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

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FORM 10-Q

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

For the quarterly period ended May 31, 2006

OR

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

For the transition period from ________to _________

Commission file number 000-25249

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

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

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 June 30, 2006Common Stock, $0.001 par value

6,127,446

Note:PDF provided as a courtesy


Intraware, Inc.Table of Contents

PART I.   FINANCIAL INFORMATION

Page No.Item 1.   Consolidated Financial Statements (unaudited):Consolidated Balance Sheets — at May 31, 2006 and February 28, 2006

2Consolidated Statements of Operations — for the Three Months Ended May 31, 2006 and May 31, 2005

3Consolidated Statements of Cash Flows — for the Three Months Ended May 31, 2006 and May 31, 2005

4Notes to Unaudited Interim Consolidated Financial Statements

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

15Item 3.   Quantitative and Qualitative Disclosures About Market Risk

23Item 4.   Controls and Procedures

23PART II.  OTHER INFORMATIONItem 1.   Legal Proceedings

23Item 1A.  Risk Factors

24Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

29Item 3.   Defaults Upon Senior Securities

29Item 4.   Submission of Matters to a Vote of Security Holders

29Item 5.   Other Information

30Item 6.   Exhibits

30Signatures

31Part I -- FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

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

May 31, 2006

February 28, 2006ASSETSCurrent assets:Cash and cash equivalents

$
12,331

$
12,650Accounts receivable, net


1,675


1,682Costs of deferred revenue


371


393Other current assets


374


329Total current assets


14,751


15,054Costs of deferred revenue, less current portion


339


244Property and equipment, net


597


620Other assets


168


146Total assets

$
15,855

$
16,064LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK &STOCKHOLDERS' EQUITYCurrent liabilities:Notes payable

$
361

$
372Accounts payable


656


478Accrued expenses


751


804Deferred revenue


2,136


2,192Total current liabilities


3,904


3,846Deferred revenue, less current portion


211


136Notes payable, less current portion


122


158Total liabilities


4,237


4,140Commitments and contingencies (Note 4)Redeemable convertible preferred stock; $0.0001 par value; 10,000 shares authorized:Series A; 28 shares issued and outstanding at May 31, 2006 andFebruary 28, 2006, (aggregate liquidation preference of $500at May 31, 2006 and February 28, 2006).


449


449Series B; 1 shares issued and outstanding at May 31, 2006 and February 28, 2006,(aggregate liquidation preference of $6,000 and $6,300 at
                    May 31, 2006 and February 28, 2006, respectively).


5,701


5,701Total redeemable convertible preferred stock


6,150


6,150Stockholders' equity:Common stock; $0.0001 par value; 25,000 shares authorized; 6,127 and 6,113 sharesissued and outstanding at May 31, 2006 and February 28, 2006, respectively.


1


1Additional paid-in-capital


164,118


163,756Shareholder Receivable


6


-Accumulated deficit


(158,657)


(157,983)Total stockholders' equity


5,468


5,774Total liabilities, redeemable convertible preferred stock and stockholders' equity

$
15,855

$
16,064See notes to unaudited interim consolidated financial statements.

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

For the three months endedMay 31, 2006


May 31, 2005Revenues:Online services and technology
$
2,613

$
2,340Alliance and reimbursement

-


503Related party online services and technology

1


3Total revenues

2,614


2,846Cost of revenues:Online services and technology

1,064


1,122Alliance and reimbursement

-


401Total cost of revenues

1,064


1,523Gross profit

1,550


1,323Operating expenses:Sales and marketing

805


682Product development

479


250General and administrative

1,218


944Total operating expenses

2,502


1,876Loss from operations

(952)


(553)Interest expense

(11)


(19)Interest and other income and expenses, net

289


53Net loss
$
(674)

$
(519)Basic and diluted net loss per share
$
(0.11)

$
(0.09)Weighted average shares - basic and diluted

6,119


6,052See notes to unaudited interim consolidated financial statements.

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

For the three months endedMay 31, 2006


May 31, 2005Cash flows from operating activities:Net loss
$
(674)

$
(519)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization

105


148Provision for (recovery of) doubtful accounts

(7)


3Stock-based compensation

287


-Amortization of discount on note payable

-


2Changes in assets and liabilities:Accounts receivable

20


132Costs of deferred revenue

(43)


1Other assets

(66)


(102)Accounts payable

153


197Accrued liabilities

(53)


(206)Deferred revenue

19


(77)Related party deferred revenue

-


(2)Net cash used in operating activities

(259)


(423)Cash flows from investing activities:Purchases of property and equipment

(58)


(110)Net cash used in investing activities

(58)


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

68


103Principal payments on notes payable

(115)


(293)Proceeds from common stock

45


64Net cash used in financing activities

(2)


(126)Net decrease in cash and cash equivalents

(319)


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

12,650


9,463Cash and cash equivalents at end of the period
$
12,331

$
8,804Supplemental disclosure of cash flow information:Cash paid for interest
$
11

$
17Supplemental non-cash activity:Purchases of property and equipment included in accounts payable
$
50

$
8Shareholder receivable for common stock purchase
$
6

$
-See notes to unaudited interim consolidated financial statements.

4INTRAWARE, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

INTRAWARE

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission ("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 pursuant to these rules and regulations.  However, management believes that the disclosures are
adequate to ensure the information presented is not misleading.  The balance sheet at February 28, 2006, has been derived from
the audited financial statements, but does not include all disclosures required by generally accepted accounting principles. 
These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended February 28, 2006, filed with the
SEC on April 21, 2006.

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 consolidated financial statements.  The results of operations for the
interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for
the fiscal year ending February 28, 2007.

We have incurred losses and negative cash flow from operations during each fiscal year since inception. Net loss for the three
months ended May 31, 2006, increased from our prior year loss for the corresponding period. For the three months ended May 31,
2006, we incurred negative cash flows from operating activities of $0.3 million, compared to approximately $0.4 million for the
corresponding period in the prior year. Our cash balances may decline further, although we believe that the effects of our capital
financing, strategic actions implemented to improve revenue, and cost controls will be adequate to generate sufficient cash resources to
fund our future operations.  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 that collection of these fees is reasonably assured; andThe amount of fees to be paid by the customer is fixed or determinable.Our online services and technology revenue results primarily from three types of arrangements.  First, it results from sales of our
SubscribeNet digital delivery service to software vendors and other companies that distribute software as part of their business.
Second, it results from professional services that we provide to customize our SubscribeNet service for customers, to convert data for
customers, and to integrate our proprietary software.  Third, it results from our resale of third-party services or licenses complementary
to our SubscribeNet service, one of which is e-commerce.  In addition, if appropriate opportunities present themselves in the future, we
may generate online services and technology revenue from the sale of licenses to our proprietary software, and related maintenance, to
companies using those products internally or using those products to provide web-based services to their customers.

Alliance and reimbursement revenue primarily relates to our recently terminated alliance agreement with Software Spectrum for
sales and marketing services. This revenue consisted of a percentage of the gross profit derived from Software Spectrum's sales of the
third-party software and maintenance for which we provided sales and marketing services, and, prior to August 1, 2005, reimbursement
for the costs of maintaining a sales team dedicated to providing sales and marketing services to Software Spectrum for that third-party
software and maintenance. This revenue was recognized as we provided the services to Software Spectrum.  On August 1, 2005, we
signed an updated agreement with Software Spectrum.  Under the updated agreement, Software Spectrum paid us a higher
percentage of the gross profit derived from its sales of Sun software licenses and maintenance.  However, Software Spectrum stopped
reimbursing us for our direct costs in maintaining a team dedicated to sales of Sun software licenses and maintenance.  We terminated
our alliance agreement with Software5Spectrum effective January 3, 2006, in connection with the sale of our Sun One customer list to
FusionStorm.  That sale was completed on January 3, 2006.  We ceased recognizing alliance and reimbursement revenue on that date.

We defer online services and technology revenues related to our SubscribeNet digital delivery 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 approximately 3 years.  Our customer contracts are generally noncancelable, though customers usually have the right to
terminate their contracts 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 those cases, we defer revenue recognition until the
service go-live date is reached, and then recognize the revenue on a ratable basis over the remaining contract term.  The go-live date is
the later of the date on which the essential functionality is delivered or the point at which no additional customization is required.  Our
SubscribeNet contracts with customers normally give the customer a period of time (generally five days) to evaluate a SubscribeNet
implementation after we have completed it, and provide that the customer is deemed to have accepted the implementation if it has not
affirmatively rejected it within that period.  We typically rely on such non-rejections by customers to indicate their acceptance of
implementations.

We also sell additional professional services related to SubscribeNet agreements.  Generally, these services do not provide
stand-alone value to a customer, and accordingly, we defer recognition of that revenue until the go-live date for the professional services,
similar to the manner in which we treat SubscribeNet service revenues as 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
completion 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.

Online services and technology revenues related to our resale of third-party services or software licenses complementary to our
SubscribeNet service are generally recognized as the service is provided.  If the service or license resold involves customization
essential to the functionality of the underlying SubscribeNet service, 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, had 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 in the same manner 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 fringe benefits
directly related to the time spent on significant implementation and professional services activities.  These costs are recognized over
the longer of the remaining estimated customer life or the remaining contract term (see Revenue 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 change in our revenue recognition estimates could result in corresponding changes to our
recognition of costs of deferred revenues. A 10% increase in our estimated customer life during the three months ended May 31, 2006,
would have caused a net increase in our net loss of approximately $6,000.  At May 31, 2006, we had approximately $0.7 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 May 31, 2006 we had $0.2 million in deferred legal costs.
Upon issuance of a patent, the legal costs are recognized ratably over the patent's useful life.

Stock-Based Compensation

In March 2004, the Financial Accounting Standards Board ("FASB") issued a Statement, "Share-Based
Payment, an amendment of FASB Statements Nos. 123 and 95" ("SFAS 123 (R)"), that addresses 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. The statement eliminates the practice of accounting for share-based compensation transactions using the
intrinsic method, and generally requires that such transactions be accounted for using a fair-value-based method and recognized as
expense in the consolidated statements of income. In March 2005, the SEC issued Staff Accounting Bulletin ("SAB")
No. 107 regarding the Staff's interpretation of SFAS 123 (R). This interpretation provides the Staff's views regarding interactions
between SFAS 123 (R) and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments
for public companies. The interpretive guidance is intended to assist companies in applying the provisions of SFAS 123 (R) and
investors and users of the financial statements in analyzing the information provided.

Following the guidance prescribed in SAB 107, on March 1, 2006, we adopted SFAS 123 (R) using the modified prospective
method, and accordingly, we have not restated the consolidated results of income from prior interim periods and fiscal years. Under
SFAS 123 (R), we are required to measure compensation cost for all stock-based awards at fair value on 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 issued under
our equity plans, as well as stock purchases under our employee stock purchase plan, are subject to the provisions of SFAS 123 (R).
Stock options generally vest over a three to6four-year service period. Since our adoption of SFAS 123 (R), there have been no changes
to our equity plans or modifications to outstanding stock-based awards.

Prior to March 1, 2006, Intraware accounted for employee stock-based compensation using the intrinsic method in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), as permitted by SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
and SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." Under the intrinsic method, the
difference between the market price on the date of grant and the exercise price is charged to the results of operations over the vesting
period on a straight-line method. For the quarter ended May 31, 2005, had Intraware accounted for all employee stock-based
compensation based on the estimated grant date fair values, as defined by SFAS 123, Intraware's net loss and net loss per share
would have been adjusted to the following pro forma amounts (in thousands, except per share data):

For the three months endedMay 31, 2005Net loss
$
(519)Deduct:  Total stock-based employee compensation expensedetermined under fair value based method for all awards


(628)Pro forma

$
(1,147)Net loss per share -- basic and dilutedAs reported

$
(0.09)Pro forma

$
(0.19)In the pro forma disclosures prior to the adoption of SFAS No. 123(R), we accounted for forfeitures upon occurrence.

Upon adoption of SFAS 123(R) in the first quarter of fiscal 2007, we recognized the compensation expense associated with awards
granted on or after March 1, 2006, and the unvested portion of previously granted awards that remain outstanding as of
March 1, 2006, in our unaudited consolidated statement of operations.

The effect of recording stock-based compensation for the three months ended May 31, 2006 was as follows:

Three Months EndedMay 31, 2006Stock-based compensation expense by type of awardEmployee stock options

$
281Employee stock purchase plan


6Total stock based compensation


287Net effect on net loss

$
287Effect on loss per share: - basic and diluted

$
(0.05)Consistent with our valuation method for the disclosure-only provisions of SFAS 123, 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.

7The following weighted average assumptions were used in the estimated grant date fair value calculations for stock option and
stock purchase awards:

Three Months EndedMay 31, 2006


May 31, 2005Stock option plans:Dividend yield

0
%

0
%Expected stock price volatility

100
%

88
%Risk-free interest rate

4.70 - 5.00
%

3.72 - 4.17
%Average expected life (in years)

5.4


4Stock purchase plans:Dividend yield

0
%

0
%Expected stock price volatility

61
%

52
%Risk-free interest rate

4.08
%

3.12
%Average expected life (in months)

6


6The expected stock price volatility rates are based on historical volatilities of our common stock. The risk-free interest rates are
based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The
average expected life represents the weighted average period of time that options granted are expected to be outstanding, giving
consideration to vesting schedules and our historical exercise patterns. For the quarter ended May 31, 2006, the average
expected life was determined using the historical approach described under SAB 107.

Net loss per share

Basic net loss per common share is computed by dividing the net loss for the period by the weighted average number of common
shares outstanding during the period, excluding shares subject to repurchase. The terms of our redeemable convertible preferred stock
include the right to participate in dividends declared to common stockholders. Our redeemable convertible preferred stock does not
have a contractual obligation to share in the losses in any given period. As a result, this participating security will not be allocated any
losses in the periods of net losses, but will be allocated in the periods of net income using the two-class method. The two-class method
is an earnings allocation formula that determines earnings per share for each class of common stock and participating securities
according to dividends declared or accumulated and participation rights in undistributed earnings. Under the two-class method, net
income is reduced by the amount of dividends declared in the current period for each class of stock and by the contractual amounts of
dividends that must be paid for the current period. The remaining earnings are then allocated to common stock and participating
securities to the extent that each security may share in earnings, as if all of the earnings for the period had been distributed. The total
earnings allocated to each security are determined by adding together the amounts allocated for dividends and the amounts allocated
for a participation feature. The total earnings allocated to each security are then divided by the number of outstanding shares of the
security to which the earnings are allocated to determine the earnings per share.

Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and
potential common shares outstanding during the period if the effect is dilutive. Potential common shares are composed of common
stock subject to repurchase rights and incremental shares of common stock issuable upon the exercise of stock options and warrants
and upon the conversion of preferred stock. The dilutive effect of outstanding stock options and warrants is computed using the
treasury stock method.

8The following table sets forth the computation of basic and diluted net loss per share, as well as securities not included in the
diluted net loss per share calculation because to do so would be antidilutive (in thousands, except per share amounts):

For the three months endedMay 31, 2006


May 31, 2005Numerator:Net loss

$
(674)

$
(519)Denominator:Weighted average shares


6,119


6,052Basic and diluted net loss per share
$
(0.11)

$
(0.09)Antidilutive securities not included in weighted average shares:Redeemable convertible preferred stock


1,028


55Warrants to purchase common stock


159


159Employee stock options


1,158


1,0952,345


1,309Web Site Development Costs

Intraware accounts for web site development costs in accordance with the provisions of Emerging Issues Task Force Issue No.00-2
or EITF 00-2, "Accounting for Web Site Development Costs," which requires that certain costs to develop Web sites be
capitalized or expensed, depending on the nature of the costs. Amortization of web site development costs is provided for by the
straight-line method over the estimated useful life of two years. The capitalized development costs for the three months ended May 31,
2006 were approximately $8,500.

NOTE 3. CHANGES IN STOCKHOLDERS' EQUITY

During the three months ended May 31, 2006 our stockholders' equity changed as follows (in thousands):

Common stock


Additional
 paid-in


Shareholder


Accumulated


Stockholders'


ComprehensiveShares


Amount


capital


Receivable


deficit


equity


lossBalance at February 28, 2006
6,113

$
1

$
163,756

$
-

$
(157,983)

$
5,774Exercise of stock options
3


-


5


6


-


11Issuance of common stock for employee stock purchase program
11


-


41





-


41Stock Based Compensation






316








316Net loss
-


-


-





(674)


(674)

$
(674)Other comprehensive loss


















-Comprehensive loss

















$
(674)Balance at May 31, 2006
6,127

$
1

$
164,118

$
6

$
(158,657)

$
5,4689NOTE 4. CONTINGENCIES

Indemnifications

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

Intellectual Property Indemnities to Customers and Resellers. Our 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 the 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 to another 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 software
publishers. 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.Intellectual Property Indemnity to Acquiror of Asset Management Business. In the May 2002 sale of our Asset
Management software business to Computer Associates International, Inc., we agreed to indemnify Computer Associates for damages
and costs incurred by it in connection with claims alleging that the software and technology we sold to them infringes the intellectual
property rights of third parties. This indemnity will remain in effect until May 2007. Our maximum potential payment under this indemnity
is $9.5 million.Indemnities to Private Investors. In our private placements of stock, we have made representations and warranties to the
investors and placement agents, and have agreed to indemnify them for any damages and costs they 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 indemnify them for damages they incur as a result of any material misstatements or omissions in our registration statements,
and pay penalties in the event we fail to maintain the effectiveness of registration statements. The duration of our indemnities to our
investors under the respective stock and warrant purchase agreements ranges from one to two years from the respective closing dates,
other than the purchase agreements for our June 2000 warrants, our January 2001 Series A Preferred Stock, and our November 2005
Series B Preferred Stock, which provide for indemnities of unlimited duration. In general, our indemnities to our investors under the
respective registration rights agreements expire upon termination of our registration obligations, which is typically the date the securities
may be sold under Rule 144(k) under the Securities Act of 1933. With respect to our Investor Rights Agreement with Digital River, Inc.
for Series B Preferred Stock, however, our indemnification obligations survive any offering of Registrable Securities, as defined in the
agreement, or the termination of the agreement.  Our potential payments under these indemnities are unlimited.Indemnities to Directors and Officers. We 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 only a very limited number of requests for indemnification under these agreements and have not
been required to make material payments under them. Accordingly, we 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 Intraware, three of our
present and former officers and directors, and several investment banking firms that served as underwriters of our initial public offering.
The complaint alleges liability under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, on the grounds that the registration statement for the offerings did not disclose that: (1) the underwriters had
agreed to allow certain customers to purchase shares in the offerings in exchange for excess commissions paid to the underwriters;
and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices.
The amended complaint also alleges that the underwriters misused their securities analysts to manipulate the price of our stock.  No
specific damages are claimed.

Lawsuits containing similar allegations have been filed in the Southern District of New York challenging over 300 other initial public
offerings and secondary offerings conducted in 1999 and 2000.  All of these lawsuits have been consolidated for pretrial purposes
before United States District Court Judge Shira Scheindlin of the Southern District of New York.  On July 15, 2002, an omnibus motion
to dismiss10was filed in the coordinated litigation on behalf of the issuer defendants, of which Intraware and its three named current and
former officers and directors are a part, on common pleadings issues.  On or about October 9, 2002, the Court entered and ordered a
Stipulation of Dismissal, which dismissed the three named current and former officers and directors from the litigation without prejudice.
On February 19, 2003, the Court entered an order denying in part the issuer-defendants' omnibus motion to dismiss, including those
portions of the motion to dismiss relating to Intraware.

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

The settlement provides that, in exchange for a release of claims against the settling issuer-defendants, the insurers of all of the
settling issuer-defendants will provide a surety undertaking to guarantee plaintiffs a $1 billion recovery from the non-settling defendants,
including the underwriter-defendants.  The amount our insurers would be required to pay to the plaintiffs could range from zero to
approximately $3.5 million, depending on plaintiffs' recovery from the underwriter-defendants and from other non-settling parties.  If the
plaintiffs recover at least $1 billion from the underwriter-defendants, our insurers would have no liability for settlement payments under
the terms of the settlement.  If the plaintiffs recover less than $1 billion, we believe our insurance will likely cover our share of any
payments towards satisfying plaintiffs' $1 billion recovery deficit.  Management estimates that its range of loss relative to this matter is
zero to $3.5 million.  Presently there is no more likely point estimate of loss within this range.  As a consequence of the uncertainties
described above regarding the amount we will ultimately be required to pay, if any, as of May 31, 2006, we have not accrued a liability
for this matter.

On August 31, 2005, the court granted preliminary approval of the settlement.  A fairness hearing for the settlement took place in
April 2006.  After the hearing, the court took the matter under submission and has not yet issued a final ruling.

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

In July 2004, a complaint was filed in the United States District Court for the District of Delaware, Civ. No. 04-822, against ComVest
Venture Partners, LP and various affiliated parties and individuals (the "ComVest Defendants"); and Intraware. The complaint described
Intraware as a nominal defendant. The complaint alleged that between August 2001 and January 2002 various ComVest Defendants
owned more than 10% of our common stock, bought and sold our equity securities within a 6-month period, and failed to disgorge to us
the profits allegedly realized in those trades, thereby violating Section 16(b) of the 1934 Act.  Certain of the ComVest Defendants were
members of our Board of Directors between April 2001 and May 2002.  The complaint demanded repayment to Intraware of the profits
allegedly realized and retained in violation of Section 16(b) of the 1934 Act, together with interest and legal costs. According to the
complaint, the amount of those alleged profits was unknown to the plaintiff, however, the information alleged in the complaint suggested
that amount may be approximately $1.3 million. The complaint did not seek damages against us.

In April 2006, the parties entered into a settlement agreement under which the ComVest Defendants paid us approximately
$155,000, net of estimated attorney fees and costs, in settlement of all claims. The settlement did not require shareholder approval and
was formally approved by the court on April 18, 2006.

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


NOTE 5.  NOTES PAYABLE

In August 2003, we issued a note payable to Silicon Valley Bank for proceeds of approximately $2.0 million. The note was payable
in fixed monthly principal installments plus interest through September 2005.  In connection with the note payable, we issued a warrant
to purchase 4,173 shares of our common stock at an exercise price of $11.90 per share.  The warrant was immediately exercisable and
expires in August 2010.  We estimated the allocated fair value of such warrant at approximately $46,000, using the Black-Scholes
valuation model with the following assumptions: expected volatility of 136%, risk-free interest rate of 4.01%, expected life of seven
years and no dividends.  The value of the warrant was recorded as a debt discount and was amortized as interest expense using the
effective interest method over the life of the note payable. The debt discount related to the warrant was fully amortized as of May 31,
2006. As of May 31, 2006, the warrant had not been exercised.

In August 2003, we also entered into an equipment advance agreement with Silicon Valley Bank. The equipment advance
bears an annual interest at the greater of 5.50% or 1.00% above the bank's prime rate.  The agreement provided for borrowings
of up to $500,000 through August 2004 and was limited to equipment purchases.  As of May 31, 2006, we had borrowed
approximately $363,000 under this agreement and the interest rate at that date was 9.00%.  Monthly payments of interest only
were payable through August 1, 2004, after which fixed monthly principal installments plus interest will be made through
August 2006.

In September 2004, we entered into a second equipment advance agreement with Silicon Valley Bank.  The
equipment advance bears an annual interest at the greater of 5.50% or 1.00% above the bank's prime rate.  This equipment
advance allowed us to borrow up to $500,000 through August 1, 2005, solely to finance equipment purchases.  As
of May 31, 2006, we had borrowed approximately $493,000 under this11agreement and the interest rate at that date was
9.00%.  Monthly payments of interest only were payable through August 2005, after which fixed monthly principal
installments plus interest will be made through August 2007.

In November 2005, we entered into a third equipment advance agreement with Silicon Valley Bank.  This new
equipment advance bears an annual interest at the greater of 7.0% or 1.00% above the bank's prime rate.  This third equipment
advance allows us to borrow up to $500,000 through November 30, 2006, solely to finance equipment purchases.  As of
May 31, 2006, we had borrowed approximately $130,000 under this agreement and the interest rate at that date was
9.00%.  Each advance is repayable over 24 monthly installments of principal plus interest, beginning the month after the
advance is made.

All of this debt is collateralized by a senior security interest in substantially all of our assets.  We are also required to maintain
compliance with certain financial covenants, all of which we were in compliance with at May 31, 2006.

Scheduled maturities of debt at May 31, 2006 are as follows (in thousands):

Years ending:February 28, 2007
$
282February 29, 2008

192February 29, 2009

9$
483NOTE 6. RELATED PARTY TRANSACTIONS

During the three months ended May 31, 2006, we provided e-commerce solutions to our customers by utilizing managed e-
commerce services that were provided by Commerce5, Inc. On November 9, 2005, we entered into a Series B Preferred Stock
Purchase Agreement with Digital River, which represents an approximate 14% ownership stake. In December of 2005, Digital River
announced an agreement to acquire Commerce5, Inc. Upon the closing of the acquisition, Commerce5 became a wholly-owned
subsidiary of Digital River.

NOTE 7. COMMON STOCK

Stock Option Plans

1996 Stock Option Plan

In October 1996, we adopted the 1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan provides for the
granting of stock options to our employees and consultants. Options granted under the 1996 Plan may be either incentive stock options
or nonqualified stock options. Incentive stock options (that is, options intended to qualify as incentive stock options under the Internal
Revenue Code, or "ISOs") may be granted only to our employees (including directors who are also employees).
Nonstatutory stock options (that is, options not intended to qualify as incentive stock options under the Internal Revenue Code, or
"NSOs") may be granted to our employees and consultants. At February 28, 2006, we had reserved approximately
0.4 million shares of common stock for issuance under the 1996 Plan. The shares reserved are subject to annual increases equal
to the lesser of (a) 300,000 shares, (b) 6% of the outstanding shares on such date, or (c) a lesser amount
determined by the Board.

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

Under the 1996 Plan, the exercise price of an option may not be less than 100% of the fair market value of the shares on the date
of grant as determined by the Board of Directors; however, the exercise price of an ISO or NSO granted to a 10% shareholder may not
be less than 110% of the fair market value of the shares on the date of grant.  The 1996 Plan expires in November 2006.

1998 Director Option Plan

In December 1998, we adopted the 1998 Director Option Plan (the "Director Plan"), which became effective in
February 1999. The Director Plan provides for the granting of stock options to Board members who are not employees of
Intraware. We have reserved approximately 17,000 shares of common stock for issuance under the Director Plan at February 28, 2006.
The option grants under the Director Plan are automatic and nondiscretionary, and the exercise price of the options must be 100% of
the fair market value of the common stock on the date of grant. We determine fair market value by the closing price of the common
stock on Nasdaq on the grant date. Each eligible Board member is granted an option to purchase 1,500 shares ("First
Option") on the date such person first becomes a director. Immediately following each annual meeting of stockholders, each
eligible Board member is automatically granted an additional option to purchase 750 shares ("Subsequent Option") if such
director has served continuously as a member of the Board for at least the preceding six months. The Director12Plan provides that the
options shall be exercisable over a period not to exceed ten years from the date of the grant; however, the options terminate
3 months following the date the director ceases to be a member of the Board (12 months if the director ceased to be a
Board member because of death or disability). First Options vest as to 12.5% of the shares 6 months after the grant date and as
to remaining shares in equal installments over the next 42 months provided the optionee continues as a member of the Board.
Subsequent Options vest as to 25% of the shares 6 months after the grant date and as to the remaining shares in equal
installments over the next 18 months.

The 1998 Director Plan expires in December 2008.

1999 Non-Qualified Acquisition Stock Option Plan

In October 1999, we adopted the Non-Qualified Acquisition Stock Option Plan (the "1999 Plan"). The 1999 Plan
provides for the granting of NSOs to our employees and consultants. Officers may only receive grants under the 1999 Plan in
connection with their initial service to us, and Board members may not receive any grants under the 1999 Plan. We reserved 350,000
shares of common stock for issuance under the 1999 Plan at the time of its adoption. The standard form of Stock Option Agreement
used under the 1999 Plan provides that the options are exercisable over a period not to exceed ten years from the date of the grant.
Options granted under the 1999 Plan generally vest as to 25% of the shares one year after the date of grant and as to the remaining
options in equal monthly installments over the next 36 months. The exercise price of all options granted under the 1999 Plan has
been the fair market value of our common stock on the grant date, as determined by the closing price of the common stock on Nasdaq
on that date. During the year ended February 29, 2004, we ceased issuing options from this plan. All remaining options available for
grant were removed from the plan at that time.

The 1999 Plan expires in October 2009.

Employee Stock Purchase Plan

In December 1998, the Board adopted the 1998 Employee Stock Purchase Plan (the "Purchase Plan"), which
became effective February 1999. The Purchase Plan reserves 60,000 shares of common stock for issuance there under. On
each March 1 beginning in 2000, the aggregate number of shares reserved for issuance under the Purchase Plan is increased
automatically to the lesser of 40,000 shares, 1% of the outstanding shares on such date, or a lesser amount determined by the Board of
Directors. Employees generally are eligible to participate in the Purchase Plan if they are customarily employed by us for more than
20 hours per week and more than five months in a calendar year and are not (and would not become as a result of being granted
an option under the Purchase Plan) 5% stockholders. Under the Purchase Plan, eligible employees select a rate of payroll deduction up
to 15% of their W-2 cash compensation subject to certain maximum purchase limitations. Each offering period has a maximum duration
of two years and consists of four six-month purchase periods. Depending on the effective date, the first purchase period is
approximately six months long. Offering Periods and purchase periods thereafter begin on April 15 and October 15. The
price at which the common stock is purchased under the Purchase Plan is 85% of the lesser of the fair market value of our common
stock on the first day of the applicable offering period or on the last day of that purchase period.  The Purchase Plan expires in
2008.
Stock Options

As of May 31, 2006, we had an aggregate of 0.7 million shares available for grant under our equity plans. The
equity plans provide for the issuance of common shares pursuant to stock option exercises and other equity-based awards. Under the
equity plans, stock options can be issued to employees and to non-employee directors.  Stock options are generally granted under the
equity plans with exercise prices equal to the fair market value of the common stock on the date of grant, and generally vest over a
period of three to four years.

The following table presents a summary of Intraware's stock option activity for the three months ended May 31, 2006:

WeightedAverageWeighted


Remaining


AggregateAverage


Contractual


IntrinsicExercise


Term


ValueShares


Price


(Years)


($000's)Outstanding at February 28, 2006


1,119,649


16.36


6.57

$
527Granted


129,300


6.42Exercised


(3,344)


3.34Forfeited


(88,081)


31.08Outstanding at May 31, 2006


1,157,524

$
14.16


6.73

$
509Exercisable at May 31, 2006


721,225

$
17.88


6.21

$
149The 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 May 31, 2006, for those options for which the quoted market price was in excess of the exercise price
("in-the-money options").13The aggregate intrinsic value of options exercised during the quarter ended May 31, 2006 was
approximately $4,000. The total cash received from employees as a result of stock option exercises was approximately $11,000 for the
quarter ended May 31, 2006. The company did not realize any tax benefits in connection with these exercises due to the fact that
a full valuation allowance relating to the deferred tax assets has been recorded.

The following table summarizes the information about all stock options outstanding and exercisable as of May 31, 2006 (in
thousands, except per share amounts and years):

Options Vested and Exercisable atOptions Outstanding at May 31, 2006

May 31, 2006WeightedAverageRemaining

Weighted



WeightedNumber

Contractual

Average

Number

AverageRange of Exercise Prices

Outstanding

Life

Exercise Price

Outstanding

Exercise Price$
1.25 -          4.20


181

4.88
$
3.35

44
$
3.204.40 -          7.70


327

7.46

6.65

185

6.817.85 -        11.60


275

6.75

10.18

221

10.0511.70 -      15.94


211

7.42

14.44

119

14.7116.70 -    662.50


163

6.36

47.02

151

49.16727.50 -  727.50


1

3.75

727.50

1

727.501,158

6.73

16.36

721

17.88Reverse Stock Split

At the close of business on September 26, 2005, we effected a one-for-ten reverse stock split of our common stock.  All
share and per share information included in these unaudited condensed consolidated financial statements has been retroactively
adjusted to reflect the reverse stock split.  Shares authorized and par value were not adjusted as they were not affected by the
reverse stock split.


NOTE 8. 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 months ended May 31, 2006 there was no activity in our redeemable convertible preferred stock.


NOTE 9. SUBSEQUENT EVENT

On June 23, 2006, we entered into a Strategic Marketing Agreement with Digital River.  Under the terms of the agreement
we will work collaboratively in joint marketing and co-selling initiatives. Also, as provided in the November 9, 2005 Investor Rights
Agreement between the Company and Digital River, the execution of the Strategic Marketing Agreement will result in our nominating a
Digital River representative to our Board of Directors.  Digital River will be entitled to retain that Board seat so long as it owns ten
percent or more of our outstanding voting stock.
On June 22, 2006 the Company's Board of Directors approved an Amended and Restated Preferred Stock Rights Agreement
("Rights Agreement") between the Company and Computershare Investor Services, LLC (the "Rights Agent"),
which supersedes and replaces the Company's previous Preferred Stock Rights Agreement dated September 8, 2005.  The amended
Rights Agreement allows one of the Company's existing investors, Crosslink Capital, Inc. ("Crosslink"), and its affiliated
companies, to acquire up to twenty percent of the Company's outstanding common stock without creating a triggering event under the
Rights Plan.  Crosslink is a venture capital firm located in San Francisco, California.
In the event Crosslink does acquire more than fifteen percent of our outstanding common shares, one element of our Standstill and
Stock Restriction Agreement ("Standstill Agreement") with Digital River will be affected.  In particular, our Standstill
Agreement with Digital River precludes Digital River from acquiring more than fifteen percent of our voting securities.  However, the
Standstill Agreement also provides that this restriction will be suspended so long as any other person or entity owns more than fifteen
percent of our voting shares.  Accordingly, if Crosslink acquires more than fifteen percent of our voting shares, our Standstill Agreement
with Digital River will be suspended for as long as Crosslink's ownership remains above fifteen percent.  Digital River will, however,
remain subject to the provisions in the14Rights Agreement, under which the Rights Plan will be triggered if Digital River acquires more
than a fifteen percent ownership in the Company.

ITEM 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 consolidated
financial statements and related notes included in our annual report on Form 10-K for the fiscal year ended February 28, 2006, which
was filed with the SEC on April 21, 2006, and the unaudited consolidated 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 and expenses and customer demand, the deployment of our products and services or the anticipated
performance 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 but not limited to, those discussed in "Risk
Factors" below and elsewhere in this quarterly report on Form 10-Q.

Intraware Overview

Our goal is to become the de facto standard among digital delivery solution providers. We are pursuing various strategy objectives
to achieve this goal. First, we are working to become a profitable, cash-generating company by growing our SubscribeNet business and
practicing stringent fiscal responsibility. Second, we are seeking to strengthen our technological advantage and extend the breadth of
our functionality in the electronic software delivery and management area by further improving our electronic software and licensing
management solutions through internal research and development, and through alliances with adjacent technology providers.  Third,
we are increasing our efforts to reach additional markets outside our existing enterprise software developer customer base.  We intend
to leverage our digital delivery expertise and expanded service offering to penetrate new markets and new market segments.   Fourth,
we seek to continue extending and strengthening our customer base by executing on our sales and marketing plan, and by providing
exceptional customer service.

We currently see a number of trends in the marketplace that are potentially important for our business. First, growth in the
technology sector has improved over the past two years.  We have benefited from this trend as technology companies experiencing
growth have been more willing to invest in technologies that support their own businesses.  However, with this growth have come
inflationary pressures on our personnel costs, which is the most significant component of our cost structure.  Second, the pace of
mergers and acquisitions in the enterprise software sector remains brisk. These consolidations pose both opportunities and risks for us,
potentially leading either to growth in our contracts with those customers if they grow larger, or to cancellation of customer contracts if
our customers merge or are acquired by companies that do not use our electronic software and licensing management service. Third,
technology companies continue the trend of outsourcing operational functions to reduce costs. Our services enable enterprise software
companies to outsource key operational functions in a manner we believe is financially compelling. Therefore, we may benefit from this
outsourcing trend. Fourth, the use of hosted web-based applications, which in the past has been limited by concerns about speed,
reliability and security, continues to gain acceptance among mainstream businesses, largely because of a desire for cost savings. This
trend may benefit us because our SubscribeNet service is a hosted web-based application.

Our management is focused on five key areas. The first is broadening our SubscribeNet service to meet expanding and more
sophisticated requirements of the enterprise software industry for digital delivery management systems, including requirements for
license management and delivery, management of channel partner relationships, and electronic commerce.  The second is
taking advantage, through our planned Digital Fastball service, of the growing acceptance by non-technology businesses and individual
consumers of the Internet as a medium for exchanging all types of digital files.  The third is leveraging our relationships with our
strategic allies to reach new and larger customers for our SubscribeNet service. The fourth is to take advantage of the drive toward
greater efficiency among large information technology companies, as evidenced by the increasing consolidation in that sector, by
emphasizing the cost savings that can be realized through broad adoption of electronic software delivery and management. The fifth
area is the development of new pricing packages for our services that emphasize shorter sales cycles and strong profit margins.

We also face a number of key risks, which are described in more detail in the "Risk Factors" beginning on page 24.

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

We have incurred losses and negative cash flow from operations during each fiscal year since inception. Net loss for the three
months ended May 31, 2006, increased from our prior year loss for the corresponding period.  For the three months ended May 31,
2006, we incurred negative cash flows from operating activities of $0.3 million, compared to approximately $0.4 million for the
corresponding period in the prior year. Our cash balances may decline further, although we believe that the effects of our capital
financing, strategic actions implemented to improve revenue, and cost controls will be adequate to generate sufficient cash resources to
fund our future operations.  Historically, we also have raised substantial amounts of cash through private stock placements.

We believe that the effects of our capital financings to date, our past and current strategic actions to improve revenue, and our
ongoing15cost 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.

Critical Accounting Policies and Estimates

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

We consider accounting policies related to revenue recognition, 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 that collection of these fees is reasonably assured; andThe amount of fees to be paid by the customer is fixed or determinable.Our online services and technology revenue results primarily from three types of arrangements.  First, it results from sales of our
SubscribeNet digital delivery service to software vendors and other companies that distribute software as part of their business.
Second, it results from professional services that we provide to customize our SubscribeNet service for customers, to convert data for
customers, and to integrate our proprietary software.  Third, it results from our resale of third-party services or licenses complementary
to our SubscribeNet service, one of which is e-commerce.  In addition, if appropriate opportunities present themselves in the future, we
may generate online services and technology revenue from the sale of our proprietary software licenses, and related maintenance, to
companies using those products internally or using those products to provide web-based services to their customers. As a result of the
sale of our Asset Management software business in May 2002, we are not currently deriving revenue from licenses, maintenance or
integration services for asset management software.

Alliance and reimbursement revenue primarily relates to our recently terminated alliance agreement with Software Spectrum for
sales and marketing services. This revenue consisted of a percentage of the gross profit derived from Software Spectrum's sales of the
third-party software and maintenance for which we provided sales and marketing services, and, prior to August 1, 2005, reimbursement
for the costs of maintaining a sales team dedicated to providing sales and marketing services to Software Spectrum for that third-party
software and maintenance. This revenue was recognized as we provided the services to Software Spectrum.  On August 1, 2005, we
signed an updated agreement with Software Spectrum.  Under the updated agreement, Software Spectrum paid us a higher
percentage of the gross profit derived from its sales of Sun software licenses and maintenance.  However, Software Spectrum stopped
reimbursing us for our direct costs in maintaining a team dedicated to sales of Sun software licenses and maintenance.  We terminated
our alliance agreement with Software Spectrum effective January 3, 2006, and ceased recognizing alliance and reimbursement
revenue on that date.

We defer online services and technology revenues related to our SubscribeNet digital delivery 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 approximately 3 years.  Our customer contracts are generally noncancelable, though customers typically have the right to
terminate their contracts 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 those cases, we defer revenue recognition until the
service go-live date is reached, and then recognize the revenue on a ratable basis over the remaining contract term.  The go-live date is
the later of the date on which the essential functionality is delivered or the point at which no additional customization is required.  Our
SubscribeNet contracts with customers typically give the customer a period of time (generally five days) to evaluate a SubscribeNet
implementation after we have completed it, and provide that the customer is deemed to have accepted the implementation if it has not
affirmatively rejected it within that period.  We typically rely on such non-rejections by customers to indicate their acceptance of
implementations. Any subsequent indications by our customers that their implementations have not been properly completed could
have a material adverse impact on our financial condition or results of operations.

We also sell additional professional services related to SubscribeNet agreements.  Generally, these services do not provide
stand-alone value to a customer, and accordingly, we defer recognition of that revenue until the go-live date for the professional services,
similar to the manner in which we treat SubscribeNet service revenues as discussed above.  Such professional services revenues are
recognized ratably over16the longer of the remaining estimated customer life or the remaining contract term, commencing with the
completion 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.  Our estimated customer life has increased over time due
to relatively high customer retention rates.  We expect the projected customer life to continue to increase as customers lengthen and
renew their service agreements.  A 10% increase in our estimated customer life during the three months ended May 31, 2006, would
have caused a net increase in our net loss of approximately $6,000.

Online services and technology revenues related to our resale of third-party services or software licenses complementary to our
SubscribeNet service are generally recognized as the service is provided.  If the service or license resold involves customization
essential to the functionality of the underlying SubscribeNet service, 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, had 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 in the same manner 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 fringe benefits
directly related to the time spent on significant implementation and professional services activities.  These costs are recognized over
the longer of the remaining estimated customer life or the remaining contract term (see Revenue Recognition above). Costs associated
with professional services involving significant new functionality for the SubscribeNet service that are partially or fully funded by
customers but do not qualify as funded research and development activities are expensed as costs 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 change in our revenue recognition estimates could result in corresponding changes to our
recognition of costs of deferred revenues. A 10% increase in our estimated customer life during the three months ended May 31, 2006,
would have caused a net increase in our net loss of approximately $6,000.  At May 31, 2006, we had approximately $0.7 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 May 31, 2006 we had $0.2 million in deferred legal costs.
Upon issuance of a patent, the legal costs are recognized ratably over the patent's useful life.


Stock-based Compensation
On March 1, 2006, Intraware adopted SFAS 123(R), which addresses 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.
Using the modified prospective method, we estimate the fair value of stock options using the Black-Scholes valuation model, consistent
with the provisions of "Share-Based Payment, an amendment of FASB Statements Nos.123 and 95" ("SFAS
123(R)"), Staff Accounting Bulletin ("SAB") No. 107, and SFAS 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") for our prior period pro forma disclosures of net earnings. Option-pricing models require
the input of highly subjective assumptions, including the option's expected life and the price volatility of the underlying stock. Judgment
is also required in estimating the number of stock-based awards that are expected to be forfeited. If actual results or future changes in
estimates differ significantly from our current estimates, stock-based compensation expense and our results of operations could be
materially impacted.  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.

17The following table presents the stock compensation expense recognized in accordance with SFAS 123(R) during the three months
ended May 31, 2006:

Three Months Ended May 31, 2006Stock



Percent ofCompensation



Total(In thousands)


Expense



ExpenseCost of revenues:Online services and technology

$
33



11
%Sales and marketing


56



20
%Research and development


26



9
%General and administrative


172



60
%Total stock-based compensation

$
287Web Site Development Costs

We account for Web site development costs in accordance with the provisions of EITF 00-2, which requires that certain costs to
develop Web sites be capitalized or expensed, depending on the nature of the costs. Amortization of Web site development costs is
provided for by the straight-line method over the estimated useful life of two 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.  At May 31, 2006, we had many accounts receivable balances.  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 result of operations.
Income Taxes

In conjunction with preparing our financial statements, we must estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We must
then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that
recovery is not likely, we must establish a valuation allowance. Given that we have incurred losses since inception and therefore have
not been required to pay income taxes, we have fully reserved our deferred tax assets at May 31, 2006.  In the event that we are able
to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period that this is
determined.

Results of Operations

Total Revenue

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

For the three months endedMay 31, 2006


May 31, 2005Total


Change

% of  Revenue


Total

% of  RevenueRevenues:Online services and technology
$
2,613

$
273

100%

$
2,340

82%Alliance and reimbursement

-


(503)

0%


503

18%Related party online services and technology

1


(2)

0%


3

0%Total revenues
$
2,614

$
(232)



$
2,846Combined online services and technology revenue results primarily from sales of our SubscribeNet services.  The online
services and technology revenue increase during the three months ended May 31, 2006, as compared to the three months ended May
31, 2005, is primarily due to two factors: first, approximately $0.2 million in revenue recognized from both new SubscribeNet customers
whose go-live date was achieved between June 1, 2005, and May 31, 2006, and existing customers who expanded their agreements;
and second, approximately $0.118million in additional revenue as a result of professional services provided to existing SubscribeNet
customers. We expect our online services and technology revenue for our second quarter ending August 31, 2006, to slightly increase
from our first quarter, which ended May 31, 2006.

Alliance and reimbursement revenue relates to our alliance agreement with Software Spectrum for sales of Sun software licenses
and maintenance, which we terminated January 3, 2006. This revenue consisted of a percentage of the gross profit derived from the
sales of Sun software licenses and maintenance services, and reimbursement for the costs of maintaining a sales team dedicated to
selling Sun software for Software Spectrum. We ceased recognizing alliance and reimbursement revenue in our fiscal year ended
February 28, 2006.

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 endedMay 31, 2006

May 31, 2005Total

Change

% of Revenue

Total

% of RevenueTotal cost of revenues
$    1,064

$     (459)

41%

$    1,523

54%Gross margin
1,550

227

59%

1,323

46%Operating expenses:Sales and marketing
805

123

31%

682

24%Product development
479

229

18%

250

9%General and administrative
1,218

274

47%

944

33%Total operating expenses
$    2,502

$       626

96%

$    1,876

66%Cost of Revenues

The decrease in cost of revenues and increase in margin percentage for the three months ended May 31, 2006, is primarily due to
the approximately $0.4 million decrease that was attributed to the alliance and reimbursement cost of revenues. The additional
approximate $0.1 million dollar decrease is in online services and technology cost of revenues and is attributed to a specific statement
of work in which the costs were expensed rather than deferred for the three months ended May 31, 2005.

Cost of revenues primarily consists of certain allocated costs related to our internet connectivity, assets supporting cost of
revenues, and customer support, and in the prior year, the costs associated with maintaining our team dedicated to helping Software
Spectrum sell Sun software. 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 lower than our fiscal year 2006
amounts. This is primarily due to the termination of our agreement with Software Spectrum, whereby we will no longer be
recognizing any associated costs previously recorded as alliance and reimbursement cost of revenues. In addition, we expect our gross
profit margin percentage for the current fiscal year to be higher than those for our fiscal year 2006. Our quarterly cost of revenues
may fluctuate based on multiple variables including but not limited to revenue mix fluctuations, levels of professional services activities,
infrastructure costs, and variable external support utilization rates, and expect our margins to fluctuate accordingly.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of employee salaries, benefits and commissions, advertising, consulting,
promotional materials, trade show expenses and certain allocated overhead costs.

The increase in sales and marketing expense for the three months ended May 31, 2006, compared to the three months ended May
31, 2005, is primarily due to increased efforts in marketing and advertising. We plan to increase our overall sales and marketing
expenses in the current fiscal year. There was also an increase of approximately $50,000 for stock-based compensation expense
recognized in accordance with FAS 123(R).

Product Development Expenses

Product development expenses consist primarily of employee salaries and benefits, 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.

The increase in our product development expenses for the three months ended May 31, 2006, compared to those for the three
months ended May 31, 2005, is due primarily to a $0.1 million increase related to consulting and recruiting fees for personnel involved
in product development activities and to $0.1 million in expenditures that were a result of variable support costs and incremental
investments in our infrastructure in relation to product development activities.

19We anticipate continuing to invest in additional functionality for our SubscribeNet service and underlying proprietary software.
However, we expect those investments to fluctuate over time, and expect our product development expenses to fluctuate accordingly.
We expect total product development expenditures to increase in our fiscal year ending February 28, 2007. We cannot give assurance
that our product development efforts will result in new or improved products, features or functionality, or that the market will accept the
improvements to existing or new products, features or functionality developed.

General and Administrative Expenses

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 the three months ended May 31, 2006, compared to the three months
ended May 31, 2005, is primarily due to approximately $0.2 million for stock-based compensation expense recognized in accordance
with FAS 123(R), as well as approximately $0.05 million in audit related fees.

We expect total expenditures in fiscal year 2007 to increase from our fiscal year 2006 levels due to both increased personnel costs
and external fees.

Interest Expense

For the three months ended May 31, 2006, interest expense was approximately $11,000, a decrease from $19,000 for the three
months ended May 31, 2005.

Interest expense primarily relates to obligations under capital leases and notes payable.  The decrease in interest expense
for the three months ended May 31, 2006 is primarily due to the reduction of the principal balance on our notes payable, slightly offset
by higher interest rates.

Interest and Other Income and Expenses, Net

For the three months ended May 31, 2006, interest and other income and expenses, net was approximately $290,000 of income,
an increase from $53,000 of income for the three months ended May 31, 2005.

Interest and other income and expenses, net, primarily relates to interest earned on our investment balances.  The increase
in interest and other income and expenses, net for the three months ended May 31, 2006 is primarily the result of several factors: (1)
increased investment balances, resulting from the $6 million investment in our Series B Convertible Preferred Stock by Digital River in
November 2005; (2) a sustained cash balance from the prior year; (3) an increase in the interest rates in the investment account; and
(4) during the three months ended May 31, 2006, we received $152,366 in relation to the settlement of Leon Segen v. ComVest
Venture Partners, LP et al. The settlement did not require shareholder approval.

Income Taxes

As of February 28, 2006, we had approximately $90 million of federal and $45 million of state net operating loss carryforwards
available to offset future taxable income, which expire in varying amounts between fiscal years 2007 and 2026. 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. Because of these cumulative ownership changes,
federal loss carry forwards totaling approximately $42 million and state loss carry forwards totaling approximately $19 million are
subject to limitation. At February 28, 2006, $48 million and $26 million of federal and state net operating losses, respectively, are
available without limitation to offset future taxable income. 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.

20Liquidity and Capital Resources

The following table presents our liquidity position at May 31, 2006 and 2005 (in thousands):

For the three months ended

May 31, 2006


May 31, 2005Cash and cash equivalents

$
12,331

$
8,804Working capital

$
10,847

$
6,865Net cash used in operating activities

$
(259)

$
(423)Net cash used in financing activities

$
(2)

$
(126)Net cash used in investing activities

$
(58)

$
(110)At May 31, 2006 we had $12.3 million in cash and cash equivalents. At May 31, 2006 our working capital was $10.9 million.

Our net cash used by operations was $0.3 million for the three months ended May 31, 2006, an improvement from
$0.4 million net cash used in operations in the three months ended May 31, 2005. This improvement was primarily due to lower
net losses, when adjusting for non cash stock based compensation, for the three months ended May 31, 2006, and due to our receipt of
$152,366 from our ComVest Venture Partners legal settlement.  Our ability to improve our uses of cash and generate continued
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 used by financing activities was approximately $2,000 for the three months ended May 31, 2006.  This
primarily resulted from principal payments of approximately $100,000 on notes payable offset by additional borrowings under our
equipment advance agreement (see below) of approximately $70,000, and by our issuance of approximately 12,500 shares of common
stock in connection with our stock option and employee stock purchase plans for proceeds of approximately $50,000.

As of May 31, 2006, we have three equipment advance agreements with Silicon Valley Bank, under which we have three
equipment advances outstanding.  The equipment advances bear annual interest rates of the greater of 1% in excess of the
bank's prime rate (8% at May 31, 2006) or 5.50%, 5.50% and 7%, respectively, and are payable in fixed monthly installments through
September 2006, 2007 and December 2008, respectively.  At May 31, 2006, the interest rate for the equipment advances
was 9%.

Under the agreements, all borrowings are collateralized by a senior security interest in substantially all of our assets. The
agreements also require us to comply with financial covenants, with which we were in compliance as of May 31, 2006. The agreements
further restrict us from incurring or assuming additional indebtedness outside of the note payable and equipment advances, excluding
trade payables and certain other liabilities incurred in the ordinary course of business.

Our net cash used in investing activities during the three months ended May 31, 2006 was $0.06 million. This amount was
comprised of our purchases of fixed assets. We paid for these equipment purchases from our cash and cash equivalents, but later drew
down approximately $0.07 million under the above-mentioned second equipment advance agreement to finance these purchases. We
used these fixed asset purchases primarily to upgrade and expand our SubscribeNet infrastructure and corporate information systems.
We expect to continue to use and renew our equipment advances to finance additional fixed asset purchases.

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. However, if our SubscribeNet
business fails to grow significantly or declines from its current level, we could be forced to seek additional capital.

At May 31, 2006, we did not have any 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.

21The following table summarizes our debt and lease obligations at May 31, 2006, and the effect such obligations are expected to
have on our liquidity and cash flow in future periods (in thousands). This table provides information through our year ending
February 28, 2010, as we do not have any debt or lease obligations beyond that point.

Payments due by periodTotal

Less than 1 Year

1-3 years(a)Long-term debt


$       513
(b)
$       305

$            208Operating leases


1,717

397

1,320$    2,230

$       702

$         1,528(a)   Includes payments from March 1, 2007 through February 28, 2010.

(b)   This amount includes approximately $30,000 in interest.


As of May 31, 2006, our Series A and Series B redeemable convertible preferred stock entitled their holders to liquidation
preferences of $0.5 million and $6.0 million, respectively, in the event of certain liquidation events with respect to Intraware.

22ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At May 31, 2006, we had cash and cash equivalents of $12.3 million. We have not used derivative financial instruments in
our investment portfolio during fiscal 2006 or the three months ended May 31, 2006. We place our investments with high quality issuers,
by policy, in an effort to limit the amount of credit exposure to any one issue or issuer.

Our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalents portfolio, note payable
and lines of credit. We have not used derivative financial instruments. The effect of changes in interest rates of +/-10% over a six-month
horizon would not have a material effect on the fair value of the portfolio or our debt. Declines in interest rates will, over time, cause a
decrease in our interest income from our portfolio.  Increases in interest rates will increase the interest we pay on our credit
facilities.

ITEM 4. CONTROLS AND PROCEDURES

(a)  Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer,
after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (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
the controls and procedures required by paragraph (b) of the Exchange Act Rules 13a-15 or 15d-15.

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

PART II-OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are subject to legal proceedings in the normal course of business.  In addition, as described below, we are
subject to a lawsuit regarding our initial public offering.

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 Intraware, three of our
present and former officers and directors, and several investment banking firms that served as underwriters of our initial public offering.
The complaint alleges liability under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, on the grounds that the registration statement for the offerings did not disclose that: (1) the underwriters had
agreed to allow certain customers to purchase shares in the offerings in exchange for excess commissions paid to the underwriters;
and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices.
The amended complaint also alleges that the underwriters misused their securities analysts to manipulate the price of our stock.  No
specific damages are claimed.

Lawsuits containing similar allegations have been filed in the Southern District of New York challenging over 300 other initial public
offerings and secondary offerings conducted in 1999 and 2000.  All of these lawsuits have been consolidated for pretrial purposes
before United States District Court Judge Shira Scheindlin of the Southern District of New York.  On July 15, 2002, an omnibus motion
to dismiss was filed in the coordinated litigation on behalf of the issuer defendants, of which Intraware and its three named current and
former officers and directors are a part, on common pleadings issues.  On or about October 9, 2002, the Court entered and ordered a
Stipulation of Dismissal, which dismissed the three named current and former officers and directors from the litigation without prejudice.
On February 19, 2003, the Court entered an order denying in part the issuer-defendants' omnibus motion to dismiss, including those
portions of the motion to dismiss relating to Intraware.

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

The settlement provides that, in exchange for a release of claims against the settling issuer-defendants, the insurers of all of the
settling issuer-defendants will provide a surety undertaking to guarantee plaintiffs a $1 billion recovery from the non-settling defendants,
including the underwriter-defendants.  The amount our insurers would be required to pay to the plaintiffs could range from zero to
approximately $3.5 million, depending on plaintiffs' recovery from the underwriter-defendants and from other non-settling parties.  If the
plaintiffs recover at least $1 billion from the underwriter-defendants, our insurers would have no liability for settlement payments under
the terms of the settlement.  If the plaintiffs recover less than $1 billion, we believe our insurance will likely cover our share of any
payments towards satisfying plaintiffs' $123billion recovery deficit.  Management estimates that its range of loss relative to this matter is
zero to $3.5 million.  Presently there is no more likely point estimate of loss within this range.  As a consequence of the uncertainties
described above regarding the amount we will ultimately be required to pay, if any, as of May 31, 2006, we have not accrued a liability
for this matter.

On August 31, 2005, the court granted preliminary approval of the settlement.  A fairness hearing for the settlement took place in
April 2006.  After the hearing, the court took the matter under submission and has not yet issued a final ruling.

ITEM 1A.  RISK FACTORS

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

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 $158.6 million, and have yet to achieve
sustained profitability or positive cash flow.  Also, with the exception of our quarters ended November 30, 2002, and August 31, 2005,
we have not achieved positive cash flow from operations since our formation in 1996.  We expect to report an overall cash usage from
operations for our 2007 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 electronic software and license delivery and management service is immature and volatile.  If
the market for our service does not develop, or develops more slowly than we expect, our business will be harmed.

The market for hosted digital delivery 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 hosted digital delivery services. If companies do not increase their use of hosted digital delivery
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 electronic software and license delivery and management service principally to software 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
so, 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 either our SubscribeNet delivery services because they are concerned about the
security capabilities of these services.

Competition from other electronic delivery and licensing providers, and potential customers' development of their own
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, 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.


24In recent years, there has been an increase in mergers and acquisitions among technology companies.  This trend poses risks for
us.  First, our customers are technology companies, and any acquisitions of our customers could lead to cancellation of our contracts
with those customers by the acquiring companies.  Second, our competitors also are 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 Digital River, Inc., Hewlett Packard, Corp., On Demand Delivery, Inc. dba
Nextra, and Zomax, Inc.  Of particular importance to us is our joint marketing relationship with Digital River.  We believe this alliance
agreement could help further expand our electronic delivery service into the consumer software market, where Digital River has a much
larger presence than we do, while at the same time enabling us to offer e-commerce services to our existing installed base and to other
prospective customers in the enterprise software market.  We believe that gaining a greater presence in the consumer software market,
and enhancing our offering to include e-commerce services, both can play an important role in our future growth.  Our relationships with
Zomax, On Demand Delivery, and Hewlett Packard have yet to produce significant revenue, however, and it is possible our relationship
with Digital River will prove less beneficial than we currently expect, in which case our business could suffer.

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, to fluctuate.

Our SubscribeNet service fees, which comprise most of our online services and technology revenues, 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 online services and technology revenues to fluctuate.  In addition to the other risk factors described in this section,
factors that could cause such fluctuation include:

Deferral of SubscribeNet revenue recognition due to delays by customers in implementing the SubscribeNet service, due to new
sales involving extensive implementations, or due to 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
consolidated financial statements or unaudited interim consolidated financial statements; andChanges 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 technological and functional requirements we must meet to stay competitive are subject to rapid change.  If we are unable
to quickly adapt to these changes and meet the demands of our current and potential customers, we will likely lose sales and market
share and our revenue growth will be limited.

We market primarily to software publishers, 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.  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 or the 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 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 withhold25payment 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, 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 service and harm our business.

We provide our service through computer hardware that is currently located in a third-party Web hosting facilities in Santa Clara,
California operated by SAVVIS Communications, and in Ireland operated by Data Electronics.  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.
We have an agreement with SBC E-Services, an affiliate of SBC Communications, Inc., to provide access to a geographically remote
disaster recovery facility that would provide us access to hardware, software and Internet connectivity in the event the SAVVIS facility
becomes unavailable.  Even with this disaster recovery arrangement, however, our service would be interrupted during the transition.
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.

The Market for Our Proposed Digital Fastball Service is Unproven.

We continue to develop a production release of a new service called Digital Fastball, which we hope will leverage our digital
delivery expertise 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 plan to market our Digital Fastball service principally to small and
medium-sized companies that need to send large digital files as part of their businesses.  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.

Further, some companies may be reluctant to use either our SubscribeNet or Digital Fastball hosted digital delivery services
because they are concerned about the security capabilities of these services.  If our development or marketing efforts prove
unsuccessful with respect to Digital Fastball, we may not generate any profit even recover our investments in the Digital Fastball
service, in which case our business could suffer.

Our operating results could vary due to the methods, estimates and judgments we use in applying our accounting policies,
particularly SFAS No. 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 No. 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  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. Among other things, these provisions:

trigger certain shareholder rights in the event a person or entity acquires more than fifteen percent of our voting securities (or up to
twenty percent in the case of Crosslink Capital, Inc.);
establish a classified board of directors so that not all members of our board are elected at one time;26require super-majority voting to amend some provisions in our amended and restated certificate of incorporation and bylaws;
authorize the issuance of "blank check" preferred stock that our board could issue to increase the number of
outstanding shares and to discourage a takeover attempt;
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our
stockholders;
provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and
establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by
stockholders at stockholder meetings.In 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 percent 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 in spite of those periodic virus scans,
our system could transmit the virus to one or more end-users.  Any such virus transmission could result in disputes, litigation and
negative publicity that could adversely affect our business and our stock price.

If our security measures are breached and unauthorized access is obtained to a customer's data, our service may be perceived
as not being secure and customers may curtail or stop using our service.

Our 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 customers' 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.

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 and electronically 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; or27Claims 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 solution incorporates automated procedures to help ensure that the software we deliver electronically is not
downloaded in violation of U.S. export laws and regulations.  However, these procedures may not prevent unauthorized exports of
restricted software in every case.  If an unauthorized export of software occurs through the SubscribeNet service and the U.S.
government determines that we 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 the company, our product development, sales, and corporate management could suffer.

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

Financial 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 Nadaq 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 control over financial reporting
to allow management to report on, and our independent registered public accounting firm to attest to, our internal control 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 losses.
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 CEO and CFO, 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.

28We 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.

Our sales and marketing services arrangement with Software Spectrum, Inc. terminated on January 3, 2006.  As a result, we
stopped recognizing alliance and reimbursement revenues after January 3, 2006.

Until January 3, 2006, we provided sales and marketing services to Software Spectrum to assist in its resale and marketing of Sun
Java Enterprise System and Sun One software licenses and maintenance, under a Sales Alliance Agreement between us and Software
Spectrum.  Under that agreement, Software Spectrum shared with us a portion of its gross profit from resales of licenses and
maintenance for that Sun software, and paid us a SubscribeNet service fee for electronic delivery of that Sun software.  This agreement
accounted for substantially all of our alliance and reimbursement revenues, a significant portion of our online services and technology
revenues, and more than 10% of our total revenues in our 2006 fiscal year.

Effective January 3, 2006, we terminated our Sales Alliances Agreement with Software Spectrum We have signed a two-year
SubscribeNet service agreement with FusionStorm to provide electronic software and license management services for their SunOne
product sales, which we expect will partially offset the decline in our online services and technology revenues.  We do not expect to
offer sales and marketing services in the future to other customers as part of the SubscribeNet offering.   We ceased recognize any
alliance and reimbursement revenues after January 3, 2006.
If we acquire any companies or technologies in the future, 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.  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; anddelays 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.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.


29ITEM 5. OTHER INFORMATION

On June 22, 2006 the Company's Board of Directors approved an Amended and Restated Preferred Stock Rights Agreement
("Rights Agreement") between the Company and Computershare Investor Services, LLC (the "Rights Agent"),
which supersedes and replaces the Company's previous Preferred Stock Rights Agreement dated September 8, 2005.  The amended
Rights Agreement allows one of the Company's existing investors, Crosslink Capital, Inc. ("Crosslink"), and its affiliated
companies, to acquire up to twenty percent of the Company's outstanding common stock without creating a triggering event under the
Rights Plan.  Crosslink is a venture capital firm located in San Francisco, California, which in the judgment of management and our
Board is not acquiring our stock for purposes of obtaining control of the Company.
In the event Crosslink does acquire more than fifteen percent of our outstanding common shares, one element of our Standstill and
Stock Restriction Agreement ("Standstill Agreement") with Digital River will be affected.  In particular, our Standstill
Agreement with Digital River precludes Digital River from acquiring more than fifteen percent of our voting securities.  However, the
Standstill Agreement also provides that this restriction will be suspended so long as any other person or entity owns more than fifteen
percent of our voting shares.  Accordingly, if Crosslink acquires more than fifteen percent of our voting shares, our Standstill Agreement
with Digital River will be suspended for as long as Crosslink's ownership remains above fifteen percent.  Digital River will, however,
remain subject to the provisions in the Rights Agreement, under which the Rights Plan will be triggered if Digital River acquires more
than a fifteen percent ownership in the Company.

ITEM 6. EXHIBITS

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 Designations, Preferences and Rights of Series A Convertible Preferred Stock3.4(3)
Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock3.5(1)
Certificate of Designations, Preferences and Rights of the Series D Convertible Preferred Stock3.6(4)
Amended and Restated Bylaws of Intraware, Inc.4.1(5)
Amended and Restated Preferred Stock Rights Agreement, dated as of June 22, 2006 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, respectively31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act - Peter H. Jackson31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act - Wendy A. Nieto32.1
Certification pursuant to Section 906 of the Sarbanes-Oxley Act_______________(1)	Incorporated by reference to Intraware's Quarterly Report on Form 10-Q for the quarter ended August 31, 2005 (File
No. 000-25249), filed with the SEC on October 5, 2005.
(2)	Incorporated by reference to Intraware's Current Report
on Form 8-K dated April 2, 2001 (File No. 000-25249), filed with the SEC on April 13, 2001.
(3)	Incorporated by reference to Intraware's Current Report on Form 8-K dated November 9, 2005 (File No. 000-25249),
filed with the SEC on November 15, 2005.
(4)	Incorporated by reference to Intraware's Current Report on Form 8-K dated September 12, 2005 (File No. 000-25249),
filed with the SEC on September 12, 2005.
(5)	Incorporated by reference to Intraware's Current Report on Form 8-K dated June 22, 2006 (File No. 000-25249), filed
with the SEC on June 27, 2006.

30SIGNATURE

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: July 14, 2006
    By: /s/ WENDY A. NIETO
               
    Wendy A. Nieto
Chief Financial Officer and Executive Vice President of Intraware, Inc.31