Statements" in Item 8 below).

Outsourced Sales and Marketing Services

We provide contracted sales and marketing services (Sales and Marketing Services) to Software Spectrum, Inc. Software Spectrum is a global
business-to-business software services company that is one of the world's largest business software resellers and a wholly owned subsidiary of Level 3
Communications, Inc. Under our agreement with Software Spectrum, we act as an outsourced sales force assisting Software Spectrum in its resales and marketing of third-party enterprise software,
in exchange for a portion of the gross margin from those resales and reimbursement of certain costs. Currently we provide Sales and Marketing Services to Software Spectrum for Sun
Microsystems, Inc. Java Enterprise System and Sun ONE software and for Websense, Inc. software. We also provide our SubscribeNet service to Software Spectrum to enable them to deliver
Sun software to their customers electronically. We describe this relationship between Intraware and Software Spectrum further in Note 2 of our "Notes to Consolidated Financial Statements" in
Item 8 below.

Sales

Direct Sales of SubscribeNet ESDM Service

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

We
sell our SubscribeNet service primarily through a direct sales force dedicated to our SubscribeNet business.We have established direct
sales offices for our SubscribeNet sales at our headquarters in Orinda, California, and in Boston, Massachusetts, and Chicago, Illinois. Each SubscribeNet sales representative has a territory that he
or she covers through telecommunications and in-person sales calls. The sales cycle for these services is typically lengthy, as our sales efforts must target the prospective customer's
senior personnel across multiple departments.

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Sales of SubscribeNet ESDM Service through Strategic Alliances

We maintain a number of strategic alliances intended to complement our direct sales efforts and broaden sales of our SubscribeNet service.



Sales and Marketing Services

We use an inside sales and marketing team to provide Sales and Marketing Services to Software Spectrum for resale and marketing of Sun and Websense software and
related maintenance. Each

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inside
sales representative has a territory that he or she covers using telephone, facsimile and email communications. We also have a marketing manager who conducts marketing programs for Sun and
Websense software. The length of sales cycles for Sun and Websense software tends to correspond to the dollar values of those sales. Our Sales and Marketing Services business is somewhat seasonal,
with sales tending to be stronger in the non-summer months than the summer months, and strongest at the end of the calendar year.

Under
the June 2001 agreement under which we provide Sales and Marketing Services to Software Spectrum, Software Spectrum is the reseller of record for Sun and Websense software
and maintenance, and we assist Software Spectrum in selling and marketing that software and maintenance. We also provide our SubscribeNet service to Software Spectrum to enable it to deliver Sun
software to its customers electronically. As part of this arrangement, Software Spectrum pays us a percentage of the gross profit derived from its sales of Sun and Websense software licenses and
maintenance services, and reimburses us for our cost in maintaining a Sales and Marketing Services team dedicated to sales of Sun and Websense software licenses and maintenance. Software Spectrum also
pays us a periodic SubscribeNet service fee based on software license and maintenance sales generated by Intraware through our Sales and Marketing Services for Software Spectrum. The term of this
agreement will expire in June 2004 and is renewable for subsequent one-year terms. We expect but cannot guarantee that it will be renewed (see "Risk Factors" beginning on
page 32 below).

Marketing

Our central marketing goals are to attract and retain customers for our services. We target our marketing efforts to senior personnel across multiple departments
in software companies and other mid-sized and large corporations. We use an integrated approach of targeted advertising and promotions, interactive web-based seminars, or "webinars,"
brand-awareness campaigns, and regular meetings with existing customers to stimulate demand for our services, generate sales leads and maintain customer relationships.

We
employ a variety of tools to achieve our marketing goals. Our print and online advertising campaigns are designed to target senior personnel across multiple departments in software
companies, and educate them on our products and services. In our webinars, our senior executives and other panelists who may include independent IT analysts, senior executives of our customers and
partners, and other industry experts, educate prospective customers on ESDM and other topics relevant to our business. Our public relations efforts help maintain press coverage of the company and help
secure invitations to present at IT industry events. Our co-branding with Software Spectrum for sales of Sun software and maintenance helps us penetrate highly qualified market segments.
We also use trade shows, direct mail, online promotions, and regional marketing to further our marketing goals of expanding our customer base and heightening awareness of the "Intraware" brand.

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

Competition

The ESDM market is rapidly evolving and intensely competitive, and we expect competition to increase in the future. Our primary competition comes from our
potential customers, including software companies and other companies that distribute software or digital goods, who choose to develop an in-house alternative to the SubscribeNet service.
However, we also face increasing competition from other providers of outsourced electronic software delivery services. A number of these competitors have historically provided e-commerce
services, or replication and distribution of physical media such as CDs, and relatively recently have begun to provide electronic software delivery services. We believe this

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trend
will continue as software and other digital goods companies convert from physical to digital distribution of their products, stimulating additional demand for ESDM services.

We
believe we compete effectively as a result of our early deployment of a centralized, high-capacity, web-based, customizable ESDM solution containing valuable
administrative and reporting tools. Principal competitive factors include:



We
believe we compete effectively as to all of these factors. We believe our principal advantages include our relatively senior position as one of the first ESDM service providers; our
high-capacity, high-availability network that is able to deliver enterprise-class software applications rapidly and securely; the flexibility of our solution, which is easily
customized and personalized; and our suite of administrative and reporting tools that add value for software companies and their end-users.

Nevertheless,
we face a number of competitive challenges. A key challenge is resistance from software companies that determine, for perceived strategic reasons or based on their cost
assessments, that they do not wish to outsource electronic software delivery. Another principal challenge is our focus on ESDM, and our reliance on third-party alliances for key ancillary services
such as digital rights management and device deployment. While we believe our focus has enabled us to offer a superior ESDM solution to our competitors, and our integration with
best-of-breed ancillary solutions addresses a broad set of customer needs, some prospective customers prefer this set of solutions to be supported by a single provider.

In
addition, many of our competitors have longer and more profitable operating histories than we have. They may also have significantly greater financial and other resources, wider name
recognition, and a larger installed base of customers (including non-ESDM customers) than we have. They also may be able to devote greater resources to the development, promotion and sale
of their products than we can, which would allow them to respond more quickly to new or emerging technologies and changes in customer requirements. In addition, many of our competitors have existing
relationships with divisions of our current or potential customers, and may be able to leverage their existing relationships to discourage these customers from purchasing additional services or
products from us, or may be able to persuade these customers to replace our services or products with their own.

Intellectual Property, Proprietary Rights and Licenses

Our future success depends in part on our proprietary rights and technology. We rely on a combination of patent, copyright, trademark and trade secret laws,
employee and third-party nondisclosure agreements and other methods to protect our proprietary rights. Although we seek to take advantage of available intellectual property protections, we believe
that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements and reliable product maintenance are more essential to establishing
and maintaining a

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technology
leadership position. There can be no assurance that others will not develop technologies that are similar or superior to our technology.

To
date, we own three U.S. patents on electronic commerce technologies, expiring in July 2016, September 2017 and February 2018, respectively. In addition, we have
three patent applications pending in the United States on our SubscribeNet ESDM technology. We plan to file additional patent applications on our SubscribeNet ESDM technology in the current fiscal
year.

We
have 10 trademark registrations in the United States. Our key registered and unregistered trademarks and service marks include Intraware, SubscribeNet, The Way Digital Goods Move, and
Control Your Technology. We also hold registrations and pending applications for a number of trademarks and service marks outside the 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 the United States. While we do not believe we have infringed any rights and we have received no notice of any claims of
infringement from any of those companies, and we own registrations for the "Intraware" trademark in the United States and in other countries, we can make no assurance that these or other companies
will not claim superior rights to "Intraware" or other marks used in our business.

We
generally enter into confidentiality or license agreements with our employees, consultants and corporate partners, and generally control access to and distribution of our software,
documentation and other proprietary information. Despite our efforts to protect our proprietary rights, it may be possible for unauthorized parties to copy certain portions of our products or
services, or reverse-engineer or obtain and use information that we regard as proprietary. There can be no assurance that the steps we take will prevent misappropriation of our technology,
particularly in foreign countries where the laws may not protect our proprietary rights as fully as do the laws of the United States.

We
purchase licenses and will continue to purchase licenses for certain products integral to our services and products, including products which are integrated with 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 be available to us on commercially reasonable terms or that we will
be able to successfully integrate such third party products into our solutions.

Employees

As of April 20, 2004, we had 60 employees, including part-time employees. None of our employees is represented by a labor union. We have not
experienced any work stoppages and consider our relations with our employees to be good.

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ITEM 2. PROPERTIES.

We rent approximately 16,000 square feet of office space located in Orinda, California, under a lease expiring in August 2009. We have additional field
sales offices in Chicago, Illinois, and Boston, Massachusetts.

ITEM 3. LEGAL PROCEEDINGS.

In October 2001, we were served with a summons and complaint in a purported securities class action lawsuit. On or about April 19, 2002, we were
served with an amended complaint in this action, which is now titled In re Intraware, Inc. Initial Public Offering Securities Litigation, Civ. No. 01-9349 (SAS) (S.D.N.Y.),
related to In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) (S.D.N.Y.). The amended complaint is brought purportedly on behalf of all persons who purchased our common stock from
February 25, 1999 (the date of our initial public offering) through December 6, 2000. It names as defendants Intraware, three of our present and former officers and directors, and
several investment banking firms that served as underwriters of our initial public offering. The complaint alleges liability under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the offerings did not disclose that: (1) the underwriters had agreed to allow certain
customers to purchase shares in the offerings in exchange for excess commissions paid to the underwriters; and (2) the underwriters had arranged for certain customers to purchase additional
shares in the aftermarket at predetermined prices. The amended complaint also alleges that the underwriters misused their securities analysts to manipulate the price of our stock. No specific damages
are claimed.

Lawsuits
containing similar allegations have been filed in the Southern District of New York challenging over 300 other initial public offerings and secondary offerings conducted in 1999
and 2000. All of these lawsuits have been consolidated for pretrial purposes before United States District Court Judge Shira Scheindlin of the Southern District of New York. On July 15, 2002,
an omnibus motion to dismiss was filed in the coordinated litigation on behalf of the issuer defendants, of which Intraware and its three named current and former officers and directors are a part, on
common pleadings issues. On or about October 9, 2002, the Court entered and ordered a Stipulation of Dismissal, which dismissed the three named current and former officers and directors from
the litigation without prejudice. On February 19, 2003, the Court entered an order denying in part the issuer defendants'
omnibus motion to dismiss, including those portions of the motion to dismiss relating to Intraware. No discovery has been served on us to date.

In
June and July 2003, nearly all of the issuers named as defendants in the In re Initial Public Offering Securities Litigation (collectively, the "issuer-defendants"), including
us, approved a tentative settlement proposal that is reflected in a memorandum of understanding. A special committee of our Board of Directors approved the memorandum of understanding in
June 2003. The memorandum of understanding is not a legally binding agreement. Further, any final settlement agreement would be subject to a number of conditions, most of which would be outside
of the Company's control, including approval by the Court. The underwriter-defendants in the In re Initial Public Offering Securities Litigation (collectively, the "underwriter-defendants"), including
the underwriters of our initial public offering, are not parties to the memorandum of understanding.

The
memorandum of understanding provides that, in exchange for a release of claims against the settling issuer-defendants, the insurers of all of the settling issuer-defendants will
provide a surety undertaking to guarantee plaintiffs a $1 billion recovery from the non-settling defendants, including the underwriter-defendants. The ultimate amount, if any, that
may be paid on behalf of Intraware will therefore depend on the final terms of the settlement agreement, including the number of issuer-defendants that ultimately approve the final settlement
agreement, and the amounts, if any, recovered by the plaintiffs from the underwriter-defendants and other non-settling defendants. In the event that

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all
or substantially all of the issuer-defendants approve the final settlement agreement, the amount we would be required to pay to the plaintiffs could range from zero to approximately
$3.5 million, depending on plaintiffs' recovery from the underwriter-defendants and from other non-settling parties. If the plaintiffs recover at least $1 billion from the
underwriter-defendants, we would have no liability for settlement payments under the proposed terms of the settlement. If the plaintiffs recover less than $1 billion, we believe our insurance
will likely cover our share of any payments towards satisfying plaintiffs' $1 billion recovery deficit. Management estimates that its range of loss relative to this matter is zero to
$3.5 million. Presently there is no more likely point estimate of loss within this range. As a consequence of the uncertainties described above regarding the amount we will ultimately be
required to pay, if any, as of February 29, 2004, we have not accrued a liability for this matter.

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

To date, we have not declared or paid dividends on our common stock. Our Board of Directors presently intends to retain all earnings for use in our business and
therefore does not anticipate declaring or paying any cash dividends in the foreseeable future.

Our
common stock was traded on the Nasdaq National Market under the symbol "ITRA" from February 26, 1999 until May 29, 2002. Since May 30, 2002, our common stock has
traded on the Nasdaq SmallCap Market under the symbol "ITRA." The following table reflects the range of reported high and low sale prices for our common stock for the periods indicated.

High

LowFor the quarter endedFebruary 29, 2004

$
2.49

$
1.56November 30, 2003


2.86


1.29August 31, 2003


1.90


1.01May 31, 2003


1.52


0.86For the quarter endedFebruary 28, 2003


1.40


0.86November 30, 2002


1.47


0.88August 31, 2002


1.35


0.56May 31, 2002


2.05


0.96


On
April 20, 2004, the last reported sale price for our common stock on the Nasdaq SmallCap Market was $1.96 per share. As of April 20, 2004, there were 382 holders
of record of Intraware common stock and a substantially greater number of beneficial owners.

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Equity Compensation Plan Information

The following table sets forth information, as of February 29, 2004, about equity awards under our equity compensation plans (in thousands, except weighted
average exercise price information):

|                                                       |  | A     |     | B |      | C |      
|------------------------------------------------------ |  | ----- | --- | - | ---- | - | -----
|
|Equity Compensation Plans Approved by Shareholders(1)  |  | 8,233 | (2) | $ | 2.45 |   | 3,554
|Equity Compensation Plans Not Approved by Shareholders |  | 1,107 | (4) | $ | 3.20 |   |     
|                                                       |  |       |     |   |      |   |      
|Total                                                  |  | 9,340 |     | $ | 2.19 |   | 3,554
|                                                       |  |       |     |   |      |   |      

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Our
Non-Qualified Acquisition Stock Option Plan, adopted in October 1999 (the "1999 Plan"), has not been approved by our shareholders. The 1999 Plan provided for the
granting of NSOs to our employees and consultants. Officers could only receive grants under the 1999 Plan in connection with their initial service to us, and Board members could not receive any grants
under the 1999 Plan. The standard form of Stock Option Agreement used under the 1999 Plan provides that the options are exercisable 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 one year after the date of grant and as to the remaining options in equal monthly installments over the next
36 months. The exercise price of all options granted under the 1999 Plan has been the fair market value of our common stock on the grant date, as determined by the closing price of the common
stock on the applicable Nasdaq exchange on that date.

Effective
May 30, 2002, the day our common stock began trading on the Nasdaq SmallCap Market, we ceased granting options under the 1999 Plan. However, the 1999 Plan remains in
effect solely to the extent of options granted before May 30, 2002 that remain outstanding. As of February 29, 2004, approximately 1,107,000 shares of our common stock were reserved for
issuance under the 1999 Plan, and the same number of shares were issuable pursuant to options outstanding under the plan as of that date.

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ITEM 6. SELECTED FINANCIAL DATA.

The following tables present selected historical financial information for Intraware. This information has been derived from our respective consolidated financial
statements and notes, some of which are included elsewhere in this annual report. The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and are qualified by reference to the consolidated financial statements and notes thereto and appearing elsewhere in this annual report. The
consolidated statement of operations data set forth below for the years ended February 29, 2004, February 28, 2003, and February 28, 2002, and the consolidated balance sheet data
at February 29, 2004 and February 28, 2003, are derived from, and are qualified by reference to, the audited consolidated financial statements of Intraware included elsewhere in this
annual report. The consolidated statement of operations data for the years ended February 28, 2001 and February 29, 2000, and the balance sheet data at February 28, 2002,
February 28, 2001, and February 29, 2000, are derived from audited consolidated financial statements of Intraware which are not included or incorporated by reference in this annual
report. The historical results are not necessarily indicative of results to be expected for any future period.

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|                                                                                                                     |                                              | For the Years Ended |       
|-------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------- | ------
|
|
|Statement of Operations Data:                                                                                        |                                              |                     |       
|Revenues:                                                                                                            |                                              |                     |       
|                                                                                                                     | Software product sales                       |                     | $     
|                                                                                                                     | Online services and technology               |                     |       
|                                                                                                                     | Alliance and reimbursement                   |                     |       
|                                                                                                                     | Related party online services and technology |                     |       
|                                                                                                                     |                                              |                     |       
|                                                                                                                     |                                              | Total revenues      |       
|                                                                                                                     |                                              |                     |       
|Cost of revenues:                                                                                                    |                                              |                     |       
|                                                                                                                     | Software product sales                       |                     |       
|                                                                                                                     | Online services and technology               |                     |       
|                                                                                                                     | Alliance and reimbursement                   |                     |       
|                                                                                                                     |                                              |                     |       
|Total cost of revenues                                                                                               |                                              |                     | 4,460 
|                                                                                                                     |                                              |                     |       
|Gross profit                                                                                                         |                                              |                     | 6,447 
|                                                                                                                     |                                              |                     |       
|Operating expenses:                                                                                                  |                                              |                     |       
|                                                                                                                     | Sales and marketing                          |                     |       
|                                                                                                                     | Product development                          |                     |       
|                                                                                                                     | General and administrative                   |                     |       
|                                                                                                                     | Amortization of intangibles                  |                     |       
|                                                                                                                     | Amortization of goodwill                     |                     |       
|                                                                                                                     | Restructuring                                |                     |       
|                                                                                                                     | Impairment of assets                         |                     |       
|                                                                                                                     | Loss on abandonment of assets                |                     |       
|                                                                                                                     |                                              |                     |       
|Total operating expenses                                                                                             |                                              |                     | 8,717 
|                                                                                                                     |                                              |                     |       
|Loss from operations                                                                                                 |                                              |                     | (2,270
|Interest expense                                                                                                     |                                              |                     | (206  
|Interest income                                                                                                      |                                              |                     | 72    
|Other income and expenses                                                                                            |                                              |                     | 24    
|Gain on sale of Asset Management software business                                                                   |                                              |                     |      
|                                                                                                                     |                                              |                     |       
|Net loss                                                                                                             |                                              |                     | (2,380
|Redeemable convertible preferred stock accrued dividends, accretion to liquidation and beneficial conversion feature |                                              |                     |      
|                                                                                                                     |                                              |                     |       
|Net loss attributable to common stockholders                                                                         |                                              | $                   | (2,380
|                                                                                                                     |                                              |                     |       
|Basic and diluted net loss per share attributable to common stockholders                                             |                                              | $                   | (0.04 
|                                                                                                                     |                                              |                     |       
|Weighted average sharesbasic and diluted                                                                            |                                              |                     | 55,910
|                                                                                                                     |                                              |                     |       

|                                            |  | February 29, 2004 |        | February 28, 2003 |   | February 28, 2002 |  | February 28, 2001 |        | February 29, 2000
|------------------------------------------- |  | ----------------- | ------ | ----------------- | - | ----------------- |  | ----------------- | ------ | -----------------
|
|Balance Sheet Data:                         |  |                   |        |                   |   |                   |  |                   |        |                  
|Cash and cash equivalents and investments   |  | $                 | 11,804 |                   | $ | 6,841             |  | $                 | 2,979  |                  
|Working capital (deficit)                   |  |                   | 8,575  |                   |   | 2,642             |  |                   | (9,320 | )                
|Total assets                                |  |                   | 14,770 |                   |   | 10,936            |  |                   | 26,519 |                  
|Long term obligations, less current portion |  |                   | 766    |                   |   | 906               |  |                   | 2,235  |                  
|Redeemable convertible preferred stock      |  |                   | 897    |                   |   | 2,473             |  |                   | 3,347  |                  
|Total stockholders' equity                  |  | $                 | 7,590  |                   | $ | 764               |  | $                 | 110    |                  

Note: Historical results of operations are not necessarily indicative of future results. Refer to the "Risk Factors" under Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for discussion of factors that may impact future results. Our historical results of operations reflect our acquisition of
Janus Technologies in July 2000.

14

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All
historical information has been restated to reflect our acquisition of Internet Image, Inc. during the year ended February 28, 2000, which was accounted for as a
pooling of interests.

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

With
respect to the calculation of net loss per share and weighted average shares, Note 1 of the "Notes to Consolidated Financial Statements" in Item 8 below provides an
explanation of the determination of the weighted average shares used to compute net loss per share.

We
have not paid cash dividends on our common stock.

15

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

We begin Management's Discussion and Analysis of Financial Condition and Results of Operation (MD&A) with our overall strategy to give the reader an overview of
the goals of our business and the direction in which our business is moving. This is followed by a discussion of the Critical Accounting Policies and Estimates that we believe are important to
understanding the assumptions and judgments incorporated in our reported financial results. In the next section, we discuss our Results of Operations for our 2004 fiscal year compared to our 2003 and
2002 fiscal years. We then analyze our Liquidity and Capital Resources and discuss relevant Recent Accounting Pronouncements.

This
MD&A should be read in 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 this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and
could be affected by the uncertainties and risk factors described throughout this filing and particularly in the "Risk Factors" section. Our actual results may differ materially.

Overview

Our goal is to be the preeminent digital entitlement and delivery services provider. We are pursuing a three-pronged strategy to achieve this goal. First, we are
seeking to solidify and strengthen our technological advantage by further improving our ESDM technology solutions through internal research and development and through alliances with adjacent
technology providers. Second, we are seeking to extend our customer base by strengthening our sales force, implementing new marketing programs focused on lead generation, offering new functional
capabilities and pricing packages, and providing exceptional customer service. Third, we are working to become a profitable, cash-generating company by growing our SubscribeNet business
and practicing stringent fiscal responsibility.

We
currently see a number of trends in the marketplace that are potentially important for our business. First, the macroeconomy and the technology sector have improved in the past year.
However, the improvement seems tentative, apparently due in part to concerns about geopolitical instability and
potential terrorist attacks, and spending by technology companies remains cautious. Second, in the past year there have been a number of mergers and acquisitions in the enterprise software sector.
These consolidations pose both opportunities and risks for us, potentially leading either to growth in our contracts with those customers or to cancellation of customer contracts. Third, technology
companies are increasingly outsourcing operational functions to reduce costs. Our services enable enterprise software companies to outsource key operational functions in a manner that we believe is
financially compelling. Therefore, we may benefit from this outsourcing trend. Fourth, the use of hosted web-based applications, which in the past has been limited by concerns about speed,
reliability and security, is now becoming more accepted among mainstream businesses, largely because of a desire for cost savings. This trend may benefit us because our SubscribeNet service is a
hosted web-based application.

Our
management is focused on four key opportunities. The first is what appears to be growing demand for electronic delivery and management of enterprise software applications. The second
opportunity is to further penetrate the enterprise software provider market by better integrating and cross-selling our suite of services, including our SubscribeNet ESDM service, our outsourced sales
and marketing services, and the digital rights management and desktop update management and deployment services that we provide through strategic alliances. The third opportunity is to continue
expanding into vertical markets other than enterprise software, and into other untapped markets. The fourth is to continue forging alliances with adjacent technology providers to build our market
position and develop new revenue streams.

16

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We
also face a number of key risks, which are described in the "Risk Factors" beginning on page 32 below.

We
earn revenues and generate cash principally through recurring service fees charged for our SubscribeNet service, professional services fees charged for customization of our
SubscribeNet service, and profit-sharing and cost reimbursement received for our sales and marketing services. We have also raised substantial amounts of cash through private stock placements. In our
most recent private stock placement, in September 2003, we raised gross proceeds of approximately $6.2 million through a sale of common stock to investment funds and accounts managed by
Apex Capital, LLC. See Note 7 of our "Notes to Consolidated Financial Statements" in Item 8 below.

Critical Accounting Policies and Estimates

This MD&A discusses our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United
States of America. In preparing these financial statements, we are required to make estimates and assumptions affecting the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates and judgments on historical experience and on various other factors believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

We
consider accounting policies related to revenue recognition, prepaid licenses, services and costs of deferred revenue, allowance for doubtful accounts, goodwill and intangibles, and
income taxes to be critical accounting policies due to the estimation process involved in each.

Revenue Recognition

Online services and technology revenue results primarily from three types of arrangements. First, it results from sales of our SubscribeNet electronic software
delivery and management service to software vendors and other companies that distribute software as part of their business. Second, it results from professional services that we provide to integrate
our proprietary software, to convert data for customers, and to customize our SubscribeNet service for customers. Third, it results from the sale of our proprietary software licenses and related
maintenance to companies using those products internally or using those products to provide web-based services to their customers. As a result of the sale of our Asset Management software
business in May 2002 (discussed below in Results of Operations), we are not currently deriving significant revenue from licenses for our proprietary software; however, we may recognize future
revenues if we are able to sell licenses for our proprietary software underlying our SubscribeNet service and related maintenance. We sell our SubscribeNet service, and will sell proprietary software
licenses if opportunities present themselves, primarily through our direct sales force or through authorized resellers.

Alliance
and reimbursement revenue primarily relates to our alliance agreement with Software Spectrum for sales of Sun software licenses and maintenance. This revenue consists of a
percentage of the gross profit derived from the sales of Sun software licenses and maintenance services, and reimbursement for the costs of maintaining a sales team dedicated to selling Sun software
for Software Spectrum. This revenue is recognized as we provide the services to Software Spectrum.

We
derive software product revenues from resold licenses and maintenance for multiple business software product lines. As of July 1, 2001, we generally no longer resell third
party software licenses and maintenance, though we still resell licenses for third party products complementary to our SubscribeNet service. We continue to recognize revenue from third party software
licenses and related

17

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maintenance
contracts over the life of the arrangements made prior to July 1, 2001. Vendor specific objective evidence of fair value for the maintenance element of the resold software
arrangements is based on historical and contractual renewal rates for maintenance. We defer the maintenance revenue at the outset of the arrangement and recognize it ratably over the period during
which the maintenance is to be provided (generally 12 months), which normally commenced on the date the software was delivered.

We
defer online services and technology revenues related to ESDM and generally recognize them ratably over the term of the service arrangement. Some SubscribeNet services provided to new
customers involve implementation or customization activities essential to the functionality of our SubscribeNet services. In those cases, we defer revenue recognition until the services
go-live date is reached and recognize the revenue on a ratable basis over the remaining contract term. The go-live date is the date on which the essential functionality has
been delivered or on which the website through which the service is provided enters the production environment, or the point at which no additional customization is required, whichever is later. We
typically rely on a negative confirmation from the customer to indicate acceptance of the implementation of the service. If customers were to subsequently indicate that services have not been
completed, this could have a material adverse impact on our financial condition and results of operations.

When
we sell additional professional services related to the original SubscribeNet agreement, we defer revenue recognition until the services go-live date is reached in the
same manner as the overall SubscribeNet services noted above. This revenue is recognized ratably over the longer of the remaining estimated customer life or the remaining contract term, commencing
with the delivery of the additional services. Estimated customer life requires that we periodically estimate the projected life of our existing customers, based on historical information, such as
customer renewal rates. Since revenues generated from additional professional services represent less than 6% of our overall revenues for the year ended February 29, 2004, any change to our
estimated customer life is unlikely to have a material adverse impact on our financial condition or results of operations.

We
recognize revenue when all of the following conditions are met:



Revenue
from transactions through authorized resellers has been recognized when the licenses and maintenance have been resold or utilized by the reseller or when our related obligations
have been satisfied. These transactions primarily related to Asset Management software licenses and maintenance resold. During the year ended February 28, 2003, we sold our Asset Management
software business to Computer Associates International, Inc., as discussed in Note 11 to our "Notes to Consolidated Financial Statement" in Item 8 below. We base vendor specific
objective evidence of fair value for the maintenance element of the proprietary software arrangements on historical and contractual renewal rates for maintenance. We defer the maintenance revenue at
the outset of the arrangement and recognize it ratably over the period during which the maintenance is to be provided (generally 12 months), which normally commences on the date the software is
delivered.

As
mentioned above, a determination that the collection of fees is probable is a precursor to recognizing revenue. Determination of collectability of payments requires judgment on the
part of management and includes periodically evaluating customers' credit (see "Allowance for doubtful accounts" below).

18

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Prepaid Licenses, Services and Costs of Deferred Revenue

As part of our earlier business of reselling third-party software, we purchased prepaid licenses for resale. These costs are recognized over the same term as the
associated revenue from licenses resold. We wrote down those prepaid licenses for estimated obsolescence in an amount equal to the difference between the cost of the prepaid licenses and the estimated
recoverable value based on assumptions about future demand, market conditions and our rights to return the licenses. If actual future demand or market conditions had been less favorable than those we
projected, additional prepaid license write-downs may have been required. As of July 1, 2001, we generally ceased reselling third party software
licenses, though we still resell licenses for third party products complementary to our SubscribeNet service (see "Revenue recognition" above). During the year ended February 29, 2004, we
recorded zero prepaid license write-downs. At February 29, 2004, we had approximately $0.1 million in prepaid licenses, which represents the cost of resold third-party licenses sold
prior to July 1, 2001.

In
addition, we capitalize deferred costs of revenues related to significant implementation and professional services contracts associated with our SubscribeNet services. These costs are
recognized over the same term as the associated revenue from those contracts (see Revenue Recognition above). Any change in our revenue recognition estimates could result in corresponding changes to
our recognition of costs of deferred revenues. At February 29, 2004, we had approximately $0.2 million in capitalized costs of deferred revenues.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses from our inability to collect required payments from our customers. When evaluating the
adequacy of this allowance, we analyze specific accounts receivable, historical bad debts, customer credit-worthiness, current economic trends and changes in our customer payment history. There is no
assurance that we will not need to record increases to our allowance balances in the future. We have many accounts receivable balances and one large unbilled receivable balance, and any dispute, early
contract termination or other collection issues could have a material adverse impact on our financial condition and result of operations. At February 29, 2004, our unbilled receivable balance
was $0.5 million. There are no allowances for doubtful accounts related to our unbilled accounts receivable balance. This balance relates to our Software Spectrum agreement (see Revenue
Recognition above). This estimate involves management's judgment, which takes into account their prior payment history, current credit-worthiness and overall business condition. Changes in the above
factors could have a material impact on actual bad debts incurred.

Goodwill and Intangibles

As discussed in Note 1 of our "Notes to Consolidated Financial Statements" in Item 8 below, we are required to regularly review all of our
long-lived assets, including goodwill and other intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
Goodwill balances were reviewed for impairment at least once annually. Factors we consider important which could trigger an impairment review include, but are not limited to, significant
underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, significant
negative industry or economic trends, a significant decline in our stock price for a sustained period, and our market capitalization relative to net book value. When we determine that an impairment
review for intangible and long-lived assets is necessary based upon the existence of one or more of the above indicators of impairment, we compare the book value of such assets to the
future undiscounted cash flows attributable to those assets. If the book value is greater than the future undiscounted cash flows, we measure any impairment based on a projected discounted cash flow
method using a discount rate commensurate with the risk inherent in our current business model. When we determine an impairment

19

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review
of goodwill is necessary based on an impairment indicator or based on our annual testing requirements, we compare the fair value of the reporting unit to the carrying value of the reporting
unit. If the carrying value of the reporting unit is greater than the fair value of the reporting unit, an impairment may be necessary. Significant judgment is required in the development of projected
cash flows for these purposes, including assumptions regarding the appropriate level of aggregation of cash flows, their term and discount rate as well as the underlying forecasts of expected future
revenue and expense. During fiscal year 2003, our remaining goodwill and intangibles were included in our calculation of the gain on sale of our Asset Management software business, as discussed in
Note 11 of our "Notes to Consolidated Financial Statements" in Item 8 below.

Income Taxes

In conjunction with preparing our financial statements, we must estimate our income taxes in each of the jurisdictions in which we operate. This process involves
estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not
likely, we must establish a valuation allowance. Given that we have incurred losses since inception and therefore have not been required to pay income taxes, we have fully reserved our deferred tax
assets at February 29, 2004. In the event that we are able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period that
this is determined.

Results of Operations

Total Revenue

The following table sets forth the revenue, changes in revenue and percentage of total revenue for the periods indicated (in thousands):

|          |                                              | For the Years Ended |  
|--------- | -------------------------------------------- | ------------------- | -
|
|
|Revenues: |                                              |                     |  
|          | Software product sales                       |                     | $
|          | Online services and technology               |                     |  
|          | Alliance and reimbursement                   |                     |  
|          | Related party online services and technology |                     |  
|          |                                              |                     |  
|          |                                              | Total revenues      |  
|          |                                              |                     |  

Revenues for combined online services and technology and related party online service and technology revenue for the year ended
February 29, 2004, increased slightly from the prior year. This increase was primarily due to increased SubscribeNet revenues from existing customers of approximately $1.6 million. These
increases were partially offset by the decrease in revenue from our services agreement with Sun Microsystems, Inc. of $1.4 million for the year ended February 29, 2004. As of
March 31, 2003, Sun no longer receives the SubscribeNet service. The portion of our services agreement with Sun related to our electronic fulfillment of initial Sun software license sales will
remain in effect through June 2004; however, the fees payable by Sun for our fulfillment services were reduced substantially effective March 1, 2003. The decrease in combined online
services and technology revenue for the year ended February 28, 2003 as compared to the year ended February 28, 2002, is primarily due to our sale of our Asset Management software
business in May 2002, which resulted in a reduction of approximately $4.7 million in combined online services and technology revenue. We expect our

20

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combined
online services and technology revenue and related party online services and technology revenue in our first quarter of fiscal year 2005 to be slightly higher than those in our fiscal quarter
ended February 29, 2004. The previous sentence is a forward looking statement and actual results could differ materially from those anticipated.

Alliance
and reimbursement revenue primarily relates to our alliance agreement with Software Spectrum for sales of Sun software licenses and maintenance. This revenue consists of a
percentage of the gross profit derived from the sales of Sun software licenses and maintenance services, and reimbursement for the costs of maintaining a sales team dedicated to selling Sun software
for Software Spectrum. The decrease in alliance and reimbursement revenue for the year ended February 29, 2004, was primarily due to a reduction of the shared gross profit derived from the
sales of Sun software licenses and maintenance services of $0.7 million. The increase in alliance and reimbursement revenue for the year ended February 28, 2003 is primarily due to fact
that our agreement with Software Spectrum did not go into effect until June 2001, approximately four months into our fiscal year ended February 28, 2002. We expect our alliance and
reimbursement revenues in our first quarter of fiscal year 2005 to be lower than those in our three months ended February 29, 2004 due to seasonality and forecasted reduced demand for Sun
products. The previous sentence is a forward-looking statement and actual results could differ materially from those anticipated.

The
decline in software product revenue and the majority of the decline in total revenue for the years ended February 29, 2004 and February 28, 2003, was due to our
transition out of the business of reselling third-party software products and related maintenance. We expect our third-party product revenue to continue to decrease as a result of this transition.
However, we may recognize future revenues from products and services complementary to our SubscribeNet service, which originate with other companies and are sold to customers through us as part of a
comprehensive ESDM business solution. The previous two sentences are forward-looking statements and actual results could differ materially from those anticipated.

Costs and Expenses

The following table sets forth certain items from our consolidated statements of operations as a percentage of total revenue for the periods indicated:

For the Years EndedFebruary 29, 2004

February 28, 2003

February 28, 2002Gross margin

59
%
55
%
36
%Operating expenses:Sales and marketing

24
%
39
%
24
%Product development

25
%
44
%
19
%General and administrative

31
%
21
%
13
%Amortization of intangibles

0
%
7
%
11
%Amortization of goodwill

0
%
0
%
4
%Restructuring

0
%
9
%
4
%Impairment of assets

0
%
6
%
0
%Loss on abandonment of assets

0
%
1
%
13
%Total operating expenses

80
%
127
%
88
%


Cost of Revenues

Total cost of revenues decreased to $4.5 million for the year ended February 29, 2004, from $6.4 million for the year ended
February 28, 2003, and $34.3 million for the year ended February 28, 2002. The decreases in cost of revenues are primarily due to the phasing out of our third-party software

21

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reseller
business, which resulted in decreases of $1.7 million and $27.3 million in cost of revenues for the years ended February 29, 2004 and February 28, 2003.

Our
gross margin increased to 59% for the year ended February 29, 2004, from 55% for the year ended February 28, 2003, and 36% for the year ended February 28, 2002.
The gross margin increases primarily reflect our focus on the sale of our own services and technology, which generate higher margins than third-party products we resold.

Cost
of revenues primarily consists of certain allocated costs related to our purchase of bandwidth services to support software delivery through our SubscribeNet service and data center
services to support our SubscribeNet service, equipment and other infrastructure that we purchase and maintain to support our sales and support teams, and customer support and the costs associated
with maintaining our sales team dedicated to selling Sun software for which Software Spectrum reimburses us. Cost of revenues also consists of professional services personnel costs and the cost of
third-party products sold. We generally purchased such third-party products at a discount to the third-party's established list prices according to standard reseller terms. We expect our overall cost
of revenues and gross profit margin percentage to increase over our fiscal year 2004 levels. However, the actual mix of sales transactions and the timing of the transactions may cause our cost of
revenues and gross profit margins to fluctuate materially from those anticipated.

Sales and Marketing Expenses

For the year ended February 29, 2004, sales and marketing expenses were $2.6 million or 24% of revenue, a decrease from $5.4 million or 39%
of revenue for the year ended February 28, 2003, and $12.6 million or 24% of revenue for the year ended February 28, 2002.

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

The
decrease in the dollar amount and percentage of revenue 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 our restructuring efforts in connection with the sale of our Asset Management software business in May 2002, which reduced expenditures on salaries and marketing, and
eliminated rent on closed offices for a total of approximately $1.8 million in reduced expenses. The decrease is also attributable to reduced stock-based employee compensation expense of
$0.5 million.

The
decrease in the dollar amount of our sales and marketing expenses for the year ended February 28, 2003 compared to the year ended February 28, 2002, is also due to our
restructuring efforts and the sale of our Asset Management software business in May 2002, which reduced expenditures on salaries and marketing, and eliminated rent on closed offices for a total
of approximately $6.0 million in reduced expenses.

We
plan to increase our expenditures on sales and marketing in fiscal year 2005 over those in fiscal year 2004, both in dollar amounts and as a percentage of revenue. We plan to continue
to market and sell our services, and may market and sell proprietary software licenses, directly to customers using our existing sales force. We also plan to continue to develop additional business
relationships to sell our services to a broader customer base. The previous three sentences are forward-looking statements and actual results could differ materially from those anticipated.

Product Development Expenses

For the year ended February 29, 2004, product development expenses were $2.7 million or 25% of revenue, a decrease from $6.2 million or 44%
of revenue for the year ended February 28, 2003, and $10.1 million or 19% of revenue for the year ended February 28, 2002.

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Product development expenses primarily consist of personnel, consulting, software and related maintenance, equipment depreciation expenses and allocated overhead costs. Costs related to
research, design and development of products and services have been charged to product development expense as incurred.

The
decrease in the dollar amount and percentage of revenue of our product development expenses for the year ended February 29, 2004, compared to those for the year ended
February 28, 2003, is primarily due to our restructuring efforts in connection with the sale of our Asset Management software business in May 2002, which eliminated expenditures on
salaries and consulting fees for Asset Management software development personnel of $0.4 million, reduced software and related maintenance and equipment depreciation expenses through the
disposal or retirement of software and equipment of $1.7 million, and reduced stock-based employee compensation expense of $0.3 million.

The
decrease in the dollar amount of our product development expenses for the year ended February 28, 2003 compared to the year ended February 28, 2002, was primarily due
to reductions in payroll and related expenses of $2.1 million, a significant portion of which related to our restructuring efforts and the sale of our Asset Management software business in
May 2002. The decrease was also due to a decrease in software and related maintenance and equipment depreciation expense of $1.1 million.

We
anticipate continuing to invest in additional functionality for our SubscribeNet service and underlying proprietary software. However, we expect those investments to fluctuate over
time, and expect our product development expenses to fluctuate accordingly. We expect total product development expenditures to be lower in fiscal year 2005 than in fiscal year 2004, both in dollar
amounts and as a percentage of revenue. We cannot give assurance that our product development efforts will result in new or improved products, features or functionality or that the market will accept
the improvements to existing or new products, features or functionality developed.

General and Administrative Expenses

For the year ended February 29, 2004, general and administrative expenses were $3.4 million or 31% of revenue, an increase from $3.0 million
or 21% of revenue for the year ended February 28, 2003, and a decrease from $6.9 million or 13% of revenue for the year ended February 28, 2002.

General
and administrative expenses consist primarily of compensation for administrative and executive personnel, fees for professional services, uncollectible accounts and certain
allocated overhead costs.

A
significant part of the increase in our general and administrative expenses for the year ended February 29, 2004, is the reduction in recovery of accounts previously written
off, as compared to our higher recovery of such accounts during the year ended February 28, 2003. During our 2001 fiscal year, we wrote off accounts that were deemed to be uncollectible at that
time. However, we continued to pursue collection efforts and ultimately succeeded in recovering 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 recoveries were partially offset by reductions in payroll related expenses of $0.4 million and
external personnel costs and state administrative fees of $0.4 million.

The
decrease in our general and administrative expenses for the year ended February 28, 2003 compared to the year ended February 28, 2002, is primarily due to increased
recoveries of accounts previously written off (as described in the preceding paragraph) of approximately $1.4 million during the year ended February 28, 2003. In addition, we recognized
decreases in payroll related expenses of approximately $1.6 million.

23

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We
expect total expenditures in fiscal year 2005 to approximate fiscal year 2004 levels. The previous sentence is a forward-looking statement and actual results could differ materially
from those anticipated.

August 2001 Restructuring and Loss on Abandonment of Assets

On August 8, 2001, we announced a strategic reorganization. We recorded a charge of $8.6 million relating to this restructuring and the loss on
abandonment of assets during the quarter ended August 31, 2001.

The
loss on abandonment of assets included the write off of approximately $6.4 million of property and equipment and certain intangibles relating to our 1999 acquisition of
BitSource, Inc., as we abandoned the related technology. The write off consisted of the following components: $2.7 million for property and equipment, $0.5 million for trademarks,
$0.5 million for goodwill, and $2.7 million for existing technology.

The
property and equipment written off included assets taken out of service, as they were deemed unnecessary due to our workforce reductions. These assets were subsequently disposed of
or sold. Included in this write off were furniture and fixtures that were written down to a net realizable value of approximately $55,000.

The
restructuring consisted of approximately $262,000 for severance and benefits relating to the involuntary termination of 66 employees, all of whom were based in North America. We
reduced our workforce to 120 employees from 186 at the end of July 2001. Of the 66 terminated employees, 25 were in Sales and Marketing, 26 were in Product Development and 15 were in General
and Administrative. We also consolidated our two San Francisco Bay Area offices into one. We accrued lease and related costs of approximately $1.9 million principally pertaining to the
estimated future obligations of non-cancelable lease payments for excess facilities in the San Francisco Bay Area that were vacated due to the workforce reduction. We also recognized an
additional $27,000 relating to other restructuring expenses.

Due
to changes in management's estimates relating to our strategic reorganization on August 8, 2001, we recognized additional expenses of approximately $478,000 during the three
months ended November 30, 2001. This additional charge principally related to the acquisition of the title to assets held under a capital lease. In connection with our restructuring efforts we
recorded a charge of approximately $120,000 relating to the fair value of an option issued to a consultant on September 5, 2001, for services performed in conjunction with exiting our excess
lease space. We issued a fully-vested and immediately exercisable option to purchase 110,000 shares of our common stock at an exercise price of $0.01 per share. The term of the option is ten years.
The following assumptions were used to value the option under the Black-Scholes option pricing model: term of 10 years; fair value of the stock price on the grant date of $1.09; option exercise
price of $0.01 per share; volatility of 159%; and a zero dividend yield.

24

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The
following table sets forth an analysis of the components of the restructuring and loss on abandonment charges recorded in the second quarter of fiscal 2002 and subsequent adjustments
and payments made against the reserve (in thousands):

|                                                               |                                      | Severance and benefits |      | Asset
write-offs |   | Excess lease
and related costs |       | Other costs |        | Total |  
|-------------------------------------------------------------- | ------------------------------------ | ---------------------- | ---- | ---------------- | - | ------------------------------ | ----- | ----------- | ------ | ----- | -
|August 8, 2001 restructuring and loss on abandonment of assets |                                      | $                      | 262  |                  | $ | 6,407                          |       | $           | 1,917  |       | $
|                                                               |                                      |                        |      |                  |   |                                |       |             |        |       |  
|                                                               | Total                                |                        |      | 262              |   |                                | 6,407 |             |        | 1,917 |  
|Cash paid                                                      |                                      |                        | (209 | )                |   |                               |       |             | (94    | )     |  
|Non-cash charges                                               |                                      |                        |     |                  |   | (6,407                         | )     |             |       |       |  
|                                                               |                                      |                        |      |                  |   |                                |       |             |        |       |  
|                                                               | Reserve balance at August 31, 2001   |                        |      | 53               |   |                                |      |             |        | 1,823 |  
|Cash paid                                                      |                                      |                        | (47  | )                |   |                               |       |             | (246   | )     |  
|Non-cash charges                                               |                                      |                        |     |                  |   | (328                           | )     |             | (410   | )     |  
|Provision adjustment                                           |                                      |                        |     |                  |   | 328                            |       |             | 150    |       |  
|                                                               |                                      |                        |      |                  |   |                                |       |             |        |       |  
|                                                               | Reserve balance at November 30, 2001 |                        |      | 6                |   |                                |      |             |        | 1,317 |  
|Cash paid                                                      |                                      |                        | (6   | )                |   |                               |       |             | (1,317 | )     |  
|                                                               |                                      |                        |      |                  |   |                                |       |             |        |       |  
|                                                               | Reserve balance at February 28, 2002 |                        | $    |                 |   | $                              |      |             | $      |      |  
|                                                               |                                      |                        |      |                  |   |                                |       |             |        |       |  

May 2002 Restructuring and Sale of Asset Management Software Business

In May 2002, we sold substantially all of the assets related to our Asset Management software business to Computer Associates International, Inc.
for approximately $9.5 million in cash. In connection with this sale, our July 2001 agreement with Computer Associates for its resale of our Argis suite of software products was
terminated. In addition, as part of that asset sale, we assigned to Computer Associates our May 2001 agreement with Corporate Software (now Software Spectrum) for its resale 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, all of the shares subject to the warrant that we issued to Software
Spectrum in May 2001 will immediately become exercisable. We recorded the fair value of the warrant as prepaid distribution costs and were recognizing it as a reduction of revenue over the
lesser of a ratable charge over the 24-month term of the agreement with Software Spectrum or the period it took Software Spectrum to generate revenue to Intraware of $1.6 million
from Software Spectrum's resale of our asset management software. As a result of the asset sale, we recorded the remaining unamortized prepaid distribution costs of $936,000 as a reduction to revenue
during the year ended February 28, 2003.

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

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

Total consideration

$
9,500Net book value of equipment, intangible assets and deferred revenue


(6,536
)Transaction costs


(308
)Gain on sale

$
2,656


In
connection with our disposition of the Asset Management software business, we announced a restructuring and workforce reduction to reduce our operating expenses. We recorded a charge
of

25

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$1.8 million
relating to this restructuring and the impairment of assets during the three months ended May 31, 2002.

The
impairment of assets includes the write-off of approximately $403,000 in prepaid licenses that were held for resale. The restructuring charge consisted of approximately
$345,000 for severance and benefits relating to the involuntary termination of 14 employees who were not hired by Computer Associates. We terminated an additional 33 employees, all of whom were based
in North America. These 33 terminated employees were all hired by Computer Associates and therefore received no severance payments. Overall, we reduced our workforce to 71 employees from 118 in
connection with the asset sale to Computer Associates. Of the 47 terminated employees, 22 were in Sales and Marketing, 10 were in Product Development and 15 were directly involved in our product
support. We also closed our Pittsburgh, Pennsylvania office and various satellite offices.

We
accrued for lease and related costs of approximately $983,000, principally pertaining to the estimated future obligations of non-cancelable lease payments for excess
facilities that were vacated due to our workforce reductions. We also recognized $63,000 relating to other restructuring expenses. Due to changes in management's estimates relating to the
restructuring during the three months ended August 31, 2002, we recognized an additional expense of $106,000 pertaining to the estimated future obligations of non-cancelable lease
payments for excess facilities that were vacated due to our workforce reductions. In addition, we did not incur projected severance and benefits of $106,000 and reduced the reserve accordingly. During
the three months ended February 28, 2003, we agreed with the landlord to terminate our Pittsburgh, Pennsylvania lease and realized a savings of approximately $152,000 that would otherwise have
been payable as rent under the lease.

In
our December 2000 restructuring, we closed our Fremont, California office and assigned our lease to 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.

26

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The
following table sets forth an analysis of the components of the restructuring and impairment of assets charges recorded in the first quarter of fiscal year 2003 and subsequent
adjustments 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  |       | $
|                           |                                      |                        |      |                                |   |                      |     |             |      |       |  
|                           | Total                                |                        |      | 345                            |   |                      | 983 |             |      | 403   |  
|Cash paid                  |                                      |                        |     |                                |   | (89                  | )   |             |     |       |  
|Non-cash charges           |                                      |                        |     |                                |   | (18                  | )   |             | (403 | )     |  
|                           |                                      |                        |      |                                |   |                      |     |             |      |       |  
|                           | Reserve balance at May 31, 2002      |                        |      | 345                            |   |                      | 876 |             |      |      |  
|Cash paid                  |                                      |                        | (239 | )                              |   | (119                 | )   |             |     |       |  
|Provision adjustment       |                                      |                        | (106 | )                              |   | 106                  |     |             |     |       |  
|                           |                                      |                        |      |                                |   |                      |     |             |      |       |  
|                           | Reserve balance at August 31, 2002   |                        |      |                               |   |                      | 863 |             |      |      |  
|Cash paid                  |                                      |                        |     |                                |   | (294                 | )   |             |     |       |  
|                           |                                      |                        |      |                                |   |                      |     |             |      |       |  
|                           | Reserve balance at November 30, 2002 |                        |      |                               |   |                      | 569 |             |      |      |  
|Cash paid                  |                                      |                        |     |                                |   | (356                 | )   |             |     |       |  
|Non-cash charges           |                                      |                        |     |                                |   | (51                  | )   |             |     |       |  
|Provision adjustment       |                                      |                        |     |                                |   | (152                 | )   |             |     |       |  
|                           |                                      |                        |      |                                |   |                      |     |             |      |       |  
|                           | Reserve balance at February 28, 2003 |                        |      |                               |   |                      | 10  |             |      |      |  
|                           |                                      |                        |      |                                |   |                      |     |             |      |       |  
|Cash paid                  |                                      |                        |     |                                |   | (10                  | )   |             |     |       |  
|                           |                                      |                        |      |                                |   |                      |     |             |      |       |  
|                           | Reserve balance at February 29, 2004 |                        | $    |                               |   | $                    |    |             | $    |      |  
|                           |                                      |                        |      |                                |   |                      |     |             |      |       |  

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

Amortization of Intangibles and Goodwill

For the year ended February 29, 2004, amortization of intangibles and goodwill was zero, a decrease from $1.1 million for the year ended
February 28, 2003, and $8.5 million for the year ended February 28, 2002.

Amortization
of intangibles and goodwill related to our acquisitions of BitSource, Inc. in October 1999 and Janus Technologies, Inc. in July 2000. On
March 1, 2002, we ceased amortization of our goodwill balance of $7.0 million. Subsequently, in May 2002, as part of our Asset Management software business sale to Computer
Associates, we included our remaining intangible assets and goodwill in the determination of the gain on sale.

Interest Expense

For the year ended February 29, 2004, interest expense was $0.2 million, a decrease from $2.7 million for both the years ended
February 28, 2003 and 2002.

Interest
expense relates to obligations under capital leases, notes payable and borrowings under a bank line. The decrease in interest expense from February 28, 2003 and 2002 is
primarily the result of accrued interest and accretion to redemption value related to our $7.0 million in notes payable, which were fully converted or paid off in the first quarter of fiscal
year 2003.

27

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Interest and Other Income and Expenses, Net

For the year ended February 29, 2004, interest and other income and expenses, net was a $96,000 credit, a decrease from a $544,000 credit for the year
ended February 28, 2003, and an increase from a net charge of $3.8 million for the year ended February 28, 2002.

Interest
and other income and expenses, net primarily relates to interest earned on our investment balances and warrants recorded as liabilities adjusted to fair value. The increase in
interest 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 adjust any warrants to fair value. The
increase in interest and other income and expenses, net for the year ended February 28, 2003, is primarily the result of the decrease in the charges recorded to adjust the warrants we issued in
connection with our August 31 and September 20, 2001, debt issuances, and our May 24, 2002, common stock financing to fair value. All warrants have been reclassified to permanent
equity and will no longer be adjusted to fair value.

Income Taxes

From inception through February 29, 2004, we incurred net losses for federal and state tax purposes and have not recognized any tax provision or benefit.
As of February 29, 2004, we had approximately $129 million of federal and $59 million of state net operating loss carryforwards available to offset future taxable income, which
expire in varying amounts between 2004 and 2025. Because of cumulative ownership changes, federal loss carryforwards totaling approximately $90 million and state loss carryforwards totaling
approximately $39 million are subject to limitation. At February 29, 2004, $39 million and $20 million of federal and state net operating losses, respectively, are
available, without limitation to offset future taxable income. Should there be a change of ownership in the future, the available net operating losses may be further limited. Given our limited
operating history, losses incurred to date and the difficulty in accurately forecasting our future results, management does not believe that the realization of the related deferred income tax asset
meets the criteria required by generally accepted accounting principles. Accordingly, we have recorded a 100% valuation allowance. (See Note 4 of "Notes to the consolidated financial
statements".)

Liquidity and Capital Resources

The following table presents our liquidity position at the end of our fiscal years 2004 and 2003 (in thousands):

For the years endedFebruary 29, 2004

February 28, 2003Cash and cash equivalents

$
11,804

$
6,841Working capital

$
8,575

$
2,642Net cash used in operating activities

$
(1,441
)
$
(5,199
)Net cash provided by (used in) investing activities

$
(575
)
$
8,953Net cash provided by financing activities

$
6,979

$
108


We
significantly improved our cash used in operations in fiscal year 2004 by reducing operating expenditures. However, we still used $1.4 million in cash to support our operations
in our fiscal year 2004. This cash came from our existing cash and cash equivalents, and from our issuance of common stock in a private placement in September 2003. Due in large part to this
financing, we ended the year with $11.8 million in cash, as compared to $6.8 million at the end of the prior year. We expect to continue to improve our cash used in operations by
increasing our billings to customers as more subscribers are added to our ESDM service. We plan to use part of those expected increased cash receipts in additional sales and marketing expenditures to
expand our market reach. Our ability to improve our uses of cash and generate positive cash flows in future periods will largely depend on our

28

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ability
to increase the number of customers of our SubscribeNet service while increasing existing subscriptions through strong contract renewals. It is also important for us to maintain our current
level of sales through our Software Spectrum sales alliance, and continue to control our operational and customer support costs in the coming year.

Our
net cash used in operations was $1.4 million for the year ended February 29, 2004, down from $5.2 million net cash used in operations in the year ended
February 28, 2003. This decrease was primarily due to approximately $1.9 million in reductions in payroll-related expenditures and $1.1 million in reduced restructuring cash
payments (see "May 2002 Restructuring and Sale of Asset Management Software Business" above). Our net cash used in operating activities primarily resulted from our net loss for the year. The
majority of our operating costs continue to relate to employee payroll and related expenditures.

Our
net cash provided by financing activities was $7.0 million for the year ended February 29, 2004. Most of this amount came from a private placement of common stock we
completed in September 2003. In that financing, we issued 4.0 million shares of common stock at a price of $1.55 per share for gross proceeds of $6.2 million. Part of that
$7.0 million amount also came from our issuance of about 1.3 million shares of common stock pursuant to stock option exercises for proceeds of approximately $1.3 million.

In
August 2003, we entered into an agreement with a bank under which we issued a note payable for proceeds of approximately $2.0 million and obtained access to a $500,000
line of credit. The note payable bears an annual interest rate of the greater of 1% in excess of the bank's prime rate (4.00% at February 29, 2004) or 5.25%. We used the proceeds from the note
payable to settle our remaining
liability under a capital lease bearing an interest rate of approximately 12%. This refinancing enabled us to significantly reduce our monthly capital financing and interest expenditures. The line of
credit allows us to draw, through August 2004, for equipment purchases at the same interest rate that applies to the note payable.

Under
the agreement for the note payable and line of credit, all borrowings are collateralized by a senior security interest in substantially all of our assets. The agreement also
requires us to comply with financial covenants, with which we complied as of February 29, 2004. The agreement further restricts us from incurring or assuming additional indebtedness outside of
this note payable and line of credit, excluding trade payables and certain other liabilities incurred in the ordinary course of business.

During
the year ended February 29, 2004, we made $2.4 million in capital lease payments, of which $1.7 million was for our settlement of the capital lease described
above. As of February 29, 2004, we had extinguished all of our capital lease liabilities, and our only capital financing arrangements were the note payable and line of credit described above.

Our
net cash used in investing activities during the year ended February 29, 2004, included $0.6 million for our purchase of fixed assets. We originally paid for these
equipment purchases from our cash and cash equivalents, but later drew down $250,000 under the above-mentioned line of credit to finance these purchases. We used these fixed asset purchases primarily
to upgrade and expand our SubscribeNet infrastructure and corporate information systems. We expect to continue to use and renew our line of credit to finance additional fixed asset purchases at levels
that approximate or are slightly higher than our prior year levels.

We
believe our existing cash and cash equivalents, together with any cash generated 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 declines from its current level, we could be forced to seek additional capital.

At
February 29, 2004, we did not have any other relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or
special purpose

29

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entities,
which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. 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 table summarizes our debt and lease obligations at February 29, 2004, and the effect such obligations are expected to have on our liquidity and cash flow in future
periods (in thousands). This table provides information through our year ending February 28, 2007, as we do not have any debt or lease obligations beyond that point.

Payments due by period2005

2006

2007

TotalBank notes payable

$
1,126

$
722

$
65

$
1,913
(a)Operating leases


560


284





844
(b)$
1,686

$
1,006

$
65

$
2,757


---

As
of February 29, 2004, our Series A redeemable convertible preferred stock entitled its holders to a liquidation preference of $1.0 million in the event of
Intraware's liquidation.

Recent Accounting Pronouncements

In November 2002, EITF reached a consensus on issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF
No. 00-21") on a model to be used to determine when a revenue arrangement with multiple deliverables should be divided into separate units of accounting and, if separation is
appropriate, how the arrangement consideration should be allocated to the identified accounting units. The EITF also reached a consensus that this guidance should be effective for all revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF No. 00-21 did not have a material impact on our results of operations or our
financial position.

In
January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities ("VIE"), an Interpretation of ARB
No. 51" ("FIN 46") and in December 2003, issued a revised interpretation ("FIN 46-R"). FIN No. 46, as revised, requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46-R are effective immediately for all arrangements
entered into after January 31, 2003. For arrangements entered into prior to February 1, 2003, we are required to adopt the provisions of FIN 46-R in the first quarter of our
fiscal year 2005. The adoption of FIN 46-R is not expected to have a significant effect on our financial position or results of operations.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). SFAS
No. 150 establishes standards for the classification and measurement of financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 apply to
the first interim period beginning after June 15,

30

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2003.
While the effective date of certain elements of SFAS No. 150 have been deferred, the adoption of SFAS No. 150 when finalized is not expected to have a material impact on our
financial position, results of operations or cash flows.

In
December 2003, the Staff of the SEC issued Staff Accounting Bulletin No. 104, "Revenue Recognition," ("SAB 104") which superseded SAB 101, "Revenue Recognition in
Financial
Statements." SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF
00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked Questions and
Answers (the FAQ) issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has
changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not materially
affect our revenue recognition policies, or our results of operations, financial position or cash flows.

In
April 2004, the EITF issued Statement No. 03-06 "Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses a
number of questions regarding the computation of earnings per share
by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of a company when, and if, it declares dividends on its
common stock. The issue also provides further guidance in applying the two-class method of computing earnings per share once it is determined that a security is participating, including
how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. We are currently evaluating the effect of
adopting EITF 03-06.

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RISK FACTORS

You should carefully consider the risks described below before making a decision to invest in our common stock. The risks and uncertainties described below are
not the only ones facing Intraware. Additional risks and uncertainties not presently known to us or that we do not currently believe are important to an investor may 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 be seriously
harmed. If that occurs, the trading price of our common stock could decline, and you may lose part or all of your investment.

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

Under
our June 2001 agreement with Software Spectrum, we provide Sales and Marketing Services to Software Spectrum to assist in its resale and marketing of Sun and Websense
software licenses and maintenance. Software Spectrum shares with us a portion of its gross profit from resales of Sun and Websense software licenses and maintenance, and reimburses us for a
substantial portion of our cost of maintaining a team dedicated to sales and marketing of that software and maintenance. This contract accounted for substantially all of our Alliance and reimbursement
revenues, a significant portion of our Online services and technology revenues, and more than 10% of our total revenues in our 2004 fiscal year (see Note 2 of our "Notes to Consolidated
Financial Statements" in Item 8 below). However, in recent years, sales and market share of the Sun software product lines that we resell with Software Spectrum have generally declined. If this trend
continues, revenues to us under this contract are likely to decrease over the long term. In addition, the term of this agreement will expire in June 2004 and is renewable for subsequent
one-year terms. It is possible that Software Spectrum will choose not to renew this agreement at any of those points. It is also possible that Sun and/or Websense will choose to stop
permitting Software Spectrum to resell their software. Any non-renewal of our agreement with Software 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 partners could cause our revenue growth to slow or cause our revenues to decline.

A
substantial amount of the revenues from our SubscribeNet service come from a relatively small number of companies. These include software providers to whom we provide our SubscribeNet
service, as well as Software Spectrum, to whom we provide both our SubscribeNet service and Sales and Marketing Services. Our contracts with most of these companies are subject to renewal or
cancellation annually. If any of these companies elected to cancel their agreements with us, our revenue growth would likely slow or our revenues might decline.

In
April 2004, Zomax and Intraware terminated our August 2002 strategic alliance agreement, under which Zomax paid us an aggregate of $1.3 million in annual
SubscribeNet license fees over two years. We replaced that agreement with a new reseller agreement under which Zomax does not pay us annual license fees, but rather pays us for services as they are
provided.

We have a history of losses and negative cash flow, and we have yet to achieve sustained profitability or positive cash flow. We plan to increase spending on sales and
marketing, which could limit or prevent any near-term improvement in our net income and cash flow.

We
have incurred significant losses since we were formed in 1996, and have yet to achieve sustained profitability or positive cash flow. As of February 29, 2004, we had an
accumulated deficit of approximately $155 million. Also, with the exception of our quarter ended November 30, 2002, we have not achieved positive cash flow since our formation in 1996.
Our operating history, combined with our

32

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plans
to increase investments in sales and marketing programs, make it difficult to evaluate whether or when we will be able to achieve sustained profitability or positive cash flow in the future.

To
help us achieve our long-term revenue and profit goals, we plan to increase our spending on sales and marketing activities and programs. We believe these investments will
contribute to improved financial performance over the longer term. However, in the near term this increase in our costs may limit our gross profit margins and limit or prevent any improvement in our
net income and cash flows.

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

The
market for selling electronic software delivery services is highly competitive. We believe we compete effectively because of the technology, performance, features, functionality, and
open
architecture of our SubscribeNet service, as well as its pricing and demonstrated return on investment. However, some of our competitors have longer operating histories, greater financial, technical,
marketing and other resources, broader product and service offerings, better name recognition, and a larger installed base of customers than we do. Some of our competitors also have
well-established relationships with our potential customers and with third-party information technology or consulting firms that help market our competitors' services. We expect
competition to intensify as current competitors expand and improve their service offerings and new competitors enter the market. Mergers and consolidation in the information technology industry may
also increase competition by enlarging our competitors and their product and service offerings, and/or by reducing the pool of potential customers. In addition, our current and potential customers are
primarily information technology companies with strong software development expertise. When considering their alternatives for implementing an electronic software delivery and management system, these
companies sometimes elect to develop such systems in-house. While we believe our competitive position is strong against both external competitors and in-house development, we
have at times experienced reduced prices, reduced gross margins and lost sales as a result of such competitive factors. It is possible that such competition will intensify and thereby limit the growth
of our revenues and gross margins.

Our operating results may fluctuate in future periods, which may adversely affect our stock price.

Our
operating results have been in the past, and will continue to be, subject to quarterly and annual fluctuations as a result of a number of factors. In addition to the other risk
factors described in this section, those factors include:



33

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As
a consequence, operating results for a particular future period are difficult to predict, and therefore, prior results are not necessarily indicative of results to be expected in
future periods. Any of the foregoing factors, or any other factors discussed elsewhere herein, could have a material adverse effect on our business, results of operations, and financial condition that
could adversely affect our stock price.

The technological and functional requirements we must meet to stay competitive are subject to rapid change. If we are unable to quickly adapt to 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 be limited.

We
market primarily to software providers, who generally demand that a service like ours meet high technological and functional standards. To remain competitive in this market and meet
the demands of current and prospective customers, we must continually adapt and upgrade our technology and functionality. If we do not respond quickly enough to changing industry standards or the
demands of customers and potential customers, we will likely lose sales and market share to competitors and our growth prospects will be limited. In addition, we could incur substantial costs to
modify our services or infrastructure in order to adapt to changing standards and demands. If we incur such costs but our sales fail to increase commensurately, our goals of sustained profitability
and positive operating cash flow will become more difficult to achieve.

Viruses and potential security breaches may hinder acceptance of Internet-based electronic software delivery and management, which could in turn limit our revenue
growth.

Use
of the Internet for business purposes poses several risks that could inhibit acceptance by information technology professionals of Web-based electronic software delivery
and management. The proliferation of software viruses is a key risk. Any well-publicized
transmission of a computer virus by us or another company using electronic software delivery could deter information technology professionals from using and deter software providers from outsourcing
electronic software delivery, thereby adversely affecting our business. Our SubscribeNet service enables our customers to upload their software products directly onto our systems for downloading by
their end-users. Our systems automatically scan our customers' software products for known computer viruses on an ongoing basis while they are on our systems. 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 virus transmission could result in disputes, litigation and negative
publicity that could adversely affect our business.

Concerns
over the security of transactions conducted on the Internet and the privacy of users may also inhibit the growth of our SubscribeNet service. We believe the security precautions
we employ to protect our customers' and their end-users' confidential files and information are effective. However, extremely sophisticated means have been used to breach the security of
other companies and governmental agencies. If we experience a security breach that affects one or more of our customers or their end-users, our business and results of operations could be
harmed. Anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may be required to incur significant costs to
protect against security breaches or to alleviate problems caused by breaches. Any well-publicized compromise of security in our industry could deter information technology professionals
from using and deter software providers from outsourcing electronic software delivery, thereby adversely affecting our business.

We may raise additional capital to fund acquisitions, product development or general operations. Any such capital financing would dilute our shareholders'
investments.

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

34

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generally
strengthening our balance sheet. Any such additional financing would likely dilute the investments of our current shareholders.

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

Our
business has benefited from the tax laws of states in which purchases of software licenses are not taxable if the software is received only electronically. Some states currently
experiencing revenue shortfalls are considering whether to change their laws to broaden the taxability of transactions executed over the Internet. Any new imposition of taxes on sales of software
licenses, where the
software is received electronically, could substantially harm demand for our services and thereby materially adversely affect our business, operating results and financial condition. We have also
benefited from implementing our services in Ireland, which offers tax advantages to software companies distributing their software from Ireland to other European countries. Any regulatory change in
Ireland or elsewhere that diminishes those advantages could harm our business. Other changes in government regulations, in areas such as privacy and export compliance, could also require us to
implement changes in our services or operations that increase our cost of doing business and thereby negatively affect our financial performance.

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

We
electronically deliver third-party software to end-users. This activity creates the potential for claims to be made against us, either directly or through our contractual
indemnification obligations to our customers. Any claims could result in costly litigation and be time-consuming to defend, divert management's attention and resources, cause delays in
releasing new or upgrading existing services or require us to enter into royalty or licensing agreements. These claims could be made for defamation, negligence, patent, copyright or trademark
infringement, personal injury, invasion of privacy or other legal theories based on the nature, content or copying of these materials.

Litigation
regarding intellectual property rights is common in the Internet and software industries. We expect that Internet technologies and software products and services may be
increasingly subject to third-party infringement claims as the number of competitors in our industry segment grows and the functionality of products in different industry segments overlaps. There can
be no assurance that our services do not infringe the intellectual property rights of third parties. In addition, we may be involved in litigation involving the software of third-party vendors that we
have electronically distributed in the past. Royalty or licensing agreements, if required, may not be available on acceptable terms, if at all. A successful claim of infringement against us could
adversely affect our business. Although we carry general liability insurance, our insurance may not cover all potential claims or may not be adequate to protect us from all liability that may be
imposed.

We
take steps to verify that end-users who download third-party software through our SubscribeNet service are entitled to deploy and use that software. However, there can be
no assurance that this verification procedure will help us defend against claims by, or protect us against liability to, the owners of copyrights in that third-party software. Our success and ability
to compete are substantially dependent upon our internally developed technology, which we protect through a combination of patent, copyright, trade secret and trademark law. We are aware that certain
other companies are using or may have plans to use the name "Intraware" as a company name or as a trademark or service mark. While we have received no notice of any claims of trademark infringement
from any of those companies, we cannot assure you that these companies may not claim superior rights to "Intraware" or to other marks we use. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our services or technology and we cannot be certain that the steps we have taken will prevent misappropriation of our technology.

35

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If our export compliance system fails to prevent unauthorized exports of our customers' software, we could be sanctioned by the U.S. government.

Through
our SubscribeNet service we globally distribute software containing high encryption and other features restricted by U.S. laws and regulations from exportation to certain
countries, types of recipients, and specific end-users. Our SubscribeNet solution incorporates automated procedures to help ensure that the software we deliver electronically is not
downloaded in violation of U.S. export laws and regulations. However, these procedures may not prevent unauthorized exports of restricted software in every case. If an unauthorized export of software
occurs through the SubscribeNet service and the U.S. government determines that we violated the U.S. export laws or regulations, we could 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 product development, sales, and corporate management could suffer.

Our
future success depends upon the continued service of our executive officers and other key technology, sales, marketing and support personnel. None of our officers or key employees is
bound by an employment agreement for any specific term. If we lost the services of one or more of our key employees, or if one or more of our executive officers or key employees decided to join a
competitor or otherwise compete directly or indirectly with us, this could have a significant adverse effect on our business.

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

At the end of fiscal year 2004, we had cash and cash equivalents of $11.8 million. We have not used derivative financial instruments in our investment
portfolio during fiscal 2004. We place our investments with high quality issuers, by policy, in an effort to limit the amount of credit exposure to any one issue or issuer.

Our
exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalents portfolio. We have not used derivative financial instruments in our cash and
cash equivalents portfolio. At February 29, 2004, our cash and cash equivalents portfolio totalled $11.8 million. The effect of changes in interest rates of +/-10% over a
six-month horizon would not have a material effect on the fair value of the portfolio.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index

PageReport of Independent Auditors

37Consolidated Balance Sheets

38Consolidated Statements of Operations

39Consolidated Statement of Stockholders' Equity

40Consolidated Statements of Cash Flows

41Notes to Consolidated Financial Statements

42


36

---



Report of Pricewaterhouse LLP, Independent Auditors

To
the Board of Directors and Stockholders
of Intraware, Inc:

In
our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Intraware, Inc. and its
subsidiaries at February 29, 2004 and February 28, 2003, and the results of their operations and their cash flows for each of the three years in the period ended February 29, 2004
in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As
discussed in Note 1 to the consolidated financial statements, effective March 1, 2002, the Company changed its method of accounting for goodwill in accordance with
Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".

PricewaterhouseCoopers
LLP

San
Jose, California
April 12, 2004, except for Note 12, which is as of April 30, 2004

37

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INTRAWARE, INC.  CONSOLIDATED BALANCE SHEETS  (in thousands, except for per share amounts)

|                                                                                     |                                                                                                                                                                                                                                  | February 29, 2004                            |                                                                                    | February 28, 2003 |       
|------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ---------------------------------------------------------------------------------- | ----------------- | ------
|ASSETS                                                                               |                                                                                                                                                                                                                                  |                                              |                                                                                    |                   |       
|Current assets:                                                                      |                                                                                                                                                                                                                                  |                                              |                                                                                    |                   |       
|                                                                                     | Cash and cash equivalents                                                                                                                                                                                                        |                                              | $                                                                                  | 11,804            |       
|                                                                                     | Accounts receivable, net                                                                                                                                                                                                         |                                              |                                                                                    | 1,462             |       
|                                                                                     | Prepaid licenses, services and cost of deferred revenue                                                                                                                                                                          |                                              |                                                                                    | 214               |       
|                                                                                     | Other current assets                                                                                                                                                                                                             |                                              |                                                                                    | 317               |       
|                                                                                     |                                                                                                                                                                                                                                  |                                              |                                                                                    |                   |       
|                                                                                     |                                                                                                                                                                                                                                  | Total current assets                         |                                                                                    |                   | 13,797
|Cost of deferred revenue, less current portion                                       |                                                                                                                                                                                                                                  |                                              | 43                                                                                 |                   |       
|Property and equipment, net                                                          |                                                                                                                                                                                                                                  |                                              | 897                                                                                |                   |       
|Other assets                                                                         |                                                                                                                                                                                                                                  |                                              | 33                                                                                 |                   |       
|                                                                                     |                                                                                                                                                                                                                                  |                                              |                                                                                    |                   |       
|                                                                                     |                                                                                                                                                                                                                                  |                                              | Total assets                                                                       |                   | $     
|                                                                                     |                                                                                                                                                                                                                                  |                                              |                                                                                    |                   |       
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK & STOCKHOLDERS' EQUITY           |                                                                                                                                                                                                                                  |                                              |                                                                                    |                   |       
|Current liabilities:                                                                 |                                                                                                                                                                                                                                  |                                              |                                                                                    |                   |       
|                                                                                     | Notes payable                                                                                                                                                                                                                    |                                              | $                                                                                  | 1,034             |       
|                                                                                     | Accounts payable                                                                                                                                                                                                                 |                                              |                                                                                    | 577               |       
|                                                                                     | Accrued expenses                                                                                                                                                                                                                 |                                              |                                                                                    | 928               |       
|                                                                                     | Deferred revenue                                                                                                                                                                                                                 |                                              |                                                                                    | 2,035             |       
|                                                                                     | Related party deferred revenue                                                                                                                                                                                                   |                                              |                                                                                    | 648               |       
|                                                                                     | Capital lease obligations                                                                                                                                                                                                        |                                              |                                                                                    |                  |       
|                                                                                     |                                                                                                                                                                                                                                  |                                              |                                                                                    |                   |       
|                                                                                     |                                                                                                                                                                                                                                  | Total current liabilities                    |                                                                                    |                   | 5,222 
|Deferred revenue, less current portion                                               |                                                                                                                                                                                                                                  |                                              | 295                                                                                |                   |       
|Related party deferred revenue, less current portion                                 |                                                                                                                                                                                                                                  |                                              |                                                                                   |                   |       
|Notes payable, less current portion                                                  |                                                                                                                                                                                                                                  |                                              | 766                                                                                |                   |       
|Capital lease obligations, less current portion                                      |                                                                                                                                                                                                                                  |                                              |                                                                                   |                   |       
|                                                                                     |                                                                                                                                                                                                                                  |                                              |                                                                                    |                   |       
|                                                                                     |                                                                                                                                                                                                                                  |                                              | Total liabilities                                                                  |                   |       
|                                                                                     |                                                                                                                                                                                                                                  |                                              |                                                                                    |                   |       
|Commitments and contingencies (Note 5)                                               |                                                                                                                                                                                                                                  |                                              |                                                                                    |                   |       
|Redeemable convertible preferred stock; $0.0001 par value; 10,000 shares authorized: |                                                                                                                                                                                                                                  |                                              |                                                                                    |                   |       
|                                                                                     | Series A; 552 and 1,298 shares issued and outstanding at February 29, 2004 and February 28, 2003, respectively (aggregate liquidation preference of $1,000 and $2,350 at February 29, 2004 and February 28,
2003, respectively). |                                              |                                                                                    | 897               |       
|                                                                                     | Series B-1; zero and 49 shares issued and outstanding at February 29, 2004 and February 28, 2003, respectively (aggregate liquidation preference of zero and $486 at February 29, 2004 and February 28,
2003, respectively).     |                                              |                                                                                    |                  |       
|                                                                                     |                                                                                                                                                                                                                                  |                                              |                                                                                    |                   |       
|                                                                                     |                                                                                                                                                                                                                                  | Total redeemable convertible preferred stock |                                                                                    |                   | 897   
|                                                                                     |                                                                                                                                                                                                                                  |                                              |                                                                                    |                   |       
|Stockholders' equity:                                                                |                                                                                                                                                                                                                                  |                                              |                                                                                    |                   |       
|                                                                                     | Common stock; $0.0001 par value; 250,000 shares authorized ; 59,504 and 52,101 shares issued and outstanding at February 29, 2004 and February 28, 2003, respectively.                                                           |                                              |                                                                                    | 6                 |       
|                                                                                     | Additional paid-in-capital                                                                                                                                                                                                       |                                              |                                                                                    | 162,043           |       
|                                                                                     | Unearned stock-based compensation                                                                                                                                                                                                |                                              |                                                                                    |                  |       
|                                                                                     | Accumulated deficit                                                                                                                                                                                                              |                                              |                                                                                    | (154,459          | )     
|                                                                                     |                                                                                                                                                                                                                                  |                                              |                                                                                    |                   |       
|                                                                                     |                                                                                                                                                                                                                                  | Total stockholders' equity                   |                                                                                    |                   | 7,590 
|                                                                                     |                                                                                                                                                                                                                                  |                                              |                                                                                    |                   |       
|                                                                                     |                                                                                                                                                                                                                                  |                                              | Total liabilities, redeemable convertible preferred stock and stockholders' equity |                   | $     
|                                                                                     |                                                                                                                                                                                                                                  |                                              |                                                                                    |                   |       

The accompanying notes are an integral part of these consolidated financial statements.

38

---





INTRAWARE, INC.  CONSOLIDATED STATEMENTS OF OPERATIONS  (in thousands, except for per share amounts)

|                                                                         |                                              | For the Years Ended      |             
|------------------------------------------------------------------------ | -------------------------------------------- | ------------------------ | ------------
|
|Revenues:                                                                |                                              |                          |             
|                                                                         | Software product sales                       |                          | $           
|                                                                         | Online services and technology               |                          |             
|                                                                         | Alliance and reimbursement                   |                          |             
|                                                                         | Related party online services and technology |                          |             
|                                                                         |                                              |                          |             
|                                                                         |                                              | Total revenues           |             
|                                                                         |                                              |                          |             
|Cost of revenues:                                                        |                                              |                          |             
|                                                                         | Software product sales                       |                          |             
|                                                                         | Online services and technology               |                          |             
|                                                                         | Alliance and reimbursement                   |                          |             
|                                                                         |                                              |                          |             
|                                                                         |                                              | Total cost of revenues   |             
|                                                                         |                                              |                          |             
|                                                                         |                                              |                          | Gross profit
|                                                                         |                                              |                          |             
|Operating expenses:                                                      |                                              |                          |             
|                                                                         | Sales and marketing                          |                          |             
|                                                                         | Product development                          |                          |             
|                                                                         | General and administrative                   |                          |             
|                                                                         | Amortization of intangibles                  |                          |             
|                                                                         | Amortization of goodwill                     |                          |             
|                                                                         | Restructuring                                |                          |             
|                                                                         | Impairment of assets                         |                          |             
|                                                                         | Loss on abandonment of assets                |                          |             
|                                                                         |                                              |                          |             
|                                                                         |                                              | Total operating expenses |             
|                                                                         |                                              |                          |             
|Loss from operations                                                     |                                              |                          | (2,270      
|Interest expense                                                         |                                              |                          | (206        
|Interest income                                                          |                                              |                          | 72          
|Other income and expenses, net                                           |                                              |                          | 24          
|Gain on sale of Asset Management software business                       |                                              |                          |            
|                                                                         |                                              |                          |             
|Net loss                                                                 |                                              |                          | (2,380      
|Deemed dividend due to beneficial conversion feature of preferred stock  |                                              |                          |            
|                                                                         |                                              |                          |             
|Net loss attributable to common stockholders                             |                                              | $                        | (2,380      
|                                                                         |                                              |                          |             
|Basic and diluted net loss per share attributable to common stockholders |                                              | $                        | (0.04       
|                                                                         |                                              |                          |             
|Weighted average sharesbasic and diluted                                |                                              |                          | 55,910      
|                                                                         |                                              |                          |             

The
accompanying notes are an integral part of these consolidated financial statements.

39

---





INTRAWARE, INC.  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY  (in thousands)

|                                                                                   |  | Common Stock |  |   |   |  |   |         |   |   |        |   |  
|---------------------------------------------------------------------------------- |  | ------------ |  | - | - |  | - | ------- | - | - | ------ | - | -
|
|
|Balance at February 28, 2001                                                       |  | 28,375       |  | $ | 3 |  | $ | 130,625 |   | $ | (4,462 | ) | $
|Exercise of stock options, net of repurchased common stock                         |  | 39           |  |   |  |  |   | 41      |   |   |       |   |  
|Issuance of common stock for employee stock purchase program                       |  | 302          |  |   |  |  |   | 253     |   |   |       |   |  
|Deferred stock-based compensation for forfeited options                            |  |             |  |   |  |  |   | (386    | ) |   | 386    |   |  
|Issuance of preferred stock with warrants, net of issuance costs of $380           |  |             |  |   |  |  |   | 524     |   |   |       |   |  
|Beneficial conversion feature on preferred stock                                   |  |             |  |   |  |  |   | 2,696   |   |   |       |   |  
|Deemed dividend relating to beneficial conversion feature on preferred stock       |  |             |  |   |  |  |   | (2,696  | ) |   |       |   |  
|Issuance of warrants in connection with reseller arrangement                       |  |             |  |   |  |  |   | 1,588   |   |   |       |   |  
|Amortization of unearned stock-based compensation                                  |  |             |  |   |  |  |   |        |   |   | 2,555  |   |  
|Options and warrants issued below fair value for services                          |  |             |  |   |  |  |   | 226     |   |   |       |   |  
|Conversion of preferred stock into common stock                                    |  | 4,318        |  |   |  |  |   | 4,015   |   |   |       |   |  
|Options issued below fair value                                                    |  |             |  |   |  |  |   | 97      |   |   | (97    | ) |  
|Exercise of common stock warrants                                                  |  | 7,413        |  |   | 1 |  |   | 7,157   |   |   |       |   |  
|Net loss                                                                           |  |             |  |   |  |  |   |        |   |   |       |   |  
|Other comprehensive loss                                                           |  |              |  |   |   |  |   |         |   |   |        |   |  
|                                                                                   |  |              |  |   |   |  |   |         |   |   |        |   |  
|Total comprehensive loss                                                           |  |              |  |   |   |  |   |         |   |   |        |   |  
|                                                                                   |  |              |  |   |   |  |   |         |   |   |        |   |  
|Balance at February 28, 2002                                                       |  | 40,447       |  |   | 4 |  |   | 144,140 |   |   | (1,618 | ) |  
|Exercise of stock options and warrants, net of repurchase of unvested common stock |  | 399          |  |   |  |  |   | 389     |   |   |       |   |  
|Issuance of common stock for employee stock purchase program                       |  | 214          |  |   |  |  |   | 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   |   |   |       |   |  
|Conversion of notes payable to common stock, net of issuance costs of $210         |  | 1,300        |  |   |  |  |   | 1,078   |   |   |       |   |  
|Reclassification of warrants to equity                                             |  |             |  |   |  |  |   | 891     |   |   |       |   |  
|Amortization of unearned stock-based compensation                                  |  |             |  |   |  |  |   |        |   |   | 1,042  |   |  
|Conversion of preferred stock into common stock                                    |  | 1,003        |  |   |  |  |   | 874     |   |   |       |   |  
|Options issued for services                                                        |  |             |  |   |  |  |   | 63      |   |   |       |   |  
|Net loss                                                                           |  |             |  |   |  |  |   |        |   |   |       |   |  
|Other comprehensive loss                                                           |  |              |  |   |   |  |   |         |   |   |        |   |  
|                                                                                   |  |              |  |   |   |  |   |         |   |   |        |   |  
|Total comprehensive loss                                                           |  |              |  |   |   |  |   |         |   |   |        |   |  
|                                                                                   |  |              |  |   |   |  |   |         |   |   |        |   |  
|Balance at February 28, 2003                                                       |  | 52,101       |  |   | 5 |  |   | 152,870 |   |   | (32    | ) |  
|Exercise of stock options                                                          |  | 1,317        |  |   |  |  |   | 1,309   |   |   |       |   |  
|Issuance of common stock for employee stock purchase program                       |  | 183          |  |   |  |  |   | 125     |   |   |       |   |  
|Issuance of common stock, net of issuance costs of $89                             |  | 4,000        |  |   | 1 |  |   | 6,111   |   |   |       |   |  
|Amortization of unearned stock-based compensation                                  |  |             |  |   |  |  |   |        |   |   | 28     |   |  
|Deferred stock-based compensation for options forfeited                            |  |             |  |   |  |  |   | (4      | ) |   | 4      |   |  
|Issuance of warrant to purchase common stock in connection with note payable       |  |             |  |   |  |  |   | 46      |   |   |       |   |  
|Conversion of preferred stock and warrants into common stock                       |  | 1,903        |  |   |  |  |   | 1,586   |   |   |       |   |  
|Net loss                                                                           |  |             |  |   |  |  |   |        |   |   |       |   |  
|Other comprehensive loss                                                           |  |              |  |   |   |  |   |         |   |   |        |   |  
|                                                                                   |  |              |  |   |   |  |   |         |   |   |        |   |  
|Total comprehensive loss                                                           |  |              |  |   |   |  |   |         |   |   |        |   |  
|                                                                                   |  |              |  |   |   |  |   |         |   |   |        |   |  
|Balance at February 29, 2004                                                       |  | 59,504       |  | $ | 6 |  | $ | 162,043 |   | $ |       |   | $
|                                                                                   |  |              |  |   |   |  |   |         |   |   |        |   |  

The accompanying notes are an integral part of these consolidated financial statements.

40

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INTRAWARE, INC.  CONSOLIDATED STATEMENTS OF CASH FLOWS  (in thousands, except for per share amounts)

|                                                     |                                                                             | For the Years Ended                                               |                                                        
|---------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------------------------------- | -------------------------------------------------------
|
|Cash flows from operating activities:                |                                                                             |                                                                   |                                                        
|                                                     | Net loss                                                                    |                                                                   | $                                                      
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities: |                                                                   |                                                        
|                                                     |                                                                             | Depreciation and amortization                                     |                                                        
|                                                     |                                                                             | Amortization of goodwill and intangibles                          |                                                        
|                                                     |                                                                             | Amortization of unearned compensation                             |                                                        
|                                                     |                                                                             | Provision for (recovery of) doubtful accounts                     |                                                        
|                                                     |                                                                             | Gain on sale of fixed assets                                      |                                                        
|                                                     |                                                                             | Gain on sale of Asset Management software business                |                                                        
|                                                     |                                                                             | Warrants adjustment to fair value                                 |                                                        
|                                                     |                                                                             | Amortization of discount on note payable                          |                                                        
|                                                     |                                                                             | Impairment of assets                                              |                                                        
|                                                     |                                                                             | Loss on abandonment of assets                                     |                                                        
|                                                     |                                                                             | Amortization of warrant charge offset against revenue             |                                                        
|                                                     |                                                                             | Options to purchase common stock issued for services              |                                                        
|                                                     |                                                                             | Changes in assets and liabilities:                                |                                                        
|                                                     |                                                                             |                                                                   | Accounts receivable                                    
|                                                     |                                                                             |                                                                   | Prepaid licenses, services and cost of deferred revenue
|                                                     |                                                                             |                                                                   | Other assets                                           
|                                                     |                                                                             |                                                                   | Accounts payable                                       
|                                                     |                                                                             |                                                                   | Accrued expenses                                       
|                                                     |                                                                             |                                                                   | Deferred revenue                                       
|                                                     |                                                                             |                                                                   | Related party deferred revenue                         
|                                                     |                                                                             |                                                                   |                                                        
|Net cash used in operating activities                |                                                                             |                                                                   | (1,441                                                 
|                                                     |                                                                             |                                                                   |                                                        
|Cash flows from investing activities:                |                                                                             |                                                                   |                                                        
|                                                     |                                                                             | Purchase of property and equipment                                |                                                        
|                                                     |                                                                             | Restricted cash                                                   |                                                        
|                                                     |                                                                             | Proceeds from sale of Asset Management software business          |                                                        
|                                                     |                                                                             | Proceeds from sale of fixed assets                                |                                                        
|                                                     |                                                                             |                                                                   |                                                        
|Net cash provided by (used in) investment activities |                                                                             |                                                                   | (575                                                   
|                                                     |                                                                             |                                                                   |                                                        
|Cash flows from financing activities:                |                                                                             |                                                                   |                                                        
|                                                     |                                                                             | Repayments of bank borrowings                                     |                                                        
|                                                     |                                                                             | Proceeds from notes and warrants, net of issuance costs           |                                                        
|                                                     |                                                                             | Proceeds from preferred stock and warrants, net of issuance costs |                                                        
|                                                     |                                                                             | Principal payments on notes payable                               |                                                        
|                                                     |                                                                             | Proceeds from common stock and warrants, net of issuance costs    |                                                        
|                                                     |                                                                             | Principal payments on capital lease obligations                   |                                                        
|                                                     |                                                                             |                                                                   |                                                        
|Net cash provided by financing activities            |                                                                             |                                                                   | 6,979                                                  
|                                                     |                                                                             |                                                                   |                                                        
|Net increase (decrease) in cash and cash equivalents |                                                                             |                                                                   | 4,963                                                  
|Cash and cash equivalents at beginning of the year   |                                                                             |                                                                   | 6,841                                                  
|                                                     |                                                                             |                                                                   |                                                        
|Cash and cash equivalents at end of the year         |                                                                             | $                                                                 | 11,804                                                 
|                                                     |                                                                             |                                                                   |                                                        
|Supplemental disclosure of cash flow information:    |                                                                             |                                                                   |                                                        
|                                                     | Cash paid for interest                                                      |                                                                   | $                                                      
|Supplemental non-cash activity:                      |                                                                             |                                                                   |                                                        
|                                                     | Property and equipment leases                                               |                                                                   |                                                        
|                                                     | Common stock issued for preferred stock conversion and warrant exercises    |                                                                   |                                                        
|                                                     | Reclassification of warrants to equity                                      |                                                                   |                                                        
|                                                     | Notes payable converted to common stock and warrants                        |                                                                   |                                                        
|                                                     | Purchases of property and equipment in accounts payable                     |                                                                   |                                                        
|                                                     | Issuance of warrants to purchase common stock                               |                                                                   |                                                        

The accompanying notes are an integral part of these consolidated financial statements.

41

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INTRAWARE, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Overview

We were incorporated in Delaware on August 14, 1996. We are a leading provider of ESDM solutions. Our ESDM solutions help software publishers reduce
operational and support costs, increase customer satisfaction and retention, accelerate and strengthen the software revenue recognition processes, and comply with U.S. export regulations. We also
offer complementary products and services, including enterprise software sales and marketing, and global web-based content caching and delivery.

We
have incurred losses and negative cash flows during each fiscal year since inception. For the year ended February 29, 2004, we narrowed our net losses to approximately
$2.4 million and negative cash flows from operations to approximately $1.4 million. In September 2003, we raised $6.2 million in new capital (see Note 7). Despite
these improvements, we continued to experience recurring losses and negative cash flows from operations for the year ended February 29, 2004. Our cash balances may decline further although we
believe that the effects of our capital financing, strategic actions implemented to improve revenue, and cost controls will be adequate to generate sufficient cash resources to fund our future
operations. Failure to generate sufficient revenues or control spending could adversely affect our ability to achieve our business objectives.

Principles of consolidation

These consolidated financial statements include our accounts and those of our wholly owned subsidiaries Intraware Canada, Inc. and Intraware Europe
Limited. Intraware Canada, Inc. was dissolved effective March 5, 2003. We have eliminated all significant inter-company balances and transactions.

Use of estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash, cash equivalents and short-term investments

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

We
consider all investments with remaining maturities at the balance sheet date of less than one year to be short-term marketable securities and all investments with
maturities greater than one year to be long term marketable securities. These investments are carried at fair market value and are classified as "available-for-sale." Changes
in fair market value are recorded as a component of other comprehensive income until realized. Realized gains and losses are determined based on the specific identification method and are reflected in
other income and unrealized gains and losses are reflected on the statement of stockholders' equity as other comprehensive income/loss.

As
of February 29, 2004 and February 28, 2003, we did not have any short-term or long-term investments.

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Concentration of credit risk

Financial instruments that potentially subject us to a concentration of credit risk consist of cash and cash equivalents and accounts receivable. Cash and cash
equivalents are deposited with high credit quality financial institutions. Deposits in these financial institutions may exceed the amount of insurance, if any, provided on such deposits. Our accounts
receivable are derived from revenue earned from customers located primarily in the United States 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 our historical experience and the expected collectability of all accounts receivable. For
the years ended February 29, 2004 and February 28, 2003 and 2002, we provided for an increase/(decrease) in allowance for doubtful accounts of approximately $9,000, ($53,000),
($1,348,000), respectively, and wrote-off accounts receivable against the allowance for doubtful accounts of approximately $1,000, $80,000, and $850,000, respectively.

For
the year ended February 29, 2004, transactions with Software Spectrum, Inc. accounted for approximately 41% of our total revenues. For the year ended
February 28, 2003, two customers, Software Spectrum, Inc. and Sun Microsystems, Inc., accounted for approximately 33% and 18% of our total revenues, respectively. For the year ended
February 28, 2002, transactions with Xerox Corporation accounted for approximately 13% of our total revenues. For the years ended February 29, 2004, February 28, 2003 and 2002, no
other customers accounted for more than 10% of the our total revenues. At February 29, 2004, two customers, Software Spectrum, Inc. and Progress Software Corporation, accounted for 39%
and 15% of our accounts receivable balance, respectively. At February 28, 2003, three customers, Software Spectrum, Inc., Sun Microsystems, Inc. and E.piphany Inc., accounted for
38%, 16% and 11% of our accounts receivable balance, respectively.

Fair value of financial instruments

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

Foreign currency translation

The functional currency of our foreign subsidiaries is the local currency. The financial statements of these subsidiaries are translated to United States dollars
using period-end rates of exchange for assets and liabilities, and average rates of exchange for the year for revenues and
expenses. Translation gains (losses) are recorded in accumulated other comprehensive loss as a component of stockholders' equity and were not significant during the periods presented. Net gains and
losses resulting from foreign exchange transactions are included in other income and expenses, net and were not significant during the periods presented.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Equipment under capital lease is capitalized at the present value of the
future minimum lease payments. We provide for depreciation and amortization by charges to expense, which are sufficient to recover the cost of the assets over their estimated useful lives on a
straight-line basis. Leasehold improvements and assets acquired pursuant to capital leases are amortized over the lesser of the lease

43

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term
or the estimated useful life of the improvement. Depreciation and amortization periods by principal classifications are as follows:

Furniture and office equipment

5 yearsComputer equipment and software

3 yearsLeasehold improvements

1-5 years


When
assets are sold or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the asset and accumulated depreciation and amortization accounts,
respectively. Upon the disposition of property and equipment, the accumulated depreciation and amortization is deducted from the original cost and any gain or loss on that sale or disposal is credited
or charged to operating expenses.

Maintenance,
repairs, and minor renewals are charged to expense as incurred.

Expenditures
that substantially increase an asset's useful life are capitalized.

Goodwill and intangible assets

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

In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and other Intangible Assets," goodwill amortization was discontinued as of
March 1, 2002, and $1.2 million of intangibles relating to assembled workforce was subsumed into goodwill. SFAS 142 requires that goodwill be tested for impairment at the
reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. The performance of the test involves a
two-step process. The first step of the impairment test involves comparing the fair value of our reporting units with the reporting unit's carrying amount, including goodwill. If the
carrying amount of our reporting units exceeds the reporting unit's fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment loss. The second step
of the goodwill impairment test involves comparing the implied fair value of our reporting unit's goodwill with the carrying amount of that goodwill. We completed our first phase impairment analysis
during the quarter ended May 31, 2002, and found no instances of impairment. There were no goodwill or intangibles recorded at February 29, 2004 and February 28, 2003, due to the
inclusion of the remaining goodwill balance in the determination of the gain on sale of our Asset Management software business during the quarter ended May 31, 2002 (see Note 11).
Previous period amortization of assembled workforce has been reclassified to the amortization of goodwill line item in the consolidated statements of operations for all periods presented.

The
changes in the carrying amount of goodwill during year ended February 28, 2003, are as follows (in thousands):

Balance as of March 1, 2002

$
6,979Goodwill included in the determination of the gain related to the sale of Asset Management software business


(6,979
)Balance as of February 28, 2003

$



44

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Summarized
below are the effects on our net loss and net loss per share data if we had followed the amortization provisions of SFAS No. 142 (in thousands, except per share
amounts):

For the Year Ended
February 28, 2002Reported net loss attributable to common stockholders

$
(37,374
)Addback: Goodwill amortization


2,397Adjusted net loss

$
(34,977
)


For the Year Ended
February 28, 2002Basic and diluted net loss per share:Reported net loss per share attributable to common stockholders

$
(1.18
)Addback: Goodwill amortization


0.08Adjusted net loss per share attributable to common stockholders

$
(1.10
)


Long-lived assets

We account for impairments of tangible long-lived assets in accordance with the provisions of Statement on Financial Accounting Standards (SFAS)
No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." As of February 28, 2002, we assessed the impairment of identifiable tangible and intangible
long-lived assets and related goodwill in accordance with the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of." We also assessed the impairment of enterprise level goodwill periodically in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 17, "Intangible Assets." An impairment review is performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Since
February 28, 2002, no such changes in circumstances have occurred. Factors we consider important which could trigger an impairment review include, but are not limited to, significant
underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, significant
negative industry or economic trends, a significant decline in our stock price for a sustained period, and our market capitalization relative to net book value. When we determine that an impairment
review is necessary based upon the existence of one or more of the above indicators of impairment, we compare the book value of such assets to the future undiscounted cash flows attributed to those
assets. If the book value is greater than the future undiscounted cash flows, we measure any impairment based on a projected discounted cash flow method using a discount rate commensurate with the
risk inherent in our current business model.

Revenue recognition

We derive online services and technology revenues primarily from ESDM services (our SubscribeNet service), from professional services, and from the sale of
proprietary software licenses and related maintenance. In the past, the proprietary software licenses we sold were primarily licenses to use our asset management software; however, we may recognize
future revenues from any sale of licenses for our proprietary software underlying our SubscribeNet service and related maintenance.

We
derive alliance and reimbursement revenue from our alliance agreement with Software Spectrum, Inc. ("Software Spectrum") (see Note 2). This revenue consists of a
percentage of the gross

45

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profit
derived from the sales of Sun ONE software licenses and maintenance services, and reimbursement for the costs of maintaining a sales team dedicated to selling Sun ONE software for Software
Spectrum. This revenue is recognized as we provide the services to Software Spectrum. The reimbursement revenue is recognized in accordance with Emerging Issues Task Force ("EITF")
No. 01-14, "Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred," which generally requires that a company
recognize as revenue travel expenses and other reimbursable expenses billed to customers.

We
derive software product revenues from resold licenses and maintenance for multiple business software product lines.

We
defer online services and technology revenues related to ESDM, and generally recognize them ratably over the term of the service arrangement. Some SubscribeNet services provided to
new customers involve significant implementation or customization essential to the functionality of our SubscribeNet services. In those cases, we defer revenue recognition until the services
go-live date is reached and recognize the revenue on a ratable basis over the remaining contract term. The go-live date is the date on which the essential functionality has
been delivered or on which the website through which the service is provided enters the production environment, or the point at which no additional customization is required, whichever is later. When
we sell additional professional services related to the original SubscribeNet agreement, revenue is recognized ratably over the longer of the remaining estimated customer life or the remaining
contract term, commencing with the delivery of the additional services. The revenue is included in online services and technology.

We
recognize revenue when all of the following conditions are met:



We
obtain vendor specific objective evidence of fair value for the maintenance element of the resold and proprietary software arrangements based on historical and contractual renewal
rates for maintenance. In such cases, we defer the maintenance revenue at the outset of the arrangement and recognize it ratably over the period during which the maintenance is to be provided
(generally 12 months), which normally commences on the date the software is delivered.

Deferred revenue

Deferred revenue consists primarily of billings or payments received in advance of revenue recognition from the sale of ESDM services, software licenses, software
maintenance, and software research and evaluation services. Such revenue is recognized as revenue recognition criteria are met.

Prepaid licenses, services and cost of deferred revenue

Prepaid licenses, services and cost of deferred revenue consist primarily of capitalized costs associated with the implementation of our SubscribeNet service
sites for our customers and capitalized costs associated with professional services. Prepaid licenses, services and cost of deferred revenue also include orders for software licenses and subscription
services in advance of resale and are expensed when the related revenue is recognized. In addition to these orders, cost of deferred revenue consists of

46

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third-party
maintenance that has been deferred and recognized over the service period (generally 12 months).

Capitalized software

During fiscal year 2000, we adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which requires that certain costs for the development of internal use software should be capitalized, including the costs of coding, software configuration, upgrades and enhancements.
Product development costs include costs incurred by us to develop, enhance and manage our website and online services. Capitalized costs of computer software developed or obtained for internal use for
the years ended February 29, 2004 and February 28, 2003, were approximately $37,000 and $27,000, respectively. Previously capitalized costs of computer software developed or obtained for
internal use are amortized over three years. At February 29, 2004 and February 28, 2003, the unamortized balance for costs of computer software obtained or developed for internal use was
$0.1 million and $0.5 million, respectively. For the years ended February 29, 2004 and February 28, 2003 and 2002, accumulated amortization for costs of computer software
developed or obtained for internal use was approximately $3.3 million, $4.3 million, and $2.3 million, respectively. For the years ended February 29, 2004 and
February 28, 2003 and 2002, amortization expense for costs of computer software developed or obtained for internal use was approximately $0.5 million, $1.7 million, and
$2.3 million, respectively.

In
our fiscal year 2003, we implemented a plan to sell licenses for our proprietary software underlying our SubscribeNet service. Such development costs are being accounted for in
accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," under which certain software development costs incurred subsequent to the
establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. Technological feasibility is established upon completion of a working model.
Development costs incurred subsequent to the establishment of technological feasibility have not been significant, and all software development costs have been charged to product development expense
in the accompanying consolidated statements of operations.

Advertising expense

We utilize online seminars known as webinars, print and online advertising, trade shows, direct mail, online promotions and regional marketing development to
expand product and brand awareness in the information technology professional community. All advertising costs are expensed as incurred. Advertising costs amounted to approximately $188,000 for the
year ended February 29, 2004, $357,000 for the year ended February 28, 2003, and $590,000 for the year ended February 28, 2002.

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Stock-based compensation

We account for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB No. 25") and its related interpretations and comply with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and
related SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure." Under APB No. 25, compensation expense is based on the difference, if any, on the
date of the grant between the fair value of our stock and the exercise price of the option. We account for equity instruments issued to non-employees in accordance with the provisions of
SFAS No. 123 and Emerging Issues Task Force ("EITF") 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in conjunction with Selling
Goods or Services."

The
following table illustrates the effect on net loss attributable to common stockholders and net loss attributable to common stockholders per share if we had applied the fair value
recognition provisions of SFAS No. 123, to stock-based employee compensation (in thousands, except per share data).

|                                                                                                                |             | For the year ended, |       
|--------------------------------------------------------------------------------------------------------------- | ----------- | ------------------- | ------
|
|Net loss attributable to common stockholders as reported                                                        |             | $                   | (2,380
|Add: unearned stock-based compensation expense included in reported net loss                                    |             |                     | 28    
|Deduct: total stock-based employee compensation expense determined under fair value based method for all awards |             |                     | (3,588
|                                                                                                                |             |                     |       
|                                                                                                                | Pro forma   |                     | $     
|                                                                                                                |             |                     |       
|Net loss attributable to common stockholders per share-basic and diluted                                        |             |                     |       
|                                                                                                                | As reported |                     | $     
|                                                                                                                |             |                     |       
|                                                                                                                | Pro forma   |                     | $     
|                                                                                                                |             |                     |       

We
calculated the fair value and value of each option grant on the date of grant during the years ended February 29, 2004 and February 28, 2003 and 2002, respectively,
using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following assumptions:

For the year ended,February 29, 2004

February 28, 2003

February 28, 2002Risk-free interest rates

1.51%-3.37
%
2.48%-4.44
%
3.53%-4.72
%Expected lives (in years)

4

4

4Dividend yield

0
%
0
%
0
%Expected volatility

130
%
142
%
158
%


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---



We
calculated the fair value of the stock issued under the employee stock purchase plan for the years ended February 29, 2004 and February 28, 2003 and 2002, respectively,
using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following assumptions:

For the year ended,February 29, 2004

February 28, 2003

February 28, 2002Risk-free interest rates

1.01-1.22
%
1.64-1.96
%
2.20-4.23
%Expected lives (in months)

6

6

6Dividend yield

0
%
0
%
0
%Expected volatility

58-102
%
120-151
%
139-194
%


Income taxes

Income taxes are accounted for using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. The measurement of current and deferred
tax liabilities and assets are based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced by
a valuation allowance, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.

Net loss per share

Basic net loss per common share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of common
shares outstanding during the period excluding shares subject to repurchase. If dilutive, the participation right of the redeemable convertible preferred stock is reflected in the calculation of basic
income per share using the two class method. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of common
and potential common shares outstanding during the period if the effect is dilutive. Potential common shares are composed of common stock subject to repurchase rights and incremental shares of common
stock issuable upon the exercise of stock options and warrants and upon the conversion of preferred stock.

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The
following table sets forth the computation of basic and diluted net loss per share as well as securities that are not included in the diluted net loss per share attributable to
common stockholders calculation because to do so would be antidilutive:

|                                                                         |                                                                                                | For the Years Ended |       
|------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------- | ------------------- | ------
|
|
|Numerator:                                                               |                                                                                                |                     |       
|                                                                         | Net loss                                                                                       |                     | $     
|                                                                         | Deemed dividend due to beneficial conversion feature of redeemable convertible preferred stock |                     |       
|                                                                         |                                                                                                |                     |       
|                                                                         | Net loss attributable to common stockholders                                                   |                     | $     
|                                                                         |                                                                                                |                     |       
|Denominator:                                                             |                                                                                                |                     |       
|                                                                         | Weighted average shares                                                                        |                     |       
|                                                                         | Weighted average unvested common shares subject to repurchase                                  |                     |       
|                                                                         |                                                                                                |                     |       
|                                                                         | Denominator for basic and diluted calculation                                                  |                     |       
|                                                                         |                                                                                                |                     |       
|Basic and diluted net loss per share attributable to common stockholders |                                                                                                | $                   | (0.04 
|                                                                         |                                                                                                |                     |       
|Effect of antidilutive Securities:                                       |                                                                                                |                     |       
|                                                                         | Redeemable convertible preferred stock                                                         |                     |       
|                                                                         | Warrants to purchase common stock                                                              |                     |       
|                                                                         | Unvested common shares subject to repurchase                                                   |                     |       
|                                                                         | Options to purchase common stock                                                               |                     |       
|                                                                         |                                                                                                |                     |       
|                                                                         |                                                                                                |                     | 12,107
|                                                                         |                                                                                                |                     |       

Comprehensive Loss

We comply with SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 requires that all items recognized under accounting standards as
components of comprehensive earnings be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. Comprehensive loss has been included
in the Statement of Stockholders' Equity for all periods presented.

Segment information

We identify our operating segments based on business activities, management responsibility and geographical location. During the years ended February 29,
2004 and February 28, 2003 and 2002, we operated in a single business segment providing online purchasing and delivery services for business software in the United States of America.

Recent accounting pronouncements

In November 2002, EITF reached a consensus on issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF
No. 00-21") on a model to be used to determine when a revenue arrangement with multiple deliverables should be divided into separate units of accounting and, if separation is
appropriate, how the arrangement consideration should be allocated to

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the
identified accounting units. The EITF also reached a consensus that this guidance should be effective for all revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The adoption of EITF 00-21 did not have a material impact on our results of operations or our financial position.

In
January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities ("VIE"), an Interpretation of ARB
No. 51" ("FIN 46") and in December 2003, issued a revised interpretation ("FIN 46-R"). FIN No. 46, as revised, requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46-R are effective immediately for all arrangements
entered into after January 31, 2003. For arrangements entered into prior to February 1, 2003, we are required to adopt the provisions of FIN 46-R in the first quarter of our
fiscal year 2005. The adoption of FIN 46-R is not expected to have a significant effect on our financial position or results of operations.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). SFAS
No. 150 establishes standards for the classification and measurement of financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 apply to
the first interim period beginning after June 15, 2003. While the effective date of certain elements of SFAS No. 150 have been deferred, the adoption of SFAS No. 150 when
finalized is not expected to have a material impact on our financial position, results of operations or cash flows.

In
December 2003, the Staff of the SEC issued Staff Accounting Bulletin No. 104, "Revenue Recognition," ("SAB 104") which superseded SAB 101, "Revenue Recognition in
Financial Statements." SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF
00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked Questions and
Answers (the FAQ) issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of
SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did
not materially affect our revenue recognition policies, or our results of operations, financial position or cash flows.

In
April 2004, the EITF issued Statement No. 03-06 "Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share" ("EITF 03-06"). EITF 03-06
addresses a number of questions regarding the computation of
earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of a company when, and if, it
declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of computing earnings per share once it is determined that a security is
participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. We are
currently evaluating the effect of adopting EITF 03-06.

Reclassification

Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications did not change previously reported net
loss, stockholders' equity or cash flow.

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NOTE 2. Alliances

Resale of Sun ONE (formerly iPlanet) Software by Intraware and Software Spectrum (formerly Corporate Software)

In October 1998, we entered into an agreement with Netscape Communications Corporation for our resale and electronic distribution of Netscape software to
end-users in North America. The agreement also allowed us to use Netscape products internally. In 1999, America Online, Inc. acquired Netscape and formed an alliance with Sun
Microsystems, Inc. to manage Netscape's business
software division. In September 1999, we signed an agreement with Sun for our resale and electronic distribution of Netscape business software (marketed by Sun under the brands "Sun/Netscape
Alliance," "iPlanet" and ultimately "Sun ONE") and related maintenance services to end-users in North America. In July 2001, this agreement was replaced by a new agreement between
Intraware and Sun for our resale and electronic distribution of Sun ONE software and maintenance services in North America. Concurrently with entering into this July 2001 software resale
agreement with Sun, we assigned the agreement to CorpSoft, Inc., as detailed below. (CorpSoft later merged with Software Spectrum, Inc., and we refer to the combined entity as Software
Spectrum below.)

In
June 2001, we signed an agreement with Software Spectrum under which we transferred to Software Spectrum our Sun ONE software resale business, including our agreement with Sun
for resale of Sun ONE software and maintenance services. Software Spectrum has assumed primary responsibility for resale of Sun ONE software and related maintenance under that agreement with Sun.
However, we continue to assist Software Spectrum in its sales and marketing of Sun ONE software and maintenance, and also provide our SubscribeNet service to Software Spectrum to enable it to deliver
Sun ONE software to its customers electronically. As part of this arrangement, Software Spectrum pays us a percentage of the gross profit derived from its sales of Sun ONE software licenses and
maintenance services, and reimburses us for our cost in maintaining a team dedicated to sales of Sun ONE software licenses and maintenance (included in alliance and reimbursement revenue line item on
the consolidated statement of operations). The term of this agreement will expire in June 2004 and is renewable for subsequent one-year terms. We continue to maintain a separate
relationship with Sun (see below) under which we provide fulfillment services, that is, electronic delivery of Sun software on a case-by-case basis to fulfill initial license
sales. The June 2001 agreement with Software Spectrum was part of our transition out of the business of reselling third-party software. At the time we announced this agreement, we also ceased
reselling all other third-party software except in a limited manner in connection with our proprietary products and services.

During
the years ended February 29, 2004 and February 28, 2003 and 2002, Software Spectrum reimbursed us $3.2 million, $4.2 million, and $2.6 million,
respectively, for the salaries of the sales team dedicated to selling Sun ONE software and the gross profit derived from its sales of Sun ONE software licenses and maintenance services (included in
alliance and reimbursement revenue). During the years ended February 29, 2004 and February 28, 2003 and 2002, we recorded revenue from SubscribeNet services provided under this contract
of $1.3 million, $1.4 million and $1.1 million, respectively (included in online services and technology revenue). An amount of $0.6 million was recorded in accounts
receivable as of February 29, 2004 and February 28, 2003, from Software Spectrum.

Resale of SubscribeNet Service by Zomax Incorporated

On August 12, 2002, we entered into a strategic alliance agreement with Zomax Incorporated ("Zomax"), an international outsource provider of process
management services. The agreement provides for Zomax' marketing and resale of our SubscribeNet ESDM service to its global customer base. Under the agreement, Zomax was required to pay a minimum
license fee totaling $15 million to us over 10 years, subject to some conditions, including Zomax' right to cancel the agreement at any time with one year's notice. The annual minimum
license fee is based on a graduated scale, beginning with $0.5 million in the first year of the agreement and escalating to $2.2 million in the final year of

52

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the
agreement. Zomax will also pay us non-refundable quarterly service fees, based on sales of the SubscribeNet service by Zomax, over the term of the agreement. Under this agreement, our
SubscribeNet service is the only ESDM solution Zomax may sell and Zomax is the only supply chain management outsourcing industry company we may authorize to resell our SubscribeNet service. Under the
agreement, on September 3, 2002, Zomax paid to us a $1 million prepayment to be applied against future fees. As part of the agreement, we are also a non-exclusive lead
generator for Zomax' products and services, through which we can receive fees based on the generation of completed leads for Zomax. Lastly, we will reimburse Zomax for one-half of the base
salary of a product sales manager, up to a maximum amount. On the day we entered into that strategic alliance agreement with Zomax, we also completed a private placement of approximately
6.1 million shares of our common stock to Zomax for gross proceeds of approximately $5.0 million. Upon completion of that private placement, Zomax held approximately 12% of our
outstanding common stock. On September 18, 2003, we filed an amended registration statement to register the resale of the common stock issued to Zomax. The SEC declared that registration
statement effective on September 25, 2003.

On
August 29, 2003, we amended our strategic alliance agreement with Zomax to: (1) allow Zomax to terminate the agreement as of August 12, 2004, or as of any date
thereafter, 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 us, which was the balance of
the amount owing for the second year of the agreement; and (3) reduce the minimum license fee for the third year of the agreement, which begins August 12, 2004, from $1.0 million
to $0.6 million if Zomax has not terminated the agreement. During the three months ended November 30, 2003, and in accordance with that amendment, we received $0.4 million from
Zomax, all of which was recorded as deferred revenue at February 29, 2004, and will be applied to future services.

Subsequent
to February 29, 2004, this agreement was terminated and replaced with a new reseller agreement (see Note 12).

At
February 29, 2004, deferred revenue and accounts receivable balances related to this agreement totaled approximately $0.6 million and zero, respectively. During years
ended years ended February 29,
2004 and February 28, 2003, we recognized approximately $0.5 million and $0.3 million of revenue, related to this agreement, respectively.

Services Agreement with Sun Microsystems, Inc.

In July 1999, we entered into a services agreement with Sun under which we provided the SubscribeNet service and other maintenance services to Sun for
business software sold by Sun under the brands "Sun/Netscape Alliance," "iPlanet," and ultimately "Sun ONE." In December 2000, we amended the SubscribeNet services agreement to add a related
service whereby we electronically delivered iPlanet software to fulfill initial software licenses purchased by customers directly from Sun (the "fulfillment service"), and also extended the agreement
term through June 2003.

In
April 2002, we entered into a new services agreement with Sun, which replaced our prior services agreement with Sun. The new agreement became effective in July 2002.
Under this new agreement, we provided our SubscribeNet ESDM and fulfillment services to Sun for the Sun ONE product line, and at Sun's option, for additional Sun software products. The fulfillment
services under that agreement consist of our making Sun ONE software products electronically available to Sun customers on a one-time basis upon their purchase of initial licenses for that
software. The term of this agreement was to expire in June 2003, with a one-year renewal term. Sun may terminate this agreement for its convenience at any time upon 90 days'
notice.

In
October 2002, Sun and Intraware amended that agreement, making the SubscribeNet service cancelable by either party at the end of any calendar quarter, provided the canceling
party gave 30 days' notice. Sun canceled the SubscribeNet service under that agreement effective March 31, 2003. As of March 1, 2003, we amended our agreement with Sun to extend
the fulfillment portion of the

53

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agreement
through June 2004. However, the fees payable by Sun for our fulfillment service have been reduced substantially effective March 1, 2003.

At
February 28, 2002 and 2003 and February 29, 2004, deferred revenue under our agreements with Sun totaled approximately $913,000, $383,000, and $13,000, respectively.
During the years ended February 28, 2002 and 2003 and February 29, 2004, we recognized $3.0 million, $2.4 million, and $0.5 million, respectively, of revenue related
to these agreements.

Alliances for Resale of Argis Software Licenses and Related Services

Computer Associates International, Inc.

In July 2001 we signed an agreement with Computer Associates International, Inc., a leading provider of enterprise management software, for Computer
Associates' resale of our Asset Management ("Argis") suite of products and maintenance to its customers worldwide. Computer Associates resold the Argis suite as an integrated component of its
Unicenter infrastructure management software. Under the agreement, Computer Associates paid us our list fees, less prescribed discount percentages, for the Argis software products and related
maintenance services. The term of the agreement would have expired in July 2002 and could have been renewed for subsequent periods. This agreement was terminated in May 2002, when
Computer Associates acquired our Argis software business (See Note 11).

Software Spectrum

In May 2001 we signed an agreement with CorpSoft, Inc. (now Software Spectrum), a leading business software reseller and provider of software asset
management solutions, for its resale of our Argis suite of products in North America. Under this agreement, our Argis suite was the exclusive information technology asset management repository
solution being sold by Software Spectrum in North America, and Software Spectrum acted as our exclusive reseller of the Argis suite in North America. These exclusivity provisions of the agreement were
subject to exceptions (including an exception for the above agreement with Computer Associates), and could terminate completely in certain circumstances. Software Spectrum paid us our list fees, less
prescribed discount percentages, for the Argis software products and related maintenance, training and professional services. We recognized the associated revenue based on the criteria described in
Note 1. In addition, we agreed to issue to Software Spectrum a fully-vested nonforfeitable warrant to purchase 800,000 shares of our common stock at $1.71 per share, the average closing price
of our common stock from May 8, 2001 to May 21, 2001. Of the 800,000 shares subject to the warrant, 200,000 would have become exercisable on November 30, 2001, and 100,000 would
have become exercisable on February 28, 2002, had Software Spectrum attained prescribed sales goals for our fiscal quarters ended on those dates. However, Software Spectrum did not attain those
goals; therefore, these shares will become exercisable on the earlier of either May 22, 2005 (the fourth anniversary date of the agreement) or any termination of the agreement. Of the remaining
500,000 shares subject to the warrant, 100,000 will become exercisable on a quarterly basis, if Software Spectrum attains its prescribed sales goals. If any of these sales goals are not attained, the
relevant shares will become exercisable on the earlier of either May 22, 2005, or any termination of the agreement. The term of the warrant is ten years. The fair value of the warrant was
approximately $1.6 million on May 22, 2001, computed using the Black-Scholes option-pricing model. This fair value was recorded as prepaid distribution costs which are included in other
assets and were recognized as a reduction of revenue over the lesser of a ratable charge over the 24-month term of the arrangement or the period of time it takes for Software Spectrum to
generate $1.6 million in Argis
revenue. At February 29, 2004, there was no remaining unamortized portion of these prepaid distribution costs. During the years ended February 29, 2004 and February 28, 2003 and
2002, we recorded the amortization of these prepaid distribution costs as a non-cash offset to revenue of approximately zero, $936,000 and $652,000, respectively. In May 2002 this
agreement was assigned to Computer Associates in connection with our sale of our Asset Management software (see Note 11).

54

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NOTE 3. BALANCE SHEET COMPONENTS:

BALANCE SHEET COMPONENTS:

February 29, 2004

February 28, 2003(in thousands)Accounts receivable, net:Accounts receivable

$
1,498

$
1,548Allowance for doubtful accounts


(36
)

(27
)$
1,462

$
1,521Property and equipment, net:Computer equipment and software

$
8,637

$
11,916Furniture and office equipment


974


1,003Leasehold improvements


55


1139,666


13,032Less: accumulated depreciation and amortization


(8,769
)

(11,173
)$
897

$
1,859Accrued expenses:Accrued compensation and benefits

$
553

$
523Customer deposits


27


194Other


348


472$
928

$
1,189


Property
and equipment includes approximately zero and $4.3 million of computer equipment and software and furniture and office equipment under capital leases at
February 29, 2004 and February 28, 2003, respectively. Accumulated amortization of assets under capital leases totaled approximately zero and $3.7 million at February 29,
2004 and February 28, 2003, respectively.

In
July 2002, due to changes in our business and Hewlett-Packard Co.'s announcement that it would shut down its Bluestone Software business, we took some computer software out of
service. As a result of this impairment, we wrote off computer software with a net book value of approximately $389,000 during the year ended February 28, 2003.

NOTE 4. INCOME TAXES

As of February 29, 2004, we had approximately $129 million of federal and $59 million of state net operating loss carryforwards available to
offset future taxable income, which expire in varying amounts between 2004 and 2025. Because of cumulative ownership changes, federal loss carryforwards totaling approximately $90 million and
state loss carryforwards totaling approximately $39 million are subject to limitation. At February 29, 2004, $39 million and $20 million of federal and state net operating
losses,
respectively, are available without limitation to offset future taxable income. Should there be a change of ownership in the future, the available net operating losses may be further limited.

As
of February 29, 2004, Intraware had approximately $957,000 and $751,000 of federal and state research and development credit carryforwards, respectively. These federal credits
will expire in various years through 2025 if not utilized. The California credits can be carried forward indefinitely.

Approximately
$4.0 million of the valuation allowance relates to stock option deductions that, if recognized, will be recorded as a credit to shareholders' equity.

55

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Based
upon our limited operating history and losses incurred to date, management does not believe the realization of the related deferred tax assets meets the recognition criteria
required by generally accepted accounting principles, and accordingly, a full valuation allowance has been recorded to reduce the carrying value of the deferred tax assets to zero. Changes in our
valuation allowance for the years ended February 29, 2004 and February 28, 2003 and 2002 were approximately $1,000, $1,000, and $14,000, respectively.

Net
deferred assets are composed of the following (in thousands):

February 29, 2004

February 28, 2003Deferred tax assets:Net operating loss carryforwards

$
45,869

$
44,994Fixed asset basis difference


321


376Research and development credits


1,453


1,440Accruals and reserves


236


147Total deferred tax assets


47,879


46,957Valuation allowance


(47,879
)

(46,957
)Total deferred tax assets

$


$



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

|                                             |  | February 29, 2004 |   | February 28, 2003 |   | February 28, 2002 |  
|-------------------------------------------- |  | ----------------- | - | ----------------- | - | ----------------- | -
|Provision computed at federal statutory rate |  | -34.00            | % | -34.00            | % | -34.00            | %
|State taxes, net of federal benefit          |  | 0.00              | % | 0.00              | % | -4.99             | %
|Amortization of goodwill                     |  | 0.00              | % | 3.85              | % | 1.80              | %
|Impairment of goodwill                       |  | 0.00              | % | 26.50             | % | 0.00              | %
|Amortization of deferred compensation        |  | 0.40              | % | 3.69              | % | 1.97              | %
|Other                                        |  | 0.87              | % | -1.39             | % | -4.62             | %
|Change in valuation allowance                |  | 32.73             | % | 1.35              | % | 39.84             | %
|                                             |  |                   |   |                   |   |                   |  
|Provision for income taxes                   |  | 0.00              | % | 0.00              | % | 0.00              | %
|                                             |  |                   |   |                   |   |                   |  

NOTE 5. COMMITMENTS AND CONTINGENCIES

Operating and Capital Leases

We lease our office facilities and certain equipment under noncancelable operating lease agreements, which expire at various dates through our fiscal year ending
2006. The leases require that we pay all costs of maintenance, utilities, insurance and taxes. Rent expense under these leases totaled approximately $0.5 million, $0.9 million, and
$1.5 million during the years ended February 29, 2004 and February 28, 2003 and 2002, respectively.

In
addition, we sublease a portion of our facilities in Orinda, California. As a result, we received approximately $60,000 in sublease payments during the year ended February 29,
2004, which has been offset against rent expense.

In
connection with our strategic reorganization in August 2001, as discussed in Note 10, we vacated one of our San Francisco Bay Area offices. In addition, certain of the
assets in that location were written down to their net realizable value, during the three months ended August 31, 2001, as a loss on abandonment of assets. During the year ended
February 28, 2002, we agreed to sell the related furniture and fixtures to the landlord. These assets were financed by capital leases. In order to obtain

56

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title
to these assets for purposes of the sale to the landlord, we paid cash of approximately $243,000 and renegotiated our capital lease with the leasing company.

Future
minimum payments under all noncancelable debt and operating leases at February 29, 2004, are as follows (in thousands):

Year Ending February 28,

Long-term
Debt

Operating
Leases

Total2005

$
1,126

$
560

$
1,6862006


722


284


1,0062007


65





651,913


844


2,757Less: amounts representing interest


(89
)




(89
)Total principal balance

$
1,824

$
844

$
2,668


The
operating leases on the table 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, which would
become due and payable if we do not exercise our right to exit our operating lease for our Orinda office. In addition, the table does not include potential sublease receipts.

Indemnifications

In the course of our business, we have given indemnities and made commitments and guarantees under which we may be required to make payments. These indemnities
include:



57

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We
have historically received only a very limited number of requests for indemnification under these agreements and have not been required to make material payments under them.
Accordingly, we have not recorded a liability related to these indemnification provisions.

Legal Proceedings

In October 2001, we were served with a summons and complaint in a purported securities class action lawsuit. On or about April 19, 2002, we were
served with an amended complaint in this action, which is now titled In re Intraware, Inc. Initial Public Offering Securities Litigation, Civ. No. 01-9349 (SAS) (S.D.N.Y.),
related to In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) (S.D.N.Y.). The amended complaint is brought purportedly on behalf of all persons who purchased our common stock from
February 25, 1999 (the date of our initial public offering) through December 6, 2000. It names as defendants Intraware, three of our present and former officers and directors, and
several investment banking firms that served as underwriters of our initial public offering. The complaint alleges liability under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the offerings did not disclose that: (1) the underwriters had agreed to allow certain
customers to purchase shares in the offerings in exchange for excess commissions paid to the
underwriters; and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The amended complaint also alleges that the
underwriters misused their securities analysts to manipulate the price of our stock. No specific damages are claimed.

Lawsuits
containing similar allegations have been filed in the Southern District of New York challenging over 300 other initial public offerings and secondary offerings conducted in 1999
and 2000. All of these lawsuits have been consolidated for pretrial purposes before United States District Court Judge Shira Scheindlin of the Southern District of New York. On July 15, 2002,
an omnibus motion to dismiss was filed in the coordinated litigation on behalf of the issuer defendants, of which Intraware and its three named current and former officers and directors are a part, on
common pleadings issues. On or about October 9, 2002, the Court entered and ordered a Stipulation of Dismissal, which dismissed the three named current and former officers and directors from
the litigation without prejudice. On February 19, 2003, the Court entered an order denying in part the issuer defendants' omnibus motion to dismiss, including those portions of the motion to
dismiss relating to Intraware. No discovery has been served on us to date.

In
June and July 2003, nearly all of the issuers named as defendants in the In re Initial Public Offering Securities Litigation (collectively, the "issuer-defendants"), including
us, approved a tentative settlement proposal that is reflected in a memorandum of understanding. A special committee of our Board of Directors approved the memorandum of understanding in
June 2003. The memorandum of understanding is not a legally binding agreement. Further, any final settlement agreement would be subject to a number of conditions, most of which would be outside
of the Company's control, including approval by the Court. The underwriter-defendants in the In re Initial Public Offering Securities

58

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Litigation
(collectively, the "underwriter-defendants"), including the underwriters of our initial public offering, are not parties to the memorandum of understanding.

The
memorandum of understanding provides that, in exchange for a release of claims against the settling issuer-defendants, the insurers of all of the settling issuer-defendants will
provide a surety undertaking to guarantee plaintiffs a $1 billion recovery from the non-settling defendants, including the underwriter-defendants. The ultimate amount, if any, that
may be paid on behalf of Intraware will therefore depend on the final terms of the settlement agreement, including the number of issuer-defendants that ultimately approve the final settlement
agreement, and the amounts, if any, recovered by the plaintiffs from the underwriter-defendants and other non-settling defendants. In the event that all or substantially all of the
issuer-defendants approve the final settlement agreement, the amount we would be required to pay to the plaintiffs could range from zero to approximately $3.5 million, depending on plaintiffs'
recovery from the underwriter-defendants and from other non-settling parties. If the plaintiffs recover at least $1 billion from the underwriter-defendants, the Company would have
no liability for settlement payments under the proposed terms of the settlement. If the plaintiffs recover less than $1 billion, we believe our insurance will likely cover our share of any
payments towards satisfying plaintiffs' $1 billion recovery deficit. Management estimates that its range of loss relative to this matter is zero to $3.5 million. Presently there is no
more likely point estimate of loss within this range. As a consequence of the uncertainties
described above regarding the amount we will ultimately be required to pay, if any, as of February 29, 2004, we have not accrued a liability for this matter.

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

NOTE 6. REDEEMABLE CONVERTIBLE PREFERRED STOCK

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

|                                                                                        |  | Preferred Stock |  
|--------------------------------------------------------------------------------------- |  | --------------- | -
|
|Balance at February 28, 2001                                                            |  | 2,873           |  
|Issuance of Series B-1 Preferred Stock with warrants, net of issuance costs of $380     |  | 360             |  
|Beneficial conversion feature on Series B-1 Preferred Stock                             |  |                |  
|Deemed dividend relating to beneficial conversion feature on Series B-1 Preferred Stock |  |                |  
|Conversion of Series A Preferred Stock into common stock                                |  | (1,327          | )
|Conversion of Series B-1 Preferred Stock into common stock                              |  | (248            | )
|                                                                                        |  |                 |  
|Balance at February 28, 2002                                                            |  | 1,658           |  
|Conversion of Series A Preferred Stock into common stock                                |  | (248            | )
|Conversion of Series B-1 Preferred Stock into common stock                              |  | (63             | )
|                                                                                        |  |                 |  
|Balance at February 28, 2003                                                            |  | 1,347           |  
|Conversion of Series A Preferred Stock into common stock                                |  | (746            | )
|Conversion of Series B-1 Preferred Stock into common stock                              |  | (49             | )
|                                                                                        |  |                 |  
|Balance at February 29, 2004                                                            |  | 552             |  
|                                                                                        |  |                 |  

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On June 30, 2000, we entered into a financing arrangement with institutional investors to issue a maximum of 2,500 shares of 9% Redeemable Convertible Preferred Stock for a
maximum of $25 million in proceeds. The $25 million was advanced to us on June 30, 2000. The conversion price of the Preferred Stock was to be set in three tranches during three
pricing periods between July 5, 2000 and September 5, 2000, based on the average price of our common stock during each of those periods. If the average price of our common stock fell
below a certain level during any of those periods, we could elect to redeem that tranche of Preferred Stock and refund that portion of the proceeds to the investors. The market value of our common
stock declined during this sixty-day period and we ultimately agreed to permit the investors to retain approximately 900 shares for total proceeds of approximately $9.2 million. We
repaid the remaining $15.8 million of advanced proceeds to the investors in August 2000 and September 2000. We also issued warrants to purchase up to 346,967 shares of our common
stock at an exercise price of $12.68 in connection with the financing. The warrants expire in June 2004.

The
net proceeds of approximately $9.2 million were allocated between the Preferred Stock and the warrants based upon the relative fair values of each security in accordance with
APB No. 14. This allocation resulted in an assignment of proceeds of $3.0 million to the warrants and $6.2 million to the Preferred Stock. The amount allocated to the warrants was
recorded as additional paid-in-capital.

In
January 2001, we redeemed all of the outstanding Preferred Stock in exchange for our payment of $7.5 million in cash, our issuance of 750,000 shares of our common stock
(market value of $2.06 per share on the day immediately preceding the redemption date), and an adjustment of the exercise price of the warrants from $12.68 to $2.03, which was the closing bid price of
our common stock on the day immediately preceding the redemption date. Since then, the exercise price of those warrants has been reduced to $1.41 as a result of an anti-dilution feature of
the warrants, which was triggered by our subsequent issuances of preferred stock, common stock and warrants to third parties. The redemption value was $9.6 million and we recorded an accretion
charge of $3.4 million representing the difference in the carrying amount of Preferred Stock of $6.2 million and the value of the redemption, as follows (in millions):

Cash

$
7.5Common Stock


1.5Warrants


0.6Redemption value


9.6Less: Carrying value of Preferred Stock


(6.2
)Accretion Charge

$
3.4


Had
we not redeemed the Preferred Stock, we may have been obligated to make additional dividend payments, pay additional cash penalties and potentially redeem the outstanding Preferred
Stock for approximately $11 million, due to our failure to meet certain financial requirements at November 30, 2000, as set forth in the governing agreements.

As
a result of anti-dilution protections relating to the Series A Redeemable Convertible Preferred Stock issuance (see below) on January 16, 2001, the common
stock warrants were adjusted to be exercisable at a price of $1.94 per share.

As
a result of anti-dilution protections relating to the Series B-1 Redeemable Convertible Preferred Stock issuance (see below) on April 2, 2001,
our debt financings with warrants (see Note 8) on August 31 and September 20, 2001, our issuance of common stock with warrants on May 24, 2002 (see Note 7), our
issuance of common stock on August 12, 2002 (see Note 7), and our issuance of common stock on September 9, 2003 (see Note 7), the common stock warrants were adjusted to be
exercisable at a prices of $1.84, $1.58, $1.54, $1.50, $1.43, and $1.41 per share, respectively.

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Series A

On January 16, 2001, we raised $5.2 million in financing through the sale of a new class of Series A Redeemable Convertible Preferred Stock
and warrants to investors. Under the terms of this financing, we issued an aggregate of 2,872,922 shares of Redeemable Convertible Preferred Stock at a per share price of $1.81 and warrants to
purchase 287,284 shares of common stock at an exercise price of $1.99, or 110% of the purchase price of the Redeemable Convertible Preferred Stock. The warrants expire four years from the issuance
date. The purchase price for the Redeemable Convertible Preferred Stock was the average closing price of our common stock during the ten trading-day period ending January 11, 2001,
plus a 15% premium. Each share of Redeemable Convertible Preferred Stock is convertible into one share of common stock at the election of the holder and entitles the holder to a liquidation preference
equal to the amount of the original investment, in the event of liquidation, winding-up or our dissolution. The Redeemable Convertible Preferred Stock does not have a dividend; however,
the stockholders do participate in dividends declared to common stockholders. No common dividends have been declared during the years ended February 29, 2004 and February 28, 2003 and
2002. The Redeemable Convertible Preferred Stock is not subject to adjustments to the conversion ratio, except for proportional adjustments in the event of a split or combination of the common stock.
The holders of the Series A Redeemable Convertible Preferred Stock vote together as a single class with each share of Series A Redeemable Convertible Preferred Stock having the number of
votes equal to the number of shares of common stock into which the Series A Redeemable Convertible Preferred Stock could be converted. Proceeds from this financing were allocated based on
relative fair values of the Preferred Stock and warrants issued. During fiscal year 2001 we recognized a deemed dividend of $4.7 million that increased our net loss attributable to common
stockholders. This charge was calculated based on the difference between the accounting conversion price of the Preferred Stock and the fair market value of our common stock on the commitment date.

During
the year ended February 29, 2004, approximately 746,000 shares of our Series A Redeemable Convertible Preferred Stock were converted into 746,000 shares of common
stock. At February 29, 2004, approximately 552,000 shares of Series A Redeemable Convertible Preferred Stock remained outstanding.

Series B-1

On April 2, 2001, we entered into an agreement to sell a new class of Series B Preferred Stock and warrants to institutional and individual
investors. Under the terms of this financing, we issued an aggregate of 360,000 shares of Preferred Stock for aggregate gross proceeds of $3.6 million and net proceeds of $3.2 million,
after fees and expenses. We also issued warrants to purchase 720,000 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 to the closing of the financing. The warrants expire seven years from the issuance date. Each share of Preferred Stock was convertible into ten shares of common stock at the election
of the holder and entitled the holder to a liquidation preference equal to the amount of the original investment, in the event of a liquidation, winding-up or our dissolution. The
Preferred Stock carried anti-dilution protection requiring a full adjustment of the conversion price to any lower price at which we sold stock to investors during the three months
following the closing, and carried a weighted-average adjustment of the conversion price based on any sale of stock by us to investors during the subsequent nine-month period. The
Preferred Stock did not carry a dividend, however the stockholders do participate in dividends declared to Common stockholders. No dividends have been declared during the years ended
February 29, 2004 and February 28, 2003 and 2002. The new class of Series B Preferred Stock entitled the holders to elect a member of our Board of Directors. The holders of the
Series B Redeemable Convertible Preferred Stock vote together as a single class with each share of Series B Redeemable Convertible Preferred Stock having the number of votes equal to the
number

61

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of
shares of common stock into which the Series B Redeemable Convertible Preferred Stock could be converted.

Proceeds
from this financing were allocated to the Series B Preferred Stock and warrants issued based on their relative fair values. Since the Series B Preferred Stock was
immediately convertible upon issuance we recognized a deemed dividend for the discount of Series B Preferred Stock created by a beneficial conversion feature amounting to $1.1 million
upon the issuance of the Series B Preferred Stock. This amount was calculated based on the difference between the accounting conversion price of the Series B Preferred Stock and the fair
market value of the common stock at the time of commitment to purchase the Series B Preferred Stock.

In
connection with the debt financing that we completed on September 20, 2001, all of the Series B Preferred 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-1 Preferred Stock carries substantially the same
rights, privileges and preferences as the eliminated Series B Preferred Stock. The exchange was affected primarily to enable us to issue debt as part of the debt financing that we closed on
August 31, 2001 and September 20, 2001 (see Note 8). The terms of the Series B Preferred Stock prohibited us from issuing debt, but the terms of the
Series B-1 Preferred Stock permit us to issue debt with the consent of the holders of a majority of the Series B-1 Preferred Stock.

We
recognized an additional deemed dividend of approximately $687,000 on August 31, 2001, based on the adjustment of the conversion price of the Series B-1
Preferred Stock under its anti-dilution protections. This deemed dividend was related to the initial closing of our debt financing, with a commitment to issue warrants, on
August 31, 2001 (see Note 8). As a result of the anti-dilution protections, the Series B-1 Preferred Stock was adjusted to be convertible into
4.2 million shares of our common stock, and the associated common stock warrants were adjusted to be exercisable for 849,322 shares of our common stock at an exercise price of $0.95 per share.

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

During
the year ended February 29, 2004, approximately 49,000 shares of our Series B-1 Redeemable Convertible Preferred Stock were converted into approximately
600,000 shares of common stock. At February 29, 2004, there were no shares of the Series B-1 Redeemable Convertible Preferred Stock outstanding.

NOTE 7. COMMON STOCK

Our Certificate of Incorporation, as amended, authorizes us to issue 250 million shares of $0.0001 par value common stock.

On
May 24, 2002, we completed a private placement of our common stock and warrants to purchase our common stock to institutional and individual investors. Under the terms of the
financing, we issued an aggregate of 3,940,000 shares of common stock, and warrants to purchase 788,000 shares of our common stock with an exercise price of $1.19 per share, for aggregate gross
proceeds of $3.9 million, including $2.6 million in cash and $1.3 million in cancelled indebtedness. The $1.19 per share exercise price of the warrants was the average closing
sale price of our common stock on the five trading days preceding the closing date. The warrants issued to the investors expire four years from the issuance date. In addition to paying the placement
agent a cash fee of $231,400 and reimbursing it for approximately $70,000 in expenses, we also issued to the placement agent and its designee warrants to purchase an aggregate of 310,200 shares of
common stock at an exercise price of $1.00 per share, and

62

---



warrants
to purchase an aggregate of 62,040 shares of common stock at an exercise price of $1.19 per share. These warrants were valued at a fair value of $421,000 at May 24, 2002 and were
accounted for as issuance costs. The warrants issued to the placement agent and its designee expire five years from the issuance date. All $1.19 warrants carry anti-dilution protection
requiring a weighted-average adjustment of the exercise price and of the number of shares issuable upon exercise of the warrants for certain sales of stock by us at less than $1.19 per share during
the 12 months following the closing; however, in accordance with NASD Marketplace Rules, we will not sell shares of our stock that would lead to an anti-dilution adjustment
requiring us to issue a number of shares exceeding 19.9% of our then-current total common shares outstanding, without obtaining stockholder approval. As part of this transaction, we
incurred approximately $126,000 in legal, accounting and other costs.

On
June 13, 2002, we filed with the SEC a registration statement for the resale of the common stock issued and the common stock issuable upon exercise of the warrants, which was
declared effective by the SEC on June 26, 2002.

Cash
proceeds from this financing were allocated first to the fair value of the warrants associated with the transaction in the amount of $1.3 million and the remaining balance,
net of issuance costs, of $0.9 million to the common stock. Proceeds related to the cancelled indebtedness were accounted for as an effective conversion and were converted to common stock at
their carrying value of $1.1 million.

The
warrants were classified as a liability during the time that the associated underlying common stock was unregistered, as we were obligated to register that common stock as well as
the common stock issuable upon exercise of the warrants, and our ability to perform that obligation was assumed to be outside our control. During each accounting period that the warrants were
classified as liabilities, the warrants were adjusted to their fair value. On June 26, 2002, as described above, the registration 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 ended February 28, 2003, we recorded a net credit of approximately $378,000, to other income and expense to adjust the carrying amount of the warrants issued on
May 24, 2002, to fair value.

During
the year ended February 29, 2004, warrants for approximately 200,000 shares associated with our May 24, 2002 private placement were exercised for common stock.

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

On
August 12, 2002, we completed a private placement of common stock to Zomax Incorporated. Under the terms of the financing, we issued an aggregate of approximately
6.1 million shares of common stock for aggregate gross proceeds of approximately $5.0 million. As part of this transaction, we incurred approximately $89,000 in legal, accounting and
other costs. Concurrent with that agreement, we entered into a strategic alliance agreement with Zomax (see Note 2). As of February 29, 2004, Zomax held approximately 10% of our
outstanding common stock.

The
common stock was issued in a private placement without registration under the Securities Act of 1933 and may not be offered or sold in the United States of America absent
registration or an applicable exemption from registration requirements. In issuing the securities, we relied on the exemption from registration provided by Section 4(2) of the Securities Act of
1933 and Regulation D promulgated thereunder, based in part on the purchaser being an institutional type investor and on its representations in the purchase agreement. As part of the agreement,
we agreed to file with the SEC a registration statement to register the resale of the common stock issued to Zomax within one year of

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closing,
and to use commercially reasonable efforts to cause the registration statement to be declared effective by the SEC as promptly thereafter as practicable.

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

In
addition, the August 12, 2002 common stock financing resulted in an anti-dilution adjustment to the exercise price of the warrants issued in connection with our
May 24, 2002 common stock financing and an increase in the number of shares of common stock issuable upon exercise of
those warrants. The exercise price of the warrants was adjusted from $1.19 to $1.07. The number of shares issuable upon 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 and accounts managed by Apex Capital, LLC. Under the terms of the financing, we issued
4.0 million shares of common stock at a price of $1.55 per share for gross proceeds of $6.2 million. This purchase price represents approximately a 24% discount from the closing price of
our common stock on September 9, 2003. As part of this transaction, we incurred and expect to incur approximately $89,000 in legal, accounting, and other costs. Including shares previously
acquired on the open market, as of September 9, 2003, investment funds and accounts managed by Apex Capital, LLC held approximately 9% of our outstanding common stock.

The
common stock was issued in a private placement without registration under the Securities Act of 1933 and may not be offered or sold in the United States of America absent
registration or an applicable exemption from registration requirements. In issuing the securities, we relied on the exemption from registration provided by Section 4(2) of the Securities Act of
1933 and Regulation D promulgated thereunder, based in part on the purchasers being institutional type investors and on their representations in the purchase agreement. As part of the
agreement, we agreed to file with the SEC a registration statement to register the resale of the common stock issued under this private placement within 45 days of closing, and to use
commercially reasonable efforts to cause the registration statement to be declared effective by the SEC as promptly as practicable, but in no case more than one year, thereafter.

On
October 24, 2003, we filed with the SEC a registration statement for the resale of the common stock issued in connection with our September 9, 2003 private placement.
The SEC declared this registration statement effective on November 4, 2003.

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

As
of February 29, 2004 and February 28, 2003, there were no shares of outstanding common stock subject to repurchase, at our election in the event of voluntary or
involuntary termination of employment of the employees holding the stock.

NOTE 8. NOTES PAYABLE

Investor Notes Payable

On August 31, 2001, we issued promissory notes and committed to issue warrants in a private placement to a group of institutional and individual investors,
for aggregate gross proceeds of $6.15 million. Our net receipts from the financing were approximately $5.6 million after fees to the placement agent, Commonwealth Associates, L.P.
("Commonwealth"), of $307,500 and expenses of

64

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approximately
$223,000. The promissory notes bore annual interest of 8%, payable quarterly beginning six months after issuance, and were secured by a senior security interest in substantially all of
our assets. The promissory notes restricted us from issuing common stock dividends. The promissory notes were convertible, at the option of the note holder, into the type of securities offered in our
next private round of equity financing, at that round's price. This could have resulted in the recognition of a contingent beneficial conversion feature. The notes were due in full on
August 31, 2002. The note holders also received warrants to purchase 6.15 million shares of our common stock at an exercise price of $0.01 per share. In accordance with NASD Marketplace
Rule 4350(i)(1)(D), warrants exceeding an aggregate of 5,600,000 shares of our common stock (approximately 19.7% of our outstanding common stock) were not exercisable until we received
stockholder approval. We received stockholder approval on November 27, 2001. In addition, we issued common stock warrants to Commonwealth equal in number to 10% of the warrants issued to the
investors. We entered into binding agreements on August 31, 2001, to issue these warrants to the note holders and Commonwealth. We issued these warrants on September 24, 2001, in
accordance with Nasdaq's application of NASD Marketplace Rules as described below.

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

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

We
allocated the proceeds from the August 31, 2001 financing based on the relative fair values of the promissory notes and warrants issued. The warrants were classified as a
liability as they contain registration rights, which are assumed to be outside our control. Warrants classified as liabilities were adjusted to their fair value each accounting period.

On
September 20, 2001, we issued additional promissory notes and committed to issue additional warrants to another group of institutional and individual investors for aggregate
gross proceeds of $850,000. Our net receipts from the financing were approximately $779,500 after fees to Commonwealth of $42,500 and expenses of approximately $28,000. The note holders also received
warrants to purchase 850,000 shares of our common stock at an exercise price of $0.01 per share. In addition, we issued common stock warrants to Commonwealth equal in number to 10% of the warrants
issued to the investors. These notes carried the same terms as the promissory notes referred to above. We entered into binding agreements on September 20, 2001, to issue these additional
warrants to the note holders and Commonwealth. We issued these warrants on September 24, 2001, in accordance with Nasdaq's application of NASD Marketplace Rules as described below.

During
the year ended February 28, 2002, we recorded a net charge of approximately $4.0 million to other expense to adjust the carrying amount of the warrants issued on
August 31 and September 20, 2001, to fair value.

The
promissory notes and warrants were issued in a private placement without registration under the Securities Act of 1933 and could not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements. In issuing the securities, we relied on the exemption from registration provided by Section 4(2) of the Securities Act of
1933, based in part upon the limited number of institutional type investors and their representations in the purchase agreements. We agreed to file with the SEC a registration statement for the resale
of the common stock issuable upon exercise of the warrants, and if the notes are ultimately converted into or exchanged for equity,

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any
common stock issuable as a result of such conversion or exchange. On May 31, 2002, we filed a registration statement which was declared effective by the SEC on June 14, 2002.

The
notes were repayable by us at any time and would have matured early if we were acquired or underwent a change of control.

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

In
connection with this debt financing, our Board of Directors created a new seat on the Board and appointed to 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 Directors during the 2002 fiscal year. Mr. Falk is also indirectly affiliated with one of the purchasers of notes and
warrants in the financings.
Because of these relationships, as well as the quantity of warrants issued and the price of the warrants, Nasdaq's application of NASD Marketplace Rules would have required us to obtain stockholder
approval before issuing the warrants. However, Nasdaq granted us an exception from the stockholder approval rule. In keeping with Nasdaq's determination, we gave our stockholders 10 days prior
written notice of this exception before issuing the warrants. We gave this notice on September 14, 2001, and issued the warrants on September 24, 2001.

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

In
May 2002, following the asset sale and private placement described in Notes 7 and 11, we repaid $5.7 million of the $7.0 million principal amount of the
promissory notes that we had issued in August and September 2001. As part of this repayment, we were required to accrete the portion of carrying amount of the promissory notes relating to the
repayment to its full value. This resulted in a charge of approximately $973,000, which is included in interest and other income and expenses. The remaining $1.3 million in principal amount of
those promissory notes was effectively converted into the private placement of common stock and warrants described in Note 7.

Bank Notes Payable and Equipment Line

In August 2003, we issued a note payable to a bank for proceeds of approximately $2.0 million. The note bears an annual interest rate of the greater
of 1% in excess of the bank's prime rate (4.00% at February 29, 2004) or 5.25%. The interest rate on the note payable at February 29, 2004, was 5.25%. The note payable is payable in
fixed monthly principal installments plus interest through September 2005. In connection with the note payable, we issued a warrant 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 in August 2010. We allocated the proceeds from the note payable based on the relative fair value of the note
payable and the warrant issued. We estimated the fair value of such warrant at approximately $46,000, using the Black-Scholes valuation model with the following assumptions: expected volatility of
136%, risk-free interest rate of 4.01%, expected life of seven years and no dividends. The value of the warrant was recorded as a debt discount and is being amortized as interest expense
using the effective interest method over the life of the note payable. For the year ended

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February 29,
2004, interest expense related to such warrant amounted to approximately $22,000. The unamortized balance is presented as a discount against the principal balance of the note
payable outstanding. At February 29, 2004, the warrant had not been exercised.

In
August 2003, we also entered into a line of credit with the same bank. The line of credit bears annual interest at the greater of the bank's prime rate plus 1% or 5.25%. The
agreement provides for borrowings of up to $500,000 through August 2004 and is limited to equipment purchases. As of February 29, 2004, we had borrowed approximately $254,000 under this
agreement and the interest rate at that date was 5.25%. Monthly payments of interest only are payable through August 2004, after which fixed monthly principal installments plus interest will be
made through August 2006.

All
of this debt is collateralized by a senior security interest in substantially all of our assets. We are also required to maintain compliance with some financial covenants for which
we were in compliance at February 29, 2004.

Scheduled
maturities of debt at February 29, 2004 are as follows (in thousands):

Years ending:February 28, 2005

$
1,055February 28, 2006


705February 28, 2007


64$
1,824


NOTE 9. EMPLOYEE BENEFIT PLANS

401(k) savings plan

We have a savings plan (the "Savings Plan") that qualifies as a defined contribution arrangement under Section 401(a), 401(k) and 501(a) of the Internal
Revenue Code. Under the Savings Plan, participating employees may defer a percentage (not to exceed 20%) of their eligible pretax earnings up to the Internal Revenue Service's annual contribution
limit. All of our employees on the United States payroll are eligible to participate in the Plan. We will determine our contributions, if any, to the Savings Plan based on our current profits and/or
retained earnings, however, we have not made any contributions to the Savings Plan since its inception.

1996 Stock Option Plan

In October 1996, we adopted the 1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan provides for the granting of stock options to our employees and
consultants. Options granted under the 1996 Plan may be either incentive stock options or nonqualified stock options. Incentive stock options (that is, options intended to qualify as incentive stock
options under the Internal Revenue Code, or "ISOs") may be granted only to our employees (including directors who are also employees). Nonstatutory stock options (that is, options not intended to
qualify as incentive stock options under the Internal Revenue Code, or "NSOs") may be granted to our employees and consultants. At February 29, 2004, we had reserved approximately
2.8 million shares of common stock for issuance under the 1996 Plan. The
shares reserved are subject to annual increases equal to the lesser of (a) 3,000,000 shares, (b) 6% of the outstanding shares on such date, or (c) a lesser amount determined by
the Board.

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

Under
the 1996 Plan, the exercise price of an option may not be less than 100% of the fair market value of 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 may not be less than 110% of the fair market value of the shares on the date of grant.

1998 Director Option Plan

In December 1998, we adopted the 1998 Director Option Plan (the "Director Plan"), which became effective in February 1999. The Director Plan
provides for the granting of stock options to Board members who are not employees of Intraware. We have reserved approximately 250,000 shares of common stock for issuance under the Director Plan at
February 29, 2004. The option grants under the Director Plan are automatic and nondiscretionary, and the exercise price of the options must be 100% of the fair market value of the common stock
on the date of grant. We determine fair market value by the closing price of the common stock on the Nasdaq exchange on the grant date. Each eligible Board member is granted an option to purchase
15,000 shares ("First Option") on the date such person first becomes a director. Immediately following each annual meeting of stockholders, each eligible Board member is automatically granted an
additional option to purchase 7,500 shares ("Subsequent Option") if such director has served continuously as a member of the Board for at least the preceding six months. The Director Plan provides
that the options shall be exercisable over a period not to exceed ten years from the date of the grant; however, the options terminate 3 months following 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 or disability). First Options vest as to 12.5% of the shares 6 months after the grant date and
as to remaining shares in equal installments over the next 42 months provided the optionee continues as a member of the Board. Subsequent Options vest as to 25% of the shares 6 months
after the grant date and as to the remaining shares in equal installments over the next 18 months.

1999 Non-Qualified Acquisition Stock Option Plan

In October 1999, we adopted the Non-Qualified Acquisition Stock Option Plan (the "1999 Plan"). The 1999 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 initial service to us, and Board members may not receive any grants under the 1999 Plan.
We had reserved 3,500,000 shares of common stock for issuance under the 1999 plan. The standard form of Stock Option Agreement used under the 1999 Plan provides that the options are exercisable 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 one year after the date of grant and as to the remaining options
in equal monthly installments over the next 36 months. The exercise price of all options granted under the 1999 Plan has been the fair market value of our common stock on the grant date, as
determined by the closing price of the common stock on Nasdaq on that date. During the year ended February 28, 2003, we ceased issuing options from this plan. All remaining options available
for grant were removed from the plan at that time.

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Employee Stock Purchase Plan

In December 1998, the Board adopted the 1998 Employee Stock Purchase Plan (the "Purchase Plan"), which became effective February 1999. The Purchase
Plan reserves 600,000 shares of common stock for issuance thereunder. On each March 1 beginning in 2000, the aggregate number of shares reserved for issuance under the Purchase Plan is
increased automatically to the lesser of 400,000 shares, 1% of the outstanding shares on such date, or a lesser amount determined by the Board of Directors. Employees generally are eligible to
participate in the Purchase Plan if they are customarily employed by us for more than 20 hours per week and more than five months in a calendar year and are not (and would not become as a
result of being granted an option under the Purchase Plan) 5% stockholders. Under the Purchase 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 four six-month purchase periods. Depending on the
effective date, the first purchase period is approximately six months long. Offering Periods and purchase periods thereafter begin on April 15 and October 15. The price at which the
common stock is purchased under the Purchase Plan is 85% of the lesser of the fair market value of our common stock on the first day of the applicable offering period or on the last day of that
purchase period. During the years ended February 29, 2004 and February 28, 2003 and 2002, approximately 183,000, 214,000, and 302,000 shares of common stock were issued under this plan.
At February 29, 2004, approximately 549,000 shares were available for issuance under this plan.

Selected Information Regarding all Stock Option Plans

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

Options OutstandingOptions
Available
For Grant

Number of
Options

Weighted
Average
Exercise
PriceBalance at February 28, 2001

1,372

7,633

$
8.18Shares authorized

1,716




Options granted below fair value

(1,310
)
1,310


0.51Options granted at fair value

(3,222
)
3,222


0.92Options exercised



(66
)

0.63Options canceled

2,801

(2,801
)

8.79Balance at February 28, 2002

1,357

9,298


7.84Shares authorized

2,427




Plan shares expired

(2,172
)



Options granted at fair value

(2,603
)
2,603


0.83Options exercised



(199
)

0.60Options canceled

3,367

(3,367
)

6.21Balance at February 28, 2003

2,376

8,335


2.57Shares authorized

3,000




Plan shares expired

(49
)



Options granted at fair value

(3,760
)
3,760


1.37Options exercised



(1,317
)

0.99Options canceled

1,438

(1,438
)

3.20Balance at February 29, 2004

3,005

9,340


2.21


The
weighted average fair value of options that were granted for the years ended February 29, 2004 and February 28, 2003 and 2002, was $1.37, $0.83, and $0.88,
respectively.

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At
February 29, 2004 and February 28, 2003 and 2002, approximately 4.2 million, 3.5 million, and 2.7 million options were exercisable at a weighted
average exercise price per share of $3.33, $2.57, and $7.84, respectively.

The
following table summarizes the information about all stock options outstanding and exercisable as of February 29, 2004 (in thousands, except per share amounts and years):

|           |  | Options Outstanding at February 29, 2004 |  |      |  |  
|---------- |  | ---------------------------------------- |  | ---- |  | -
|
|
|
|$0.01-0.66 |  | 1,067                                    |  | 7.51 |  | $
|0.77-0.77  |  | 1,701                                    |  | 8.44 |  |  
|0.80-1.02  |  | 1,711                                    |  | 7.97 |  |  
|1.05-1.16  |  | 1,973                                    |  | 9.47 |  |  
|1.17-4.97  |  | 2,207                                    |  | 7.84 |  |  
|5.50-73.00 |  | 681                                      |  | 5.98 |  |  
|           |  |                                          |  |      |  |  
|           |  | 9,340                                    |  | 8.14 |  |  
|           |  |                                          |  |      |  |  

As
of February 29, 2004, we have six change of control severance agreements with certain executives and employees. The agreements provide that if we experience a change of
control, and any of such executive officers is involuntarily terminated without cause within twelve months following the change of control or the announcement of such change of control, we will
provide to the executive officer one year of additional vesting of unvested stock options in addition to any vesting acceleration provided under our 1996 Stock Option Plan.

These
agreements were modifications to the terms of the original grants, and create a new measurement date for the shares affected. Any additional compensation charge will be taken when
and if the officers achieve a benefit from the change (i.e., if a change in control or termination occurs). Under these agreements, approximately 1.3 million shares were modified, resulting in
a contingent additional maximum compensation charge of approximately $5,000 at February 29, 2004. The recognition of the compensation charge, if any, depends on whether the employee ultimately
retains an option award that would have been otherwise forfeited under the option or award's original vesting terms.

In
January 2002, we issued options to purchase 150,000 shares of common stock, at an exercise price of $1.99 per share, to a consultant in consideration for services rendered. The
options vested monthly over 12 months and expire in 5 years. The options were valued using the Black-Scholes option pricing model. The monthly Black-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 a zero dividend yield. The fair value of the options totaled approximately
$169,000 over their vesting period and was recorded in general and administrative expense.

Unearned stock-based compensation

In connection with certain stock option grants during the years ended February 28, 1999 and 1998, we recognized unearned stock-based compensation totaling
$12.1 million and $1.3 million, respectively, which was amortized over the four-year vesting periods of the related options. In connection with our acquisition of Janus
Technologies, Inc. during the year ended February 28, 2001, we recognized unearned compensation totaling $1.5 million, which was being amortized over the vesting periods of the
related options. Amortization expense related to all stock-based compensation recognized during the

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years
ended February 29, 2004 and February 28, 2003 and 2002, totaled approximately $28,000, $1.0 million, and $2.6 million, respectively.

NOTE 10. RESTRUCTURING

On August 8, 2001, we announced a strategic reorganization. We recorded a charge of $8.6 million relating to this restructuring and the loss on
abandonment of assets during the quarter ended August 31, 2001.

The
loss on abandonment of assets included the write off of approximately $6.4 million of property and equipment and certain intangibles relating to the BitSource, Inc.
acquisition, as we have abandoned the related technology. The write off consisted of the following components: $2.7 million for property and equipment, $0.5 million for trademarks,
$0.5 million for goodwill, and $2.7 million for existing technology.

The
property and equipment written off included assets taken out of service, as they were deemed unnecessary due to the reductions in work force. These assets were subsequently disposed
of or sold.
Included in this write off were certain furniture and fixtures that were written down to a net realizable value of approximately $55,000.

The
restructuring consisted of approximately $262,000 for severance and benefits relating to the involuntary termination of 66 employees, all of whom were based in North America. We
reduced our workforce to 120 employees from 186 at the end of July. Of the 66 terminated employees, 25 were in Sales and Marketing, 26 were in Product Development and 15 were in General and
Administrative. We also consolidated our two San Francisco Bay Area offices into one. We accrued lease and related costs of approximately $1.9 million principally pertaining to the estimated
future obligations of non-cancelable lease payments for excess facilities in the San Francisco Bay Area that were vacated due to the reduction in work force. We also recognized an
additional $27,000 relating to other restructuring expenses.

Due
to changes in management's estimates relating to our strategic reorganization on August 8, 2001, we recognized additional expenses of approximately $478,000 during the three
months ended November 30, 2001. This additional charge principally related to the acquisition of the title to assets held under a capital lease (see Note 5). In connection with our
restructuring efforts, we recorded a charge of approximately $120,000 relating to the Black-Scholes fair value of an option issued to a consultant on September 5, 2001, for services performed
in conjunction with exiting our excess lease space. We issued a fully-vested and immediately exercisable option to purchase 110,000 shares of our common stock at an exercise price of $0.01 per share.
The term of the option is ten years. The following assumptions were used to value the option under the Black-Scholes model: term of 10 years; fair value of the stock price on the grant date of
$1.09; option exercise price of $0.01 per share; volatility of 159%; and a zero dividend yield.

We
made cash payments of approximately $1.9 million during the year ended February 28, 2002. As of February 28, 2002, we had settled all liabilities associated with
the August 2001 restructuring.

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The following table sets forth an analysis of the components of the restructuring and loss on abandonment charges recorded in the second quarter of fiscal 2002 and subsequent adjustments
and payments made against the reserve (in thousands):

|                                                               |                                      | Severance and
benefits |      | Asset
write-offs |   | Excess lease
and related costs |       | Other costs |        | Total |  
|-------------------------------------------------------------- | ------------------------------------ | ---------------------- | ---- | ---------------- | - | ------------------------------ | ----- | ----------- | ------ | ----- | -
|August 8, 2001 restructuring and loss on abandonment of assets |                                      | $                      | 262  |                  | $ | 6,407                          |       | $           | 1,917  |       | $
|                                                               |                                      |                        |      |                  |   |                                |       |             |        |       |  
|                                                               | Total                                |                        |      | 262              |   |                                | 6,407 |             |        | 1,917 |  
|Cash paid                                                      |                                      |                        | (209 | )                |   |                               |       |             | (94    | )     |  
|Non-cash charges                                               |                                      |                        |     |                  |   | (6,407                         | )     |             |       |       |  
|                                                               |                                      |                        |      |                  |   |                                |       |             |        |       |  
|                                                               | Reserve balance at August 31, 2001   |                        |      | 53               |   |                                |      |             |        | 1,823 |  
|Cash paid                                                      |                                      |                        | (47  | )                |   |                               |       |             | (246   | )     |  
|Non-cash charges                                               |                                      |                        |     |                  |   | (328                           | )     |             | (410   | )     |  
|Provision adjustment                                           |                                      |                        |     |                  |   | 328                            |       |             | 150    |       |  
|                                                               |                                      |                        |      |                  |   |                                |       |             |        |       |  
|                                                               | Reserve balance at November 30, 2001 |                        |      | 6                |   |                                |      |             |        | 1,317 |  
|Cash paid                                                      |                                      |                        | (6   | )                |   |                               |       |             | (1,317 | )     |  
|                                                               |                                      |                        |      |                  |   |                                |       |             |        |       |  
|                                                               | Reserve balance at February 28, 2002 |                        | $    |                 |   | $                              |      |             | $      |      |  
|                                                               |                                      |                        |      |                  |   |                                |       |             |        |       |  

NOTE 11. ASSET SALE

In May 2002, we sold substantially all of the assets related to our Asset Management software business to Computer Associates International, Inc.
for approximately $9.5 million in cash. In connection with this sale, our July 2001 agreement with Computer Associates for its resale of our Argis suite of software products was
terminated. In addition, as part of that asset sale, we assigned to Computer Associates
our May 2001 agreement with Corporate Software (now Software Spectrum) for its resale 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, all of the shares subject to the warrant that we issued to Corporate Software in May 2001 will immediately become exercisable. The fair value of the
warrant had been recorded as prepaid distribution costs and was being recognized as a reduction of revenue over the lesser of a ratable charge over the 24-month term of the agreement with
Corporate Software or the period it took Corporate Software to generate revenue to Intraware of $1.6 million from Corporate Software's resale of our asset management software. As no additional
revenue would be generated for us under this distribution agreement, the remaining unamortized prepaid distribution costs of $936,000 were recorded as a reduction to revenue during the year ended
February 28, 2003.

The
total proceeds from the sale 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 a gain on sale of assets in the year ended February 28, 2003.

Total consideration

$
9,500Net book value of equipment, intangible assets and deferred revenue


(6,536
)Transaction costs


(308
)Gain on sale

$
2,656


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

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

The
impairment of assets includes the write-off of approximately $403,000 in prepaid licenses that were held for resale. The restructuring charge consisted of approximately
$345,000 for severance and benefits relating to the involuntary termination of 14 employees who were not hired by Computer Associates. We terminated an additional 33 employees, all of whom were based
in North America. These 33 terminated employees were all hired by Computer Associates and therefore received no severance payments. Overall, we reduced our workforce to 71 employees from 118 in
connection with the asset sale to Computer Associates. Of the 47 terminated employees, 22 were in Sales and Marketing, 10 were in Product Development and 15 were directly involved in our product
support. We also closed our Pittsburgh, Pennsylvania office and various satellite offices.

We
accrued for lease and related costs of approximately $983,000, principally pertaining to the estimated future obligations of non-cancelable lease payments for excess
facilities that were vacated due to our reductions in work force. We also recognized $63,000 relating to other restructuring expenses. Due to changes in management's estimates relating to the
restructuring during the three months ended August 31, 2002, we recognized an additional expense of $106,000 pertaining to the estimated future obligations of non-cancelable lease
payments for excess facilities that were vacated due to our reductions in work force. In addition, we did not incur projected severance and benefits of $106,000 and reduced the reserve accordingly.
During the three months ended February 28, 2003, we terminated our Pittsburgh, Pennsylvania lease and realized a savings of approximately $152,000 in rent that would otherwise have been
payable, and which was included in the restructuring line item on the consolidated statement of operations.

In
our December 2000 restructuring, we closed our Fremont, California office and assigned our lease to 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.

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The
following table sets forth an analysis of the components of the restructuring and impairment of assets charges recorded in our year ended February 29, 2004, and subsequent
adjustments 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  |       | $
|                           |                                      |                        |      |                                |   |                      |     |             |      |       |  
|                           | Total                                |                        |      | 345                            |   |                      | 983 |             |      | 403   |  
|Cash paid                  |                                      |                        |     |                                |   | (89                  | )   |             |     |       |  
|Non-cash charges           |                                      |                        |     |                                |   | (18                  | )   |             | (403 | )     |  
|                           |                                      |                        |      |                                |   |                      |     |             |      |       |  
|                           | Reserve balance at May 31, 2002      |                        |      | 345                            |   |                      | 876 |             |      |      |  
|Cash paid                  |                                      |                        | (239 | )                              |   | (119                 | )   |             |     |       |  
|Provision adjustment       |                                      |                        | (106 | )                              |   | 106                  |     |             |     |       |  
|                           |                                      |                        |      |                                |   |                      |     |             |      |       |  
|                           | Reserve balance at August 31, 2002   |                        |      |                               |   |                      | 863 |             |      |      |  
|Cash paid                  |                                      |                        |     |                                |   | (294                 | )   |             |     |       |  
|                           |                                      |                        |      |                                |   |                      |     |             |      |       |  
|                           | Reserve balance at November 30, 2002 |                        |      |                               |   |                      | 569 |             |      |      |  
|Cash paid                  |                                      |                        |     |                                |   | (356                 | )   |             |     |       |  
|Non-cash charges           |                                      |                        |     |                                |   | (51                  | )   |             |     |       |  
|Provision adjustment       |                                      |                        |     |                                |   | (152                 | )   |             |     |       |  
|                           |                                      |                        |      |                                |   |                      |     |             |      |       |  
|                           | Reserve balance at February 28, 2003 |                        |      |                               |   |                      | 10  |             |      |      |  
|                           |                                      |                        |      |                                |   |                      |     |             |      |       |  
|Cash paid                  |                                      |                        |     |                                |   | (10                  | )   |             |     |       |  
|                           |                                      |                        |      |                                |   |                      |     |             |      |       |  
|                           | Reserve balance at February 29, 2004 |                        | $    |                               |   | $                    |    |             | $    |      |  
|                           |                                      |                        |      |                                |   |                      |     |             |      |       |  

As
of February 29, 2004, we have settled all liabilities associated with the May 2002 restructuring and the sale of the Asset Management software business, subject to the
ongoing indemnification obligation discussed in Note 5.

NOTE 12. SUBSEQUENT EVENT

On April 30, 2004, we terminated our strategic alliance agreement with Zomax dated August 12, 2002 (see Note 2) and entered into a new
reseller agreement. The new reseller agreement allows Zomax to resell our SubscribeNet ESDM service. Zomax will pay us fees for each resale of the SubscribeNet service to a customer, to be determined
on a case-by-case basis. Under the new agreement, Zomax will no longer pay minimum annual license fees to us. The term of the new agreement is one year, subject to automatic
annual renewal for one-year periods. Each party has the right to terminate the agreement without cause upon 60 days' notice.

As
part of the termination of the 2002 agreement, Zomax and Intraware will no longer be subject to exclusivity requirements or restrictions on sales to certain companies. In addition, in
consideration for Zomax' termination of the 2002 agreement, we agreed to refund $115,000 of the $400,000 prepayment for future services paid by Zomax to us in October 2003. The entire amount of
the $400,000 prepaid services was recorded in related party deferred revenue at February 29, 2004.

SUPPLEMENTARY DATA

The following table sets forth selected unaudited quarterly information for our last eight fiscal quarters (in thousands, except per share amounts). We believe
all necessary adjustments (which

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consisted
only of normal recurring adjustments) have been included in the amounts stated below to present fairly the results of such periods when read in conjunction with the consolidated financial
statements and related notes included elsewhere herein.

|                                                |  | For the quarter ended |       
|----------------------------------------------- |  | --------------------- | ------
|
|Revenue                                         |  | $                     | 3,043 
|Gross profit                                    |  |                       | 1,948 
|Income (loss) from operations                   |  |                       | 6     
|Net income (loss)                               |  |                       | 19    
|Basic and diluted (earnings) net loss per share |  | $                     | 0.00  
|Weighted average sharesbasic                   |  |                       | 59,489
|Weighted average sharesfully diluted           |  |                       | 64,499

|                                          |  | For the quarter ended |       
|----------------------------------------- |  | --------------------- | ------
|
|Revenue                                   |  | $                     | 3,258 
|Gross profit                              |  |                       | 1,920 
|Loss from operations                      |  |                       | (500  
|Net loss                                  |  |                       | (550  
|Basic and diluted net loss per share      |  | $                     | (0.01 
|Weighted average sharesbasic and diluted |  |                       | 52,018

Quarterly
information includes the operating revenues and expenses of the Asset Management software business through the quarter ended May 31, 2002, and the gain on sale of the
Asset Management software business and resulting restructuring in the quarter ended May 31, 2002 as described in Note 10 of the "Notes to Consolidated Financial Statements."

The
quarter ended February 29, 2004 includes the application of a credit from a vendor relating to internet expenses of approximately $0.1 million. The credit was issued in
relationship to a renegotiation and correction of fees charged to us during our fiscal year 2004 and was recorded as a reduction to cost of revenues and operating expenses.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES.

(a)Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after
evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")) as of February 29, 2004, have concluded that our disclosure controls and procedures are effective based on their evaluation of the controls and procedures required by
paragraph (b) of the Exchange Act Rules 13a-15 or 15d-15.

(b)Changes in Internal Controls over Financial Reporting. No changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 occurred during our last fiscal quarter that have
materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

As of April 20, 2004, our executive officers were:

|Name                |  | Age |  | Position                                                                         
|------------------- |  | --- |  | ---------------------------------------------------------------------------------
|Peter H. Jackson    |  | 45  |  | Chairman, Chief Executive Officer and President                                  
|Wendy A. Nieto      |  | 39  |  | Chief Financial Officer and Executive Vice President of Technology and Operations
|David L. Dunlap     |  | 37  |  | Executive Vice President of Sales and Marketing                                  
|John J. Moss        |  | 41  |  | Vice President and General Counsel                                               
|Richard J. Northing |  | 39  |  | Vice President of Technology and Operations                                      

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

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

David L. Dunlapjoined us as the Director of Product Lines in September 1997. He became Vice President of Operations in
May 1998, Chief Operations Officer in December 2000, Senior Vice President of Business Development in February 2001, Senior Vice President of Sales and Marketing in
July 2003, and Executive Vice President of Sales and Marketing in August 2003. Prior to joining Intraware, he served as a Financial Systems Project Manager of PeopleSoft, Inc.,
Vice President of National Operations of Dataflex Corporation, Vice President of Operations of Granite Computer Products, Inc., and Director of Purchasing of Vanstar Corporation.
Mr. Dunlap holds a B.A. in Government from Cornell University.

John J. Mossjoined us as General Counsel in October 1999. He became Vice President and General Counsel in August 2001.
Prior to joining Intraware, he served as Deputy General Counsel of Barra, Inc., Corporate Counsel of Oracle Corporation, and an associate at the law firm of Graham & James.
Mr. Moss holds a J.D. from Stanford University, an M.A. in International Economics from the Johns Hopkins School of Advanced International Studies, and a B.A. from Sarah Lawrence College.

Richard J. Northingjoined us as Project Manager in May 1999. He became Director of Project Management in October 1999,
Senior Director of Project Management in May 2000, and Vice President of Technology Operations in March 2001. Prior to joining Intraware, he held senior

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consulting
positions at Accenture and at Electronic Data Systems Corporation. Dr. Northing holds a B.Sc. from the University of Liverpool, U.K., and a D.Phil from Oxford University, U.K.

Our
Board of Directors has determined that Peter F. Pervere, the Chairman of the Audit Committee of our Board, is an audit committee financial expert for purposes of applicable SEC
rules, and that Mr. Pervere meets the independence standards for audit committee members under applicable SEC and Nasdaq Stock Market rules.

Our
website (www.intraware.com/company/corp_governance/index.html) contains Intraware's Code of Ethics, which applies to our directors, executive officers and employees. Any amendment to
the Code of Ethics that applies to our directors or executive officers will be disclosed on our website, and any waiver of the Code of Ethics for directors or executive officers may be made only by
our Board of Directors or the Audit Committee and will be disclosed on our website.

The
information regarding Directors and Executive Officers appearing under the headings "Proposal 1: Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" of the Proxy Statement for our 2004 Annual Meeting of Stockholders is incorporated by reference in this section.

ITEM 11. EXECUTIVE COMPENSATION

The information appearing under the headings "Director Compensation," "Employment Contracts and Change of Control Arrangements," "Report of the Compensation
Committee," "Stock Price Performance Graph" and "Executive Compensation" of the Proxy Statement for our 2004 Annual Meeting of Stockholders is incorporated by reference in this section.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information appearing under the heading "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement for our 2004 Annual Meeting of
Stockholders is incorporated by reference in this section.

See
the information contained under the heading "Equity Compensation Plan Information" in Item 5 above regarding shares authorized for issuance under equity compensation plans approved
by stockholders and not approved by stockholders. For descriptions of our equity compensation plans, including the 1999 Non-Qualified Acquisition Stock Option Plan, which has not been
approved by stockholders, see "Equity Compensation Plan Information" in Item 5 above and "Note 9: Employee Stock Benefit Plans" in the "Notes to Consolidated Financial Statements" in Item 8
above.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information appearing under the heading "Certain Relationships and Related Transactions" of our Proxy Statement for our 2004 Annual Meeting of Stockholders is
incorporated by reference in this section.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information appearing under the headings "Report of the Audit Committee," "Ratification of Appointment of Independent Accountants," "Audit Fees for Fiscal
Year 2004" and "All Other Independent Accountant Fees for Fiscal Year 2004" of the Proxy Statement for our 2004 Annual Meeting of Stockholders is incorporated by reference in this section.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

See
Item 8 above.



Schedule II
is omitted as the required information is contained in the "Notes to the Consolidated Financial Statements" in Item 8 above.



|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.                                                                                                                                  
|3(i).3(3)      |   | Certificate of Elimination of Series B Convertible Preferred Stock.                                                                                                                                                           
|3(i).4(3)      |   | Certificate of Designations, Preference and Rights of Series B-1 Convertible Preferred Stock.                                                                                                                                 
|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(2)         |   | Form of Warrant issued in connection with the April 2001 sale of Series B Convertible Preferred Stock.                                                                                                                        
|4.5(8)         |   | Warrant issued to CorpSoft, Inc. in May 2001.                                                                                                                                                                                 
|4.6(9)         |   | Warrant Agreement dated May 24, 2002 between Intraware, Inc. and Commonwealth Associates, L.P. and Form of Investor Warrant Certificate.                                                                                      
|4.7(9)         |   | Form of Placement Agent Warrant with $1.00 exercise price.                                                                                                                                                                    
|4.8(9)         |   | Form of Placement Agent Warrant with $1.19 exercise price.                                                                                                                                                                    
|4.9(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.                                                                                                                                                          
|               |   |                                                                                                                                                                                                                               

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|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)  |   | Form of Registration and Information Rights Agreement.                                                                                                         
|10.7(10)  |   | Sleepy Hollow Investment Company Office Lease made August 23, 1996 between Sleepy Hollow Investment Company and Intraware.                                     
|10.8(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.                     
|10.9(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.                 
|10.10(6)  |   | Securities Purchase Agreement dated as of June 29, 2000 by and among Intraware and the investors listed on the Schedule of Buyers.                             
|10.11(14) |   | Form of Redemption and Amendment Agreement, dated as of January 10, 2001, by and among Intraware and the investors set forth therein.                          
|10.12(14) |   | Registration Rights Agreement dated as of January 10, 2001, by and among Intraware and the investors set forth therein.                                        
|10.13(7)  |   | Preferred Stock and Warrant Purchase Agreement, dated January 12, 2001, by and among Intraware and the investors set forth therein.                            
|10.14(7)  |   | Registration Rights Agreement, dated January 12, 2001, by and among Intraware and the investors set forth therein.                                             
|10.15(2)  |   | Form of Placement Agency Agreement, dated April 2, 2001 between Intraware and the placement agent for the offering of the Series B Convertible Preferred Stock.
|10.16(2)  |   | Form of Subscription Agreement, dated April 2, 2001, between Intraware and the purchasers of Intraware's Series B Convertible Preferred Stock.                 
|10.17(2)  |   | Form of Registration Rights Agreement dated April 2, 2001, by and among Intraware and the investors set forth therein.                                         
|10.18(15) | * | Form of Change of Control Severance Agreement between Intraware, Inc. and certain executive officers of Intraware.                                             
|10.19(4)  | + | Sales Alliance Agreement dated June 28, 2001 between CorpSoft, Inc. and Intraware, Inc.                                                                        
|10.20(3)  |   | Exchange Agreement, dated August 31, 2001 by and among Intraware and the investors named therein.                                                              
|10.21(3)  |   | Registration Rights Agreement, dated August 31, 2001 by and among Intraware, Inc. and the investors named therein.                                             
|10.22(9)  |   | Form of Subscription Agreement, dated May 24, 2002 by and among Intraware, Inc. and the investors named therein.                                               
|10.23(9)  |   | Form of Registration Rights Agreement, dated May 24, 2002 by and among Intraware, Inc., Commonwealth Associates, L.P. and the investors named therein.         
|10.24(9)  |   | Placement Agency Agreement, dated May 10, 2002 by and between Intraware, Inc. and Commonwealth Associates, L.P.                                                
|          |   |                                                                                                                                                                

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|10.25(16)  | * | Employment Agreement dated July 17, 2002 between Intraware, Inc. and Frost R. R. Prioleau.                                                                     
|---------- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.26(17)  |   | Form of Registration Rights Agreement, dated August 12, 2002, by and between Intraware, Inc. and Zomax Incorporated.                                           
|10.27(17)  |   | Form of Common Stock Purchase Agreement, dated August 12, 2002, by and between Intraware, Inc. and Zomax Incorporated.                                         
|10.28+(18) |   | Amendment One to Sales Alliance Agreement dated June 28, 2001 between Intraware, Inc. and Software Spectrum, Inc. (as successor-in-interest to CorpSoft, Inc.).
|10.29(19)  |   | Loan and Security Agreement dated August 1, 2003 between Silicon Valley Bank and Intraware, Inc.                                                               
|10.30(19)  |   | Negative Pledge Agreement dated August 1, 2003 between Silicon Valley Bank and Intraware, Inc.                                                                 
|10.31(20)  |   | Form of Registration Rights Agreement, dated September 9, 2003, by and among Intraware, Inc. and the investors set forth therein.                              
|10.32(20)  |   | Form of Common Stock Purchase Agreement, dated September 9, 2003, by and among Intraware, Inc. and the investors set forth therein.                            
|10.33      |   | Amendment Two to Sales Alliance Agreement dated June 28, 2001 between Intraware, Inc. and Software Spectrum, Inc. (as successor-in-interest CorpSoft, Inc.).   
|11         |   | See Note 1 to our "Notes to Consolidated Financial Statements" in Item 8.                                                                                      
|23.1       |   | Consent of Independent Accountants.                                                                                                                            
|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.                                                                                               

---

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(b)   REPORTS ON FORM 8-K

None.

(c)   EXHIBITS

See Item 15(a)(3) above.

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SIGNATURES

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

|                   |  | INTRAWARE, INC.
|------------------ |  | ---------------
|Dated: May 4, 2004 |  | By:            

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

|Signature                                       |  | Capacity in Which Signed                                                                                                       |  | Date       
|----------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------ |  | -----------
|/s/PETER H. JACKSON(Peter H. Jackson)           |  | Chairman, Chief Executive Officer and President (Principal Executive Officer)                                                  |  | May 4, 2004
|/s/WENDY A. NIETO(Wendy A. Nieto)               |  | Chief Financial Officer and Executive Vice President of Technology and Operations (Principal Financial and Accounting Officer) |  | May 4, 2004
|/s/MARK B. HOFFMAN(Mark B. Hoffman)             |  | Director                                                                                                                       |  | May 4, 2004
|/s/BRENDAN A. MCLOUGHLIN(Brendan A. McLoughlin) |  | Director                                                                                                                       |  | May 4, 2004
|/s/RAYMOND L. OCAMPO JR.(Raymond L. Ocampo Jr.) |  | Director                                                                                                                       |  | May 4, 2004
|/s/PETER F. PERVERE(Peter F. Pervere)           |  | Director                                                                                                                       |  | May 4, 2004

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