**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHESECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE QUARTERLY PERIOD ENDED MAY 31, 2003**

**or**

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHESECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE TRANSITION PERIOD FROM         TO           .**

 

**Commission file number 000-25249**

 

**INTRAWARE,INC.**

(Exactname of Registrant as specified in its charter)

 

**DELAWARE**(State or other jurisdiction ofincorporation or organization)

**68-0389976**(I.R.S. EmployerIdentification Number)

**25 ORINDA WAYORINDA, CA 94563**(Address of principal executiveoffices)

**(925) 253-4500**(Registrant’s telephone number,including area code)

Indicate by check (X) whetherthe registrant: (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90days.  Yes  ý          No  o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).  Yes  o          No  ý

 

As of June 30, 2003 there were 53,573,699 shares of the registrant’scommon stock outstanding.

 

 

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**PARTI—FINANCIAL INFORMATION**

 

**ITEM 1.CONSOLIDATED FINANCIAL STATEMENTS**

 

**INTRAWARE, INC.****CONSOLIDATEDBALANCE SHEETS****(in thousands,except per share amounts)****(unaudited)**

 
|                                                                                                                                                                                                    |   | **May 31,  2003** |   | **February 28,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|------------------------|--------|
| **ASSETS**                                                                                                                                                                                              |   | **(unaudited)**   |   |                   |   |
| Current assets:                                                                                                                                                                                         |   |              |   |                   |   |
| Cash and cash equivalents                                                                                                                                                                               |   | $                 | 5,812  |                   | $      | 6,841 |   |
| Accounts receivable, net                                                                                                                                                                                |   | 1,290             |   | 1,521                  |   |
| Prepaid licenses, services and cost of deferred  revenue                                                                                                                                                |   | 296               |   | 329                    |   |
| Other current assets                                                                                                                                                                                    |   | 595               |   | 338                    |   |
| Total current assets                                                                                                                                                                                    |   | 7,993             |   | 9,029                  |   |
| Cost of deferred revenue                                                                                                                                                                                |   | 12                |   | 37                     |   |
| Property and equipment, net                                                                                                                                                                             |   | 1,307             |   | 1,859                  |   |
| Other assets                                                                                                                                                                                            |   | 10                |   | 11                     |   |
| Total assets                                                                                                                                                                                            |   | $                 | 9,322  |                   | $      | 10,936 |   |
|                                                                                                                                                                                                    |   |              |   |                   |   |
| **LIABILITIES, REDEEMABLE  CONVERTIBLE PREFERRED STOCK & STOCKHOLDERS’ EQUITY**                                                                                                                |   |              |   |                   |   |
| Current liabilities:                                                                                                                                                                                    |   |              |   |                   |   |
| Accounts payable                                                                                                                                                                                        |   | $                 | 925    |                   | $      | 683 |   |
| Accrued expenses                                                                                                                                                                                        |   | 1,082             |   | 1,189                  |   |
| Deferred revenue                                                                                                                                                                                        |   | 1,947             |   | 2,495                  |   |
| Related party deferred revenue                                                                                                                                                                          |   | 525               |   | 525                    |   |
| Capital lease and other obligations                                                                                                                                                                     |   | 1,432             |   | 1,495                  |   |
| Total current liabilities                                                                                                                                                                               |   | 5,911             |   | 6,387                  |   |
| Deferred revenue                                                                                                                                                                                        |   | 312               |   | 183                    |   |
| Related party deferred revenue                                                                                                                                                                          |   | 98                |   | 223                    |   |
| Capital lease obligations                                                                                                                                                                               |   | 575               |   | 906                    |   |
| Total liabilities                                                                                                                                                                                       |   | 6,896             |   | 7,699                  |   |
| Contingencies (Note 7)                                                                                                                                                                                  |   |              |   |                   |   |
| Redeemable convertible preferred stock; $.0001 par  value; 10,000 shares authorized:                                                                                                                    |   |              |   |                   |   |
| Series A; 1,298 shares issued and outstanding at  May 31 and February 28, 2003 (aggregate liquidation preference of $2,350 at  May 31 and February 28, 2003).                                           |   | 2,109             |   | 2,109                  |   |
| Series B-1; 42 and 49 shares issued and  outstanding at May 31 and February 28, 2003, respectively (aggregate  liquidation preference of $418 and $486 at May 31 and February 28, 2003,  respectively). |   | 313               |   | 364                    |   |
| Total redeemable convertible preferred stock                                                                                                                                                            |   | 2,422             |   | 2,473                  |   |
| Stockholders’ equity:                                                                                                                                                                              |   |              |   |                   |   |
| Common stock; $0.0001 par value; 250,000 shares  authorized; 52,310 and 52,101 shares issued and outstanding at May 31 and  February 28, 2003, respectively.                                            |   | 5                 |   | 5                      |   |
| Additional paid-in-capital                                                                                                                                                                              |   | 153,007           |   | 152,870                |   |
| Unearned stock-based compensation                                                                                                                                                                       |   | (20               | )      | (32                    | )      |
| Accumulated deficit                                                                                                                                                                                     |   | (152,988          | )      | (152,079               | )      |
| Total stockholders’ equity                                                                                                                                                                         |   | 4                 |   | 764                    |   |
| Total liabilities, redeemable convertible  preferred stock and stockholders’ equity                                                                                                                |   | $                 | 9,322  |                   | $      | 10,936 |   |

 

Seenotes to unaudited interim consolidated financial information.

 

2

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

 
|                                               |   | **For the  Three Months Ended** |   |
|----------------------------------------------------|--------|---------------------------------|--------|
|                                               |   | **May 31,  2003**               |   | **May 31,  2002** |   |
|                                               |   |                            |   |   |   |
| Revenues:                                          |   |                            |   |   |   |
| Software product sales                             |   | $                               | 114    |   | $ | 1,744 |   |
| Online services and technology                     |   | 1,720                           |   | 1,659 |   |
| Alliance and reimbursement                         |   | 862                             |   | 1,106 |   |
| Related party online services and technology       |   | 117                             |   | — |   |
| Total revenues                                     |   | 2,813                           |   | 4,509 |   |
|                                               |   |                            |   |   |   |
| Cost of revenues:                                  |   |                            |   |   |   |
| Software product sales                             |   | 100                             |   | 1,213 |   |
| Online services and technology                     |   | 623                             |   | 625 |   |
| Alliance and reimbursement                         |   | 490                             |   | 521 |   |
| Total cost of revenues                             |   | 1,213                           |   | 2,359 |   |
| Gross profit                                       |   | 1,600                           |   | 2,150 |   |
|                                               |   |                            |   |   |   |
| Operating expenses:                                |   |                            |   |   |   |
| Sales and marketing                                |   | 769                             |   | 2,491 |   |
| Product development                                |   | 919                             |   | 2,195 |   |
| General and administrative                         |   | 766                             |   | 1,587 |   |
| Amortization of intangibles                        |   | —                          |   | 1,085 |   |
| Restructuring                                      |   | —                          |   | 1,391 |   |
| Impairment of assets                               |   | —                          |   | 403 |   |
| Total operating expenses                           |   | 2,454                           |   | 9,152 |   |
| Loss from operations                               |   | (854                            | )      | (7,002 | ) |
| Interest expense                                   |   | (69                             | )      | (2,369 | ) |
| Interest and other income and expenses, net        |   | 14                              |   | (35 | ) |
| Gain on sale of Asset Management software business |   | —                          |   | 2,656 |   |
| Net loss                                           |   | (909                            | )      | (6,750 | ) |
| Basic and diluted net loss per share               |   | $                               | (0.02  | ) | $ | (0.16 | ) |
| Weighted average shares - basic and diluted        |   | 52,202                          |   | 40,933 |   |

 

Seenotes to unaudited interim consolidated financial information.

 

3

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**INTRAWARE, INC.****CONSOLIDATED STATEMENTSOF CASH FLOWS****(in thousands)****(unaudited)**

** **
|                                                                         |   | **For the Three Months ended** |   |
|------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                         |   | **May 31, 2003**               |   | **May 31, 2002** |   |
| Cash flows from operating activities:                                        |   |                           |   |   |   |
| Net loss                                                                     |   | $                              | (909   | ) | $ | (6,750 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |   |                           |   |   |   |
| Depreciation and amortization                                                |   | 685                            |   | 1,173 |   |
| Amortization of goodwill and intangibles                                     |   | —                         |   | 1,085 |   |
| Amortization of unearned compensation                                        |   | 12                             |   | 526 |   |
| Provision for doubtful accounts                                              |   | 2                              |   | 18 |   |
| Gain on sale of fixed assets                                                 |   | —                         |   | (2 | ) |
| Gain on sale of Asset Management software business                           |   | —                         |   | (2,656 | ) |
| Warrants adjustment to fair value                                            |   | —                         |   | 38 |   |
| Amortization of discount on note payable                                     |   | —                         |   | 1,845 |   |
| Impairment of assets                                                         |   | —                         |   | 403 |   |
| Amortization of warrant charge offset against  revenue                       |   | —                         |   | 936 |   |
| Options to purchase common stock issued for  services                        |   | —                         |   | 48 |   |
| Changes in assets and liabilities:                                           |   |                           |   |   |   |
| Accounts receivable                                                          |   | 229                            |   | (474 | ) |
| Prepaid licenses, services and cost of deferred  revenue                     |   | 58                             |   | 2,227 |   |
| Other assets                                                                 |   | (256                           | )      | (11 | ) |
| Accounts payable                                                             |   | 112                            |   | (1,250 | ) |
| Accrued expenses                                                             |   | (107                           | )      | 1,089 |   |
| Deferred revenue                                                             |   | (419                           | )      | (1,375 | ) |
| Related party deferred revenue                                               |   | (125                           | )      | — |   |
| Net cash used in operating activities                                        |   | (718                           | )      | (3,130 | ) |
| Cash flows from investing activities:                                        |   |                           |   |   |   |
| Purchases of property and equipment                                          |   | (3                             | )      | (14 | ) |
| Proceeds from sale of Asset Management software  business                    |   | —                         |   | 9,500 |   |
| Proceeds from sale of fixed assets                                           |   | —                         |   | 7 |   |
| Net cash provided by (used in) investment  activities                        |   | (3                             | )      | 9,493 |   |
|                                                                         |   |                           |   |   |   |
| Cash flows from financing activities:                                        |   |                           |   |   |   |
| Principal payments on notes payable                                          |   | —                         |   | (5,700 | ) |
| Bank overdraft                                                               |   | —                         |   | 424 |   |
| Proceeds from common stock and warrants, net of  issuance costs              |   | 86                             |   | 2,261 |   |
| Principal payments on capital lease obligations                              |   | (394                           | )      | (291 | ) |
| Net cash used in financing activities                                        |   | (308                           | )      | (3,306 | ) |
| Net increase (decrease) in cash and cash  equivalents                        |   | (1,029                         | )      | 3,057 |   |
| Cash and cash equivalents at beginning of the  period                        |   | 6,841                          |   | 2,979 |   |
| Cash and cash equivalents at end of the period                               |   | $                              | 5,812  |   | $ | 6,036 |   |
|                                                                         |   |                           |   |   |   |
| Supplemental disclosure of cash flow information:                            |   |                           |   |   |   |
| Cash paid for interest                                                       |   | $                              | 70     |   | $ | 519 |   |
| Supplemental non-cash activity:                                              |   |                           |   |   |   |
| Property and equipment leases                                                |   | $                              | — |   | $ | 16 |   |
| Common stock issued for preferred stock conversion                           |   | $                              | 51     |   | $ | 572 |   |
| Purchases of property and equipment in accounts  payable                     |   | $                              | 130    |   | $ | — |   |

 

Seenotes to unaudited interim consolidated financial information.

 

4

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**INTRAWARE, INC.NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL INFORMATION**

 

**NOTE 1. BASIS OF PRESENTATION**

 

**INTRAWARE**

 

The accompanying unauditedconsolidated financial statements have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted pursuant to these rules andregulations. However, management believes that the disclosures are adequate toensure the information presented is not misleading. The balance sheet atFebruary 28, 2003, has been derived from the audited financial statements, butdoes not include all disclosures required by generally accepted accounting principles.These unaudited consolidated financial statements should be read in conjunctionwith the audited financial statements and notes thereto included in our annualreport on Form 10-K, as amended by Amendment One thereto on Form 10-K/A,****for the fiscal year ended February 28,2003. 

 

In the opinion of management,all adjustments, consisting only of normal recurring items, considerednecessary for a fair presentation have been included in the accompanyingunaudited financial statements. The results of operations for the interimperiods presented are not necessarily indicative of the operating results to beexpected for any subsequent interim period or for the fiscal year endingFebruary 29, 2004. Certain prior period balances have been reclassified to conformto the current period presentation.

 

**NOTE 2. SIGNIFICANT ACCOUNTING POLICIES**

** **

**Revenue recognition**

 

We derive online servicesand technology revenues primarily from electronic software delivery andmanagement (ESDM) services (our SubscribeNet service), from professionalservices, and from the sale of proprietary software licenses and relatedmaintenance. In the past, the proprietary software licenses we sold wereprimarily licenses to use our asset management software; however, we mayrecognize future revenues as a result of our plan to sell licenses for ourproprietary software underlying our SubscribeNet service and relatedmaintenance.

 

We derive alliance and reimbursement revenue from ouralliance agreement with Software Spectrum. The revenue from Software Spectrumconsists of a percentage of the gross profit derived from the sales of Sun ONEsoftware licenses and maintenance services, and reimbursement for the costs ofmaintaining a sales team dedicated to selling Sun ONE software for Software Spectrum.This revenue is recognized as we provide the services to Software Spectrum. Thereimbursement revenue is recognized in accordance with Emerging Issues TaskForce ("EITF") No. 01-14, "Income Statement Characterization ofReimbursements Received for Out-of-Pocket Expenses Incurred," whichgenerally requires that a company recognize as revenue travel expense and otherreimbursable expenses billed to customers. 

 

We derive software product revenues from resoldlicenses and maintenance for multiple business software product lines. We mayrecognize future revenues for complementary SubscribeNet services provided byother third parties but sold through Intraware as part of a comprehensive ESDMbusiness solution.

 

We defer online services andtechnology revenues related to ESDM services (our SubscribeNet service) andrelated professional services and generally recognize them ratably over theterm of the service arrangement. Some SubscribeNet services provided to newcustomers involve significant implementation or customization essential to thefunctionality of our SubscribeNet services. In those cases, we defer revenuerecognition until the services go-live date is reached. The go-live date is thedate on which the essential functionality has been delivered or on which theservices site enters the production environment, or the point at which noadditional customization is required. When we sell additional services related to the original SubscribeNetagreement, revenue is recognized ratably over the remaining term of theagreement, commencing with the delivery of the additional services. The revenueis included in online services and technology.

 

Werecognize revenue when all of the following conditions are met:

 

•           Thereis persuasive evidence of an arrangement;

•           Weprovide the service to the customer or we have made the software available forcustomer download through our website, or shipped the software to the customer;

•           Webelieve that collection of these fees is reasonably assured; and

•           Theamount of fees to be paid by the customer is fixed or determinable.

 

 

We obtain vendor specificobjective evidence of fair value for the maintenance element of the resold andproprietary software arrangements based on historical and contractual renewalrates for maintenance. In such cases, we defer the maintenance revenue at theoutset of the arrangement and recognize it ratably over the period during whichthe maintenance is to be provided (generally 12 months), which normallycommences on the date the software is delivered.

 

**Concentration of credit risk**

 

Financial instruments thatpotentially subject us to a concentration of credit risk consist of cash andcash equivalents and accounts receivable. Cash and cash equivalents aredeposited with high credit quality financial institutions. Deposits in thesefinancial institutions may exceed the amount of insurance, if any, provided onsuch deposits. Our accounts receivable are derived from revenue earned fromcustomers located primarily in the United States of America. We perform ongoingcredit evaluations of our customers' financial conditions and, generally,require no collateral from our customers. We maintain an allowance for doubtfulaccounts receivable based upon our historical experience and the expectedcollectibility of all accounts receivable. 

 

During the three monthsended May 31, 2003 and 2002, two customers accounted for greater than 10% oftotal revenue. During the three months ended May 31, 2003 and 2002, revenuefrom customers that accounted for greater than 10% of total revenue was $1.6million and $1.2 million, respectively.

 

As of May 31 and February28, 2003, two and three customers accounted for greater than 10% of ouraccounts receivable, respectively.

 

5

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## **Net Loss Per Share**

 

Basic net lossper share is computed by dividing the net loss available to common stockholdersfor the period by the weighted average number of common shares outstandingduring the period excluding shares subject to repurchase. Diluted net loss pershare is computed by dividing the net loss available to common stockholders forthe period by the weighted average number of common shares outstanding andpotentially dilutive securities outstanding during the period if the effect isdilutive. Potential common shares are composed of common stock subject torepurchase rights and incremental shares of common stock issuable upon theexercise of stock options and warrants and upon conversion of redeemableconvertible preferred stock.

 

The followingtable sets forth the computation of basic and diluted net loss per share aswell as securities that are not included in the diluted net loss per sharecalculation because to do so would be antidilutive:

 
|                                                                                                                                                                              |   | **For the  three months ended**               |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                                                                                                                                              |   | **May 31,  2003**                             |   | **May 31,  2002** |   |
|                                                                                                                                                                              |   | **(in  thousands, except per share amounts)** |   |
| Numerator:                                                                                                                                                                        |   |                                          |   |   |   |
| Net loss                                                                                                                                                                          |   | $                                             | (909   | ) | $ | (6,750 | ) |
|                                                                                                                                                                              |   |                                          |   |   |   |
| Denominator:                                                                                                                                                                      |   |                                          |   |   |   |
| Weighted average shares                                                                                                                                                           |   | 52,202                                        |   | 40,937 |   |
| Weighted average unvested common shares subject to repurchase                                                                                                                     |   | —                                        |   | (4 | ) |
| Denominator for basic and diluted calculation                                                                                                                                     |   | 52,202                                        |   | 40,933 |   |
| Basic and diluted net loss per share                                                                                                                                              |   | $                                             | (0.02  | ) | $ | (0.16 | ) |
|                                                                                                                                                                              |   |                                          |   |   |   |
| Antidilutive securities including options, warrants, convertible  redeemable preferred stock and unvested common shares subject to repurchase  not included in net loss per share |   | 14,414                                        |   | 14,179 |   |

 

**NOTE 3. STOCK-BASED COMPENSATION**

 

We account forstock-based employee compensation arrangements in accordance with provisions ofAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” (“APB No. 25”) and its related interpretations and comply with thedisclosure provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation” and related SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure.” Under APB No. 25, compensation expenseis based on the difference, if any, on the date of the grant between the fairvalue of our stock and the exercise price of the option. We account for equityinstruments issued to non-employees in accordance with the provisions of SFASNo. 123 and Emerging Issues Task Force (“EITF”) 96-18, “Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or inconjunction with Selling Goods or Services.”

 

The followingtable illustrates the effect on net loss and net loss per share if we hadapplied the fair value recognition provisions of SFAS No. 123, to stock-basedemployee compensation (in thousands, except per share data):

 
|                                                                                                                    |   | **For the  three months ended,** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                                    |   | **May 31,  2003**                |   | **May 31,  2002** |   |
| Net loss                                                                                                                |   | $                                | (909   | ) | $ | (6,750 | ) |
| Add:   Stock-based compensation expense included in reported net loss                                              |   | 12                               |   | 526 |   |
| Deduct:   Total stock-based employee compensation expense determined under fair  value based method for all awards |   | (1,038                           | )      | (1,459 | ) |
| Pro forma                                                                                                               |   | $                                | (1,935 | ) | $ | (7,683 | ) |
| Net loss per share — basic and diluted                                                                             |   |                             |   |   |   |
| As reported                                                                                                             |   | $                                | (0.02  | ) | $ | (0.16 | ) |
| Pro forma                                                                                                               |   | $                                | (0.04  | ) | $ | (0.19 | ) |

 

We calculatedthe fair value and value of each option grant on the date of grant during thethree months ended May 31, 2003 and 2002, respectively, using the Black-Scholesoption pricing model as prescribed by SFAS No. 123 using the followingassumptions:

 

6

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|                      |   | **For the  three months ended,** |   |
|---------------------------|--------|----------------------------------|--------|
|                      |   | **May 31,  2003**                |   | **May 31,  2002** |   |
| Risk-free interest rates  |   | 1.56 - 2.85                      | %      | 3.80 - 4.74 | % |
| Expected lives (in years) |   | 4                                |   | 4 |   |
| Dividend yield            |   | 0                                | %      | 0 | % |
| Expected volatility       |   | 138                              | %      | 152 | % |

 

We calculatedthe fair value of the stock issued under the employee stock purchase plan for thethree months ended May 31, 2003 and 2002, respectively, using the Black-Scholesoption pricing model as prescribed by SFAS No. 123 using the followingassumptions:

 

|                       |   | **April-03** |   | **October-02** |   | **April-02** |   |
|----------------------------|--------|--------------|--------|----------------|--------|--------------|--------|
| Risk-free interest rates   |   | 1.22         | %      | 1.64           | %      | 1.96         | %      |
| Expected lives (in months) |   | 6            |   | 6              |   | 6            |   |
| Dividend yield             |   | 0            | %      | 0              | %      | 0            | %      |
| Expected volatility        |   | 102          | %      | 120            | %      | 151          | %      |

 

**NOTE 4. CHANGES IN STOCKHOLDERS’ EQUITY**

 

During thethree months ended May 31, 2003, our stockholders’ equity changed as follows(in thousands):

 
|                                                         |   | **Common  Stock** |   | **Additional  Paid-In  Capital** |   | **Unearned  Stock-Based  Compensation** |   | **Accumulated  Deficit** |   | **Stockholders’  Equity** |   | **Comprehensive  Loss** |   |
|--------------------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|-----------------------------------------|--------|--------------------------|--------|--------------------------------|--------|-------------------------|--------|
| **Shares**                                                   |   | **Amount**        |
| Balance at February 28, 2003                                 |   | 52,101            |   | 5                                |   | 152,870                                 |   | (32                      | )      | (152,079                       | )      | 764                     |   |   |   |
| Exercise of stock options                                    |   | 37                |   | —                           |   | 26                                      |   | —                   |   | —                         |   | 26                      |   |   |   |
| Issuance of common stock for employee stock purchase program |   | 88                |   | —                           |   | 60                                      |   | —                   |   | —                         |   | 60                      |   |   |   |
|                                                         |   |              |   |                             |   |                                    |   |                     |   |                           |   |                    |   |   |   |
| Amortization of unearned stock-based compensation            |   | —            |   | —                           |   | —                                  |   | 12                       |   | —                         |   | 12                      |   |   |   |
| Conversion of preferred stock into common stock              |   | 84                |   | —                           |   | 51                                      |   | —                   |   | —                         |   | 51                      |   |   |   |
| Net loss                                                     |   | —            |   | —                           |   | —                                  |   | —                   |   | (909                           | )      | (909                    | )      | $ | (909 | ) |
| Other comprehensive loss                                     |   |              |   |                             |   |                                    |   |                     |   |                           |   |                    |   |   |   |
| Total comprehensive loss                                     |   |              |   |                             |   |                                    |   |                     |   |                           |   |                    |   | $ | (909 | ) |
| Balance at May 31, 2003                                      |   | 52,310            |   | $                                | 5      |                                    | $      | 153,007                  |   | $                              | (20    | )                       | $      | (152,988 | ) | $ | 4 |   |   |   |
|                                                              |        |                   |        |                                  |        |                                         |        |                          |        |                                |        |                         |        |  |  |  |  |  |  |  |  |

 

7

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**NOTE 5. ABILITY TO CONTINUE OPERATIONS**

 

Our AnnualReport on Form 10-K, as amended by Amendment One thereto on Form 10-K/A, forour fiscal year ended February 28, 2003, contains a disclosure expressingsubstantial doubt regarding our ability to continue as a going concern as aresult of our recurring losses and negative cash flows from operations.  We narrowed our net loss to $0.9 million forthe three months ended May 31, 2003, as compared to a net loss of $6.8 millionfor the three months ended May 31, 2002. In addition, we reduced our usage of operating cash to approximately$0.7 million for the three months ended May 31, 2003, as compared to $3.1million for the three months ended May 31, 2002. Although the risks thatpotential revenue and collections shortfalls pose to our ability to continue asa going concern diminished in recent months, we continued to experiencerecurring losses and negative cash flows from operations for the three monthsended May 31, 2003.  In addition, thereremains no assurance that we will succeed in generating sufficient revenue toenable us to continue operations over the longer term.

 

Our futurecapital requirements will depend on many factors, including our ability toincrease revenue levels and/or reduce costs of operations to generate positivecash flows, the timing and extent of expenditures to support expansion of salesand marketing efforts, market acceptance of our services, and timeliness ofcollections of our accounts receivable. Any projections of future cash needsare subject to substantial uncertainty. Our ability to generate increasedrevenues and cash flows and, if necessary, raise additional capital is alsosubject to substantial uncertainty, given the challenging economic environmentcurrently prevailing in the technology sector. The bid price of our commonstock has been below $1.00 numerous times over the past 12 months. If we failto meet the $1.00 minimum bid price requirement or the other standards forcontinued listing on the Nasdaq SmallCap Market, our common stock will likelybe delisted and our ability to generate both sales and additional capital willbe subject to further uncertainty.

 

We havehistorically been able to satisfy our cash requirements through revenuescombined with financing and investing activities. Nevertheless, we continued tosuffer recurring losses and negative cash flows from operations for the periodended May 31, 2003, and there is no assurance that we will succeed ingenerating sufficient cash from operations on a regular basis, achievingprofitability, or obtaining additional capital if needed.

 

**NOTE 6. ASSET SALE**

 

In May 2002,we sold substantially all of the assets related to our Asset Managementsoftware business to Computer Associates International, Inc. for approximately$9.5 million in cash. In connection with this sale, our July 2001 agreementwith Computer Associates for its resale of our Argis suite of software productswas terminated. In addition, as part of that asset sale, we assigned toComputer Associates our May 2001 agreement with CorpSoft, Inc. (“CorporateSoftware”) for its resale of our Argis suite of software products. Because ofthe asset sale, Corporate Software’s successor-in-interest, Software Spectrum,Inc., has the right to terminate that agreement. If it does so, all of theshares subject to the warrant that we issued to Corporate Software in May 2001will immediately become exercisable. The fair value of the warrant had beenrecorded as prepaid distribution costs and was being recognized as a reductionof revenue over the lesser of a ratable charge over the 24-month term of theagreement with Corporate Software or the period it took Corporate Software togenerate revenue to Intraware of $1.6 million from Corporate Software’s resaleof our asset management software. As no additional revenue would be generatedfor us under this distribution agreement, the remaining unamortized prepaiddistribution costs of $936,000 were recorded as a reduction to revenue duringthe three months ended May 31, 2002.

 

The totalproceeds from the sale of $9.5 million, less the book value of transferredequipment, intangible assets including goodwill, deferred revenue, andtransaction costs, based on their respective carrying values at the sale date,were recorded as a gain on sale of assets in the quarter ended May 31, 2002.

 

Thecalculation of the gain on the sale was determined as follows (in thousands):

 

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

 

                In connection with our disposition of theAsset Management software business, we announced a restructuring and workforcereduction to reduce our operating expenses. We recorded a charge of $1.8 million relating to this restructuring andthe impairment of assets during the three months ended May 31, 2002.

 

The impairmentof assets includes the write-off of approximately $403,000 in prepaid licensesthat were held for resale. The restructuring charge consisted of approximately$345,000 for severance and benefits relating to the involuntary termination of14 employees who were not hired by Computer Associates. We terminated anadditional 33 employees, all of whom were based in North America. These 33terminated employees were all hired by Computer Associates and thereforereceived no severance payments. Overall, we reduced our workforce to 71employees from 118 in connection with the asset sale to Computer Associates. Ofthe 47 terminated employees, 22 were in Sales and Marketing, 10 were in ProductDevelopment and 15 were directly involved in our product support. We also closedour Pittsburgh, Pennsylvania office and various satellite offices.

 

We accrued forlease and related costs of approximately $983,000, principally pertaining tothe estimated future obligations of non-cancelable lease payments for excessfacilities that were vacated due to our reductions in work force. We alsorecognized $63,000 relating to other restructuring expenses. Due to changes inmanagement’s estimates relating to the restructuring during the three monthsended August 31, 2002, we recognized an additional expense of $106,000pertaining to the estimated future obligations of non-cancelable lease paymentsfor excess facilities that were vacated due to our reductions in work force. Inaddition, we did not incur severance and benefits of $106,000 and reduced thereserve accordingly. During the three months ended February 28, 2003, weterminated our Pittsburgh, Pennsylvania lease and realized a savings ofapproximately $152,000 in rent that would otherwise have been payable, andwhich was included in the restructuring line item on the consolidated statementof operations.

 

In ourDecember 2000 restructuring, we closed our Fremont, California office andassigned 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 monthsended November 30, 2002, we made a cash payment of approximately $214,000 toterminate this lease.

 

The followingtable sets forth an analysis of the components of the restructuring andimpairment of assets charges recorded for the three months ended May 31, 2003,(in thousands):

 
|                                 |   | **Excess  lease  and related costs** |   |
|--------------------------------------|--------|--------------------------------------|--------|
| Reserve balance at February 28, 2003 |   | $                                    | 10     |   |
|                                 |   |                                 |   |
| Cash paid                            |   | (10                                  | )      |
| Reserve balance at May 31, 2003      |   | $                                    | — |   |

 

As of May 31,2003, we have settled all liabilities associated with the May 2002restructuring and sale of the Asset Management software business, subject tothe ongoing indemnification obligation discussed in Note 7.

 

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**NOTE 7. CONTINGENCIES**

 

**Indemnifications**

 

In the courseof our business, we have given indemnities and made commitments and guaranteesunder which we may be required to make payments. These indemnities include:

 

•                  *Intellectual Property Indemnities to Customers.*Ourservice agreements with our customers typically contain provisions thatindemnify our customers for damages and costs resulting from claims allegingthat our services infringe the intellectual property rights of a third party.We have also entered into software license agreements indemnifying thelicensees for damages and costs resulting from claims alleging that thesoftware infringes third-party intellectual property rights. The duration ofthese indemnities is typically unlimited. Our potential payments under these indemnitiesare in some cases limited (e.g., to the fees paid to us under the contract orto another amount) and are in other cases unlimited. Where we have given suchindemnities for third-party software licenses that we resold, we have typicallyreceived similar indemnities from the software publishers. We plan to continueto license software and provide industry-standard indemnities to our licenseesand our service customers.

 

•                  *Intellectual Property Indemnity to Acquiror of AssetManagement Business. *In theMay 2002 sale of our Asset Management software business to Computer AssociatesInternational, Inc. (see Note 6), we agreed to indemnify Computer Associatesfor damages and costs incurred by it in connection with claims alleging thatthe software and technology we sold to them infringes the intellectual propertyrights of third parties. This indemnity will remain in effect until May 2007.Our maximum potential payment under this indemnity is $9.5 million.

 

•                  *Indemnities to Private Investors.*In ourprivate placements of stock, we have made representations and warranties to theinvestors and placement agents, and have agreed to indemnify them for anydamages and costs they incur as a result of our breach of those representationsand warranties. We also have signed registration rights agreements with privateinvestors under which we indemnify them for damages they incur as a result ofour failure to maintain the effectiveness of registration statements. Theduration of our indemnities to our investors under the respective stock andwarrant purchase agreements is two years from the closing, other than thepurchase agreements for our June 2000 warrants and our January 2001 Series APreferred Stock and warrants, which provide for indemnities of unlimited duration.Our indemnities to our investors under the respective registration rightsagreements expire upon termination of our registration obligations, which istypically the date the securities are salable under Rule 144(k) under theSecurities Act of 1933. Our potential payments under these indemnities areunlimited.

 

•                  *Indemnities to Directors and Officers.*Weindemnify our directors and officers for damages and costs incurred in theperformance of their duties, to the extent permitted by Delaware law. The durationof, and our potential payments under, these indemnities are unlimited, subjectto Delaware law.

 

We havehistorically received only a very limited number of requests forindemnification under these agreements and have not been required to makematerial payments under them. Accordingly, we have not recorded a liabilityrelated to these indemnification provisions.

 

**Legal Proceedings**

 

In October2001, we were served with a summons and complaint in a purported securitiesclass action lawsuit. On or about April 19, 2002, we were served with anamended 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, 21MC 92 (SAS) (S.D.N.Y.). The amended complaint is brought purportedly on behalfof all persons who purchased our 

 

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common stock from February 25,1999 (the date of our initial public offering) through December 6, 2000. Itnames as defendants Intraware; three of our present and former officers anddirectors, and several investment banking firms that served as underwriters ofour initial public offering. The complaint alleges liability under Sections 11and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of theSecurities Exchange Act of 1934, on the grounds that the registration statementfor the offerings did not disclose that: (1) the underwriters had agreed toallow certain customers to purchase shares in the offerings in exchange forexcess commissions paid to the underwriters; and (2) the underwriters hadarranged for certain customers to purchase additional shares in the aftermarketat predetermined prices. The amended complaint also alleges that theunderwriters misused their securities analysts to manipulate the price of ourstock. No specific damages are claimed.

 

Lawsuitscontaining similar allegations have been filed in the Southern District of NewYork challenging over 300 other initial public offerings and secondaryofferings conducted in 1999 and 2000. All of these lawsuits have beenconsolidated for pretrial purposes before United States District Court JudgeShira Scheindlin of the Southern District of New York. On July 15, 2002, anomnibus motion to dismiss was filed in the coordinated litigation on behalf ofthe issuer defendants, of which Intraware and its three named current andformer officers and directors are a part, on common pleadings issues. On orabout October 9, 2002, the Court entered and ordered a Stipulation ofDismissal, which dismissed the three named current and former officers anddirectors from the litigation without prejudice. On February 19, 2002, theCourt entered an order denying in part the issuer defendants’ omnibus motion todismiss, including those portions of the motion to dismiss relating toIntraware. No discovery has been served on us to date.  A special committee of our Board recentlyapproved a tentative settlement proposal from plaintiffs.  There is no guarantee that the settlementwill become final, as it is subject to a number of conditions, including courtapproval; however, based on this proposed settlement, we do not believe we willsuffer material future losses related to this lawsuit and therefore have notaccrued for any losses.

 

On February28, 2003 a purported securities class action lawsuit, *Liu v. Credit Suisse First Boston et al.,*wasfiled in the United States District Court, Southern District of Florida. Thedefendants were Credit Suisse Group, several of Credit Suisse Group’s currentand former directors and officers, and several public companies and certain oftheir current and former directors and officers, including Intraware and itschief executive officer and former chief financial officer. The suit allegedthat the defendants engaged in a scheme to under-price initial public offeringsand then artificially inflate prices of those stocks in the aftermarket, inviolation of Florida blue sky law, Sections 11, 12 and 15 of the Securities Actof 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, andthe common law of fraud and negligence. The suit sought unspecified damages,restitution, and injunctive relief.  OnJune 19, 2003, the plaintiffs filed an amended complaint, dismissing Intrawareand its chief executive officer and former chief financial officer from thislawsuit without prejudice.  Based onthis dismissal, we do not believe we will suffer material future losses relatedto this lawsuit and therefore have not accrued for any losses.

 

We are alsosubject to legal proceedings, claims and litigation arising in the ordinarycourse of business. We do not expect that the ultimate costs to resolve thesematters will have a material adverse effect on our consolidated financialposition, results of operations, or cash flows.

 

**NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS**

 

In July 2002,the Financial Accounting Standards Board (‘‘FASB’’) issued SFAS No. 146,‘‘Accounting for Costs Associated with Exit or Disposal Activities.’’ SFAS No.146 nullifies the guidance in EITF Issue No. 94-3, ‘‘Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).’’ Under EITF Issue No.94-3, an entity recognized a liability for an exit cost on the date that theentity committed itself to an exit plan. In SFAS 146, the FASB acknowledgesthat an entity’s commitment to a plan does not, by itself, create a presentobligation to other parties that 

 

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meets the definition of aliability and requires that a liability for a cost that is associated with anexit or disposal activity be recognized when the liability is incurred. It alsoestablishes that fair value is the objective for the initial measurement of theliability. SFAS 146 was effective for exit or disposal activities that areinitiated after December 31, 2002.  Weadopted SFAS No. 146 on January 1, 2003, and the adoption did not have amaterial impact on our financial position or results of operations.

 

In November2002, the Emerging Issues Task Force (“EITF”) reached a consensus on issue No.00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF00-21”) on a model to be used to determine when a revenue arrangement withmultiple deliverables should be divided into separate units of accounting and,if separation is appropriate, how the arrangement consideration should beallocated to the identified accounting units. The EITF also reached a consensusthat this guidance should be effective for all revenue arrangements enteredinto in fiscal periods beginning after June 15, 2003. We are currentlyassessing what the impact of the guidance would have on our financial statements.

 

In January2003, the FASB issued FIN 46, ‘‘Consolidation of Variable Interest Entities.’’In general, a variable interest entity is a corporation, partnership, trust, orany other legal structure used for business purposes that either (a) does nothave equity investors with voting rights or (b) has equity investors that donot provide sufficient financial resources for the entity to support itsactivities. FIN 46 requires certain variable interest entities to beconsolidated by the primary beneficiary of the entity if the investors do nothave the characteristics of a controlling financial interest or do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties. The consolidationrequirements of FIN 46 apply immediately to variable interest entities createdafter January 31, 2003. The consolidation requirements apply to older entitiesin interim periods beginning after June 15, 2003. Certain of the disclosurerequirements apply to all financial statements issued after January 31, 2003,regardless of when the variable interest entity was established.  Since we do not have an interest in variableinterest entities, our adoption of FIN 46 in Jaunary 2003 did not have a materialimpact on our financial position or results of operations.

 

In May 2003,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standard (“SFAS”) No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity” (“SFAS No.150”). SFAS No. 150 establishes standards for the classification andmeasurement of financial instruments with characteristics of both liabilitiesand equity. This statement is effective for financial instruments entered intoor modified after May 31, 2003, and is otherwise effective at the beginning ofthe first interim period beginning after June 15, 2003, or our third quarter ofour fiscal year 2004. We are currently assessing what the impact of the guidancewould have on our financial statements.

 

**NOTE 9. REDEEMABLE CONVERTIBLE PREFERREDSTOCK**

 

We areauthorized, subject to limitations prescribed by Delaware law, to provide forthe issuance of preferred stock in one or more series, to establish from timeto 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 anyqualifications, limitations or restrictions thereon, and to increase ordecrease the number of shares of any such series (but not below the number ofshares of such series then outstanding) without any further vote or action bythe stockholders.

 

RedeemableConvertible Preferred Stock (Preferred Stock) activity for the three monthsended May 31, 2003, was as follows (in thousands):

 
|                                                        |   | **Preferred  Stock** |   |
|-------------------------------------------------------------|--------|----------------------|--------|
|                                                        |   | **Shares**           |   | **Amount** |   |
| Balance at February 28, 2003                                |   | 1,347                |   | $ | 2,473 |   |
| Conversion of Series B-1 Preferred Stock  into common stock |   | (7                   | )      | (51 | ) |
| Balance at May 31, 2003                                     |   | 1,340                |   | $ | 2,422 |   |

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The followingdiscussion of our financial condition and results of operations should be readin conjunction with our consolidated financial statements and related notesincluded in our Annual Report on Form 10-K, as amended by Amendment One theretoon Form 10-K/A, for the fiscal year ended February 28, 2003.  This discussion contains forward-lookingstatements that involve risks and uncertainties. Forward-looking statementsinclude statements regarding our future cash and liquidity position, the extentand timing of future revenues and expenses and customer demand, the deploymentof our products and services, and our reliance on third parties. Allforward-looking statements included in this document are based on informationavailable to us as of the date hereof, and we assume no obligation to updateany forward-looking statement. Our actual results could differ materially fromthose anticipated in these forward-looking statements as a result of certainfactors, including but not limited to, those discussed in “Risk Factors” belowand elsewhere in this Quarterly Report on Form 10-Q.

 

**INTRAWARE OVERVIEW**

 

Intraware,Inc. was incorporated in Delaware on August 14, 1996. We are a leading providerof global electronic software delivery and management (ESDM) solutions. OurESDM solutions help software publishers reduce operational and support costs,increase customer satisfaction and retention, accelerate and strengthensoftware revenue recognition processes, and comply with U.S. exportregulations. We also offer complementary products and services, includingenterprise software sales and marketing, and global web-based content cachingand delivery.

 

We have alimited operating history upon which investors may evaluate our business andprospects. Since inception, we have incurred significant losses, and, as of May31, 2003, had an accumulated deficit of approximately $153 million. We expectto incur additional net losses during our fiscal year ending February 29, 2004.There can be no assurance that our gross profit will increase or continue atits current level. There also can be no assurance that we will generate cashfrom operations in future periods, or achieve or maintain profitability, orthat we will be able to finance our operations without raising additionalcapital.

 

Our futuremust be considered in light of our liquidity issues and the risks frequentlyencountered by companies in an early stage of development, particularlycompanies in new and rapidly evolving markets such as Internet-based services.To address these risks, we must, among other things, continue to develop newservices, implement and successfully execute our business and marketingstrategy, continue to develop and upgrade our technology, provide superiorcustomer service, respond to competitive developments and attract, retain andmotivate qualified personnel. We may also be required to raise additionalcapital. There can be no assurance we will be successful in addressing thoserisks, and our failure to do so would have a material adverse effect on us. Ourcurrent and future expense levels are based largely on our planned operationsand estimates of future sales. Sales and operating results generally depend onthe volume and timing of orders received, which are difficult to forecast,particularly in the current business environment. We may be unable to adjustspending in a timely manner to compensate for any unexpected revenue shortfall.Accordingly, any significant shortfall in sales would have an immediate adverseeffect on us and our cash flows. In view of the rapidly evolving nature of ourbusiness and our limited operating history, we are unable to accuratelyforecast our sales and believe that period-to-period comparisons of ouroperating results are not necessarily meaningful and should not be relied uponas an indication of future performance.

 

**Critical Accounting Policies and Estimates**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses our consolidated financial statements, which have been prepared inaccordance with generally accepted accounting principles in the United Statesof America. The preparation of these financial statements requires managementto make estimates and assumptions affecting the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial

 

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statements and the reportedamounts of revenues and expenses during the reporting period. On an ongoingbasis, management evaluates its estimates and judgments. We base our estimatesand judgments on historical experience and on various other factors believed tobe reasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

 

We consider accountingpolicies related to revenue recognition, prepaid licenses, allowance fordoubtful accounts, goodwill and intangibles, and income taxes to be criticalaccounting policies due to the estimation process involved in each.

 

*Revenuerecognition*

 

Online services andtechnology revenue results primarily from three types of arrangements.  First, it results from sales of ourSubscribeNet electronic software delivery and management service to softwarevendors and other companies that distribute software as part of their business.Second, it results from the sale of our proprietary software licenses andrelated maintenance to companies using those products internally or using thoseproducts to provide web-based services to their customers. Third, it resultsfrom professional services that we provide to integrate our proprietarysoftware, to convert data for customers, and to customize our SubscribeNetservice for individual customer needs. As a result of the sale of our Asset Management software business inMay 2002 (discussed below in Results of Operations), we are not currentlyderiving significant revenue from licenses for our proprietary software;however, we may recognize future revenues as a result of our plan to selllicenses for our proprietary software underlying our SubscribeNet service andrelated maintenance. We sell our SubscribeNet service and our proprietarysoftware licenses primarily through our direct sales force or throughauthorized resellers.

 

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

 

We derive software productrevenues from resold licenses and maintenance for multiple business softwareproduct lines. Although as of July 1, 2001, we no longer resell thirdparty software licenses and maintenance, we will continue to recognize revenuefrom third party software licenses and related maintenance contracts over thelife of the arrangements made prior to July 1, 2001. Vendor specificobjective evidence of fair value for the maintenance element of the resoldsoftware arrangements is based on historical and contractual renewal rates formaintenance. We defer the maintenance revenue at the outset of the arrangementand recognize it ratably over the period during which the maintenance is to beprovided (generally 12 months), which normally commences on the date thesoftware is delivered.

 

We defer services revenuerelated to our SubscribeNet service and generally recognize it ratably over theterm of the service arrangement. Professional service fees revenue related toour SubscribeNet service is deferred until completion of the professionalservices, then recognized ratably over the remaining term of the servicearrangement.

 

We recognize revenue whenall of the following conditions are met:

 

•                  There is persuasive evidence of anarrangement;

•                  We provide the service to the customer or wehave made the software available for customer download through our web site, orshipped the software to the customer;

•                  We believe that collection of these fees isprobable; and

•                  The amount of fees to be paid by the customeris fixed or determinable.

 

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Revenue from transactionsthrough authorized resellers has been recognized when the licenses andmaintenance have been resold, utilized by the reseller or our relatedobligations have been satisfied. We provided for sales allowances forauthorized resellers and direct sales on an estimated basis. This estimationwas based on prior history as well as contractual requirements. Vendor specificobjective evidence of fair value for the maintenance element of the proprietarysoftware arrangements is based on historical and contractual renewal rates formaintenance. We defer the maintenance revenue at the outset of the arrangementand recognize it ratably over the period during which the maintenance is to beprovided (generally 12 months), which normally commences on the date thesoftware is delivered.

 

As mentioned above, adetermination that the collection of fees is probable is a precursor torecognizing revenue. Determination of collectibility of payments requiresjudgment on the part of management and includes performing periodic creditevaluations of customers (see “Allowance for doubtful accounts” below).

 

*Prepaidlicenses*

 

We write down our prepaidlicenses for estimated obsolescence equal to the difference between the cost ofthe prepaid licenses and the estimated recoverable value based on assumptionsabout future demand, market conditions and our rights to return under stockrotation agreements. If actual future demand or market conditions are lessfavorable than those we project, additional prepaid license write-downs may berequired. These prepaid licenses were originally obtained as a result of ourthird party reseller business. As of July 1, 2001, we ceased resellingthird party software licenses (see “Revenue recognition” above).  During the three months ended May 31,2002 and 2003, we recorded approximately $403,000 and zero in prepaid licensewrite-downs, respectively.

 

*Allowancefor doubtful accounts*

 

We maintain an allowance fordoubtful accounts for estimated losses from our inability to collect requiredpayments from our customers. We analyze specific accounts receivable,historical bad debts, customer concentrations, customer credit-worthiness,current economic trends and changes in our customer payment history whenevaluating the adequacy of the allowance for doubtful accounts. Changes in theabove factors could have a material impact on actual bad debts incurred.

 

*Goodwilland intangibles*

 

As discussed in Note 1 ofour “Notes to Consolidated Financial Statements” in our Annual Report on Form10-K, as amended by Amendment One thereto on Form 10-K/A, for the year endedFebruary 28, 2003, we are required to regularly review all of ourlong-lived assets, including goodwill and other intangible assets, forimpairment whenever events or changes in circumstances indicate that thecarrying value may not be recoverable. Factors we consider important whichcould trigger an impairment review include, but are not limited to, significantunderperformance relative to historical or projected future operating results,significant changes in the manner of use of the acquired assets or the strategyfor our overall business, significant negative industry or economic trends, a significantdecline in our stock price for a sustained period, and our marketcapitalization relative to net book value. When we determine that an impairmentreview for intangible and long-lived assets is necessary based upon theexistence of one or more of the above indicators of impairment, we compare thebook value of such assets to the future undiscounted cash flows attributable tothose assets. If the book value is greater than the future undiscounted cashflows, we measure any impairment based on a projected discounted cash flowmethod using a discount rate commensurate with the risk inherent in our currentbusiness model. When we determine an impairment review of goodwill is necessarybased 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 thereporting unit. If the carrying value of the reporting unit is greater than thefair value of the reporting unit, an impairment may be necessary. Significantjudgment is required in the development of projected cash flows for thesepurposes including assumptions regarding the appropriate level of aggregationof cash flows, their term and discount rate as well as the underlying forecastsof expected future revenue and expense. During fiscal year 2003, our remaininggoodwill and intangibles were included in our calculation

 

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of the gain on sale of our Asset Managementsoftware business, as discussed in Note 13 of our “Notes to ConsolidatedFinancial Statements” in our Annual Report on Form 10-K, as amended byAmendment One thereto on Form 10-K/A, for the year ended February 28,2003.

 

*Incometaxes*

 

In conjunction withpreparing our financial statements, we must estimate our income taxes in eachof the jurisdictions in which we operate. This process involves estimating ouractual current tax expense together with assessing temporary differencesresulting from differing treatment of items for tax and accounting purposes.These differences result in deferred tax assets and liabilities. We must thenassess the likelihood that our deferred tax assets will be recovered fromfuture taxable income and to the extent we believe that recovery is not likely,we must establish a valuation allowance. Given that we have incurred lossessince inception and therefore have not been required to pay income taxes, wehave fully reserved our deferred tax assets at February 28, 2003. In theevent that we are able to realize our deferred tax assets in the future, anadjustment to the deferred tax asset would increase income in the period thatthis is determined.

 

**RESULTS OFOPERATIONS**

 

**Totalrevenue**

 

Revenue decreased to $ 2.8million for the three months ended May 31, 2003, from $4.5 million for thethree months ended May 31, 2002. For the three months ended May 31,2003, software product revenue accounted for $0.1 million or 4% of revenue,compared to $1.7 million or 39% of revenue for the three months endedMay 31, 2002. Online services and technology and related party onlineservices and technology revenue for the three months ended May 31, 2003,accounted for $1.8 million or 65% of revenue compared to $1.7 million or 37% ofrevenue for the three months ended May 31, 2002.  Alliance and reimbursement revenue for the three months ended May31, 2003, accounted for $0.9 million or 31% of revenue compared to $1.1 millionor 24% of revenue for the three months ended May 31, 2002.

 

The increase in onlineservices and technology and related party online service and technology revenuefor the three months ended May 31, 2003, is primarily due to theacquisition of additional SubscribeNet customers since May 31, 2002.  The increase in online services and technologyrevenue from these new customers was partially offset by a reduction in onlineservices and technology revenue under our services agreement with SunMicrosystems, Inc.  As of March 31,2003, Sun no longer receives the SubscribeNet service.  The portion of that agreement related to ourelectronic fulfillment of initial Sun software license sales will remain ineffect through June 2004; however, the fees payable by Sun for ourfulfillment services have been reduced substantially effective March 1,2003.  We expect our online services andtechnology revenue and related party online services and technology revenue toincrease on a full fiscal year basis, primarily as a result of the acquisitionof additional customers, an increase in total fees from existing customersthrough increased use of our services, and the introduction of new products andservices. The previous sentence is a forward-looking statement and actualresults could differ materially from those anticipated. In particular, ourexpected growth in revenue from the introduction of new products and servicesis subject to the risk that these new products and services may not beintroduced in a timely manner, or may be canceled altogether, or even if theyare introduced, customers may not be willing to buy them (see “Risk Factors”beginning on page 23 below).

 

Alliance and reimbursementrevenue primarily relates to our alliance agreement with Software Spectrum forsales of Sun ONE software licenses and maintenance. The revenue from SoftwareSpectrum consists of a percentage of the gross profit derived from the sales ofSun ONE software licenses and maintenance services, and reimbursement for thecosts of maintaining a sales team dedicated to selling Sun ONE software forSoftware Spectrum.  The decrease inalliance and reimbursement revenue for the three months ended May 31,2003, is primarily due to reduced sales of Sun ONE software licenses and

 

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maintenance services.  We expect our alliance and reimbursementrevenues in our fiscal year 2004 to be at approximately the same level as, orat a slightly lower level than, those in our three months ended May 31,2003. The previous sentence is a forward-looking statement and actual resultscould differ materially from those anticipated.

 

The decline in softwareproduct revenue and the majority of the decline in total revenue for the threemonths ended May 31, 2003, was due to our transition out of the businessof reselling third-party software products and related maintenance. We expectour exited third-party product revenue to continue to decrease. However, we mayrecognize future revenues from products and services complementary to ourSubscribeNet service which originate with other companies and are sold tocustomers through us as part of a comprehensive ESDM business solution. Theprevious two sentences are forward-looking statements and actual results coulddiffer materially from those anticipated.

 

##### **Costof Revenues**

##### ** **

Total cost of revenuesdecreased to $1.2 million for the three months ended May 31, 2003, from$2.4 million for the three months ended May 31, 2002. The decrease in costof revenues is primarily due to the phasing out of our software resellerbusiness.

 

Our gross margin increasedto 57% for the three months ended May 31, 2003, from 48% for the threemonths ended May 31, 2002. The margin percentage increase primarilyreflects our focus on the sale of our own services and technology, whichgenerate higher margins than third-party products we resold.

 

Costs of revenues primarilyconsist of certain allocated costs related to our Internet connectivity, assetssupporting costs of revenues, and customer support, as well as the costsassociated with maintaining our sales team dedicated to selling Sun ONEsoftware for which Software Spectrum reimburses us. Costs of revenues alsoconsist of professional services personnel costs and the cost of third-partyproducts sold. We purchased third-party products at a discount to thethird-party’s established list prices according to standard reseller terms. Weexpect our overall costs of revenues to decrease from, and gross profit marginpercentage to increase, over our fiscal year 2003 levels. However, the actualmix of sales transactions and the timing of the transactions may cause our costof revenues and gross profit margins to fluctuate materially from thoseanticipated.

 

##### **Salesand Marketing Expenses**

##### ** **

For the three months endedMay 31, 2003, sales and marketing expenses were $0.8 million or 27% ofrevenue, a decrease from $2.5 million or 55% of revenue for the three monthsended May 31, 2002.

 

Sales and marketing expensesconsist primarily of employee salaries, benefits and commissions, advertising,promotional materials and trade show expenses. The decrease in the dollaramount and percentage of revenue of our sales and marketing expenses is due toour restructuring efforts and the sale of our Asset Management softwarebusiness in May 2002, which reduced expenditures on salaries andmarketing, eliminated rent on closed offices and lowered commission expense dueto lower sales.

 

We plan to invest in salesand marketing at levels lower than our fiscal year 2003 levels as a percentageof revenue. We plan to continue to market and sell our service and proprietarysoftware licenses directly to customers using our existing sales force. We alsoplan to continue to develop additional business relationships to sell ourservices to a broader customer base. The previous three sentences areforward-looking statements and actual results could differ materially fromthose anticipated.

 

**ProductDevelopment Expenses**

 

For the threemonths ended May 31, 2003, product development expenses were $0.9 millionor 33% of revenue, a decrease from $2.2 million or 49% of revenue for the threemonths ended May 31, 2002.

 

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Product development expensesprimarily consist of personnel, consulting, software and related maintenanceand equipment depreciation expenses. Costs related to research, design anddevelopment of products and services have been charged to product developmentexpense as incurred. The decrease in the dollar amount and percentage ofrevenue of our product development expenses is due to our restructuring effortsand the sale of our Asset Management software business in May 2002, whicheliminated expenditures on salaries and consulting fees for Asset Managementsoftware development personnel, and reduced software and related maintenanceand equipment depreciation expenses through the sale or retirement of softwareand equipment.  We anticipate continuingto invest in additional functionality for our SubscribeNet service andunderlying proprietary software. However, we expect those investments tofluctuate over time, and expect our product development expenses to fluctuateaccordingly. Total product development expenditures are expected to be lower infiscal year 2004 than fiscal year 2003 levels as a percentage of revenue. Wecannot give assurance that our product development efforts will result inproducts, features or functionality or that the market will accept theproducts, features or functionality developed.

 

##### **Generaland Administrative Expenses**

##### ** **

For the three months endedMay 31, 2003, general and administrative expenses were $0.8 million or 27%of revenue, a decrease from $1.6 million or 35% of revenue for the three monthsended May 31, 2002.

 

General and administrativeexpenses consist primarily of compensation for administrative and executivepersonnel, facility costs and fees for professional services. A significantpart of the decrease in our general and administrative expenses stems from ourrestructuring efforts in May 2002, which resulted in a reduction incompensation expense and lease costs for office space, and from the recoveryduring the three months ended May 31, 2003 of accounts previously writtenoff during our 2001 fiscal year as uncollectible. Total expenditures areexpected to be higher than fiscal year 2003 levels in total and as a percentageof revenue, partly because we do not expect significant recovery in the currentfiscal year of accounts previously written off as uncollectible. The previoussentence is a forward-looking statement and actual results could differmaterially from those anticipated.

 

##### **May 2002Restructuring and Sale of Asset Management Software Business**

 

In May 2002, we soldsubstantially all of the assets related to our Asset Management softwarebusiness to Computer Associates International, Inc. for approximately $9.5million in cash. In connection with this sale, our July 2001 agreementwith Computer Associates for its resale of our Argis suite of software productswas terminated. In addition, as part of that asset sale, we assigned toComputer Associates our May 2001 agreement with Corporate Software (nowSoftware Spectrum) for its resale of our Argis suite of software products.Because of the asset sale, Software Spectrum has the right to terminate thatagreement. If it does so, all of the shares subject to the warrant that weissued to Software Spectrum in May 2001 will immediately become exercisable.The fair value of the warrant had been recorded as prepaid distribution costsand was being recognized as a reduction of revenue over the lesser of a ratablecharge over the 24-month term of the agreement with Software Spectrum or theperiod it took Software Spectrum to generate revenue to Intraware of $1.6million from Software Spectrum’s resale of our asset management software. As aresult of the asset sale, the remaining unamortized prepaid distribution costsof $936,000 were recorded as a reduction to revenue during the three monthsended May 31, 2002.

 

The total proceeds from thesale of $9.5 million, less the book value of transferred equipment, intangibleassets, goodwill, deferred revenue, and transaction costs, based on theirrespective carrying values at the sale date, were recorded as a gain on sale ofassets in the quarter ended May 31, 2002.

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

 

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In connection with ourdisposition of the Asset Management software business, we announced arestructuring and workforce reduction to reduce our operating expenses. Werecorded a charge of $1.8 million relating to this restructuring and theimpairment of assets during the three months ended May 31, 2002. Theimpairment of assets includes the write-off of approximately $403,000 inprepaid licenses that were held for resale. The restructuring charge consistedof approximately $345,000 for severance and benefits relating to theinvoluntary termination of 14 employees who were not hired by ComputerAssociates. We terminated an additional 33 employees, all of whom were based inNorth America. These 33 terminated employees were all hired by ComputerAssociates and therefore received no severance payments. Overall, we reducedour workforce to 71 employees from 118 in connection with the asset sale toComputer Associates. Of the 47 terminated employees, 22 were in Sales andMarketing, 10 were in Product Development and 15 were directly involved in ourproduct support. We also closed our Pittsburgh, Pennsylvania office and varioussatellite offices.

 

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

 

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

 

The following table setsforth an analysis of the components of the restructuring and impairment ofassets charges recorded for the three months ended May 31, 2003, (inthousands):

 
|                                       |   | **Excess lease  and related costs** |   |
|--------------------------------------------|--------|-------------------------------------|--------|
|                                       |   |                                |   |
| Reserve  balance at February 28, 2003 |   | $                                   | 10     |   |
|                                       |   |                                |   |
| Cash  paid                                 |   | (10                                 | )      |
| Reserve  balance at May 31, 2003      |   | $                                   | — |   |

 

As of May 31, 2003, wehave settled all liabilities associated with the May 2002 restructuringand sale of Asset Management business, subject to the ongoing indemnificationobligation discussed in Note 7 of our “Notes to Consolidated FinancialStatements” in this Quarterly Report on Form 10-Q.

 

##### **Amortizationof Intangibles**

##### ** **

For the three months endedMay 31, 2003, amortization of intangibles was zero, a decrease from $1.1million for the three months ended May 31, 2002.

 

Amortization of intangiblesrelated to our acquisitions of BitSource, Inc. in October 1999 and JanusTechnologies, Inc. in July 2000. On March 1, 2002, we ceasedamortization of our goodwill balance.

 

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Subsequently, in May 2002, as part ofour Asset Management software business sale to Computer Associates, we includedour remaining intangible assets and goodwill in the determination of the gainon sale.

 

##### **InterestExpense**

##### ** **

For the three months endedMay 31, 2003, interest expense was $69,000, a decrease from $2.4 millionfor the three months ended May 31, 2002.

 

Interest expense relates toobligations under capital leases and notes payable. The decrease in interestexpense from May 31, 2002, is primarily the result of accrued interest andaccretion to redemption value related to our $7.0 million in notes payable,which were fully converted or paid off at May 31, 2002.

 

##### **Interestand Other Income and Expenses, Net**

##### ** **

For the three months endedMay 31, 2003, interest and other income and expenses, net was a $14,000credit, an increase from a net charge of $35,000 for the three months endedMay 31, 2002.

 

Interest and other incomeand expenses, net primarily relates to interest earned on our investment balancesand warrants recorded as liabilities adjusted to fair value. The decrease ininterest and other income and expenses, net for the three months endedMay 31, 2003, is primarily the result of charges we recorded during thethree months ended May 31, 2002, to adjust the warrants we issued inconnection with our August 31 and September 20, 2001 andMay 2002 financings, which were classified as liabilities, to fair value.The charge recorded to adjust the warrants to fair value during the threemonths ended May 31, 2002, was approximately $38,000. All warrants havebeen reclassified to permanent equity and will no longer be adjusted to fairvalue.

 

##### **IncomeTaxes**

##### ** **

From inception throughFebruary 28, 2003, we incurred net losses for federal and state tax purposesand have not recognized any tax provision or benefit. As of February 28,2003, we had approximately $125 million of federal and $58 million of state netoperating loss carryforwards available to offset future taxable income, whichexpire in varying amounts between 2012 and 2022. Because of cumulativeownership changes, federal loss carry forwards totaling approximately $93million and state loss carry-overs totaling approximately $43 million aresubject to limitation. At February 28, 2003, $32 million and $15 millionof federal and state net operating losses, respectively, were available,without limitation to offset future taxable income. Should there be a change ofownership in the future, the available net operating losses may be furtherlimited. Given our limited operating history, losses incurred to date and thedifficulty in accurately forecasting our future results, management does notbelieve that the realization of the related deferred income tax asset meets thecriteria required by generally accepted accounting principles. Accordingly, wehave recorded a 100% valuation allowance.

 

**Liquidityand Capital Resources**

 

Since inception, we havefinanced our operations primarily through private sales of preferred stock andcommon stock, the initial public offering of our common stock and the issuanceof debt. We will continue to use our capital raised to date to support ouroperations until we become cash flow positive on a regular basis. While we havemade progress toward becoming cash flow positive, there can be no assurancethat we will be successful in becoming regularly cash flow positive withoutadditional capital financing or at all.

 

Our cash and cashequivalents at May 31, 2003, were $5.8 million, a decrease of $1.0 millionfrom $6.8 million at February 28, 2003. This decrease was due to $0.7million used in operating activities and $0.3 million used in financingactivities.

 

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The net cash used inoperating activities of $0.7 million for the three months ended May 31,2003, was primarily due to our net loss, offset by decreases in accountsreceivable and increases in accounts payable. Financing activities used $0.3million for the three months ended May 31, 2003, primarily due to paymentsagainst our capital lease obligations.

 

Our AnnualReport on Form 10-K, and Amendment One thereto on Form 10-K/A, for our fiscalyear ended February 28, 2003, contain a disclosure expressing substantialdoubt regarding our ability to continue as a going concern as a result of ourrecurring losses and negative cash flows from operations. We narrowedour net loss attributable to common stockholders to $0.9 million for the threemonths ended May 31, 2003, as compared to a net loss attributable tocommon stockholders of $6.8 million for the three months ended May 31,2002.  In addition, we reduced ouroperating cash burn to approximately $0.7 million for the three months endedMay 31, 2003, as compared to $3.1 million for the three months endedMay 31, 2002. Although the risks that potential revenue andcollections shortfalls pose to our ability to continue as a going concerndiminished, we continued to experience recurring losses and negative cash flowsfrom operations for the three months ended May 31, 2003. In addition,there remains no assurance that we will succeed in generating sufficientrevenue to enable us to continue operations over the longer term.

 

Our futurecapital requirements will depend on many factors, including our ability toincrease revenue levels and/or reduce costs of operations to generate positivecash flows, the timing and extent of expenditures to support expansion of salesand marketing efforts, market acceptance of our services, and timeliness ofcollections of our accounts receivable. Any projections of our future cashneeds are subject to substantial uncertainty. Our ability to generate increasedrevenues and cash flows and, if necessary, raise additional capital is alsosubject to substantial uncertainty, given the challenging economic environmentcurrently prevailing in the technology sector. The bid price of our commonstock has been below $1.00 numerous times over the past 12 months. If we failto meet the $1.00 minimum bid price requirement or the other standards forcontinued listing on the Nasdaq SmallCap Market, our common stock will likelybe delisted and our ability to generate both sales and additional capital willbe subject to further uncertainty.

 

We have historically beenable to satisfy our cash requirements through financing and investingactivities, and our cash position and net losses from operations have improvedsubstantially during the three months ended May 31, 2003.  Nevertheless, we continued to sufferrecurring losses and negative cash flows from operations for that period, andthere is no assurance that we will succeed in generating sufficient cash fromoperations on a regular basis, achieving profitability, or obtaining additionalcapital if needed.

 

At May 31, 2003, we didnot have any other relationships with unconsolidated entities or financialpartnerships, such as entities often referred to as structured finance orspecial purpose entities, which would have been established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes. As such, we are not materially exposed to any financing,liquidity, market or credit risk that could arise if we had engaged in suchrelationships.

 

The following summarizes ourlease obligations at May 31, 2003, and the effect such obligations areexpected to have on our liquidity and cash flow in future periods (inthousands):

 

 
|                       |   | **Payments  due by period** |   |
|----------------------------|--------|-----------------------------|--------|
|                       |   | **2004**                    |   | **2005** |   | **2006** |   | **Total** |   |
| Capital  lease obligations |   | $                           | 1,251  |   | $ | 950 |   | $ | — |   | $ | 2,201 |   |
| Operating  leases          |   | 402                         |   | 561 |   | 284 |   | 1,247 |   |
|                       |   | $                           | 1,653  |   | $ | 1,511 |   | $ | 284 |   | $ | 3,448 |   |

 

As of May 31, 2003, ourRedeemable Convertible Preferred Stock had a liquidation value of $2.8 million.

 

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**RecentAccounting Pronouncements**

 

In July 2002, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” SFAS No. 146 nullifies theguidance in EITF Issue No. 94-3, “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring).” Under EITF Issue No. 94-3, anentity recognized a liability for an exit cost on the date that the entitycommitted itself to an exit plan. In SFAS 146, the FASB acknowledges that anentity’s commitment to a plan does not, by itself, create a present obligationto other parties that meets the definition of a liability and requires that aliability for a cost that is associated with an exit or disposal activity be recognizedwhen the liability is incurred. It also establishes that fair value is theobjective for the initial measurement of the liability. SFAS 146 was effectivefor exit or disposal activities that are initiated after December 31,2002.  We adopted SFAS No. 146 onJanuary 1, 2003, and the adoption did not have a material impact on ourfinancial position or results of operations.

 

In November 2002, theEmerging Issues Task Force (“EITF”) reached a consensus on issue No. 00-21,“Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”)on a model to be used to determine when a revenue arrangement with multipledeliverables should be divided into separate units of accounting and, ifseparation is appropriate, how the arrangement consideration should beallocated to the identified accounting units. The EITF also reached a consensusthat this guidance should be effective for all revenue arrangements enteredinto in fiscal periods beginning after June 15, 2003. We are currentlyassessing what the impact of the guidance would have on our financialstatements.

 

InJanuary 2003, the FASB issued FIN 46, ‘‘Consolidation of Variable InterestEntities.’’ In general, a variable interest entity is a corporation,partnership, trust, or any other legal structure used for business purposesthat either (a) does not have equity investors with voting rights or (b) hasequity investors that do not provide sufficient financial resources for theentity to support its activities. FIN 46 requires certain variable interestentities to be consolidated by the primary beneficiary of the entity if theinvestors do not have the characteristics of a controlling financial interestor do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. The consolidation requirements of FIN 46 apply immediately to variableinterest entities created after January 31, 2003. The consolidationrequirements apply to older entities in interim periods beginning afterJune 15, 2003. Certain of the disclosure requirements apply in allfinancial statements issued after January 31, 2003, regardless of when thevariable interest entity was established. Since we do not have interest invariable interest entities, our adoption of FIN 46 in January 2003 did not havea material impact on our financial position or results of operations.

 

InMay 2003, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standard (“SFAS”) No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity” (“SFAS No. 150”). SFAS No. 150 establishes standards for theclassification and measurement of financial instruments with characteristics ofboth liabilities and equity. This statement is effective for financialinstruments entered into or modified after May 31, 2003, and is otherwiseeffective at the beginning of the first interim period beginning afterJune 15, 2003, or our third quarter of our fiscal year 2004. We arecurrently assessing what the impact of the guidance would have on our financialstatements.

 

 

 

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**RISK FACTORS**

 

You should carefullyconsider the risks described below before making a decision to invest in ourcommon stock. The risks and uncertainties described below are not the only onesfacing Intraware. Additional risks and uncertainties not presently known to usor that we do not currently believe are important to an investor may also harm ourbusiness operations. If any of the events, contingencies, circumstances orconditions described in the following risks actually occur, our business,financial condition or our results of operations could be seriously harmed. Ifthat occurs, the trading price of our common stock could decline, and you maylose part or all of your investment.

 

**OurSubscribeNet service is our primary service offering and demand for thisservice remains uncertain in the current economic climate.**

 

In May 2002, we soldour Asset Management software business. Accordingly, our SubscribeNetelectronic software delivery and management service is now our primary serviceoffering. We market the SubscribeNet service primarily to enterprise softwarecompanies, and many enterprise software companies have reported reductions indemand and lowered forecasts for their products and services over the past twoyears.  We may experience limited growthor a similar reduction in demand for our SubscribeNet service, which would havean immediate and adverse effect on us. In addition, we have recently noticed a trend in which potentialcustomers have increasingly delayed their decisions whether to purchase theSubscribeNet service.  These delays haveaffected and will likely continue to affect our revenues and cash flows in thecurrent fiscal year.

 

**Our plannedgrowth in revenues is dependent in part on expected revenues from untestedproducts and services.**

 

Our planned growth inrevenues and contract value, and our planned improvement in net loss per share,in fiscal year 2004 assume that a significant portion of our fiscal year 2004revenue will be derived from products and services we have not yet sold, andthat in some cases we have not yet released. For example, our planned revenuegrowth assumes significant sales of software license management and digitalrights management applications that we plan to resell; of a solution thatenables customers to order on-demand printing of third-party softwaredocumentation through the SubscribeNet service; and of business process andrelated systems integration consulting services.  We have not made any significant sales of these products orservices yet, and some of them are not ready for sale.  Our failure to derive significant revenuesfrom these new products and services in our 2004 fiscal year could have amaterial adverse effect on us.

 

**Revenues tous under our Sun ONE software resale arrangement with Software Spectrum arelikely to decline, and any termination of our relationship with SoftwareSpectrum would have a substantial adverse effect on our business.**

 

Under our Sales AllianceAgreement with Software Spectrum dated June 28, 2001, we have transitionedto Software Spectrum our reseller relationship with Sun Microsystems, Inc. forSun ONE products.  Software Spectrumshares with us a portion of its gross profit from resales of Sun ONE softwarelicenses and maintenance, and reimburses us for a substantial portion of ourcost of maintaining a team dedicated to sales of Sun ONE software licenses andmaintenance. This contract accounted for substantially all of our alliance andreimbursement revenues, a significant portion of our online services andtechnology revenues, and more than 10% of our total revenues in our 2003 fiscalyear. However, revenues to us under this contract are likely to decrease, assales and market share of Sun ONE software generally decline.  In addition, the term of this agreement willexpire in June 2004 and is renewable for subsequent one-year terms.  It is possible that Software Spectrum willchoose not to renew this agreement at any of those points.  It is also possible that Sun Microsystemswill choose to stop permitting Software Spectrum to resell Sun ONE software.  Any non-renewal of our agreement withSoftware Spectrum, or termination of Software Spectrum’s rights to resell SunONE software, would likely have a material adverse effect on us.

 

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**The loss ofone or more of our key customers or resellers could adversely affect our revenues.**

 

A substantial amount ofrevenue from our SubscribeNet service comes from a relatively small number ofcustomers.  These include SoftwareSpectrum, to whom we provide the SubscribeNet service for electronic delivery ofthe Sun software that we jointly resell; Zomax Incorporated, with whom we havean agreement for resale of the SubscribeNet service; and other companies whosesoftware we distribute electronically. If one or more of these companies were to stop using our services orproducts, our operating results could be adversely affected. Our contractualrelationships with most of these customers are subject to renewal orcancellation annually. As a result, we cannot assure you that any of ourcustomers will renew their contracts with us in any given year.

 

**If Nasdaqdetermines that we have failed to meet its SmallCap Market listingrequirements, our common stock may be delisted.**

 

Effective May 30, 2002,our common stock listing moved from the Nasdaq National Market to the NasdaqSmallCap Market. Nasdaq has requirements a company must meet in order to remainlisted on the Nasdaq SmallCap Market. One requirement is that the bid price ofa company’s stock remain at $1.00 or above. The bid price of our common stockfell and remained below $1.00 on several occasions during fiscal year 2003 andon a number of occasions during the first quarter of fiscal year 2004. If thebid price of our common stock remains below $1.00 for an extended period, ourgrace period for regaining compliance with the minimum bid price requirementmay be limited to 6 months because we may be unable to meet the requirementsfor extension of that grace period. If as a result of the application of any ofNasdaq’s listing requirements, our common stock were delisted from the Nasdaq SmallCapMarket, our stock would become harder to buy and sell. Further, our stock couldbe subject to what are known as the “penny stock” rules, which place additionalrequirements on broker-dealers who sell or make a market in such securities.Consequently, if we were removed from the Nasdaq SmallCap Market, the abilityor willingness of broker-dealers to sell or make a market in our common stockmight decline. As a result, your ability to resell your shares of our commonstock could be adversely affected.

 

**We expectto have negative cash flow from operations for fiscal year 2004 and may nothave sufficient cash to continue operations or, even if we can continueoperations, to effectively manage our working capital requirements and fund ouroperations for the period required to achieve profitability.**

 

Our AnnualReport on Form 10-K, and Amendment One thereto on Form 10-K/A, for our fiscalyear ended February 28, 2003, contain a disclosure expressing substantialdoubt regarding our ability to continue as a going concern as a result of ourrecurring losses and negative cash flows from operations. We continue toexperience recurring losses and negative cash flows from operations, and thereis no assurance that we will succeed in generating sufficient revenue to enableus to continue operations over the longer term. As of May 31, 2003, we hadapproximately $5.8 million in cash and cash equivalents and working capital ofapproximately $2.1 million. We may not be able to achieve the revenue and grossmargin objectives necessary to achieve and maintain positive cash flow orprofitability without obtaining additional financing. Such financing may not beavailable on reasonable terms, and if available, such additional financing maydilute current stockholders. If such financing is required and we cannot obtainit, we will have to substantially curtail or discontinue operations.

 

**We have ahistory of losses, we expect future losses and we may not ever becomeprofitable.**

 

We have not achievedprofitability, may incur net losses through our fiscal year endingFebruary 29, 2004, and may not ever become profitable in the future. Weincurred net losses attributable to common stockholders of $0.9 million for thequarter ended May 31, 2003, $9.7 million for the fiscal year ended February 28,2003, $37.4 million for the fiscal year ended February 28, 2002, and $68.4million for the fiscal year ended February 28, 2001. As of May 31,2003, we had an accumulated deficit of approximately $153 million. We will needto generate significant additional online services and technology revenuesand/or reduce operating costs to achieve positive cash flow and profitability.We have a limited operating history that makes it difficult to forecast ourfuture operating results. We cannot be certain we will achieve sufficientrevenues or gross profits in future quarters to achieve profitability orpositive cash flow.

 

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**Ourrelationship with Sun Microsystems has diminished substantially and our futurerevenues will be adversely affected as a result.**

 

Since we began operations,we have derived a substantial portion of our SubscribeNet revenue through ourrelationship with Netscape Communications Corporation, which was transferred toSun Microsystems, Inc. when Sun took over Netscape’s e-commerce softwarebusiness. In March 2002, we signed a new agreement with Sun for ourprovision of the SubscribeNet service and initial software license fulfillmentservices to Sun through June 2003. During our fiscal year 2003, Sunaccounted for more than 10% of our revenues. In October 2002, Sun andIntraware amended that agreement to make the SubscribeNet service cancelable byeither party on December 31, 2002, or at the end of any calendar quarterthereafter, provided the canceling party gave 30 days’ notice. Sun providedsuch a notice and canceled the SubscribeNet portion of the agreement effectiveMarch 31, 2003. We amended the agreement to extend until June 2004the service by which we electronically fulfill initial software license salesby Sun; however, the fees payable by Sun for those fulfillment services havebeen reduced substantially effective March 1, 2003.

 

**Ourquarterly financial results are subject to significant fluctuations because ofmany factors and any of these could adversely affect our stock price.**

 

Our operating results havefallen below the expectations of public market analysts and investors in thepast. It is likely that in future quarters our operating results will again bebelow the expectations of public market analysts and investors and as a result,the price of our common stock may fall. Our operating results have variedwidely in the past, and we expect that they will continue to vary significantlyfrom quarter to quarter due to a number of factors, including:

 

•                  potential cancellations of SubscribeNetcontracts due to development of in-house electronic software download systemsby our customers;

 

•                  potential weakening of demand for ourSubscribeNet services and Sun ONE products we sell jointly with SoftwareSpectrum;

 

•                  unwillingness of potential customers topurchase our services due to concerns about our financial strength;

 

•                  the timing of sales of our services;

 

•                  potential additional cost cutting in ourSales and Marketing, Product Development and support areas;

 

•                  potential loss of strategic relationshipswith major customers and resellers;

 

•                  potential delays in introducing our productsand services according to planned release schedules;

 

•                  changes in our pricing policies;

 

•                  reluctance among software companies to acceptor outsource electronic delivery of their software;

 

•                  potential technical difficulties, systemfailures or Internet downtime;

 

•                  potential changes in the regulatoryenvironment;

 

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•                  our ability to upgrade and develop ourinformation technology systems and infrastructure;

 

•                  costs related to acquisitions of technologyor businesses; and

 

•                  general economic conditions, as well as thosespecific to the software, Internet and related industries.

 

In addition, ourJune 2001 agreement with Software Spectrum, under which we havetransitioned to Software Spectrum our business of reselling Sun ONE software,has resulted in and will continue to result in a decrease in overall revenue tous. Our May 2002 sale of our Asset Management software business toComputer Associates International, Inc. has resulted in a substantial decreasein our revenue and gross profit. Our operating expenses, which include salesand marketing, product development and general and administrative expenses, arebased on our expectations of future gross profits and are relatively fixed inthe short term. If gross profits fall below our expectations and we are notable to quickly reduce our spending in response, our operating results would beadversely affected.

 

**We aredependent on market acceptance of electronic software delivery, and if it doesnot achieve widespread acceptance, our business will be adversely affected.**

 

Our future success willdepend in large part on broadened acceptance by information technologyprofessionals of electronic software delivery as a method of receiving businesssoftware. If electronic software delivery does not achieve widespread marketacceptance, our business will be adversely affected. Electronic softwaredelivery is a relatively new method of distributing software products and thegrowth and market acceptance of electronic software delivery is highlyuncertain and subject to a number of risk factors. These factors include:

 

•                  the potential for state and local authoritiesto levy taxes on Internet transactions;

 

•                  the cost of maintaining sufficient networkbandwidth to enable purchasers to rapidly download software;

 

•                  the limited number of software packagesavailable for electronic software delivery as compared to those availablethrough traditional delivery methods;

 

•                  customer unfamiliarity with and resistance tothe process of downloading software; and

 

•                  customer concerns about transaction security.

 

The proliferation of softwareviruses poses a risk to market acceptance of electronic software delivery. Anywell-publicized transmission of a computer virus by us or another company usingelectronic software delivery could deter information technology professionalsfrom utilizing electronic software delivery technology and our business couldbe adversely affected.

 

**Increasedsecurity risks of online commerce may deter future use of our services.**

 

Concerns over the securityof transactions conducted on the Internet and the privacy of users may alsoinhibit the growth of our SubscribeNet service. Any failure by us to preventsecurity breaches could significantly harm our business and results ofoperations. We cannot be certain that advances in computer capabilities, newdiscoveries in the field of cryptography, or other developments will not resultin a compromise or breach of the algorithms we use to protect our customers’transaction data or our software vendors’ products. Anyone who is able tocircumvent our security measures could misappropriate proprietary informationor cause interruptions in our operations. We may be required to incursignificant costs to protect against security breaches or to alleviate problemscaused by breaches. Any well-publicized compromise of security could deterpeople from using the Web to conduct transactions involving transmission ofconfidential information or download of sensitive materials.

 

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**Ourindustry is highly competitive and we cannot assure you that we will be able toeffectively compete.**

 

The market for sellingonline services and software is highly competitive. We expect competition tointensify as current competitors expand and improve their service offerings,new competitors enter the market, and the business market for informationtechnology services continues to exhibit softness. We cannot assure you that wewill be able to compete successfully against current or future competitors, orthat competitive pressures faced by us will not adversely affect us.

 

Our competitors include anumber of companies offering electronic software delivery and managementsolutions. We expect additional competition from other established and emergingcompanies as well as from potential customers who choose to develop in housealternatives to our SubscribeNet service. Increased competition is likely toresult in price reductions, reduced gross margins and loss of market share, anyof which could have a significant adverse effect on us. Many of our current andpotential competitors have longer operating histories, significantly greaterfinancial, technical, marketing and other resources, better name recognition,and a larger installed base of customers than we do. Many of our competitorsmay also have well-established relationships with our existing and prospectivecustomers. Our current and potential competitors have established or mayestablish cooperative relationships among themselves or with third parties toincrease the ability of their products to address customer needs and competewith our products. We also expect competition to increase as a result ofsoftware industry consolidations. As a result, we may not be able toeffectively compete for customers.

 

**Ourexecutive officers and key personnel are critical to our business and theseofficers and key personnel may not remain with us in the future.**

 

Our future success dependsupon the continued service of our executive officers and other key technology,sales, marketing and support personnel. None of our officers or key employeesis bound by an employment agreement for any specific term. If we lost theservices of one or more of our key employees, or if one or more of ourexecutive officers or key employees decided to join a competitor or otherwisecompete directly or indirectly with us, this could have a significant adverseeffect on our business.

 

**We facerisks of claims from third parties for intellectual property infringement thatcould adversely affect our business.**

 

We electronically deliverthird-party software to end-users. This activity creates the potential forclaims to be made against us, either directly or through contractualindemnification provisions with software companies. Any claims could result incostly litigation and be time-consuming to defend, divert management’sattention and resources, cause delays in releasing new or upgrading existingservices or require us to enter into royalty or licensing agreements. Theseclaims could be made for defamation, negligence, patent, copyright or trademarkinfringement, personal injury, invasion of privacy or other legal theoriesbased on the nature, content or copying of these materials.

 

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

 

We take steps to verify thatend-users who download third-party software through our SubscribeNet serviceare entitled to deploy and use that software. However, there can be noassurance that

 

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this verification procedure will help usdefend against claims by, or protect us against liability to, the owners ofcopyrights in that third-party software. Our success and ability to compete aresubstantially dependent upon our internally developed technology, which weprotect through a combination of patent, copyright, trade secret and trademarklaw. We are aware that certain other companies are using or may have plans touse 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 fromany of those companies, we cannot assure you that these companies may not claimsuperior rights to “Intraware” or to other marks we use. Despite our efforts toprotect our proprietary rights, unauthorized parties may attempt to copy orotherwise obtain and use our services or technology and we cannot be certainthat the steps we have taken will prevent misappropriation of our technology.

 

**Our marketis subject to rapid technological change and our future success will depend onour ability to meet the changing needs of our industry.**

 

Our market is characterizedby rapidly changing technology, evolving industry standards and frequent newproduct announcements. To be successful, we must adapt to our rapidly changingmarket by continually improving the performance, features and reliability ofour services. We could incur substantial costs to modify our services orinfrastructure in order to adapt to these changes. Our business could beadversely affected if we incur significant costs without adequate results, orfind ourselves unable to adapt rapidly to these changes.

 

**Additionalgovernment regulations may harm demand for our services and increase our costsof doing business.**

 

Our business has benefitedfrom the tax laws of states in which purchases of software licenses are nottaxable if the software is received only electronically. Some states currently experiencingrevenue shortfalls are considering whether to change their laws to broaden thetaxability of transactions executed over the Internet. Any new imposition oftaxes on sales of software licenses, where the software is receivedelectronically, could substantially harm demand for our services and therebymaterially adversely affect our business, operating results and financialcondition.

 

In delivering third-partysoftware through our SubscribeNet service, we must comply with U.S. exportcontrols on software generally and encryption technology in particular. Changesin these laws could require us to implement costly changes to our automatedexport compliance processes.

 

The European Union hasenacted its own data protection and privacy directive, which required all 15European Union Member States to implement laws relating to the processing andtransmission of personal data. We must, at a minimum, comply with the dataprivacy “safe harbor” agreed upon by the European Union and the U.S. CommerceDepartment, as well as any other regulations adopted by other countries wherewe may do business.

 

The growth and developmentof the market for online commerce may prompt calls for more stringent consumerprotection laws, both in the United States and abroad. Compliance with anynewly adopted laws may prove difficult for us and may negatively affect ourbusiness.

 

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

At May 31, 2003, we hadcash and cash equivalents of approximately $5.8 million. We have not usedderivative financial instruments in our investment portfolio during the threemonths ended May 31, 2003. We place our investments with high qualityissuers, by policy, in an effort to limit the amount of credit exposure to anyone issue or issuer.

 

Our exposure to market riskfor changes in interest rates relates primarily to our investment portfolio. Wehave not used derivative financial instruments in our investment portfolio. AtMay 31, 2003, all of our cash, cash equivalents and investment portfoliocarried maturity dates of less than 90 days.

 

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The effect of changes ininterest rates of +/-10% over a nine-month horizon would not have a materialeffect on the fair market value of the portfolio.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

(a) *Evaluation of disclosure controls and procedure*s.  Based on their evaluation as of a datewithin 90 days of the filing date of this Quarterly Report on Form 10-Q, theprincipal executive officer and the principal financial officer have concludedthat our disclosure controls and procedures (as defined in Rules 13a-14(c) and15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”)) areeffective to ensure that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms.

 

(b) *Changes in internal control*s.  There were no significant changes in ourinternal controls or in other factors that could significantly affect thosecontrols subsequent to the date of their most recent evaluation. There were nosignificant deficiencies or material weaknesses, and therefore there were nocorrective actions taken.

 

**PART II**

** **

**OTHER INFORMATION**

** **

**ITEM 1.LEGAL PROCEEDINGS**

 

In October 2001, wewere served with a summons and complaint in a purported securities class actionlawsuit. On or about April 19, 2002, we were served with an amendedcomplaint in this action, which is now titled In re Intraware, Inc. InitialPublic 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 allpersons who purchased our common stock from February 25, 1999 (the date ofour initial public offering) through December 6, 2000. It names asdefendants Intraware; three of our present and former officers and directors, andseveral investment banking firms that served as underwriters of our initialpublic offering. The complaint alleges liability under Sections 11 and 15 ofthe Securities Act of 1933 and Sections 10(b) and 20(a) of the SecuritiesExchange Act of 1934, on the grounds that the registration statement for theofferings did not disclose that: (1) the underwriters had agreed to allowcertain customers to purchase shares in the offerings in exchange for excesscommissions paid to the underwriters; and (2) the underwriters had arranged forcertain customers to purchase additional shares in the aftermarket atpredetermined prices. The amended complaint also alleges that the underwritersmisused their securities analysts to manipulate the price of our stock. No specificdamages are claimed.

 

Lawsuits containing similarallegations have been filed in the Southern District of New York challengingover 300 other initial public offerings and secondary offerings conducted in1999 and 2000. All of these lawsuits have been consolidated for pretrialpurposes before United States District Court Judge Shira Scheindlin of theSouthern District of New York. On July 15, 2002, an omnibus motion todismiss was filed in the coordinated litigation on behalf of the issuer defendants,of which Intraware and its three named current and former officers anddirectors are a part, on common pleadings issues. On or about October 9,2002, the Court entered and ordered a Stipulation of Dismissal, which dismissedthe three named current and former officers and directors from the litigationwithout prejudice. On February 19, 2002, the Court entered an orderdenying in part the issuer defendants’ omnibus motion to dismiss, includingthose portions of the motion to dismiss relating to Intraware. No discovery hasbeen served on us to date.  Aspecial committee of our Board recently approved a tentative settlementproposal from plaintiffs.  There is noguarantee that the settlement will become final, as it is subject to a numberof conditions, including court approval; however, based on this proposed settlement, we do notbelieve we will suffer material future losses related to this lawsuit andtherefore have not accrued for any losses.

 

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On February 28, 2003 apurported securities class action lawsuit, *Liuv. Credit Suisse First Boston et al.,*was filed in the United StatesDistrict Court, Southern District of Florida. The defendants were Credit SuisseGroup, several of Credit Suisse Group’s current and former directors andofficers, and several public companies and certain of their current and formerdirectors and officers, including Intraware and its chief executive officer andformer chief financial officer. The suit alleged that the defendants engaged ina scheme to under-price initial public offerings and then artificially inflateprices of those stocks in the aftermarket, in violation of Florida blue skylaw, Sections 11, 12 and 15 of the Securities Act of 1933, Sections 10(b) and20(a) of the Securities Exchange Act of 1934, and the common law of fraud andnegligence. The suit sought unspecified damages, restitution, and injunctiverelief.  On June 19, 2003, theplaintiffs filed an amended complaint, dismissing Intraware and its chiefexecutive officer and former chief financial officer from this lawsuit withoutprejudice.  Based on this dismissal, wedo not believe we will suffer material future losses related to this lawsuitand therefore have not accrued for any losses.

 

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

 

**ITEM 2.CHANGES IN SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3.DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS**

 

None.

 

**ITEM 5.OTHER INFORMATION**

 

None.

 

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

 

Exhibits

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                  |
|---------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1+               |   | Amendment  One to Sales Alliance Agreement dated June 28, 2001 between  Intraware, Inc. and Software Spectrum, Inc. (as successor-in-interest to  CorpSoft, Inc.) |
|                |   |                                                                                                                                                                             |
| 99.1                |   | Certifications  Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant to  Section 906 of the Sarbanes Oxley Act of 2002                                         |

 

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

 

Reports on Form 8-K

 

None.

 

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**SIGNATURE**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, as amended, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized. 

 
|                  | **INTRAWARE,  INC.** |
|-----------------------|----------------------|
|                  |                 |
|                  |                 |
| Dated:  July 15, 2003 | By:                  | /s/  WENDY A. NIETO |
|                  |                 | Wendy A. Nieto |
|                  |                 | *Chief Financial Officer and**Senior Vice  President of Finance* |

 

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**Chief Financial Officer Certification**

 

I, Wendy A. Nieto, ChiefFinancial Officer and Senior Vice President of Finance of Intraware, Inc.certify that:

 

(1)  Ihave reviewed this Quarterly Report on Form 10-Q of Intraware, Inc.(the “registrant”);

 

(2)  Basedon my knowledge, this Quarterly Report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this QuarterlyReport;

 

(3)  Basedon my knowledge, the financial statements, and other financial informationincluded in this Quarterly Report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this Quarterly Report;

 

(4)  Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as such term is defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

(i)    designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisQuarterly Report is being prepared;

 

(ii)  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within90 days prior to the filing date of this Quarterly Report (the “EvaluationDate”); and

 

(iii)  presented in this Quarterly Reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

(5)  The registrant’s othercertifying officer and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of the board of directors(or persons fulfilling the equivalent function):

 

(i)    all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(ii)  any fraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’s internal controls; and

 

(6)  The registrant’s othercertifying officer and I have indicated in this Quarterly Report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

DatedJuly 15, 2003 

 

 
| /s/  WENDY  A. NIETO                                                                                    |   |
|-------------------------------------------------------------------------------------------------------------------|--------|
| Wendy  A. Nieto                                                                                                   |
| *Chief Financial Officer and Senior  Vice President of Finance of Intraware, Inc.  (Principal Financial Officer)* |

 

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**Chief Executive Officer Certification**

 

I,Peter H. Jackson, President and Chief Executive Officer of Intraware, Inc.certify that:

 

(1)  Ihave reviewed this Quarterly Report on Form 10-Q of Intraware, Inc.(the “registrant”);

 

(2)  Basedon my knowledge, this Quarterly Report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this QuarterlyReport;

 

(3)  Basedon my knowledge, the financial statements, and other financial informationincluded in this Quarterly Report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this Quarterly Report;

 

(4)  Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as such term is defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

(i)    designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisQuarterly Report is being prepared;

 

(ii)  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within90 days prior to the filing date of this Quarterly Report (the “EvaluationDate”); and

 

(iii)  presented in this Quarterly Reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

(5)  Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theboard of directors (or persons fulfilling the equivalent function):

 

(i)    all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(ii)  any fraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’s internal controls; and

 

(6)  Theregistrant’s other certifying officer and I have indicated in this QuarterlyReport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

DatedJuly 15, 2003

 

 
| /s/  PETER  H. JACKSON                                                            |   |
|---------------------------------------------------------------------------------------------|--------|
| Peter  H. Jackson                                                                           |
| *President and Chief Executive Officer of   Intraware, Inc.  (Principal Executive Officer)* |

 

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