UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

---

FORM 10-Q

---

[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2007

OR

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from ________to _________

Commission file number 000-25249

Intraware, Inc.(Exact name of Registrant as Specified in its Charter)



|Delaware                                                       | 68-0389976                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

25 Orinda Way
Orinda, California      94563

(925) 253-4500

---

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer      ̈ Accelerated filer     ̈ Non-accelerated filer    x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES     ̈ NO    x Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.Class

Outstanding at September 28, 2007Common Stock, $0.001 par value

6,226,483
Note:PDF provided as a courtesy
Intraware, Inc.Table of Contents

PART I.   FINANCIAL INFORMATION

Page No.Item 1.   Financial Statements (unaudited):Balance Sheets — at August 31, 2007 and February 28, 2007

2Statements of Operations — for the Three and Six Months Ended August 31, 2007 and August 31, 2006

3Statements of Cash Flows — for the Six Months Ended August 31, 2007 and August 31, 2006

4Notes to Unaudited Interim Financial Statements

5Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations

14Item 3.   Quantitative and Qualitative Disclosures About Market Risk

23Item 4.   Controls and Procedures

23PART II.  OTHER INFORMATIONItem 1.   Legal Proceedings

24Item 1A.  Risk Factors

24Item 4.  Submission of Matters to a Vote of Securities Holders

33Item 6.   Exhibits

34Signatures

35Part I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

August 31, 2007

February 28, 2007ASSETSCurrent assets:Cash and cash equivalents

$
11,819

$
12,260Accounts receivable, net


1,463


1,110Costs of deferred revenue


504


490Other current assets


571


263Total current assets


14,357


14,123Costs of deferred revenue, less current portion


329


432Property and equipment, net


347


407Capitalized software, net


309


180Other assets


227


217Total assets

$
15,569

$
15,359LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK &STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable


325


797Accrued expenses


791


1,003Deferred revenue


3,046


2,576Total current liabilities


4,162


4,376Deferred revenue, less current portion


682


681Total liabilities


4,844


5,057Commitments and Contingencies (Note 4)Redeemable convertible preferred stock; $0.0001 par value; 10,000 shares authorized:Series A; 28 shares issued and outstanding at August 31, 2007 andFebruary 28, 2007 (aggregate liquidation preference of $500at August 31, 2007 and February 28, 2007).


449


449Series B; 1 shares issued and outstanding at August 31, 2007 and February 28, 2007,(aggregate liquidation preference of $6,000 at August 31, 2007 and February 28, 2007).


5,701


5,701Total redeemable convertible preferred stock


6,150


6,150Stockholders' equity:Common stock; $0.0001 par value; 50,000 shares authorized; 6,226 and 6,134 sharesissued and outstanding at August 31, 2007 and February 28, 2007, respectively.


1


1Additional paid-in-capital


166,039


165,293Accumulated deficit


(161,465)


(161,142)Total stockholders' equity


4,575


4,152Total liabilities, redeemable convertible preferred stock and stockholders' equity

$
15,569

$
15,359See notes to unaudited interim financial statements.

2INTRAWARE, INC.
                     STATEMENTS OF OPERATIONS
                     (in thousands, except per share amounts)
                     (unaudited)

For the three months ended


For the six months endedAugust 31, 2007

August 31, 2006


August 31, 2007

August 31, 2006Revenues
$
3,187

$
2,582


$
5,931

$
5,196Cost of revenues

1,044


1,084



2,097


2,148Gross profit

2,143


1,498



3,834


3,048Operating expenses:Sales and marketing

604


669



1,311


1,474Product development

317


502



774


981General and administrative

1,231


1,125



2,348


2,344Loss on disposal of assets

4


-



26


-Total operating expenses

2,156


2,296



4,459


4,799Loss from operations

(13)


(798)



(625)


(1,751)Interest expense

-


(10)



-


(21)Interest and other income

157


144



302


433Net income (loss)
$
144

$
(664)


$
(323)

$
(1,339)Basic and diluted net income (loss) per share
$
0.02

$
(0.11)


$
(0.05)

$
(0.22)Weighted average shares - basic

6,218


6,129



6,184


6,124Weighted average shares - diluted

7,405


6,129



6,184


6,124See notes to unaudited interim financial statements.

3INTRAWARE, INC.
                     STATEMENTS OF CASH FLOWS
                     (in thousands)
                     (unaudited)

For the six months endedAugust 31, 2007

August 31, 2006Cash flows from operating activities:Net loss
$
(323)

$
(1,339)Adjustments to reconcile net loss to net cash usedin operating activities:Depreciation and amortization

160


215Provision for doubtful accounts

-


30Stock-based compensation

387


562Loss on disposal of assets

29


-Changes in assets and liabilities:Accounts receivable

(353)


576Costs of deferred revenue

104


(222)Other assets

(318)


(95)Accounts payable

(439)


76Accrued liabilities

(213)


142Deferred revenue

472


165Net cash provided by (used in) operating activities

(494)


110Cash flows from investing activities:Purchases of property and equipment

(277)


(172)Net cash used in investing activities

(277)


(172)Cash flows from financing activities:Proceeds from notes payable

-


137Principal payments on notes payable

-


(240)Proceeds from issuance of common stock

330


57Net cash provided by (used in) financing activities

330


(46)Net decrease in cash and cash equivalents

(441)


(108)Cash and cash equivalents at beginning of the period

12,260


12,650Cash and cash equivalents at end of the period
$
11,819

$
12,542Supplemental disclosure of cash flow information:Cash paid for interest
$
-

$
21Supplemental non-cash activity:Purchases of property and equipment included in accounts payable
$
3

$
53See notes to unaudited interim financial statements.

4INTRAWARE, INC.
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission, or SEC.  Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United States of America have been
condensed or omitted under these rules and regulations.  However, management believes the disclosures are adequate to
ensure the information presented is not misleading.  The balance sheet at February 28, 2007 has been derived from the audited
financial statements, but does not include all disclosures required by generally accepted accounting principles.  These unaudited
interim financial statements should be read in conjunction with the audited financial statements and accompanying notes in our Annual
Report on Form 10-K for the fiscal year ended February 28, 2007, filed with the SEC on April 26, 2007.
In the opinion of management, all adjustments, consisting only of normal recurring items considered necessary
for a fair statement, have been included in the accompanying unaudited interim financial statements.  The results of operations
for the interim periods presented are not necessarily indicative of operating results to be expected for any subsequent interim period or
for the fiscal year ending February 29, 2008.

We have incurred losses from operations during each fiscal year since inception and have incurred negative cash flows from
operations during each fiscal year since inception, with the exception of our most recent fiscal year ended February 28, 2007. Net loss
for the six months ended August 31, 2007 decreased from our prior year loss for the corresponding period. We recorded net income for
the three months ended August 31, 2007 of approximately $0.1 million. For the six months ended August 31, 2007, we recorded cash
used in operating activities of approximately $0.5 million, which was an increase in cash used from operations from the corresponding
period in the prior year. Our cash balances may decline further, although we believe that strategic actions implemented to improve
revenue and control costs will be adequate to generate sufficient cash resources to fund our future operations.  If we fail to
generate sufficient revenues or adequately control spending, we may be unable to achieve key business objectives.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
We recognize revenue when all of the following conditions are met:

There is persuasive evidence of an arrangement;
We have provided the service to the customer, made the software available for customer download through our website, or
shipped the software to the customer;
We believe collection of fees is reasonably assured; and
The amount of fees to be paid by the customer is fixed or determinable.Our revenue results primarily from three types of arrangements: (1) sales of our SubscribeNet digital delivery service, which we
refer to as our SubscribeNet service, to software vendors and other companies that distribute software as part of their business; (2)
professional services to such customers in connection with customization of our SubscribeNet service, data conversion, and integration
of our SubscribeNet service with other third party software; and (3) resale of third-party services or licenses complementary to our
SubscribeNet service, including e-commerce. In addition, if appropriate opportunities present themselves in the future, we may
generate revenue from the licenses of our proprietary software, along with related maintenance and support, to companies using our
software internally or to companies using it to provide web-based services to their customers.


5We defer revenues related to our SubscribeNet service and generally recognize them ratably over the term of the service
arrangement. The typical subscription term is one year, although some terms may either be shorter or extend up to three years. Our
SubscribeNet service agreements are generally noncancelable, although customers usually have the right to terminate for cause if we
materially fail to perform. A majority of our SubscribeNet service implementations for new customers involve customization essential to
the functionality of the service. In these cases, we defer revenue recognition until the service go-live date and then recognize the
SubscribeNet service revenue ratably over the remaining contract term. The go-live date is the later of the customer acceptance date or
the point at which no additional customization is required. If the implementation fee is bundled with the recurring SubscribeNet service
fee, it is recognized over the same period as the SubscribeNet service fee. If the implementation fee is charged separately, then the
associated revenue is recognized in accordance with our professional services revenue recognition policy, described below. Our
SubscribeNet service agreements normally provide a set period (generally five days) for a customer to evaluate a completed
implementation, and also provide for deemed acceptance if the customer has not affirmatively rejected the implementation within such
period. We typically rely on such deemed acceptance by most of our customers.
As stated above, in addition to implementations, we also provide other professional services to our customers related to our
SubscribeNet service. Generally, these professional services do not provide stand-alone value to a customer and, accordingly, we defer
recognition of this revenue until the acceptance of the professional services, similar to the manner in which we treat SubscribeNet
service revenues discussed above. Such professional services revenues are recognized ratably over the longer of the remaining
estimated customer life or the remaining contract term, commencing with the acceptance of the professional services. Estimated
customer life requires that we periodically estimate the projected life of our existing customers based on historical information such as
customer renewal rates. In some instances, the fees related to the implementation of the SubscribeNet service and other professional
services are bundled with the SubscribeNet service fee without specifically stating the fees attributable to each portion of services. In
these instances, the professional services fees are recognized from acceptance of the professional services through the end of the
remaining contract term on a ratable basis with the SubscribeNet service fee.
Revenues related to our resale of third-party services or software licenses complementary to our SubscribeNet service are
generally recognized as the service or license is provided. If the resold service or license involves customization essential to the
functionality, the fees charged for the customization are recognized as revenue in the same manner as professional services discussed
above. Resold services or licenses are recognized as revenue based on the gross fee charged to the customer, since we bear the
credit risk for resold services or licenses, have latitude in establishing pricing, and are primarily responsible for acceptability of the
services or licenses delivered. In addition, costs paid to the third-party providers are recorded as cost of revenues and recognized over
the same period as the related revenue.
Deferred Costs
We capitalize direct costs of revenues related to significant SubscribeNet service implementations and established
professional services contracts associated with our SubscribeNet services. Direct costs include compensation and payroll-related
benefits directly related to the time spent on significant implementation and professional services activities. These costs are recognized
over the same period the related revenue is recognized (seeRevenue Recognition above). Costs associated with professional
services involving significant new functionality for the SubscribeNet service that are partially or fully funded by customers, but which do
not qualify as funded research and development activities, are expensed as cost of revenues as incurred until a working model is
delivered to the customer. Once a working model has been delivered, all additional direct costs are capitalized in the same manner
discussed above. Any changes in our estimated customer life estimates could result in corresponding changes to our recognition of
deferred revenues and costs. A 10% increase in our estimated customer life during the three and six months ended August 31, 2007
would have caused a decrease in the amortization of both deferred revenues and deferred costs of revenues, resulting in an immaterial
decrease to our net income and an increase to our net loss, respectively. At August 31, 2007, we had approximately $0.8 million in
capitalized costs relating to deferred revenues. We expense customer acquisition costs, including sales commissions, as incurred. We
also defer legal costs incurred in connection with patent applications. As of August 31, 2007, we had approximately $0.2 million in
deferred legal costs related to patent applications. Upon issuance of a patent, the deferred legal costs for
that patent are expensed ratably over the patent's estimated useful life.

6Stock-Based Compensation
In March 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) 123(R),Share Based Payment (SFAS 123(R)), which addressed the accounting for share-based payment transactions
in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based
on the fair value of the company's equity instruments, or that may be settled by the issuance of such equity instruments. In
March 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107 (SAB 107) regarding its interpretation of SFAS 123(R).
Following the guidance prescribed in SAB 107, on March 1, 2006 we adopted SFAS 123(R) using the modified prospective method
and, accordingly, have not restated the results of income from prior interim periods and fiscal years. Under SFAS 123(R), we measure
compensation cost for all stock-based awards at fair value on the date of grant and recognize compensation expense on a straight-line
basis over the service period that the awards are expected to vest. Stock options and awards issued under our equity plans, which
generally vest over a three to four-year service period, as well as stock purchases under our Employee Stock Purchase Plan (ESPP),
are subject to SFAS 123(R). We adopted and implemented our 2006 Equity Incentive Plan during the year ended February 28, 2007.
See our Annual Report on Form 10-K for the year ended February 28, 2007 for further discussion on our 2006 Equity Incentive
Plan.
We are using the Black-Scholes model to value the compensation expense associated with our stock-based awards under SFAS
123(R). In addition, we estimate forfeitures when recognizing compensation expense, and we will adjust our estimate of forfeitures over
the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates.
Changes in estimated forfeitures will be recognized through a catch-up adjustment in the period of change and will also impact the
amount of compensation expense to be recognized in future periods.

Net income (loss) per share
The computation of basic and diluted earnings per common share was as follows:

For the three months ended

For the six months endedAugust 31, 2007

August 31, 2006

August 31, 2007

August 31, 2006Numerator:Net income (loss)

$
144

$
(664)

$
(323)

$
(1,339)Denominator:Weighted average shares outstanding - basic


6,218


6,129


6,184


6,124Dilutive effect of shares from exercise of stock options,and vesting of restricted stock units


159


-


-


-Dilutive effect of convertible preferred stock


1,028


-


-


-Weighted average shares outstanding - diluted


7,405


6,129


6,184


6,124Basic net income (loss) per share
$
0.02

$
(0.11)

$
(0.05)

$
(0.22)Diluted net income (loss) per share
$
0.02

$
(0.11)

$
(0.05)

$
(0.22)Basic earnings per common share was computed using net income and the weighted average number of common shares
outstanding during the period. Diluted earnings per common share was computed using net income and the weighted average number
of common shares outstanding plus potentially dilutive common shares outstanding during the period. Potentially dilutive common
shares include the assumed exercise of outstanding stock options and assumed vesting of outstanding restricted stock units using the
treasury stock method, as well as the assumed conversion of convertible preferred stock using the if-converted method.

7For the quarter ended August 31, 2007, we excluded approximately 686,000 outstanding stock options as well as warrants to
purchase approximately 84,000 shares of common stock from the calculation of diluted earnings per common share because the
exercise prices of these stock options and warrants were greater than or equal to the average market value of our common shares.
These options and warrants may be included in future calculations if the average market value of our common shares becomes greater
than the exercise price of such options and warrants.
Software Development Costs
We account for costs incurred for computer software developed or obtained for internal use in accordance with Statement
of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1).
SOP 98-1 requires companies to capitalize qualifying computer software costs that are incurred during the application and development
stage and amortize them over the software's estimated useful life.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (SFAS 157), which replaced the
different definitions of fair value set forth in the accounting literature with a single definition. SFAS 157 defines fair value as the price
that would be received by selling an asset, or paid to transfer a liability, in an orderly transaction between market participants at the
measurement date. SFAS 157 is effective for fair-value measurements already required or permitted by other standards for financial
statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently
evaluating the impact of adopting SFAS 157 on our financial position, results of operations, and cash flows.
In July 2006, the FASB issued Financial Interpretation (FIN) No. 48,Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109 (FIN 48), which changed the accounting for income taxes. FIN 48 specifies, among
other provisions, how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements;
requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the
balance sheet; and provides transition and interim period guidance. We adopted FIN 48 on March 1, 2007 and, as a result of its
implementation, we did not recognize any adjustments in the liability for unrecognized tax benefits. We do not have any accrued
interest or penalties associated with unrecognized tax benefits. We will account for any future interest related to uncertain tax positions
as interest expense, and for penalties as tax expense.

NOTE 3. CHANGES IN STOCKHOLDERS' EQUITY
During the six months ended August 31, 2007, our stockholders' equity changed as follows (in thousands):

Common stock

Additional
 paid-in



Accumulated

Stockholders'Shares

Amount

capital



deficit

equityBalance at February 28, 2007
6,134

$
1

$
165,293



$
(161,142)

$
4,152Exercise of stock options
65


-


229




-


229Issuance of common stock for employee stock purchase program
27


-


101




-


101Stock based compensation






416







416Net loss
-


-


-




(323)


(323)Balance at August 31, 2007
6,226

$
1

$
166,039



$
(161,465)

$
4,5758NOTE 4. CONTINGENCIES
Indemnifications
In the course of our business, we have made commitments and provided indemnities and guarantees under which we may be
required to make payments. The indemnities include:

Intellectual Property Indemnities to Customers and Resellers. The customer and reseller agreements for our SubscribeNet
service typically contain provisions that indemnify our customers or resellers for damages and costs resulting from claims alleging that
our services infringe the intellectual property rights of a third-party. We have also entered into software license agreements
indemnifying the licensees for damages and costs resulting from claims alleging that our software infringes third-party intellectual
property rights. The duration of these indemnities is typically unlimited. Our potential payments under these indemnities are in some
cases limited (e.g., to the fees paid to us under the contract or another set amount) and are in other cases unlimited. Where we have
given such indemnities for third-party software licenses that we resold, we have typically received similar indemnities from the
enterprise technology company licensor. We plan to continue to enter into SubscribeNet service agreements with customers and
resellers, to continue to license software, and to continue to provide industry-standard indemnities to our service customers, resellers
and licensees.
Indemnities to Private Investors. We have made representations and warranties to the investors and placement agents in
our private placements of stock, and have agreed to indemnify them for any damages and costs they may incur as a result of our
breach of those representations and warranties. We also have signed investor and/or registration rights agreements with private
investors under which we have agreed to indemnify them for damages they may incur as a result of any material misstatements or
omissions in our registration statements.
Indemnities to Directors and Officers. We have agreed to indemnify our directors and officers for damages and costs
incurred in the performance of their duties, to the extent permitted by Delaware law. The duration of, and our potential payments under,
these indemnities are unlimited, subject to Delaware law.We historically have received a very limited number of requests for indemnification under these agreements and have not been
required to make any material payments under them. Accordingly, we believe that the fair value of each of these indemnification
agreements is minimal and therefore have not recorded a liability related to these indemnification provisions.
Legal Proceedings
In re Intraware, Inc. Initial Public Offering Securities Litigation
In October 2001, we were served with a summons and complaint in a purported securities class action lawsuit. On or
about April 19, 2002, we were served with an amended complaint in this action, which is now titled In re Intraware, Inc. Initial Public
Offering Securities Litigation, Civ. No. 01-9349 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, 21 MC 92
(SAS) (S.D.N.Y.). The amended complaint is brought purportedly on behalf of all persons who purchased our common stock from
February 25, 1999 (the date of our initial public offering) through December 6, 2000. It names as defendants the company, three of our
present and former officers and directors, and several investment banking firms that served as underwriters of our initial public offering.
The complaint alleges liability under Sections 11 and 15 of the Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, on the grounds that the registration statement for the offerings did not disclose that: (1)
the underwriters had agreed to allow certain customers to purchase shares in the offerings in exchange for excess commissions paid to
the underwriters; and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at
predetermined prices. The amended complaint also alleges that the underwriters misused their securities analysts to manipulate the
price of our stock. No specific damages are claimed.

9Lawsuits containing similar allegations have been filed in the Southern District of New York challenging over 300 other initial public
offerings and secondary offerings conducted in 1999 and 2000. All of these lawsuits have been consolidated for pretrial purposes
before United States District Court Judge Shira Scheindlin of the Southern District of New York. On July 15, 2002, an omnibus motion
to dismiss was filed in the coordinated litigation on behalf of the issuer defendants, of which the company and three of our named
current and former officers and directors are a part, on common pleadings issues. On or about October 9, 2002, the Court entered and
ordered a Stipulation of Dismissal, which dismissed the three named current and former officers and directors from the litigation without
prejudice. On February 19, 2003, the Court entered an order denying in part the issuer- defendants' omnibus motion to dismiss,
including those portions of the motion to dismiss relating to us.
In June 2004, a stipulation of settlement for the claims against the issuer-defendants, including us, was submitted to the Court. The
underwriter-defendants in the In re Initial Public Offering Securities Litigation, including the underwriters of our initial public offering,
were not parties to the stipulation of settlement.
Under the settlement, we would have been dismissed of all claims in exchange for a contingent payment guarantee by the
insurance companies responsible for insuring us as an issuer. In August 2005, the Court preliminarily approved the settlement.
In December 2006, the appellate court overturned the certification of classes in the six test cases that were selected by the
underwriter defendants and plaintiffs in the coordinated proceedings.  We are not one of the six test cases.
 Because class certification was a condition of the settlement, it was unlikely that the settlement
would receive final Court approval.  On June 25, 2007, the Court entered an order terminating the proposed
settlement based on a stipulation among the parties to the settlement.  Plaintiffs have filed amended master allegations
and amended complaints in the six test cases.  It is uncertain whether there will be any revised or future settlement. If the
litigation continues, then we believe that we have meritorious defenses and intend to defend the action vigorously. However, the
litigation results cannot be predicted at this point.
NOTE 5. RELATED PARTY TRANSACTIONS
During the six months ended August 31, 2007, we provided e-commerce solutions to our customers by using managed e-commerce
services provided by a wholly owned subsidiary of Digital River, Inc. As of September 28, 2007 Digital River, Inc. owned
approximately 14% of our outstanding capital stock (on an as-converted to common stock basis). As a result of providing these
solutions, we recognized an immaterial amount of revenue and related costs of revenue. All of these costs were paid to the Digital
River, Inc. subsidiary.
During the three and six months ended August 31, 2007, we purchased computer equipment and services from one of our largest
customers totaling approximately $71,000 and $153,000, respectively.

NOTE 6. COMMON STOCK
Stock Based Compensation Expense
The table below reflects stock compensation expense under SFAS 123(R) for the three and six months ended August 31,
2007 (in thousands):

For the three months ended


For the six months endedAugust 31, 2007

August 31, 2007Stock-based compensation expense by type of awardEmployee stock options and awards


$
131

$
323Employee stock purchase plan



24


64Increase to net loss


$
155

$
387Effect on earnings per share: basic and diluted


$
(0.02)

$
(0.06)10The following table summarizes stock-based compensation expense related to employee stock options and awards, as well as
employee stock purchases under the ESPP for the three and six months ended August 31, 2007, as it was allocated in the statements
of operations (in thousands):

For the three months ended


For the six months endedAugust 31, 2007


August 31, 2007Stock


Percent of



Stock


Percent ofCompensation


Total



Compensation


TotalExpense


Expense



Expense


ExpenseCost of revenues

$
15



10
%


$
32



8
%Sales and marketing


25



16
%



66



17
%Research and development


14



9
%



40



10
%General and administrative


101



65
%



249



64
%Total stock-based compensation

$
155







$
387As of August 31, 2007, we had an aggregate of 683,480 shares available for grant under our equity plans. Our equity plans provide
for the issuance of our common stock pursuant to stock option exercises and other equity-based awards. Under our equity plans, equity
awards can be issued to employees, non-employee directors and consultants. Stock options are generally granted under the equity
plans with exercise prices equal to the fair market value of our common stock on the date of grant. There were no stock option awards
granted during the three months ended August 31, 2007.

The following weighted average assumptions were used in the estimated grant date fair value calculations for stock option
awards:

For the three months ended

For the six months endedAugust 31, 2007

August 31, 2006

August 31, 2007

August 31, 2006Stock option plans:Five Year Grants:Dividend yield


n/a



0
%


0
%


0
%Expected stock price volatility


n/a



73
%


63
%


73
%Risk-free interest rate


n/a



4.84
%


5.18
%


4.84
%Average expected life (in years)


n/a



3.52



0.12



3.52Weighted average grant-date fair value of options granted during the period


n/a


$
2.76


$
1.54


$
2.76Ten Year Grants:Dividend yield


n/a



0
%


n/a



0
%Expected stock price volatility


n/a



87
%


n/a



105
%Risk-free interest rate


n/a



5.07
%


n/a



4.75
%Average expected life (in years)


n/a



5.2



n/a



5.42Weighted average grant-date fair value of options granted during the period


n/a


$
4.25



n/a


$
5.1211The following table presents a summary of our stock option activity for the three and six months ended August 31, 2007 (in
thousands):

Weighted

AggregateAverage

IntrinsicExercise

ValueShares


Price

($000's)Outstanding at February 28, 2007


1,345


$
11.86

$
704Granted


4



3.67Exercised


(48)



3.48Exchanged


(131)



7.46Forfeited


(119)



11.48Outstanding at May 31, 2007


1,051



12.30

$
288Granted


-



-Exercised


(17)



3.66Forfeited


(37)



19.13Outstanding at August 31, 2007


997


$
12.20

$
491Exercisable at August 31, 2007


811


$
14.06

$
233The aggregate intrinsic value is the sum of the amounts by which the quoted market price of our stock exceeded the exercise price
of the options at August 31, 2007, for those options for which the quoted market price was in excess of the exercise price. The
aggregate intrinsic value of options exercised during the quarter ended August 31, 2007 was approximately $26,000. The total cash
received from employees as a result of stock option exercises for the three and six months ended August 31, 2007 was approximately
$62,000 and $229,000, respectively. We did not realize any tax benefits in connection with these exercises due to a full valuation
allowance relating to our deferred tax assets that had previously been recorded.
The total compensation cost related to unvested stock options and awards is approximately $1.4 million and will be recognized over
a weighted average period of approximately 1.85 years.
Restricted Stock Units
On March 12, 2007, we offered to certain employees the opportunity to participate in the Employee Stock Option/Restricted
Stock Unit Exchange Program, which we refer to herein as the Exchange Program. Under the Exchange Program, the employees were
granted the right to exchange certain eligible stock options for restricted stock units with a three year vesting schedule (one-third vest
one year from the grant date and one-twelfth vest quarterly thereafter for the remaining eight quarters).  The eligible stock options
consisted of those unexercised and unvested stock options with an exercise price per share of $5.00 or more. The number of restricted
stock units an employee received in exchange for his or her eligible stock options was based on the number and exercise price of the
eligible stock options exchanged.  We adopted the Pool Approach to amortize any unrecognized compensation cost related to
the original stock options over the remaining modified requisite service period. We did not record any incremental compensation
expense as a result of the Exchange Program and the compensation expense remaining on the unvested options that were exchanged
for the restricted stock units will be recognized ratably over the three year vesting period of the restricted stock units.

Pursuant to the Exchange Program, which expired on April 9, 2007, we accepted for cancellation options to purchase 130,515
shares of our common stock and granted in exchange restricted stock units which represent the right to receive 52,769 shares of our
common stock in the future, resulting in an overall exchange ratio of approximately 2.5 options to 1.0 restricted stock unit. Included in
these figures were 98,000 options previously held by our executive officers, who received a total of 40,795 restricted stock units. We
entered into a Restricted Stock Unit Agreement with each participating employee.  The restricted stock units will vest over three
years beginning April 9, 2007.  The unrecognized compensation expense related to the unvested options that were exchanged
for restricted stock units will be recognized ratably over the three year vesting period of the restricted stock units.

12In addition to restricted stock units granted pursuant to the Exchange Program, we have granted restricted stock units to our
non-employee independent directors that will vest over a two year period, and restricted stock units to certain newly hired and other
employees which vest over a three year period.  We expect to grant additional restricted stock units, rather than stock options, in
future periods. We anticipate a decrease in our stock compensation expense as a result of employee stock options with higher fair
values becoming fully amortized and the cancellation of certain unvested employee stock options in connection with the Exchange
Program.
Restricted stock unit activity for the three and six months ended August 31, 2007 is summarized as follows:

Weighted-AverageGrant DateShares


Fair Value PriceUnvested at February 28, 2007


-


$
-Granted


20,100



14.83Exercised


-



-Exchanged


52,771



18.45Forfeited


(9,115)



10.61Outstanding at May 31, 2007


63,756



15.43Granted


7,000



5.08Exercised


-



-Forfeited


(645)



41.18Outstanding at August 31, 2007


70,111


$
14.16Employee Stock Purchase Plan
On March 12, 2007, our Board of Directors approved an amendment to our ESPP, which was initially approved and adopted in
December 1998 and expires in December 2008. Under the amendment, the purchase discount was reduced to 5% from 15%, and such
discount was modified so that it will be applied only to the date of purchase rather than any earlier or "look-back" dates. Effective from
May 1, 2007, the price at which our common stock will be purchased under our ESPP shall be 95% of the fair market value of our
common stock on the last day of the applicable offering period.
NOTE 7. PREFERRED STOCK
We are authorized, subject to limitations prescribed by Delaware law, to provide for the issuance of preferred stock in one or
more series, to establish from time to time the number of shares included within each series, to fix the rights, preferences and privileges
of the shares of each wholly unissued series and any qualifications, limitations or restrictions thereon, and to increase or decrease the
number of shares of any such series (but not below the number of shares of such series then outstanding) without any further vote or
action by the stockholders. During the three and six months ended August 31, 2007, there was no activity in our redeemable convertible
preferred stock.

13ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with our
financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2007, which
was filed with the SEC on April 26, 2007, and the unaudited financial statements and related notes contained in this Quarterly Report
on Form 10-Q.  This discussion contains forward-looking statements that involve risks and uncertainties. Forward-looking
statements include statements regarding trends in the marketplace, our future cash and liquidity position, the extent and timing of future
revenues, expenses and customer demand, the deployment of our products and services or the anticipated performance and
application of products or services, statements regarding the financial statement impact of SFAS 123(R), statements regarding future
economic conditions or performance, and statements regarding our anticipated interactions with third parties.  All forward-looking
statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to
update any forward-looking statement except as required by law.  Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including without limitation those discussed in Item 1A Risk Factors of
this Quarterly Report on Form 10-Q.
Overview
Our goal is to become the de facto standard among digital delivery solution providers. We are pursuing various strategic
objectives to achieve this goal. First, we are working to become a profitable, cash-generating company by growing our SubscribeNet
service business and practicing stringent fiscal responsibility. Second, we are actively increasing our efforts to reach markets outside
our existing enterprise software developer customer base. We intend to leverage our digital delivery and entitlement expertise, and
expanded service offering, to penetrate new markets and new market segments. Third, we are seeking to strengthen our technological
advantage and extend the breadth of our functionality in the electronic digital asset delivery and entitlement management area by
further improving our central offering through internal research and development, through alliances with complementary technology
providers, and through development efforts to bring new capabilities to our services to help us access new markets. We are also
seeking to extend and strengthen our customer base by executing on our sales and marketing plan and providing exceptional customer
service.
Our central offering is the SubscribeNet service. Our SubscribeNet service is an on-demand solution for digital asset management
and delivery that enables technology companies to deliver digital files and interact with customers in an efficient and controlled manner.
Our traditional market for the SubscribeNet service has been enterprise technology companies. Our SubscribeNet service allows
software providers and their channel partners to distribute software online, manage licensing and entitlement across their global
customer bases, track and report deliveries and download activity, and manage export compliance. By using the SubscribeNet service,
customers can reduce their costs associated with manufacturing, packaging and distributing physical CDs, and automate and simplify
their software licensing processes. SubscribeNet also enhances export and revenue recognition compliance.
We believe the SubscribeNet service also has broad application beyond the enterprise technology industry, including the delivery
and entitlement management of digital goods such as video, music, and content. Accordingly, we are expanding our efforts to reach
these new markets. One market of particular interest to us is video delivery. We believe our technology is well suited to digital
entertainment distribution because we have the ability to store and deliver large files at high speeds, and a unique system of entitlement
controls to prevent unauthorized downloads of valuable digital content. We believe this technology has applications both for enterprises
and individuals. We also see similar opportunities for the delivery and management of music, game files and various forms of digital
media.
During our 2006 fiscal year, we launched Digital Fastball, an electronic content delivery and management service designed for
small and medium-sized business professionals. Our Digital Fastball service uses our network to provide users a fast and secure
means of controlling ongoing access of their valuable digital content to a specified list of recipients across the globe. The underlying
technology and infrastructure is based upon our SubscribeNet technology, which our customers use for electronic software delivery and
management. We currently are offering14Digital Fastball as a free service to establish a user community and generate word-of-mouth
marketing. In the longer term, we intend to develop and market this and other new related product offerings on a revenue-generating
basis in targeted industries where the need for entitlement controls and large file delivery is greatest. We also are exploring
opportunities to deliver and manage video and digital content in new markets, including social networking, and are investing resources
toward this end. We anticipate introducing services in this area in the near future.

We earn revenues and generate cash principally through recurring service fees charged for our SubscribeNet service and
professional services fees charged for the customization of our SubscribeNet service.

We have incurred losses from operations during each fiscal year since inception and have incurred negative cash flows from
operations during each fiscal year since inception, with the exception of our most recent fiscal year ended February 28, 2007. Net loss
for the six months ended August 31, 2007 decreased from our prior year loss for the corresponding period. We recorded net income for
the three months ended August 31, 2007 of approximately $0.1 million. For the six months ended August 31, 2007, we recorded cash
used in operating activities of approximately $0.5 million, which was an increase in cash used from operations from the corresponding
period in the prior year. Our cash flow position for the current quarter is discussed further in the "Liquidity and Capital
Resources" section below.
We believe that the effects of our capital financings to date, our past and current strategic actions to improve revenue, and our
ongoing cost controls will generate sufficient cash resources to fund our future operations. However, if we fail to adequately increase
our revenues or control spending, our business could suffer material adverse effects.
We face a number of risks that are described in more detail inItem 1A. Risk Factors below.
Important Trends
We currently see a number of trends in the marketplace that are important for our business. Perhaps the most significant trend
is the increasing role our licensing technology is playing in our business, which over the past two years has become at least as
important as our electronic software delivery services. In most respects, this has been a positive development for us. For example, the
typical contract value for our license solution is often higher than that of electronic software delivery, and it has gained market
acceptance over a shorter period of time than electronic software delivery, which may suggest that the service addresses a more critical
and immediate problem for our potential customers. We also believe our software-as-a-service model gives us a competitive advantage
relative to our major competitors because we can usually offer customers delivery and entitlement management services more quickly,
and at less cost, than if they purchase an installed software application that requires a significant license fee and extensive professional
services work.
The shift toward our licensing solution also carries risks, however, because sales of our licensing service involve more complex
implementations and more professional services work than sales of our other services. Thus, while we believe our licensing solution
requires substantially less professional services work than the installed software applications sold by our competitors, our
implementations of the licensing service have taken longer and been more challenging than implementations of our software delivery
services. Consequently, it has taken substantially more time for us to recognize revenue from these contracts. Moreover, the increased
emphasis on our licensing solution has played a major role in increasing the percentage of our revenues that are derived from
professional services. Unlike our recurring subscription fees, which are relatively predictable and have favorable profit margins,
professional services revenues are neither recurring nor predictable quarter over quarter, and they often carry lower profit margins.
Over time, we expect to gain efficiencies in our licensing service implementations as we continue to build repeatable processes and
learn from implementations we have already performed. For the foreseeable future, however, we face risks that our growing
dependence on our licensing solution could delay our ability to recognize revenue, negatively impact our profit margins, and make it
more difficult to accurately forecast our future results. If some or all of these challenges continue or worsen, our business operations
and results could suffer.

Another ongoing trend affecting us is the pace of mergers and acquisitions in the enterprise software sector. These consolidations
pose both opportunities and risks for us, potentially leading either to growth in our contracts15with customers who grow larger, or to
cancellation of customer contracts by customers who merge or are acquired by companies that do not use our SubscribeNet service.
One trend that has become more prevalent over the past year, and which we expect to continue, is an increase in variable billing
provisions in our customer agreements. Typically, these variable billing terms provide that a portion of customer fees will be based upon
the number of transactions the customer processes through our SubscribeNet service. In large part, we attribute this increase in
variable billing to our penetration of markets outside the traditional enterprise software sector, and to our agreements with large digital
distributors who have contracted with us to process their deliveries. We believe these agreements have been beneficial to us, but the
trend toward variable billings carries the risk that our future revenues will be less stable and predictable.
In addition, we see a number of sustained trends in the enterprise software sector. For example, technology companies continue
moving toward outsourcing operational functions to reduce costs. Our services enable enterprise software companies to outsource key
operational functions in a manner that we believe is financially compelling. Therefore, we may benefit from this trend on an ongoing
basis. Hosted web-based applications, which in the past have been limited by concerns about speed, reliability and security, continue to
gain acceptance among mainstream businesses, largely because of the cost savings they can offer. This trend may benefit us as our
SubscribeNet service is a hosted web-based application.
Critical Accounting Policies and Estimates
In this Management's Discussion and Analysis of Financial Condition and Results of Operations, we discuss our financial
statements, which have been prepared in accordance with generally accepted accounting principles in the United States. In preparing
these financial statements, we are required to make estimates and assumptions affecting the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. We evaluate our estimates and judgments on an ongoing basis. We base our estimates and
judgments on historical experience and on various other factors we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources.
Actual results may differ from these estimates.
We consider accounting policies related to revenue recognition, costs of deferred revenue, stock-based compensation, allowance
for doubtful accounts, and income taxes to be critical accounting policies due to the estimation process involved in each.
Revenue Recognition
We recognize revenue when all of the following conditions are met:

There is persuasive evidence of an arrangement;
We have provided the service to the customer, made the software available for customer download through our website, or
shipped the software to the customer;
We believe collection of fees is reasonably assured; and
The amount of fees to be paid by the customer is fixed or determinable.Our revenue results primarily from three types of arrangements: (1) sales of our SubscribeNet digital delivery service to software
vendors and other companies that distribute software as part of their business; (2) professional services to such customers in
connection with customization of our SubscribeNet service, data conversion, and integration of our SubscribeNet service with other
third party software; and (3) resale of third-party services or licenses complementary to our SubscribeNet service, including e-commerce.
In addition, if appropriate opportunities present themselves in the future, we may generate revenue from the licenses of our
proprietary software, along with related maintenance, to companies using our software internally or to provide web-based services to
their customers.

16We defer revenues related to our SubscribeNet service and generally recognize them ratably over the term of the service
arrangement. The typical subscription term is one year, although some may be shorter or extend up to three years. Our SubscribeNet
service agreements are generally noncancelable, although customers usually have the right to terminate for cause if we materially fail
to perform. A majority of our SubscribeNet service implementations for new customers involve customization essential to the
functionality of the service. In these cases, we defer revenue recognition until the service go-live date and then recognize the
SubscribeNet service revenue ratably over the remaining contract term. The go-live date is the later of the customer acceptance date or
the point at which no additional customization is required. If the implementation fee is bundled with the recurring SubscribeNet service
fee, it is recognized over the same period as the SubscribeNet service fee. If the implementation fee is charged separately, then the
associated revenue is recognized in accordance with our professional services revenue recognition policy, described below. Our
SubscribeNet service agreements normally provide a set period (generally five days) for a customer to evaluate a completed
implementation, and also provide for deemed acceptance if the customer has not affirmatively rejected the implementation within such
period. We typically rely on such deemed acceptance by most of our customers.
As stated above, in addition to implementations, we also provide other professional services to our customers related to our
SubscribeNet agreements. Generally, these services do not provide stand-alone value to a customer and, accordingly, we defer
recognition of this revenue until the go-live date for the professional services, similar to the manner in which we treat SubscribeNet
service revenues discussed above. Such professional services revenues are recognized ratably over the longer of the remaining
estimated customer life or the remaining contract term, commencing with the acceptance of the professional services. Estimated
customer life requires that we periodically estimate the projected life of our existing customers based on historical information such as
customer renewal rates. In some instances, the fees related to the implementation of the SubscribeNet service and other professional
services are bundled with the SubscribeNet service fee without specifically stating the fees attributable to each portion of services. In
these instances, the professional services fees are recognized from acceptance of the professional services through the end of the
remaining contract term on a ratable basis with the SubscribeNet service fee.
Revenues related to our resale of third-party services or software licenses complementary to our SubscribeNet service are
generally recognized as the service or license is provided. If the resold service or license involves customization essential to the
functionality, the fees charged for the customization are recognized as revenue in the same manner as professional services discussed
above. Resold services or licenses are recognized as revenue based on the gross fee charged to the customer, since we bear the
credit risk for resold services or licenses, have latitude in establishing pricing, and are primarily responsible for acceptability of the
services or licenses delivered. In addition, costs paid to the third-party providers are recorded as cost of revenues and recognized over
the same period as the related revenue.
Deferred Costs
We capitalize direct costs of revenues related to significant SubscribeNet service implementations and established professional
services contracts associated with our SubscribeNet services. Direct costs include compensation and payroll-related benefits directly
related to the time spent on significant implementation and professional services activities. These costs are recognized over the same
period as related revenue is recognized (seeRevenue Recognition above). Costs associated with professional services
involving significant new functionality for the SubscribeNet service that are partially or fully funded by customers, but which do not
qualify as funded research and development activities, are expensed as cost of revenues as incurred until a working model is delivered
to the customer. Once a working model has been delivered, all additional direct costs are capitalized in the same manner discussed
above. Any changes in our estimated customer life estimates could result in corresponding changes to our recognition of deferred
revenues and costs. A 10% increase in our estimated customer life during the three and six months ended August 31, 2007 would have
caused a decrease in the amortization of both deferred revenues and deferred costs of revenues, resulting in an immaterial decrease to
our net income and an increase to our net loss, respectively. At August 31, 2007, we had approximately $0.8 million in capitalized costs
relating to deferred revenues. We expense customer acquisition costs, including sales commissions, as incurred. We also defer legal
costs incurred in connection with patent applications. As of August 31, 2007, we had approximately $0.2 million in deferred legal costs
related to patent applications. Upon issuance of a patent, the deferred legal costs for17that patent are expensed ratably over the patent's estimated useful life.

Stock-based Compensation
Following the guidance prescribed in SAB 107, on March 1, 2006 we adopted SFAS 123(R) using the modified prospective
method and, accordingly, have not restated the results of income from prior interim periods and fiscal years. Under SFAS 123(R), we
measure compensation cost for all stock-based awards at fair value on the date of grant and recognize compensation expense on a
straight-line basis over the service period that the awards are expected to vest. Stock options and awards issued under our equity plans
as well as stock purchases under our ESPP are subject to SFAS 123(R), which generally vest over a three to four-year service period.
We adopted and implemented our 2006 Equity Incentive Plan during the year ended February 28, 2007. See our Annual Report on
Form 10-K for the year ended February 28, 2007 for further discussion on our 2006 Equity Incentive Plan.
Software Development Costs
We account for costs incurred for computer software developed or obtained for internal use in accordance with
SOP 98-1. SOP 98-1 requires companies to capitalize qualifying computer software costs that are incurred during the application and
development stage and amortize them over the software's estimated useful life.
We capitalized approximately $160,000 and $172,000 in internal use software costs during the three and six months ended
August 31, 2007, respectively, compared to approximately $2,000 and $36,000 for the three and six months ended August 31, 2006,
respectively. The majority of the software is still in the development stage and was not placed into service as of August 31, 2007. We
will cease capitalizing the internal use software development costs when the software is used to perform the function intended and
technical feasibility has been determined. These associated costs will then be amortized using the straight-line method over the
estimated useful life of the software, which is generally three years.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses from our inability to collect required payments from our
customers. When evaluating the adequacy of this allowance, we analyze specific accounts receivable, historical bad debts, customer
credit-worthiness, current economic trends and changes in our customers' payment history. We may need to record increases to our
allowance balances in the future. Any dispute, early contract termination, or other collection issue related to these receivable balances
could have a material adverse impact on our financial condition or results of operations. There were no allowances made during the
three and six months ended August 31, 2007.
Income Taxes
In conjunction with preparing our financial statements, we must estimate our income taxes in each of the jurisdictions in which
we operate. This process involves estimating our actual current tax expense together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We
must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we believe that
recovery is not likely, we must establish a valuation allowance. Since we have incurred losses since inception and therefore have not
been required to pay income taxes, we have fully reserved our deferred tax assets at August 31, 2007. In the event we are able to
realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period in which they
are realized.

18Results of Operations
Total Revenue
The following table sets forth the revenue and change in revenue for the periods indicated (in thousands):

For the three months ended

For the six months endedAugust 31, 2007

August 31, 2006

August 31, 2007

August 31, 2006Total

Change


Total

Total

Change


TotalRevenue
$
3,187

$
605

$
2,582

$
5,931

$
735

$
5,196The increase in revenue during the three months ended August 31, 2007, compared to the three months ended August 31, 2006, is
primarily due to approximately $430,000 in revenue that was recognized from new SubscribeNet service customers whose go-live date
was achieved between June 1, 2006, and August 31, 2007, recognition of approximately $270,000 of deferred revenue from a customer
who terminated its agreement during the period, and a net increase of approximately $190,000 in professional services and variable
billings for existing customers. These increases were partially offset by a decrease of approximately $290,000 related to customers who
terminated their contracts during the last 12 months.
The increase in revenue during the six months ended August 31, 2007, compared to the six months ended August 31, 2006, is
primarily due to approximately $1,010,000 in revenue that was recognized from new SubscribeNet service customers whose go-live
date was achieved between June 1, 2006, and August 31, 2007, recognition of approximately $270,000 of deferred revenue from a
customer who terminated its agreement during the period, and a net increase of approximately $260,000 in professional services and
variable billings for existing customers. These increases were partially offset by a decrease of approximately $810,000 related to
customers who terminated their contracts during the last 12 months.
We expect our revenue for our third quarter ending November 30, 2007 to slightly decrease from our second quarter, which ended
August 31, 2007, primarily due to the full recognition of approximately $270,000 of deferred revenue from a customer in the second
quarter as a result of the termination of its agreement during the second quarter.

Costs and Expenses
The following table sets forth the costs and expenses, changes in costs and expenses, and percentage of total revenue for the
periods indicated (in thousands, except percentage amounts):

For the three months ended

For the six months endedAugust 31, 2007

August 31, 2006

August 31, 2007

August 31, 2006Total

Change

% ofRevenue

Total

% ofRevenue

Total

Change

% ofRevenue

Total

% ofRevenueTotal cost of revenues
$  1,044

$   (40)

33%

$ 1,084

42%

$  2,097

$    (51)

35%

$   2,148

41%Gross margin
2,143

645

67%

1,498

58%

3,834

786

65%

3,048

59%Operating expenses:Sales and marketing
604

(65)

19%

669

26%

1,311

(163)

22%

1,474

28%Product development
317

(185)

10%

502

19%

774

(207)

13%

981

19%General and administrative
1,231

106

39%

1,125

44%

2,348

4

40%

2,344

45%Loss on disposal of assets
4

4

0%

-



26

26

0%

-Total operating expenses
$  2,156

$ (140)

68%

$ 2,296

89%

$  4,459

$  (340)

75%

$   4,799

92%19Cost of Revenues
Our cost of revenues for the three and six months ended August 31, 2007 decreased slightly from the prior
year results. The decrease was due to lower allocated costs during the three months ended August 31, 2007 related to direct employee expenses as
personnel spent time on activities not directly related to cost of revenues. There was also a decrease in internet expenses related to
SubscribeNet service activities. These decreases were slightly offset by the recognition of approximately $90,000 of deferred costs
related to a customer who terminated its agreement during the period. The increase in the gross profit margin percentage for the three
and six months ended August 31, 2007 is primarily due to increased revenue while maintaining total costs consistent with prior
periods.
Cost of revenues primarily consists of certain allocated costs related to our internet connectivity, assets supporting cost of
revenues, and customer support. Cost of revenues also consists of professional services personnel costs and the cost of third-party
products and services sold.  We expect total cost of revenues for the current fiscal year to be slightly lower than fiscal year 2007
due to a reduction in allocated personnel expenses and slightly lower infrastructure costs. In addition, we expect our gross profit
margin percentage for the current fiscal year to increase from our fiscal year 2007 levels due to lower costs and higher revenue. In
general, we expect our total revenues to increase at a higher rate than our costs of revenues. Our quarterly cost of revenues may
fluctuate based on multiple variables including, without limitation, revenue mix fluctuations, levels of professional services activities,
infrastructure costs, and variable external support utilization rates. We expect our gross margins to slightly decrease in our third quarter
ending November 30, 2007.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of employee salaries, benefits and commissions, as well as advertising,
promotional materials and trade show expenses.
Our sales and marketing expenses for the three and six months ended August 31, 2007 decreased approximately $65,000 and
$163,000, respectively, compared to prior year results for the corresponding periods. The decrease was the result of lower expenses
primarily related to sales commissions, recruiting fees and advertising expenses. There was also a decrease related to stock based
compensation expense of approximately $27,000 and $42,000 for the three and six months ended August 31, 2007, respectively. We
expect our sales and marketing expenses in our fiscal year ending February 29, 2008 to remain fairly consistent with such expenses in
our fiscal year ended February 28, 2007.
Product Development Expenses
Product development expenses primarily consist of personnel, consulting, software and related maintenance, equipment
depreciation expense and allocated overhead costs. Costs related to research, design and development of products and services have
been charged to product development expense as incurred.
Our product development expense for the three and six months ended August 31, 2007 decreased approximately $185,000 and
$207,000, respectively, compared to the prior year results for the corresponding periods. The decrease was primarily due to a reduction
in expenses allocated to product development activities as personnel increased time spent on capitalizable product development
activities, a decrease in personnel costs related to operations management and decreases in variable support costs and incremental
investments in our infrastructure related to product development activities.
We anticipate continued investment in additional functionality for our SubscribeNet service, our underlying proprietary software, and
new services related to our software. We expect those investments to fluctuate over time and therefore expect our product development
expenses to vary accordingly. However, we expect total product development expenditures in our fiscal year ending February 29, 2008
to remain fairly consistent with such expenditures during our fiscal year ended February 28, 2007.

20General and Administrative Expenses
General and administrative expenses consist primarily of compensation for administrative and executive personnel, fees for
professional services and certain overhead costs.

The increase in our general and administrative expense for three months ended August 31, 2007 was
primarily due to an increase in allocated overhead expenses related primarily to employees and consultants who spent time on general and administrative activities.
General and administrative expenses for the six months ended August 31, 2007 remained fairly consistent with the prior year results for
the corresponding periods.
We expect total general and administrative expenditures in fiscal year 2008 to decrease from our fiscal year 2007 levels due
primarily to an expected decrease in stock compensation expense. Stock compensation expense is expected to decrease as employee
stock options become fully amortized and due to certain unvested employee stock options that were cancelled as part of the Exchange
Program described inNote 6 to our financial statements, "Common Stock."
Loss on Disposal of Assets
For the three and six months ended August 31, 2007, we recognized a loss of approximately $4,000 and $26,000 for the
disposal of assets, respectively. During the six months ended August 31, 2007 there was a loss on the disposal of an asset related to
computer software that is no longer being utilized which accounted for an approximate loss of $22,000.
Interest Expense
For the three and six months ended August 31, 2007, we incurred no interest expense, a decrease of $10,000 and $21,000
from the three and six months ended August 31, 2006, respectively.  As of August 31, 2007, we have no outstanding debt or
capital lease obligations, and accordingly, we do not expect to incur any interest expense for the fiscal year ending February 29,
2008.
Interest and Other Income
For the three months ended August 31, 2007, interest and other income was approximately $157,000 of income, a slight
increase from $144,000 for the three months ended August 31, 2006. For the six months ended August 31, 2007, interest and
other income was approximately $302,000 of income, a decrease from $433,000 for the six months ended August 31, 2006. The
decrease in interest and other income for the six months ended August 31, 2007 was primarily due to a one-time litigation settlement
that we received in the amount of $152,366 during the six months ended August 31, 2006.  On an ongoing basis, interest and
other income primarily relates to interest earned on our investment balances.
Income Taxes
As of February 28, 2007, we had approximately $25 million of federal and $12.6 million of state net operating loss carryforwards
available to offset future taxable income, which will expire at various dates between 2017 and 2027. The Tax Reform Act of 1986 limits
the use of net operating losses and tax credit carryforwards in certain circumstances where changes occur in the stock ownership of a
company. Because of cumulative ownership changes in the past, the federal and state loss carryforwards have been reduced by
the amount of the net operating loss carryforwards that will expire. Should there be a future change of ownership, the available net
operating losses may be further limited.  Based upon our limited operating history and losses incurred to date,
management does not believe the realization of the related deferred tax assets meets the recognition criteria required by generally
accepted accounting principles and accordingly, a full valuation allowance has been recorded to reduce the carrying value of the
deferred tax assets to zero.

21Liquidity and Capital Resources
The following table presents our liquidity position at August 31, 2007 and 2006 (in thousands):

For the six months endedAugust 31, 2007

August 31, 2006Cash and cash equivalents


$
11,819

$
12,542Working capital


$
10,195

$
10,317Net cash provided by (used in) operating activities


$
(494)

$
110Net cash provided by (used in) financing activities


$
330

$
(46)Net cash used in investing activities


$
(277)

$
(172)We had $11.8 million in cash and cash equivalents at August 31, 2007 and our working capital was $10.2 million.
Our net cash used in operations was approximately $494,000 for the six months ended August 31, 2007, which was a decrease
from the cash provided by operations during the six months ended August 31, 2006. During the six months ended August 31, 2007,
excluding non-cash stock-based compensation charges, we had net income of approximately $64,000. Our negative operating cash
flow was primarily due to the payments of vendor bills that resulted in a decrease of the related accounts payable and accrued expense
accounts and approximately $200,000 in severance payments that were made to terminated employees. Our ability to reduce our uses
of cash and generate positive cash flows in future periods will largely depend on our ability to increase the number of customers of our
SubscribeNet service while increasing existing subscriptions through strong contract renewals. We expect our cash balances to
fluctuate from time to time due to the timing of customer collections and vendor payments in the ordinary course of
business.
Our net cash provided by financing activities was approximately $330,000 for the six months ended August 31, 2007. 
This amount was the result of proceeds from the issuance of approximately 93,000 shares of common stock in connection with our
stock option plan and our ESPP.
Our net cash used in investing activities was approximately $277,000 during the three months ended August 31, 2007. This amount
was comprised of our purchases of fixed assets paid from our cash and cash equivalents and capitalized costs related to the
development of internal use software. We used these fixed asset purchases primarily to upgrade and expand our SubscribeNet service
infrastructure and corporate information systems.
We believe our existing cash and cash equivalents, together with any cash generated from future operations, will be sufficient to
fund our operating activities, capital expenditures and financing arrangements for the foreseeable future.
At August 31, 2007, we had no relationships with unconsolidated entities or financial partnerships, such as entities often referred to
as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
The following table summarizes our lease obligations and contractual commitments at August 31, 2007, and the effect such
obligations are expected to have on our liquidity and cash flow in future periods (in thousands). This table provides information through
our fiscal year ending February 28, 2010, as we do not have any debt or lease obligations beyond that point.


22Payments due by periodTotal

Less than1 Year (a)

1-3 years (b)Operating leases


$       1,069

$         268

$             801Contractual commitments


1,583

591

992$       2,652

$       859

$          1,793(a)   Includes payments from September 1, 2007 through February 29, 2008.
   (b)   Includes payments from March 1, 2008 through February 28, 2010.As of August 31, 2007, our Series A and Series B redeemable convertible preferred stock entitled the holders to liquidation
preferences of a minimum of $0.5 million and $6.0 million (or, if greater, the aggregate value of the common stock into which the
Series B convertible preferred stock is then convertible), respectively, in the event of deemed liquidation events with the respect to our
company.
Recent Accounting Pronouncements
We are currently evaluating the impact of adopting SFAS 157 on our financial position, results of operations, and cash flows;
seeNote 2 to our financial statements, "Significant Accounting Policies."

Our adoption of FIN 48 on March 1, 2007 has not had a significant impact on our financial position or results of operations; see
Note 2 to our financial statements, "Significant Accounting Policies."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At August 31, 2007, we had cash and cash equivalents of $11.8 million. We place our investments with high quality
issuers, according to our investment policy, in an effort to limit the amount of credit exposure to any one issue or issuer.
Our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalents portfolio. We did not
use derivative financial instruments during fiscal 2007 or the six months ended August 31, 2007. The effect of changes in interest rates
of +/-10% over a six-month horizon would not materially affect the fair value of our portfolio. Declines in interest rates will, over time,
decrease the interest income from our portfolio.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our principal
executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended or the Exchange Act) as
of the end of the period covered by this Quarterly Report, have concluded that our disclosure controls and procedures are effective
based on their evaluation of our disclosure controls and procedures required by paragraph (b) of the Exchange Act
Rules 13a-15 or 15d-15.
(b) Changes in Internal Controls over Financial Reporting. No changes in our internal controls over financial reporting
identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 occurred
during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial
reporting.

23PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In re Intraware, Inc. Initial Public Offering Securities Litigation
In October 2001, we were served with a summons and complaint in a purported securities class action lawsuit. On or
about April 19, 2002, we were served with an amended complaint in this action, which is now titled In re Intraware, Inc. Initial Public
Offering Securities Litigation, Civ. No. 01-9349 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, 21 MC 92
(SAS) (S.D.N.Y.). The amended complaint is brought purportedly on behalf of all persons who purchased our common stock from
February 25, 1999 (the date of our initial public offering) through December 6, 2000. It names as defendants the company, three of our
present and former officers and directors, and several investment banking firms that served as underwriters of our initial public offering.
The complaint alleges liability under Sections 11 and 15 of the Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, on the grounds that the registration statement for the offerings did not disclose that: (1)
the underwriters had agreed to allow certain customers to purchase shares in the offerings in exchange for excess commissions paid to
the underwriters; and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at
predetermined prices. The amended complaint also alleges that the underwriters misused their securities analysts to manipulate the
price of our stock. No specific damages are claimed.
Lawsuits containing similar allegations have been filed in the Southern District of New York challenging over 300 other initial public
offerings and secondary offerings conducted in 1999 and 2000. All of these lawsuits have been consolidated for pretrial purposes
before United States District Court Judge Shira Scheindlin of the Southern District of New York. On July 15, 2002, an omnibus motion
to dismiss was filed in the coordinated litigation on behalf of the issuer defendants, of which the company and three of our named
current and former officers and directors are a part, on common pleadings issues. On or about October 9, 2002, the Court entered and
ordered a Stipulation of Dismissal, which dismissed the three named current and former officers and directors from the litigation without
prejudice. On February 19, 2003, the Court entered an order denying in part the issuer- defendants' omnibus motion to dismiss,
including those portions of the motion to dismiss relating to us.
In June 2004, a stipulation of settlement for the claims against the issuer-defendants, including us, was submitted to the Court. The
underwriter-defendants in the In re Initial Public Offering Securities Litigation, including the underwriters of our initial public offering,
were not parties to the stipulation of settlement.
Under the settlement, we would have been dismissed of all claims in exchange for a contingent payment guarantee by the
insurance companies responsible for insuring us as an issuer. In August 2005, the Court preliminarily approved the settlement.
In December 2006, the appellate court overturned the certification of classes in the six test cases that were selected by the
underwriter defendants and plaintiffs in the coordinated proceedings.  We are not one of the six test cases.
 Because class certification was a condition of the settlement, it was unlikely that the settlement
would receive final Court approval.  On June 25, 2007, the Court entered an order terminating the proposed
settlement based on a stipulation among the parties to the settlement.  Plaintiffs have filed amended master allegations
and amended complaints in the six test cases.  It is uncertain whether there will be any revised or future settlement. If the
litigation continues, then we believe that we have meritorious defenses and intend to defend the action vigorously. However, the
litigation results cannot be predicted at this point.

24ITEM 1A. RISK FACTORS
A description of the risk factors associated with our business is set forth below. This description includes any material
changes to and supersedes the description of the risk factors associated with our business previously disclosed in our Annual Report
on Form 10-K for the fiscal year ended February 28, 2007. You should carefully consider all of these risk factors, taken as a
whole, together with the other information contained in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the
fiscal year ended February 28, 2007 and in our other public filings. If any of the risks and uncertainties described in such risk
factors actually occur, our business, financial condition or operating results could differ materially from the plans, projections and other
forward-looking statements included in the section titled "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this report and in our other public filings. In addition, if any of the risks and uncertainties described in the
following risk factors, or if any other risks and uncertainties actually occur, our business, financial condition or operating results could be
harmed substantially.
We have a history of losses and negative cash flow, and we have yet to achieve sustained profitability or positive cash
flow.
We have incurred significant losses since we were formed in 1996, totaling approximately $162 million, and have yet to
achieve sustained profitability or positive cash flow. Also, with the exception of a few quarters, we have not achieved positive cash flow
from operations since our formation in 1996. We may not have positive cash flows from operations for our 2008 fiscal year. We cannot
predict whether or when we will be able to achieve sustained profitability or positive cash flow in the future.
The market for our SubscribeNet service is not fully developed and remains volatile. If the market for our service does not fully
develop, or develops more slowly than we expect, our business will be harmed.
The market for on-demand digital asset delivery and management services is relatively unproven, and it is uncertain whether
these services will achieve and sustain high levels of demand and market acceptance. Our success will depend to a substantial extent
on the willingness of companies, large and small, to increase their use of on-demand digital delivery services. If companies do not
increase their use of on-demand digital asset delivery and management services, our operating results will suffer. In addition, in this
unproven market, we have limited insight into trends that may develop and affect our business. We may make errors in predicting and
reacting to relevant business trends, which could harm our business.
We market our SubscribeNet service principally to technology companies. However, many software companies have invested
substantial personnel and financial resources in developing their own electronic software and/or license delivery systems and therefore
may be unwilling to migrate to and pay for an outsourced service. In addition, some software companies have adopted automatic
update, or "phone home," technology for delivering software updates, whereby an end-user's computer automatically contacts the
software company's server to check whether updates are available and, if applicable, downloads and installs those updates. While
SubscribeNet supports such an approach, this method for delivering software updates could be viewed by our potential and existing
customers as an alternative to our digital delivery technology, and therefore any increased adoption of this automatic update technology
could hurt our business and results of operations. Further, some companies may be reluctant to use our SubscribeNet delivery services
because they are concerned about the security capabilities of these services.
Our efforts to enter new markets could prove unsuccessful. Conversely, we may be ill-equipped to handle growth rates that
could result from entering new markets.
We believe our SubscribeNet service also has broad application beyond the enterprise technology industry, including the
delivery and entitlement management of digital goods such as video, music, and content. Accordingly, we are expanding our efforts to
reach these new markets. Markets of particular interest to us include video delivery and social networking. We are currently investing
resources and developing services for certain of these markets. We also see opportunities for the delivery and management of music,
game files and various forms of digital media. However, we have no significant experience selling into or serving these markets, and it
is possible our efforts to enter these markets will prove unsuccessful. Similarly, it is possible our efforts to develop our service to meet
the needs of these new markets will not succeed. In either case, we may fail to generate revenue from these efforts, or25even recover our marketing and development investments, in which case our business would likely suffer.

By contrast, if we succeed in penetrating new markets, we could face another set of problems. We are staffed to support the growth
rates we foresee in our traditional enterprise software market. It is possible that if we are effective in reaching new markets, we will be
inadequately staffed to service both new and existing customers at the levels we have committed to provide. It also is possible we will
be unable to increase our staffing quickly enough, or manage growth effectively enough, to maintain necessary service levels and/or to
pursue new opportunities as they arise, in which case our business could suffer.
Competition from other electronic delivery and licensing providers, and potential customer development of in-house electronic
delivery and/or licensing systems, could limit our revenue growth and reduce our gross margins.
The market for selling electronic delivery and licensing services is highly competitive. Some of our competitors have longer
operating histories, greater financial, technical, marketing and other resources, broader product and service offerings, better name
recognition, and a larger installed base of customers than we do. Some of our competitors also have well-established relationships with
our potential customers and with third- party information technology or consulting firms that help market our competitors' services. We
expect competition to intensify as current competitors expand and improve their service offerings and new competitors enter the
market. In addition, our current and potential customers are primarily information technology companies with strong software
development expertise. When considering their alternatives for implementing a system for electronic delivery of software or license
keys, these companies sometimes elect to develop such systems in-house. While we believe our competitive position is strong against
both external competitors and in-house development, we have at times experienced reduced prices, reduced gross margins and lost
sales as a result of such competitive factors. Such competition is likely to intensify, which could limit the growth of our revenues and
gross margins.
The loss of one or more of our key customers could cause our revenue growth to slow or cause our revenues to decline.
A substantial portion of the revenues from our SubscribeNet service comes from a relatively small number of customers. Our
contracts with most of these customers are subject to renewal or cancellation annually. If any of these customers elected to cancel their
agreements with us, or are acquired by companies that do not wish to use our services, our revenue growth would likely slow and our
revenues could decline.
Mergers and acquisitions in the technology sector could harm us by causing cancellation of customer contracts where our
customers are acquired, or by strengthening our competitors.
In recent years, there has been an increase in mergers and acquisitions among technology companies. This trend poses risks
for us. Since our customers are technology companies, any acquisitions of our customers could lead to cancellation of our contracts
with those customers by the acquiring companies. In addition, since our competitors are also technology companies, any acquisitions of
other companies by our competitors, or acquisitions of our competitors by other companies, are likely to result in larger and stronger
companies competing against us. Either of these types of events could reduce our revenue through loss of existing customers, or
reduce our margins through increased price competition.
Our current strategy includes the use of strategic marketing relationships, which may prove unsuccessful.
We currently have marketing relationships in place with vendors including Digital River, Inc. and On Demand Delivery, Inc. dba
Nexstra. In addition, we have marketing relationships with vendors who are members of our Preferred Rights Management Partner
Program. We also have reseller relationships with Akamai Technologies, Inc. and Aspera, Inc., under which we resell their services to
our SubscribeNet customers. However, our marketing relationships have yet to produce significant revenue, and if they fail to do so in
the future, our business could suffer. Similarly, a deterioration or termination of our reseller relationship with Akamai could harm our
business since a portion or our customer base relies on the Akamai service today.

Although our subscription-based sales model for our SubscribeNet service limits the volatility of our online services and
technology revenue, other factors may cause our operating results, and therefore our stock price,26to fluctuate.Our SubscribeNet service fees, which comprise most of our revenue, are recognized ratably over contract terms of generally
one year, thereby limiting the quarter-to-quarter volatility of those revenues. Nevertheless, certain factors may cause our revenue to
fluctuate. In addition to the other risk factors described in this section, factors that could cause such fluctuation include:

An increasing percentage of our revenues are based upon variable fee provisions in our agreements. Those variable revenues
fluctuate based on the degree to which customers are using our SubscribeNet service, which is difficult to predict in advance;
Deferral of SubscribeNet revenue recognition due to: delays by customers in implementing the SubscribeNet service; new sales
involving extensive implementations; or contract modifications adding significant future deliverables;
Unexpected increases in customer cancellations, which could result from service deficiencies, or from external conditions or
circumstances beyond our control;
Lengthening of the sales cycle for our SubscribeNet service due to macroeconomic or other factors;
Actual events, circumstances, outcomes, and amounts differing from judgments, assumptions, and estimates used in determining
the values of certain assets (including the amounts of related valuation allowances), liabilities and other items reflected in our financial
statements or unaudited interim financial statements; and
Changes in accounting rules, such as recording expenses for employee stock option grants.Consequently, operating results for a particular future period are difficult to predict, and prior results are not necessarily indicative of
results to be expected in future periods. Any of these factors could materially adversely affect our results of operations and stock
price.
The market for our Digital Fastball service and other related new product offerings is unproven.
We continue to develop our Digital Fastball service to enable small and medium-sized businesses, as well as consumers, to
send, receive and manage many types and sizes of digital files over the Internet quickly, easily and securely. We currently offer the
Digital Fastball service at no charge, but are working on strategic initiatives to generate Digital Fastball revenue. However, many
systems are already available for sharing files over the Internet, in some cases at little or no cost. In addition, some such systems have
been the targets of widely publicized litigation by copyright holders, which may make some companies reluctant to use Internet-based
digital delivery services such as Digital Fastball or any related products and services that we offer in the future. If our development or
marketing efforts prove unsuccessful with respect to Digital Fastball or other related new product offerings, we may not generate any
profit or even recover our investments, in which case our business could suffer.
The technological and functional requirements we must meet to stay competitive are subject to rapid change. If we are unable
to quickly adapt to these changes and meet the demands of our current and potential customers, we will likely lose sales and market
share and our revenue growth will be limited.
We market primarily to enterprise technology companies who generally demand that a service like ours meet high
technological and functional standards. To remain competitive in this market and meet the demands of current and prospective
customers, we must continually adapt and upgrade our technology and functionality, including through investments in additional
functionality for our SubscribeNet service and underlying proprietary software. In addition, we are developing new functionality to reach
new markets outside of the enterprise software industry, which are similarly competitive and demanding. We are a small company with
limited resources available for enhancing and expanding our services. If we do not respond quickly enough to changing industry standards or27the increased demands of customers and potential customers, we will likely lose sales and market share to competitors
and our growth prospects will be limited. In addition, we could incur substantial costs to modify our services or infrastructure in order to
adapt to changing standards and demands. If we incur such costs and our sales fail to increase commensurately, we may not be able
to achieve sustained profitability and positive operating cash flow.

Defects in our SubscribeNet service could diminish demand for the service and subject us to substantial liability.
Our SubscribeNet service is complex and may have errors or defects that users identify after they begin using it, which could
harm our reputation and our business. Internet-based services frequently contain undetected errors when first introduced or when new
versions or enhancements are released. Despite taking precautions to avoid errors, we have found defects in our service from time to
time, and we may find new errors in our existing service in the future. Because our customers use our service for important aspects of
their business, any errors, defects or other performance problems with our service could hurt our reputation and may damage our
customers' businesses. If that occurs, customers could elect not to renew their agreements with us, could be eligible for credits under
our service level agreements, and could delay or withhold payment to us. We also could lose future sales, or customers may make
warranty claims against us, which could result in an increase in our provision for doubtful accounts and revenue reserve, an increase in
collection cycles for accounts receivable, or the expense and risk of litigation.
Interruptions or delays in service from our third-party web hosting facilities, or in our relationships with third party hardware and
software vendors, could impair the delivery of our SubscribeNet service and harm our business.
We provide our service through computer hardware that is currently located in third-party web hosting facilities in Santa Clara,
California operated by SAVVIS Communications, and in various locations that are used to support the Akamai, Inc. network. We do not
control the operation of these facilities, and they are subject to damage or interruption from earthquakes, floods, fires, power loss,
telecommunications failures and similar events. While physical security measures are in place, they are also subject to break-ins,
sabotage, intentional acts of vandalism and similar misconduct. Despite precautions taken at the facilities, the occurrence of a natural
disaster, a decision to close a facility without adequate notice, or other unanticipated problems at a facility, could result in lengthy
interruptions in our service. In addition, the failure by either facility to provide our required data communications capacity could result in
interruptions in our service. Any damage to, or failure of, our systems could result in interruptions in our service. Interruptions in our
service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and
adversely affect our renewal rates. Our business will be harmed if our customers and potential customers believe our service is
unreliable.
In addition, to a significant degree, we rely on various third-party software applications and hardware to deliver our service. If we
experience disruptions in those vendor relationships and those software and hardware components become unavailable to us, or
unavailable on commercially reasonable terms, our service could be interrupted and/or damaged, causing harm to our customer
relationships, our reputation, and our overall business.
We may raise additional capital to fund acquisitions, product development or general operations. Any such capital financing
would dilute our shareholders' investments.
We may raise additional capital in the future through private or public offerings of stock, or through other means. The purposes
of any such financing would be to increase our cash reserves for potential use in acquiring other businesses, product development
activities, funding our operations and generally strengthening our balance sheet. Any such additional financing would likely dilute the
investments of our current shareholders and may not be available on favorable terms, if at all.
A large percentage of our stock is owned by a small number of stockholders, which can lead to fluctuations and volatility in our
stock price and insurmountable voting power.
As of September 28, 2007, approximately 40% of our common stock, on an as-converted basis, was held by three investors.
Those three investors are Digital River, Inc., Crosslink Capital, Inc, and two affiliated funds, Special28Situations Technology Fund, L.P. (Tech) and Special Situations Technology II, L.P. (Tech II). Because the ownership of our stock is so concentrated, there is a high risk
that a large sale of shares by any of those stockholders could cause a rapid decline in our stock price, in which case our other
stockholders and the company itself could be harmed. In addition, the collective voting power of those stockholders is, as a practical
matter, nearly sufficient to control the outcome of any matter put to a majority vote of the stockholders.

Our operating results could vary due to the methods, estimates and judgments we use in applying our accounting policies,
particularly SFAS 123(R).
The methods, estimates and judgments we use in applying our accounting policies significantly impact our results of
operations. Those methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions,
and factors may arise over time that lead us to change our methods, estimates and judgments. In particular, the calculation of
share-based compensation expense under SFAS 123(R), which we adopted as of the fiscal quarter beginning March 1, 2006, requires that we
use valuation methodologies and a number of assumptions, estimates and conclusions regarding matters such as expected terms,
expected forfeitures, expected volatility of our share price, the expected dividend rate with respect to our common stock and the
exercise behavior of our employees. Furthermore, there are no means, under applicable accounting principles, to compare and adjust
our expense if and when we learn of additional information that may affect our previous estimates, with the exception of changes in
expected forfeitures of share-based awards. Over time, factors may arise that cause us to change our estimates and assumptions with
respect to future share-based compensation arrangements, resulting in variability in our share-based compensation expense. In
addition, any future accounting pronouncements, taxation rules, and new interpretations of existing accounting pronouncements or
taxation rules, could also have a significant effect on our reported results, including our reporting of transactions completed before the
effective date of the change.
Provisions of our charter documents could make it more difficult for a third party to acquire us, even if the offer may be
considered beneficial by our stockholders, which could depress the trading price of our common stock.
Our charter documents, as well as our Second Amended and Restated Preferred Stock Rights Agreement, contain provisions
that could depress the trading price of our common stock by acting to discourage, delay or prevent a change in control of our company
or changes in our management that the stockholders of our company may deem advantageous. These provisions include:

Certain stockholder rights that are triggered in the event a person or entity acquires more than 15% of our voting securities (or up
to 20% in the cases of Crosslink Capital, Inc. and Special Situations Technology Funds.);
The establishment of a classified board of directors so that not all members of our board are elected at one time;
The requirement of a super-majority voting to amend some provisions in our amended and restated certificate of incorporation and
bylaws;
The authorization to issue "blank check" preferred stock by our board to increase the number of outstanding shares and to
discourage a takeover attempt;
The prohibition of stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our
stockholders;
The board of directors is expressly authorized to make, alter or repeal our bylaws; and
Advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by
stockholders at stockholder meetings.29In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of
our company. Section 203 imposes certain restrictions on merger, business combinations and other transactions between us and
holders of 15% or more of our common stock.
Viruses may hinder acceptance of internet-based digital delivery, which could in turn limit our revenue growth.
The proliferation of software viruses is a key risk that could inhibit acceptance by information technology professionals of
web-based delivery of digital goods. Any well-publicized transmission of a computer virus by us or another company using digital delivery
could deter information technology professionals from using, and deter software providers from outsourcing, digital delivery, thereby
adversely affecting our business. Our SubscribeNet service enables our customers to upload their software products directly onto our
systems for downloading by their end-users. Our systems automatically scan our customers' software products for known computer
viruses on an ongoing basis while they are on our systems. However, it is possible that even with these periodic virus scans, our
system could transmit the virus to one or more end-users. Any such virus transmission could result in disputes, litigation and negative
publicity that could adversely affect our business and our stock price.
If our security measures are breached and unauthorized access is obtained to a customer's data, our SubscribeNet service
may be perceived as not being secure and customers may curtail or stop using our service.
Our SubscribeNet service involves the storage and transmission of customers' proprietary information, and security breaches
could expose us to a risk of loss of this information, litigation and possible liability. If our security measures are breached as a result of
third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to one of our
customer's data, our reputation will be damaged, our business may suffer and we could incur significant liability. Because techniques
used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against
a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived
breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose
sales and customers. Some companies may be reluctant to use either our SubscribeNet or Digital Fastball services because they are
concerned about the security capabilities of these services.
Additional government regulations may harm demand for our services and increase our costs of doing business.
Our business has benefited from the tax laws of states in which purchases of software licenses are not taxable if the software
is received only electronically. Some such states are considering whether to change their laws to broaden the taxability of transactions
fulfilled over the internet. Any new imposition of taxes on sales of software licenses where the software is received electronically could
substantially harm demand for our services and thereby materially adversely affect our business, operating results and financial
condition. We also have benefited from implementing our services in Ireland, which offers tax advantages to software companies
distributing software from Ireland. Any regulatory change in Ireland or elsewhere that diminishes those advantages could harm our
business. Other changes in government regulations, in areas such as privacy and export compliance, could also require us to
implement changes in our services or operations that increase our cost of doing business and thereby hurt our financial
performance.
Claims by third parties for intellectual property infringement could force us to stop selling our services, force us to pay royalties,
and force us to indemnify our customers.
Our business involves a high risk that we will be the target of intellectual property infringement claims. These claims could take
a number of forms, including:

Claims by other technology companies alleging that current or future components of our digital delivery service or related services
infringe their intellectual property rights;
Claims by our customers' competitors alleging that our customers' software, which we store and30electronically deliver for our customers, infringes those competitors' intellectual property rights (our customers would typically be required to defend and indemnify
us against such claims, but the claims could nevertheless disrupt our business);Claims that our use of the name "Intraware" violates the rights of other entities that are using the same name. We are aware that
certain other companies are using the name "Intraware" as a company name or as a trademark or service mark. While we have
received no notice of any claims of trademark infringement from any of those companies, we cannot assure you that these companies
may not claim superior rights to "Intraware" or to other marks we use; or
Claims by our customers that we delivered their software to unauthorized third parties, thereby infringing our customers' intellectual
property rights.Industry consolidation is increasing the risk that we will become a target of the types of infringement claims described in the first
two bullets above. Consolidation among companies providing digital delivery, licensing, e-commerce and related technologies is
resulting in more direct competition among the surviving companies in that segment, heightening the risk of intellectual property
infringement claims among those companies, including us. Similarly, consolidation in the enterprise software industry heightens the risk
of intellectual property infringement claims among the companies remaining in that industry, including most of our customers.
These intellectual property claims could be made for patent, copyright or trademark infringement or for misappropriation of trade
secrets. They could be made directly against us, or indirectly through our contractual indemnification obligations to our customers and
channel partners. Any claims could result in costly litigation and be time-consuming to defend, divert management's attention and
resources, or cause delays in releasing new or upgrading existing services. Royalty or licensing agreements, if required, may be
available only on onerous terms, if at all. Although we carry general liability insurance, our insurance may not cover all potential claims
or may not be adequate to protect us from all liability that may be imposed.
We believe we own the rights in, or have the rights required to use, our SubscribeNet technology. However, there can be no
assurance that this technology does not infringe the rights of third parties. In addition, we take steps to verify that end-users who
download our customers' software through our SubscribeNet service are entitled to deploy and use that software. However, there can
be no assurance that this verification procedure will help us defend against claims by, or protect us against liability to, our customers
whose software is downloaded.
If our export compliance system fails to prevent unauthorized exports of our customers' software, we could be sanctioned by
the U.S. government.
Through our SubscribeNet service, we globally distribute software containing encryption technology and other technologies
restricted by U.S. laws and regulations from exportation to certain countries, certain types of recipients, and certain specific end-users.
Our SubscribeNet service incorporates automated procedures to help ensure that the software we deliver electronically is not
downloaded in violation of U.S. export laws and regulations. However, these procedures may not prevent unauthorized exports of
restricted software in every case. If an unauthorized export of software occurs through our SubscribeNet service and the U.S.
government determines that we have violated U.S. export laws or regulations, we could be sanctioned under those laws or regulations.
Sanctions include fines, suspension or revocation of export privileges, and imprisonment.
If our key personnel left our company, our product development, sales, and corporate management could suffer.
Our future success depends upon the continued service of our executive officers and other key technology, sales, marketing
and support personnel. None of our officers or key employees is bound by an employment agreement for any specific term. We do not
maintain life insurance on any of our officers or key employees. If we lose the services of one or more of our key employees, or if one or
more of our executive officers or key employees decides to join a competitor or otherwise compete directly or indirectly with us, this
could significantly harm our business.

31Financial and securities laws, especially the Sarbanes-Oxley Act of 2002, require that we evaluate our internal control
structure. While we believe we currently have adequate internal controls in place, this exercise has no precedent available by which to
measure the adequacy of our compliance, and in addition it may cause our operating expenses to increase.
The Sarbanes-Oxley Act of 2002 and newly proposed or enacted rules and regulations of the SEC and the NASDAQ Stock
Market impose new duties on us and our executives, directors, attorneys and independent registered public accounting firms. In order
to comply with the Sarbanes- Oxley Act and such new rules and regulations, we are evaluating our internal controls over financial
reporting to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls
over financial reporting. We are performing the system and process evaluation and testing (and any necessary remediation) required in
an effort to comply with the management certification and independent registered public accounting firm attestation requirements of
Section 404 of the Sarbanes-Oxley Act. As a result, we are incurring additional expenses and diversion of management's time, and we
may be required to hire additional personnel and engage additional outside legal, accounting and advisory services. Any of these
developments could materially increase our operating expenses and accordingly reduce our net income or increase our net loss. While
we anticipate being able to fully implement the requirements relating to internal control over financial reporting and all other aspects of
Section 404 in a timely fashion, we cannot be certain as to the outcome of our testing and resulting remediation actions or the impact of
the same on our operations since there is little precedent available by which to measure compliance adequacy. If we are unable to
implement the requirements of Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or
investigation by regulatory authorities, such as the SEC or the NASDAQ Stock Market, and our reputation may be harmed. Any such
action could adversely affect our financial results and the price of our common stock.

Moreover, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure
controls or our internal controls over our financial reporting will eliminate all risk of error or fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our
disclosure controls or procedures could be circumvented by the individual acts of some persons, by collusion of two or more people or
by management override of the control. Because of the inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
We expect that we will be required by the Sarbanes-Oxley Act to include an assessment of our internal controls over financial
reporting beginning with our Annual Report on Form 10-K for our fiscal year ending February 29, 2008.
If we acquire any companies or technologies in the future, or enter into joint ventures, they could prove difficult to integrate,
disrupt our business, dilute stockholder value and adversely affect our operating results.
We may acquire or make investments in complementary companies, services and technologies in the future. Similarly, we may
enter into joint ventures as we try to penetrate new markets. We are considerably smaller now than we were when we made our past
acquisitions, and therefore any new acquisitions or investments could be more disruptive to our organization than in the past.
Acquisitions and investments involve numerous risks, including:

difficulties in integrating operations, technologies, services and personnel;
diversion of financial and managerial resources from existing operations;
risk of entering new markets;
potential write-offs of acquired assets;
potential loss of key employees;
inability to generate sufficient revenue to offset acquisition or investment costs; and32delays in customer purchases due to uncertainty.In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted which
could affect the market price of our stock. As a result, if we fail to properly evaluate and execute acquisitions or investments, our
business and prospects may be seriously harmed.
We could face claims in relation to our Employee Stock Purchase Plan.
We have maintained an ESPP program for the benefit of our employees since 1999. In 2006, we determined that beginning in
late 2001, we issued shares that were authorized under our ESPP plan but which exceeded the number of shares we had registered
with the SEC on Form S-8. In October 2006, we registered additional ESPP shares with the SEC, but it is possible we could face claims
for rescission of past purchases or other damages by former employees who lost money selling their ESPP shares. It is difficult to
predict the overall size of these potential claims because we do not have data showing the extent to which employees or former
employees continue to hold their shares or have sold them, or data showing any resulting losses. While we believe the aggregate
amount of potential claims is small, we cannot assure you of this. We also believe we have valid defenses against any such claims,
including without limitation applicable statutes of limitation, but the cost of litigating these issues could be expensive and we cannot
assure you we would prevail on all of our defenses or avoid rescinding certain purchases under the ESPP and/or paying damages.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
We held our Annual Meeting of Stockholders on August 8, 2007. Below are the results of the matters submitted to a vote
at that meeting.

Proposal No. 1:     The stockholders elected the following persons as Class III
Directors to hold office until the 2010 Annual Meeting of Stockholders, or until earlier resignation or removal.


Director's Name
Votes For
Votes WithheldPeter H. Jackson
6,402,113
44,296Alex Danzberger
6,412,336
34,073

The following directors were not subject to re-election at the Annual Meeting, and each such
director's term continued after the Annual Meeting:  Brendan A. McLoughlin, Raymond L. Ocampo, Jr., Peter F. Pervere and
Bradley M. Shuster.
Proposal No. 2:  The stockholders ratified the Audit Committee's appointment of BDO
Seidman LLPas our independent registered public accounting firm for the fiscal year ending February 29, 2008. 
There were 6,328,540 votes for the proposal, 16,904 votes against the proposal, and 100,965 votes abstaining.


33ITEM 6. EXHIBITS


Exhibit
Number
Description3.1(1)
Amended and Restated Certificate of Incorporation of Intraware, Inc.3.2(1)
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Intraware, Inc.3.3(2)
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Intraware, Inc.3.4(3)
Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock3.5(4)
Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock3.6(1)
Certificate of Designations, Preferences and Rights of the Series D Convertible Preferred Stock3.7(5)
Amended and Restated Bylaws of Intraware, Inc.4.1(6)
Second Amended and Restated Preferred Stock Rights Agreement, dated as of January 22, 2007 between Intraware, Inc. and
Computershare Investor Services LLC, including the Certificate of Designation, the form of Rights Certificate and the Summary of Rights attached
thereto as Exhibits A, B and C, respectively10.1*
Amended and Restated Change of Control Severance Agreement, dated as of October 9, 2007 between Intraware, Inc. and Justin M. Benson     PDF10.2*
Amended and Restated Change of Control Severance Agreement, dated as of October 5, 2007  between Intraware, Inc. and Peter H. Jackson     PDF10.3*
Amended and Restated Change of Control Severance Agreement, dated as of October 5, 2007  between Intraware, Inc. and Wendy A. Nieto     PDF31.1*
Certification pursuant to Section 302 of the Sarbanes-Oxley Act - Peter H. Jackson     PDF31.2*
Certification pursuant to Section 302 of the Sarbanes-Oxley Act - Wendy A. Nieto     PDF32.1*
Certification pursuant to Section 906 of the Sarbanes-Oxley Act     PDF_______________
(1) Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended August 31, 2005, filed with the SEC on
October 5, 2005.
   (2) Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended November 30, 2006, filed with the SEC
on January 16, 2007.
   (3) Incorporated by reference to our Current Report on Form 8-K dated April 2, 2001, filed with the SEC on April 13,
2001.
   (4) Incorporated by reference to our Current Report on Form 8-K dated November 9, 2005, filed with the SEC on November 15,
2005.
   (5) Incorporated by reference to our Current Report on Form 8-K dated September 12, 2005, filed with the SEC on September 12,
2005.
   (6) Incorporated by reference to our Current Report on Form 8-K dated January 19, 2007, filed with the SEC on January 23,
2007.
   *   Filed Herewith



34SIGNATURE

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

INTRAWARE, INC.Date: October 15, 2007
    By: /s/ WENDY A. NIETO
               
    Wendy A. Nieto
Chief Financial Officer and Executive Vice President35