---

---

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

---

FORM 10-Q

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2001

|/ / | 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(State of other jurisdiction of
incorporation or organization)

68-0389976(I.R.S. Employer
Identification Number)25 ORINDA WAY
ORINDA, CA 94563(Address of principal executive offices)(925)253-4500(Registrant's telephone number, including area code)


---

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

As
of October 11, 2001 there were 29,707,207 shares of the registrant's Common Stock outstanding.

---

---

---



TABLE OF CONTENTS

|PART I FINANCIAL INFORMATION |  |                                                                                       
|---------------------------- |  | --------------------------------------------------------------------------------------
|ITEM 1.                      |  | CONSOLIDATED FINANCIAL STATEMENTS                                                     
|                             |  | CONSOLIDATED BALANCE SHEETS                                                           
|                             |  | CONSOLIDATED STATEMENTS OF OPERATIONS                                                 
|                             |  | CONSOLIDATED STATEMENTS OF CASH FLOWS                                                 
|                             |  | NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL INFORMATION                         
|ITEM 2.                      |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
|                             |  | RISK FACTORS                                                                          
|ITEM 3.                      |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            
|PART II OTHER INFORMATION    |  |                                                                                       
|ITEM 1.                      |  | LEGAL PROCEEDINGS                                                                     
|ITEM 2.                      |  | CHANGES IN SECURITIES AND USE OF PROCEEDS                                             
|ITEM 3.                      |  | DEFAULTS UPON SENIOR SECURITIES                                                       
|ITEM 4.                      |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS                                 
|ITEM 5.                      |  | OTHER INFORMATION                                                                     
|ITEM 6.                      |  | EXHIBITS AND REPORTS ON FORM 8-K                                                      
|SIGNATURE                    |  | 33                                                                                    

2

---

PART I FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

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

|                                                                                                                                                                                                                                                                                                 |                                                                                                                                                              | August 31, 2001            |                                                                                    | February 28, 2001 |       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ---------------------------------------------------------------------------------- | ----------------- | ------
|ASSETS                                                                                                                                                                                                                                                                                           |                                                                                                                                                              |                            |                                                                                    |                   |       
|Current assets:                                                                                                                                                                                                                                                                                  |                                                                                                                                                              |                            |                                                                                    |                   |       
|                                                                                                                                                                                                                                                                                                 | Cash and cash equivalents                                                                                                                                    |                            | $                                                                                  | 6,134             |       
|                                                                                                                                                                                                                                                                                                 | Restricted cash                                                                                                                                              |                            |                                                                                    | 1,489             |       
|                                                                                                                                                                                                                                                                                                 | Accounts receivable, net                                                                                                                                     |                            |                                                                                    | 3,290             |       
|                                                                                                                                                                                                                                                                                                 | Prepaid licenses, services and cost of deferred revenue                                                                                                      |                            |                                                                                    | 18,381            |       
|                                                                                                                                                                                                                                                                                                 | Other current assets                                                                                                                                         |                            |                                                                                    | 2,624             |       
|                                                                                                                                                                                                                                                                                                 |                                                                                                                                                              |                            |                                                                                    |                   |       
|                                                                                                                                                                                                                                                                                                 |                                                                                                                                                              | Total current assets       |                                                                                    |                   | 31,918
|Cost of deferred revenue                                                                                                                                                                                                                                                                         |                                                                                                                                                              |                            | 653                                                                                |                   |       
|Property and equipment, net                                                                                                                                                                                                                                                                      |                                                                                                                                                              |                            | 8,511                                                                              |                   |       
|Intangible assets, net                                                                                                                                                                                                                                                                           |                                                                                                                                                              |                            | 12,064                                                                             |                   |       
|Other assets                                                                                                                                                                                                                                                                                     |                                                                                                                                                              |                            | 262                                                                                |                   |       
|                                                                                                                                                                                                                                                                                                 |                                                                                                                                                              |                            |                                                                                    |                   |       
|                                                                                                                                                                                                                                                                                                 |                                                                                                                                                              | Total assets               |                                                                                    | $                 | 53,408
|                                                                                                                                                                                                                                                                                                 |                                                                                                                                                              |                            |                                                                                    |                   |       
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                                     |                                                                                                                                                              |                            |                                                                                    |                   |       
|Current liabilities:                                                                                                                                                                                                                                                                             |                                                                                                                                                              |                            |                                                                                    |                   |       
|                                                                                                                                                                                                                                                                                                 | Bank borrowings                                                                                                                                              |                            | $                                                                                  |                  |       
|                                                                                                                                                                                                                                                                                                 | Notes payable                                                                                                                                                |                            |                                                                                    | 3,020             |       
|                                                                                                                                                                                                                                                                                                 | Warrants                                                                                                                                                     |                            |                                                                                    | 7,823             |       
|                                                                                                                                                                                                                                                                                                 | Accounts payable                                                                                                                                             |                            |                                                                                    | 6,739             |       
|                                                                                                                                                                                                                                                                                                 | Accrued expenses                                                                                                                                             |                            |                                                                                    | 4,160             |       
|                                                                                                                                                                                                                                                                                                 | Deferred revenue                                                                                                                                             |                            |                                                                                    | 22,539            |       
|                                                                                                                                                                                                                                                                                                 | Capital lease and other obligations                                                                                                                          |                            |                                                                                    | 2,353             |       
|                                                                                                                                                                                                                                                                                                 |                                                                                                                                                              |                            |                                                                                    |                   |       
|                                                                                                                                                                                                                                                                                                 |                                                                                                                                                              | Total current liabilities  |                                                                                    |                   | 46,634
|Deferred revenue                                                                                                                                                                                                                                                                                 |                                                                                                                                                              |                            | 1,274                                                                              |                   |       
|Capital lease and other obligations                                                                                                                                                                                                                                                              |                                                                                                                                                              |                            | 3,533                                                                              |                   |       
|                                                                                                                                                                                                                                                                                                 |                                                                                                                                                              |                            |                                                                                    |                   |       
|                                                                                                                                                                                                                                                                                                 |                                                                                                                                                              | Total liabilities          |                                                                                    |                   | 51,441
|                                                                                                                                                                                                                                                                                                 |                                                                                                                                                              |                            |                                                                                    |                   |       
|Contingencies and commitments                                                                                                                                                                                                                                                                    |                                                                                                                                                              |                            |                                                                                    |                   |       
|Redeemable convertible preferred stock, 10,000 shares authorized, $.0001 par value; 3,233 and 2,873 shares issued and outstanding at August 31 and February 28, 2001, respectively (aggregate liquidation preference
of $8,700 and $5,100 at August 31, 2001 and February 28, 2001 respectively) |                                                                                                                                                              |                            | 7,362                                                                              |                   |       
|                                                                                                                                                                                                                                                                                                 |                                                                                                                                                              |                            |                                                                                    |                   |       
|Stockholders' equity:                                                                                                                                                                                                                                                                            |                                                                                                                                                              |                            |                                                                                    |                   |       
|                                                                                                                                                                                                                                                                                                 | Common stock; $0.0001 par value; 250,000 shares authorized; 28,595 and 28,375 shares issued and outstanding at August 31 and February 28, 2001, respectively |                            |                                                                                    | 3                 |       
|                                                                                                                                                                                                                                                                                                 | Additional paid-in-capital                                                                                                                                   |                            |                                                                                    | 131,338           |       
|                                                                                                                                                                                                                                                                                                 | Unearned compensation                                                                                                                                        |                            |                                                                                    | (2,901            | )     
|                                                                                                                                                                                                                                                                                                 | Accumulated deficit                                                                                                                                          |                            |                                                                                    | (133,835          | )     
|                                                                                                                                                                                                                                                                                                 |                                                                                                                                                              |                            |                                                                                    |                   |       
|                                                                                                                                                                                                                                                                                                 |                                                                                                                                                              | Total stockholders' equity |                                                                                    |                   | (5,395
|                                                                                                                                                                                                                                                                                                 |                                                                                                                                                              |                            |                                                                                    |                   |       
|                                                                                                                                                                                                                                                                                                 |                                                                                                                                                              |                            | Total liabilities, redeemable convertible preferred stock and stockholders' equity |                   | $     
|                                                                                                                                                                                                                                                                                                 |                                                                                                                                                              |                            |                                                                                    |                   |       

See notes to unaudited interim consolidated financial information.

3

---



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

|                                                                                                                                                                                 |                                | For the Three
Months Ended |                          | For the Six
Months Ended |       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | -------------------------- | ------------------------ | ------------------------ | ------
|
|Revenues:                                                                                                                                                                        |                                |                            |                          |                          |       
|                                                                                                                                                                                 | Software product sales         |                            | $                        | 9,437                    |       
|                                                                                                                                                                                 | Online services and technology |                            |                          | 4,140                    |       
|                                                                                                                                                                                 |                                |                            |                          |                          |       
|                                                                                                                                                                                 |                                | Total revenues             |                          |                          | 13,577
|                                                                                                                                                                                 |                                |                            |                          |                          |       
|Cost of revenues:                                                                                                                                                                |                                |                            |                          |                          |       
|                                                                                                                                                                                 | Software product sales         |                            |                          | 7,444                    |       
|                                                                                                                                                                                 | Online services and technology |                            |                          | 766                      |       
|                                                                                                                                                                                 |                                |                            |                          |                          |       
|                                                                                                                                                                                 |                                | Total cost of revenues     |                          |                          | 8,210 
|                                                                                                                                                                                 |                                |                            |                          |                          |       
|                                                                                                                                                                                 |                                |                            | Gross profit             |                          |       
|                                                                                                                                                                                 |                                |                            |                          |                          |       
|Operating expenses:                                                                                                                                                              |                                |                            |                          |                          |       
|                                                                                                                                                                                 | Sales and marketing            |                            |                          | 3,685                    |       
|                                                                                                                                                                                 | Product development            |                            |                          | 2,641                    |       
|                                                                                                                                                                                 | General and administrative     |                            |                          | 2,447                    |       
|                                                                                                                                                                                 | Restructuring                  |                            |                          | 2,206                    |       
|                                                                                                                                                                                 | Loss on abandonment of assets  |                            |                          | 6,407                    |       
|                                                                                                                                                                                 | Amortization of intangibles    |                            |                          | 2,479                    |       
|                                                                                                                                                                                 |                                |                            |                          |                          |       
|                                                                                                                                                                                 |                                |                            | Total operating expenses |                          |       
|                                                                                                                                                                                 |                                |                            |                          |                          |       
|Loss from operations                                                                                                                                                             |                                |                            | (14,498                  | )                        |       
|Interest expense                                                                                                                                                                 |                                |                            | (250                     | )                        |       
|Interest income and other income and expenses                                                                                                                                    |                                |                            | (4,675                   | )                        |       
|                                                                                                                                                                                 |                                |                            |                          |                          |       
|Net loss                                                                                                                                                                         |                                |                            | (19,423                  | )                        |       
|Deemed dividend due to beneficial conversion feature of preferred stock; mandatorily redeemable convertible preferred stock accrued dividend; and accretion to liquidation value |                                |                            | (687                     | )                        |       
|                                                                                                                                                                                 |                                |                            |                          |                          |       
|Net loss attributable to common stockholders                                                                                                                                     |                                | $                          | (20,110                  | )                        | $     
|                                                                                                                                                                                 |                                |                            |                          |                          |       
|Basic and diluted net loss per share attributable to common stockholders                                                                                                         |                                | $                          | (0.71                    | )                        | $     
|                                                                                                                                                                                 |                                |                            |                          |                          |       
|Weighted average sharesbasic and diluted                                                                                                                                        |                                |                            | 28,523                   |                          |       
|                                                                                                                                                                                 |                                |                            |                          |                          |       

See
notes to unaudited interim consolidated financial information.

4

---



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

|                                                     |                                                                                | For the Six Months Ended                              |                              
|---------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------------------------------- | -----------------------------
|
|Cash flows from operating activities:                |                                                                                |                                                       |                              
|                                                     | Net loss                                                                       |                                                       | $                            
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities:    |                                                       |                              
|                                                     |                                                                                | Depreciation and amortization                         |                              
|                                                     |                                                                                | Amortization of unearned compensation                 |                              
|                                                     |                                                                                | Provision for (recovery of) doubtful accounts         |                              
|                                                     |                                                                                | Loss on abandonment of assets                         |                              
|                                                     |                                                                                | Warrant adjustment to fair value                      |                              
|                                                     |                                                                                | Amortization of warrant charge offset against revenue |                              
|                                                     |                                                                                | Changes in assets and liabilities:                    |                              
|                                                     |                                                                                |                                                       | Accounts receivable          
|                                                     |                                                                                |                                                       | Prepaid licenses and services
|                                                     |                                                                                |                                                       | Other assets                 
|                                                     |                                                                                |                                                       | Accounts payable             
|                                                     |                                                                                |                                                       | Accrued expenses             
|                                                     |                                                                                |                                                       | Deferred revenue             
|                                                     |                                                                                |                                                       |                              
|Net cash used in operating activities                |                                                                                |                                                       | (5,556                       
|                                                     |                                                                                |                                                       |                              
|Cash flows from investing activities:                |                                                                                |                                                       |                              
|                                                     | Purchase of property and equipment                                             |                                                       |                              
|                                                     | Cash from acquisition of Janus Technologies, Inc.                              |                                                       |                              
|                                                     | Decrease in restricted cash equivalents                                        |                                                       |                              
|                                                     | Proceeds from sales of fixed assets                                            |                                                       |                              
|                                                     | Puchase of investments                                                         |                                                       |                              
|                                                     | Proceeds from sales of investments                                             |                                                       |                              
|                                                     |                                                                                |                                                       |                              
|Net cash provided by investment activities           |                                                                                |                                                       | 88                           
|                                                     |                                                                                |                                                       |                              
|Cash flows from financing activities:                |                                                                                |                                                       |                              
|                                                     | Proceeds from common stock, net                                                |                                                       |                              
|                                                     | Proceeds from notes and warrants, net of issuance costs                        |                                                       |                              
|                                                     | Repayment of bank borrowings                                                   |                                                       |                              
|                                                     | Proceeds from issuance of preferred stock, net                                 |                                                       |                              
|                                                     | Redemption of preferred stock                                                  |                                                       |                              
|                                                     | Principal payments on capital lease obligations                                |                                                       |                              
|                                                     |                                                                                |                                                       |                              
|Net cash provided by financing activities            |                                                                                |                                                       | 4,556                        
|                                                     |                                                                                |                                                       |                              
|Net increase (decrease) in cash and cash equivalents |                                                                                |                                                       | (912                         
|Cash and cash equivalents at beginning of period     |                                                                                |                                                       | 7,046                        
|                                                     |                                                                                |                                                       |                              
|Cash and cash equivalents at end of period           |                                                                                | $                                                     | 6,134                        
|                                                     |                                                                                |                                                       |                              
|Supplemental disclosure of cash flow information:    |                                                                                |                                                       |                              
|                                                     | Cash paid for interest                                                         |                                                       | $                            
|Supplemental non-cash activity:                      |                                                                                |                                                       |                              
|                                                     | Property and equipment leases                                                  |                                                       | $                            
|                                                     | Prepaid maintenance leases                                                     |                                                       | $                            
|                                                     | Common stock issued in conjuction with acquisition of Janus Technologies, Inc. |                                                       | $                            

See notes to unaudited interim consolidated financial information.

5

---



INTRAWARE, INC.  NOTES TO UNAUDITED INTERIM CONDOLIDATED FINANCIAL INFORMATION

NOTE 1. BASIS OF PRESENTATION

INTRAWARE, INC.

The accompanying consolidated financial statements for the three months and six months ended August 31, 2001 and 2000 are unaudited and reflect all
normal and recurring adjustments which are, in the opinion of our management, necessary for fair presentation of the consolidated balance sheets, statements of operations, and statements of cash flows
for the periods presented.

These
consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on
Form 10-K for the fiscal year ended February 28, 2001 and the Form 10-Q for the fiscal quarter ended May 31, 2001. The preparation of consolidated
financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the
date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Certain information and footnote disclosures normally included in annual
consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as permitted by rules and regulations of the Securities and
Exchange Commission (the "SEC"). The results of operations for the interim period ended August 31, 2001 are not necessarily indicative of results to be expected for the full year.

Certain
reclassifications have been made to prior year consolidated financial statements to conform to the current year's presentation.

NOTE 2. NET LOSS PER SHARE

We compute net loss per share in accordance with Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share" and SEC
Staff Accounting Bulletin No. 98 ("SAB 98"). Basic net loss per Common share is computed by dividing the net loss attributable to Common stockholders for the period by the weighted average
number of Common shares outstanding during the period excluding shares subject to repurchase. Diluted net loss per share is computed by dividing the net loss attributable to Common stockholders for
the period by the weighted average number of Common and potential Common shares outstanding during the period if the effect is dilutive. Potential Common shares are composed of Common Stock subject to
repurchase rights and incremental shares of Common Stock issuable upon the exercise of stock options and warrants and upon conversion of Convertible Preferred Stock.

6

---

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

|                                                                                                                                                                                                                    |                                                                                                                                                                                  | For the
Three Months Ended
August 31, |        | For the
Six Months Ended
August 31, |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------ | ----------------------------------- | -
|
|
|Numerator:                                                                                                                                                                                                          |                                                                                                                                                                                  |                                       |        |                                     |  
|                                                                                                                                                                                                                    | Net loss                                                                                                                                                                         |                                       | $      | (19,423                             | )
|                                                                                                                                                                                                                    | Deemed dividend due to beneficial conversion feature of preferred stock; mandatorily redeemable convertible preferred stock accrued dividend; and accretion to liquidation value |                                       |        | (687                                | )
|                                                                                                                                                                                                                    |                                                                                                                                                                                  |                                       |        |                                     |  
|                                                                                                                                                                                                                    | Net loss attributable to common stockholders                                                                                                                                     |                                       | $      | (20,110                             | )
|                                                                                                                                                                                                                    |                                                                                                                                                                                  |                                       |        |                                     |  
|Denominator:                                                                                                                                                                                                        |                                                                                                                                                                                  |                                       |        |                                     |  
|                                                                                                                                                                                                                    | Weighted average shares                                                                                                                                                          |                                       |        | 28,599                              |  
|                                                                                                                                                                                                                    | Weighted average unvested common shares subject to repurchase                                                                                                                    |                                       |        | (76                                 | )
|                                                                                                                                                                                                                    |                                                                                                                                                                                  |                                       |        |                                     |  
|                                                                                                                                                                                                                    | Denominator for basic and diluted calculation                                                                                                                                    |                                       |        | 28,523                              |  
|                                                                                                                                                                                                                    |                                                                                                                                                                                  |                                       |        |                                     |  
|Basic and diluted net loss per share attributable to common stockholders                                                                                                                                            |                                                                                                                                                                                  | $                                     | (0.71  | )                                   | $
|                                                                                                                                                                                                                    |                                                                                                                                                                                  |                                       |        |                                     |  
|Antidilutive securities including options, warrants, convertible redeemable preferred stock and unvested common shares subject to repurchase not included in net loss per share attributable to common stockholders |                                                                                                                                                                                  |                                       | 21,852 |                                     |  
|                                                                                                                                                                                                                    |                                                                                                                                                                                  |                                       |        |                                     |  

NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"),
"Business Combinations" which supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. In addition, SFAS 141 establishes specific criteria for the recognition
of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary gain. The provisions of SFAS 141 are required to be
adopted July 1, 2001. The adoption of SFAS 141 will not change our method of accounting used in previous business combinations including those accounted for under the
pooling-of-interests method.

In
July 2001, the FASB also issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective
for fiscal years beginning after December 15, 2001. Certain provisions shall also be applied to acquisitions initiated subsequent to June 30, 2001. SFAS 142 supercedes APB Opinion
No. 17 "Intangible Assets" and requires, among other things, the discontinuance of amortization related to goodwill and indefinite lived intangible assets. These assets will then be subject to
an impairment test at least annually. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the
useful lives of existing recognized intangibles and reclassification of certain intangibles out of previously reported goodwill.

7

---

We are required to adopt SFAS 142 effective March 1, 2002, which will result in no longer amortizing goodwill. In addition, we will be required to reassess intangible
assets, including goodwill, and test goodwill for impairment, as part of the transition provisions. Any impairment resulting from these transition tests will be recorded as of March 1, 2002. We
are currently in the process of evaluating the potential impact the adoption of SFAS 142 will have on our consolidated financial position or results of operations.

In
October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes FASB Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and reporting provisions of APB Opinion
No. 30,
"Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the
disposal of a segment of a business. This Statement also amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The provisions of SFAS 144 are required to be adopted during our fiscal year beginning March 1, 2002, however early adoption is
acceptable. We are currently in the process of evaluating the potential impact the adoption of SFAS 142 will have on our consolidated financial position or results of operations.

8

---

NOTE 4. CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

During the six months ended August 31, 2001, our redeemable convertible preferred stock ("preferred stock") and stockholders' equity changed as follows
(in thousands):

|                                                                             |  | Preferred Stock |  | Common Stock |        |   |        |  |   |   |  |   |         |   |  
|---------------------------------------------------------------------------- |  | --------------- |  | ------------ | ------ | - | ------ |  | - | - |  | - | ------- | - | -
|
|
|Balance at February 28, 2001                                                 |  | 2,873           |  | $            | 4,666  |   | 28,375 |  | $ | 3 |  | $ | 130,625 |   | $
|Exercise of stock options, net of repurchased common stock                   |  |                |  |              |       |   | 7      |  |   |  |  |   |        |   |  
|Issuance of common stock for employee stock purchase program                 |  |                |  |              |       |   | 213    |  |   |  |  |   | 200     |   |  
|Deferred stock-based compensation for options forfeited                      |  |                |  |              |       |   |       |  |   |  |  |   | (210    | ) |  
|Issuance of preferred stock with warrants, net of issuance costs of $380     |  | 360             |  |              | 2,696  |   |       |  |   |  |  |   | 524     |   |  
|Beneficial conversion feature on preferred stock                             |  |                |  |              | (1,816 | ) |       |  |   |  |  |   | 1,816   |   |  
|Deemed dividend relating to beneficial conversion feature on preferred stock |  |                |  |              | 1,816  |   |       |  |   |  |  |   | (1,816  | ) |  
|Issuance of warrants in connection with reseller arrangement                 |  |                |  |              |       |   |       |  |   |  |  |   | 1,588   |   |  
|Warrants issued below fair value for offset to future related revenue        |  |                |  |              |       |   |       |  |   |  |  |   | (1,588  | ) |  
|Amortization of warrant charge offset against revenue                        |  |                |  |              |       |   |       |  |   |  |  |   | 199     |   |  
|Amortization of unearned compensation                                        |  |                |  |              |       |   |       |  |   |  |  |   |        |   |  
|Net loss                                                                     |  |                |  |              |       |   |       |  |   |  |  |   |        |   |  
|                                                                             |  |                 |  |              |        |   |        |  |   |   |  |   |         |   |  
|Other comprehensive loss                                                     |  |                 |  |              |        |   |        |  |   |   |  |   |         |   |  
|                                                                             |  |                 |  |              |        |   |        |  |   |   |  |   |         |   |  
|Balance at August 31, 2001                                                   |  | 3,233           |  | $            | 7,362  |   | 28,595 |  | $ | 3 |  | $ | 131,338 |   | $
|                                                                             |  |                 |  |              |        |   |        |  |   |   |  |   |         |   |  

NOTE 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK

On April 2, 2001, we entered into an agreement to sell a new class of Series B Preferred Stock and warrants to institutional and individual
investors. Under the terms of this financing, we issued an aggregate of 360,000 shares of Preferred Stock for aggregate gross proceeds of $3.6 million and net proceeds of $3.2 million,
after fees and expenses. We also issued warrants to purchase 720,000 shares of our Common Stock with an exercise price of $1.125 per share, the closing bid price of our Common Stock on the trading day
prior to the closing of the financing. The warrants expire seven years from the issuance date. Each share of Preferred Stock was convertible into ten shares of Common Stock at the election of the
holder and entitled the holder to a liquidation preference equal to the amount of the original investment, in the event of our liquidation, winding-up or dissolution. The Preferred Stock
carried anti-dilution protection requiring a full adjustment of the conversion price to any lower price at

9

---

which we sold stock to investors during the three months following the closing, and carried a weighted-average adjustment of the conversion price based on any sale of stock by us to investors during
the subsequent nine-month period. The Preferred Stock did not carry a dividend. The new class of Series B Preferred Stock entitled the holders to elect a member of our Board of
Directors.

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

In
connection with the debt financing that we completed on September 20, 2001, all of the Series B Preferred Stock was exchanged for a new class of
Series B-1 Preferred Stock, and the Series B Preferred Stock was eliminated as a class. The new Series B-1 Preferred Stock carries substantially the same
rights, privileges and preferences as the eliminated Series B Preferred Stock. The exchange was effected primarily to enable us to issue debt as part of the debt financing that we closed on
August 31, 2001 and September 20, 2001 (see Note 9). The terms of the Series B Preferred Stock prohibited us from issuing
debt, but the terms of the Series B-1 Preferred Stock permit us to issue debt with the consent of the holders of a majority of the Series B-1 Preferred Stock.

We
recognized an additional deemed dividend of approximately $687,000 on August 31, 2001, based on the adjustment of the conversion price of the Series B-1 Preferred
Stock under its anti-dilution protections. This deemed dividend was related to the initial closing of our debt financing, with a commitment to issue warrants, on August 31, 2001
(see Note 9). As a result of the anti-dilution protections, the Series B-1 Preferred Stock was adjusted to be convertible into 4.2 million shares of our Common Stock,
and the associated warrants were adjusted to be exercisable for 849,322 shares of our Common Stock at an exercise price of $0.95 per share.

In
addition, we expect to recognize another deemed dividend of approximately $880,000 effective September 20, 2001. This deemed dividend is related to the second closing of our
debt financing on September 20, 2001 (see Note 9). As a result of the anti-dilution protections, the Series B-1 Preferred Stock was adjusted to be convertible into
5.1 million shares of our Common Stock, and the associated warrants were adjusted to be exercisable for 866,879 shares of our Common Stock at an exercise price of $0.93 per share.

NOTE 6. ABILITY TO CONTINUE OPERATIONS

Our Annual Report on Form 10-K for the year ended February 28, 2001 contains a disclosure expressing substantial doubt regarding our
ability to continue as a going concern as a result of our recurring losses and negative cash flows from operations. We were in breach of covenants related to our commercial bank line of credit which
expired on April 29, 2001, and under which we owed $3.3 million in callable debt. On August 31, 2001 we completed our repayment in full of the $3.3 million loan previously
owing to Imperial Bank, and the agreement for that loan has been terminated. Although we restructured our operations in December 2000 and August 2001 in order to reduce discretionary
spending, raised a net $9.6 million in new financing between April 2001 and September 2001, of which $7 million is repayable on August 31, 2002, and continue to seek
both additional capital and additional revenue through sales of our products and services, there is no assurance that we will succeed in generating sufficient revenue, obtaining stockholder approval
of the August and September 2001 financing, or obtaining sufficient additional financing on terms acceptable to us to enable us to continue operations.

10

---

Our future capital requirements will depend on many factors, including our ability to increase revenue levels and reduce costs of operations to generate positive cash flows, the
timing and extent of spending to support expansion of sales and marketing, and market acceptance of our products and timeliness of collections of our accounts receivable. Although we have historically
been able to satisfy our cash requirements, there can be no assurance that efforts to obtain sufficient financing for operations will be successful in the future. Our future capital needs will be
highly dependent upon our ability to control
expenses and generate additional software license revenues, and any projections of future cash needs and cash flows are subject to substantial uncertainty. Our ability to raise additional capital may
be weakened in the event we do not maintain Nasdaq listing requirements.

While
we are taking steps to improve our sales efforts and are controlling our expenditures, there can be no assurance that we will succeed in obtaining additional funding resources,
generating sufficient cash from operations, or achieving profitability.

NOTE 7. RESTRUCTURING AND LOSS ON ABANDONMENT OF ASSETS

December 2000

At February 28, 2001, we had a remaining restructuring accrual of $628,000 relating to our December 1, 2000 strategic restructuring. We made cash
payments of approximately $432,000 during the six months ended August 31, 2001. At August 31, 2001 that accrual has been reduced to approximately $196,000, of which $186,000 was related
to future lease and related expenses and the remainder was severance costs. We expect to pay this remaining accrual in cash within the next twelve months. While our accrual reflects management's best
estimate of the costs to be incurred related to the activities above, actual costs incurred may differ from initial estimates recorded.

August 2001

On August 8, 2001 we announced a strategic reorganization designed to accelerate our drive toward profitability and enhance our capital-raising
opportunities. We reduced our workforce to approximately 120 employees from 186 at the end of July. We also consolidated our two San Francisco Bay Area offices into one. We took a charge of
approximately $8,613,000 relating to this restructuring and loss on abandonment of assets in our second quarter ended August 31, 2001, and as of August 31, 2001 had a restructuring
accrual of approximately $1,876,000.

The
restructuring charges were primarily due to the following:



We
made cash payments of approximately $330,000 during the three months ending August 31, 2001. At August 31, 2001 we had a remaining restructuring accrual of
approximately $1,876,000, of which approximately $1,823,000 was related to excess rent and sublease costs and the remainder was severance costs.

We
expect to pay this remaining accrual in cash within the next twelve months. While our accrual reflects management's best estimate of the costs to be incurred related to the
activities above, actual costs incurred may differ from initial estimates recorded.

11

---

NOTE 8. CORPSOFT, INC. ALLIANCE

On May 22 and June 28, 2001, we entered into agreements with CorpSoft, Inc., a leading reseller of business software and provider of
software asset management services and technologies.

Under
the May 22, 2001 agreement, CorpSoft will offer our Argis suite of products to its North American customers as its exclusive information technology asset management
repository solution until May 2003. During this period, CorpSoft will act as our exclusive reseller of the Argis suite in North America. These exclusivity provisions of the agreement are
subject to exceptions, and may terminate completely in certain circumstances. CorpSoft will pay to us our list fees, less prescribed discount percentages, for the Argis software products and related
maintenance, training and professional services. We will recognize the associated net revenue based on the criteria described in the previous sentence. In addition, we agreed to issue to CorpSoft a
fully-vested nonforfeitable warrant to purchase 800,000 shares of our Common Stock at $1.71 per share, the average closing price of our Common Stock from May 8, 2001 to May 21, 2001. If
CorpSoft attains a prescribed sales goal on November 30, 2001, then 200,000 shares subject to the warrant shall become exercisable on that date. Thereafter, at the end of each of our fiscal
quarters that CorpSoft attains its prescribed sales goals, 100,000 shares subject to the warrant shall become exercisable, up to a maximum of 800,000 shares. If any of the prescribed sales goals are
not attained, all the shares subject to the warrant shall become exercisable on
the earlier of either May 22, 2005 (the fourth anniversary date) or any termination of the agreement. The term of the warrant is ten years. Based on a Black-Scholes calculation on
May 22, 2001, the warrant is valued at approximately $1.6 million. This value will be recognized over the lesser of a ratable charge over the 24-month term of the arrangement
or the period of time it takes for CorpSoft to generate $1.6 million in Argis revenue. During the quarter ended August 31, 2001 we recorded a related non-cash offset to
revenue of approximately $200,000.

Under
the June 28, 2001 agreement, we assigned to CorpSoft our agreement with Sun Microsystems, Inc. under which we resold Sun's iPlanet E-Commerce Solutions
software licenses and related services. CorpSoft has assumed primary responsibility for those sales and we are providing sales and marketing assistance as well as our SubscribeNet electronic software
delivery and management service. As part of this arrangement CorpSoft will pay to us a percentage of the gross profit derived from its sales of iPlanet software licenses and services, and will
reimburse us for our cost in maintaining a team dedicated to sales of iPlanet software licenses and services. This agreement has an initial term of two years and is renewable for subsequent
one-year terms. We continue to maintain a separate relationship with Sun under which we provide our SubscribeNet service to the iPlanet customer base on behalf of Sun.

The
June 28, 2001 agreement is part of our planned transition out of the business of reselling third-party software. At the time we announced this agreement, we also ceased
reselling all other third-party software except in a limited manner in connection with our proprietary products and services.

NOTE 9. PROMISSORY NOTES

On August 31, 2001 we issued promissory notes and committed to issue warrants in a private placement to a group of institutional and individual
investors, for aggregate gross proceeds of $6.15 million. Our net receipts from the financing were approximately $5.6 million after fees to the placement agent of $307,500 and expenses
of approximately $223,000. The promissory notes bear annual interest of 8%, payable quarterly beginning six months after issuance, and are secured by a senior security interest in substantially all of
our assets. The note is due in full on August 31, 2002. The note holders also received warrants to purchase 6.15 million shares of our Common Stock at an exercise price of $0.01 per
share. However, in accordance with NASD Marketplace Rule 4350(i)(1)(D), warrants exceeding an aggregate of 5,600,000 shares of our Common Stock (approximately 19.7% of our outstanding Common
Stock) will not be exercisable until we have received stockholder approval. In

12

---

addition, we issued warrants to the placement agent equal in number to 10% of the warrants issued to the investors. We entered into binding agreements on August 31, 2001 to issue these warrants
to the note holders and the placement agent. We issued these warrants on September 24, 2001, in accordance with Nasdaq's application of NASD Marketplace Rules as described below.

We
allocated the proceeds from the August 31, 2001 financing based on the relative fair values of the promissory notes and warrants issued. The warrants were classified as a
liability as they contain registration rights which are assumed to be outside our control. Warrants classified as liabilities will be adjusted to their fair value each accounting period. We recorded a
$4.7 million charge related to this financing to adjust the carrying amount of these warrants to their fair value.

On
September 20, 2001 we issued additional promissory notes and committed to issue additional warrants to another group of institutional and individual investors for aggregate
gross proceeds of $850,000. Our net receipts from the financing were approximately $779,500 after fees to the placement agent of $42,500 and expenses of approximately $28,000. The note holders also
received warrants to purchase 850,000 shares of our Common Stock at an exercise price of $0.01 per share. In addition, we issued warrants to the placement agent equal in number to 10% of the warrants
issued to the investors. These notes carry the same terms as the promissory notes above. We will incur an adjustment to the fair value of the warrants of approximately $381,000 in our third quarter
ending November 30, 2001 related to the September 20, 2001 financing. We entered into binding agreements on September 20, 2001 to issue these additional warrants to the note
holders and the placement agent. We issued these warrants on September 24, 2001, in accordance with Nasdaq's application of NASD Marketplace Rules as described below.

The
promissory notes and warrants were issued in a private placement without registration under the Securities Act of 1933 and may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements. In issuing the securities, we relied on the exemption from registration provided by Section 4(2) of the Securities Act of
1933, based in part upon the limited number of institutional type investors and their representations in the purchase agreements. We have agreed to file with the SEC a registration statement for the
resale of the Common Stock issuable upon exercise of the warrants, and if the notes are ultimately converted into or exchanged for equity, any Common Stock issuable as a result of such conversion or
exchange. We are required to file the registration statement by February 28, 2002, and to cause the registration statement to be declared effective by the SEC by May 31, 2002. However,
the registration deadline may be accelerated to any earlier stock registration deadline agreed to by us in any subsequent private placement.

As
part of the financings, we agreed to hold a stockholder meeting to obtain stockholder approval by November 29, 2001, for the exercise of warrants exceeding an aggregate of
5,600,000 shares of our Common Stock (approximately 19.7% of our outstanding Common Stock). At that stockholder meeting, we are also required to obtain stockholder approval for the potential
conversion of the notes into the same type of securities issued by us in our next capital-raising private placement of equity securities, if we complete any such private placement.

The
notes are repayable by us at any time, and will mature early if we are acquired or undergo a change of control, or if our stockholders do not approve the financing by
November 29, 2001.

In
connection with these financings, our Board of Directors created a new seat on the Board and appointed to that seat an officer of the company which acted as placement agent in the
financings.
Another officer of the company which acted as placement agent in the financings is also a member of our Board of Directors. Those two Board members are also indirectly affiliated with one of the
purchasers of notes and warrants in the financings. Because of these relationships, as well as the quantity of warrants issued and the price of the warrants, Nasdaq's application of NASD Marketplace
Rules would have required us to obtain stockholder approval before issuing the warrants. However, Nasdaq granted an exception from the stockholder approval rule. In keeping with Nasdaq's

13

---

determination, we gave our stockholders 10 days prior written notice of this exception before issuing the warrants. We gave this notice on September 14, 2001, and issued the warrants on
September 24, 2001.

At
the same time that we agreed on terms for the financings described above, we also agreed with the placement agent on terms for a subsequent private placement of between $6,000,000
and $10,000,000 of our preferred stock, with a $2,000,000 over allotment at our option. Each share of preferred stock would be convertible into our Common Stock at a price of $0.40 per share of Common
Stock. The preferred shares would rankpari passuwith existing classes of our preferred stock, and would carry a liquidation preference equal to their
face value. The preferred shares will carry "full-ratchet" anti-dilution protection (i.e., the conversion price will adjust to any lower price at which we issue equity
securities) for one year, and thereafter will carry "weighted-average" anti-dilution protection (i.e., the conversion price will adjust on a weighted-average basis upon any issuance by us
of equity securities at a price below fair market value or below the then-current conversion price of the preferred stock). We would be required to file a registration statement,
for the resale of the Common Stock into which the preferred stock is convertible, within three months of closing, and use our best efforts to cause that registration statement to become effective
within three months thereafter.

Upon
any closing of such a preferred stock financing, the placement agent would receive a fee equal to six percent of the gross proceeds from the financing, except that fee would be
halved with respect to investments by existing shareholders other than Series B-1 shareholders. The placement agent would also receive warrants to purchase a number of preferred
shares equal to ten percent of the number of preferred shares issued in the financing, and would receive reimbursement of up to $100,000 in legal, due diligence and travel and road show expenses. In
the event we elect not to proceed with the financing before the sixtieth day after the completion of investor documents and a private placement memorandum reasonably acceptable to the placement agent,
we will be required to pay a financial advisory and structuring fee of $200,000, which fee may, at the placement agent's option, be payable in the form of 500,000 shares of our Common Stock. If we so
elect and proceed with a private placement not led by the placement agent, this fee will be equal to the greater of $200,000 or 3% of the gross proceeds of such other private placement, which fee may,
at the placement agent's option, be payable in the form of a number of shares of our Common Stock equal to the cash fee divided by 0.40.

Under
the terms of the promissory notes, at the same time that we seek stockholder approval for the exercise of warrants exceeding 5,600,000 of our Common Stock and for the
convertibility of the promissory notes into the same type of securities issued in our next round of equity financing, we will also be required to seek stockholder approval for the proposed preferred
stock financing described in
the two immediately preceding paragraphs. We may not proceed with such a preferred stock financing, even if our stockholders approve it.

NOTE 10. CONTINGENCIES

We are 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.

14

---

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. This discussion contains forward-looking statements that involve risks and uncertainties. Forward-looking statements include statements regarding our future cash and liquidity position,
the extent and timing of future revenues and expenses and customer demand, the deployment of our products, and our reliance on 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. 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

Intraware, Inc. was incorporated in Delaware on August 14, 1996. We are a leading provider of electronic software delivery and management
solutions and information technology (IT) management solutions that enable corporations to optimize their IT investments. Our software and services optimize delivery, maintenance, and management of
technology resources, to help reduce the total cost of ownership of technology assets and accelerate the return on investment in those assets.

Software
product revenue results from the licensing of third party software products to customers and is recognized when there is evidence of an arrangement for a fixed and
determinable fee that is probable of collection and the software is available for customer download through our web site. Software product maintenance revenue results from the sale of third-party
software maintenance
agreements and is recognized ratably over the service period. On July 1, 2001, we began a transition away from the licensing of third party software; however we will continue to recognize
revenue from third party software licenses and support over the life of the arrangements made prior to July 1, 2001.

Online
services and technology revenue results primarily from three types of arrangements. First, it results from the licensing of our proprietary software products to companies that
use those products to provide web-based services to their customers or that use the products internally; such revenue is recognized when there is evidence of an arrangement for a fixed and
determinable fee that is probable of collection and the software is available for customer download through our web site. Second, it results from software maintenance outsourcing arrangements with
third-party software vendors delivered through our SubscribeNet service; such revenues are recognized ratably over the service period. Third, it results from professional services from proprietary
software integration and data conversion; such revenues are recognized as services are performed.

We
have a limited operating history upon which investors may evaluate our business and prospects. Since inception, we have incurred significant losses, and, as of August 31,
2001, had an accumulated deficit of approximately $134 million. As of August 31, 2001, we had negative working capital of approximately $14.7 million. We expect to incur
additional net losses at least through our fiscal year ending February 28, 2002. There can be no assurance that our gross profit will increase or continue at its current level. There also can
be no assurances that we will achieve or maintain profitability or generate cash from operations in future periods. Our future must be considered in light of the risks frequently encountered by
companies in an early stage of development, particularly companies in new and rapidly evolving markets such as e-commerce. To address these risks, we must, among other things, raise
additional capital, continue to improve existing and develop new services, implement and successfully execute our business and marketing strategy, continue to develop and upgrade our technology,
provide superior customer service, respond to competitive developments and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing

15

---

such risks and the failure to do so would have a material adverse effect on our business, financial condition and results of operations. Our current and future expense levels are based largely on our
planned operations and estimates of future sales. Sales and operating results generally depend on the volume and timing of orders received, which are difficult to forecast, particularly in the current
business environment. We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in sales would have an immediate
adverse effect on our business, financial condition and results of operations. In view of the rapidly evolving nature of our business and our limited operating history, we are unable to accurately
forecast our sales and believe that period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied upon as an indication of
future performance.

RESULTS OF OPERATIONS

Total Revenues

Revenue for the three months ended August 31, 2001 was $13.6 million, which represents a 58% decrease from revenue for the three months ended
August 31, 2000 of $32.6 million. In addition, for the three months ended August 31, 2001, product revenue accounted for $9.4 million or 70% of revenue, while online
service and technology revenue accounted for $4.1 million or 30% of revenue. For the three months ended August 31, 2000, product revenue accounted for $26.1 million or 80% of
revenue, while online service and technology revenue accounted for $6.5 million or 20% of revenue.

Revenue
for the six months ended August 31, 2001 was $28.9 million, which represents a 61% decrease from revenue for the six months ended August 31, 2000 of
$74.1 million. In addition, for the six months ended August 31, 2001, product revenue accounted for $20.5 million or 71% of revenue, while online service and technology revenue
accounted for $8.4 million or 29% of revenue. For the six months ended August 31, 2000, product revenue accounted for $62.6 million or 84% of revenue, while online service and
technology revenue accounted for $11.5 million or 16% of revenue.

The
decline in revenue was primarily due to weakened demand for third party software and our transition out of reselling those products. The increase in online service and technology
revenue as a percentage of total revenue was due to our increased focus on selling our proprietary products and services, which tend to generate lower total revenue but higher gross margins than our
sales of third-party software. In June 2001 we entered into an agreement with CorpSoft whereby CorpSoft assumed our rights and obligations under our reseller agreement with iPlanet
E-Commerce Solutions, and agreed to pay to us a percentage of the gross profit derived from its sales of iPlanet software licenses and services. We expect our third-party product revenue
to decrease substantially as a result of this agreement. The previous sentence is a forward-looking statement and actual results could differ materially from those anticipated.

Cost of Revenues

Total cost of revenues decreased to $8.2 million for the three months ended August 31, 2001 from $21.6 million for the three months ended
August 31, 2000. Our gross margin increased to 40% for the three months ended August 31, 2001 from 34% for the three months ended August 31, 2000.

Total
cost of revenues decreased to $18.1 million for the six months ended August 31, 2001 from $54.4 million for the six months ended August 31, 2000. Our
gross margin increased to 37% for the six months ended August 31, 2001 from 27% for the six months ended August 31, 2000.

Costs
of revenue primarily consist of the cost of third-party products sold, personnel costs, content development and acquisition, Internet connectivity and allocated overhead
charges. The decrease in the cost of revenue dollars primarily reflects our decrease in revenue and changes in the mix of products

16

---

sold. The margin percentage increase primarily reflects our focus on the sale of our own services and technology, which generate higher margins than third-party products we resold.

Sales and Marketing Expenses

For the three months ended August 31, 2001, sales and marketing expenses were $3.7 million or 27% of revenue, an overall decrease from
$11.2 million or 34% of revenue for the three months ended August 31, 2000.

For
the six months ended August 31, 2001, sales and marketing expenses were $8.1 million or 28% of revenue, an overall decrease from $22.8 million or 31% of
revenue for the six months ended August 31, 2000.

Sales
and marketing expenses consist primarily of personnel-related costs, facilities, travel and entertainment, advertising, promotional materials and trade show expenses. The
decrease is due to our recent restructuring efforts, which reduced expenditures on salaries and eliminated rent on closed offices.

We
plan to continue developing strategic relationships to sell our products and services directly to our customer base as well as through resellers. The previous sentence is a
forward-looking statement and actual results could differ materially from those anticipated.

Product Development Expenses

For the three months ended August 31, 2001, product development expenses were $2.6 million or 20% of revenue, compared to $5.0 million or
15% of revenue for the three months ended August 31, 2000.

For
the six months ended August 31, 2001, product development expenses were $5.6 million or 19% of revenue, compared to $8.8 million or 12% of revenue for the six
months ended August 31, 2000.

Product
development expenses consist of costs related to our staff of software developers and outside consultants, and the associated infrastructure costs required to support software
product development initiatives. The decrease is due to our recent restructuring efforts, which reduced expenditures on salaries and unproven product and service lines. We anticipate continuing to
invest in additional functionality across all of our software product offerings, including industry specific requirements. However, we cannot give assurance that such development efforts will result
in products, features or functionality or that the market will accept the software products, features or functionality developed. The previous two sentences are forward-looking statements and actual
results could differ materially from those anticipated.

General and Administrative Expenses

For the three months ended August 31, 2001, general and administrative expenses were $2.4 million or 18% of revenue, compared to
$4.3 million or 13% of revenue for the three months ended August 31, 2000.

For
the six months ended August 31, 2001, general and administrative expenses were $4.5 million or 16% of revenue, compared to $8.5 million or 11% of revenue for
the six months ended August 31, 2000.

General
and administrative expenses consist primarily of compensation for administrative and executive personnel, facility costs, bad debt expense and fees for professional services.
A significant part of our decreased general and administrative expenses in the three months ended August 31, 2001, stems from our restructuring efforts in December 2000 and
August 2001.

17

---

December 2000 Restructuring and Loss on Abandonment of Assets

At February 28, 2001, we had a remaining restructuring accrual of $628,000 relating to our December 1, 2000 strategic restructuring. We made cash
payments of approximately $432,000 during the six months ended August 31, 2001. At August 31, 2001 that accrual has been reduced to approximately $196,000, of which $186,000 was related
to future lease and related expenses and the remainder was severance costs. We expect to pay this remaining accrual in cash within the next twelve months. While our accrual reflects management's best
estimate of the costs to be incurred related to the activities above, actual costs incurred may differ from initial estimates recorded.

August 2001 Restructuring and Loss on Abandonment of Assets

On August 8, 2001 we announced a strategic reorganization designed to accelerate our drive toward profitability and enhance our capital-raising
opportunities. We reduced our workforce to approximately 120 employees from 186 at the end of July. We also consolidated our two San Francisco Bay Area offices into one. We took a charge of
approximately $8,613,000 relating to this restructuring and loss on abandonment of assets in our second quarter ended August 31, 2001, and as of August 31, 2001 had a restructuring
accrual of approximately $1,876,000.

The
restructuring charges were primarily due to the following:



We
made cash payments of approximately $330,000 during the three months ending August 31, 2001. At August 31, 2001 we had a remaining restructuring accrual of
approximately $1,876,000, of which approximately $1,823,000 was related to excess rent and sublease costs and the remainder was severance costs.

Amortization of Intangibles

For the three months ended August 31, 2001, amortization of intangibles were $2.5 million, an increase from $2.2 million for the three
months ended August 31, 2000.

For
the six months ended August 31, 2001, amortization of intangibles were $5.0 million, an increase from $3.2 million for the six months ended August 31,
2000.

Amortization
of intangibles is a charge related to our acquisitions of BITSource, Inc. and Janus Technologies, Inc. This expense is an ongoing charge through
June 2005. The increase was due to our acquisition of Janus Technologies, Inc. in July 2000 and the related intangible amortization.

Interest Expense

For the three months ended August 31, 2001, interest expenses were $250,000 or 1.8% of revenue, an increase from $79,000 or 0.2% of revenue for the
three months ended August 31, 2000.

For
the six months ended August 31, 2001, interest expenses were $475,000 or 1.6% of revenue, an increase from $111,000 or 0.2% of revenue for the six months ended
August 31, 2000.

Interest
expense relates to obligations under capital leases and borrowings. The increase in interest expense is primarily the result of increased borrowings.

18

---

Interest Income and Other Income and Expenses

For the three months ended August 31, 2001, interest income and other income and expenses were ($4.7) million or 34% of revenue, a decrease from
$198,000 or 0.6% of revenue for the three months ended August 31, 2000.

For
the six months ended August 31, 2001, interest income and other income and expenses were ($4.7) million or 16% of revenue, a decrease from $401,000 or 0.5% of revenue for
the six months ended August 31, 2000.

Interest
income and other income and expenses relates to interest earned on our investment balances, certain state franchise taxes and mark to market adjustments of warrants disclosed
as liabilities. The decrease in interest income and other income and expenses is primarily the result of a reduction in our invested cash and a charge of $4.7 million we took this quarter to
adjust the warrants we issued in connection with our August 31, 2001 financing, which are classified as liabilities, to fair value.

Income Taxes

From inception through August 31, 2001, we incurred net losses for federal and state tax purposes. As of February 28, 2001, Intraware had
approximately $80 million of federal and $56 million of state net operating loss carryforwards available to offset future taxable income, which expire in varying amounts between 2005 and
2012. Given our limited operating history, losses incurred to date and the difficulty in accurately forecasting our future results, management does not believe that the realization of the related
deferred income tax asset meets the criteria required by generally accepted accounting principles. Accordingly, we have recorded a 100% valuation allowance against our deferred tax asset and therefore
have recorded no tax benefit. Furthermore, as a result of changes in our equity ownership from our convertible preferred stock financing and our initial public offering, utilization of the net
operating losses and tax credits is subject to substantial annual limitations. This is due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar
state provisions. The annual limitation may result in the expiration of net operating losses and tax credits before utilization.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through private sales of preferred stock, debt financing and the initial public offering of our
Common Stock. As we have not yet achieved positive cash flow from our operations, we will continue to use our capital raised to date to support our operations until we become cash flow positive. There
can be no guarantee that we will be successful in becoming cash flow positive without additional capital financing.

Our
non-restricted cash and cash equivalents at August 31, 2001 were $6.1 million, decreasing by $0.9 million from $7.0 million at
February 28, 2001. This decrease was due to $5.6 million used in operating activities, which was offset by $88,000 provided by investing activities and $4.6 million provided by
financing activities. The net cash used in operating activities of $5.6 million for the six months ended August 31, 2001 was primarily due to our net loss and a reduction in accounts
payable. This decrease was partially offset by our collections of receivables. Financing activities provided $4.6 million for the six months ended August 31, 2001 primarily due to
proceeds of the issuance of
preferred stock and promissory notes, offset by payments made to close out our bank line of credit. Net cash provided by investing activities of $88,000 for the six months ended August 31, 2001
related primarily to our reduction in restricted cash.

19

---

As of August 31, 2001, we had approximately $7.6 million of cash and cash equivalents of which $1.5 million was restricted. We have irrevocable letters of credit,
for the benefit of third parties, that have not currently been drawn upon and that carry a total combined limit of $1.5 million.

Our
future capital requirements will depend on many factors, including our ability to increase gross profit levels and reduce costs of operations to generate positive cash flows, as
well as the timing and extent of spending to support expansion of sales and marketing, and market acceptance of our products and timeliness of collections of our accounts receivable. Although we have
historically been able to satisfy our cash requirements, there can be no assurance that efforts to obtain sufficient financing for operations will be successful in the future. Our future capital needs
will be highly dependent upon our ability to control expenses and generate additional software license revenues, and any projections of future cash needs and cash flows are subject to substantial
uncertainty. Our ability to raise additional capital may be weakened in the event we do not maintain our listing on the Nasdaq National Market. If we are unable to raise adequate additional capital,
we may be required to aggressively reduce the scope of sales and marketing efforts and the size of current staff; both of which could have a material adverse effect on our business, financial
condition, and our ability to reduce losses or generate profits.

While
we are seeking to improve our sales, control our expenses and raise additional capital, there can be no assurance that we will succeed in our efforts to generate sufficient cash
from operations, obtain additional funding resources, or achieve positive cash flow or profitability.

On
April 2, 2001, we entered into an agreement to sell a new class of Series B Preferred Stock and warrants to institutional and individual investors for aggregate gross
proceeds of $3.6 million, and net proceeds of $3.2 million after fees and expenses. This transaction is described in Note 5Convertible Preferred Stock to our
Consolidated Financial Statements in Item 1 of Part I. On August 31, 2001 and September 20, 2001 we issued promissory notes and warrants in a private placement to a group of
institutional and individual investors for aggregate gross proceeds of $7 million. This transaction is described in Note 9Promissory Notes to our Consolidated Financial
Statements in Item 1 of Part I. We also repaid our line of credit of $3.3 million in August 2001.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"),
"Business Combinations" which supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. In addition, SFAS 141 establishes specific criteria for the recognition
of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary gain. The provisions of SFAS 141 are required to be
adopted July 1, 2001. The adoption of SFAS 141 will not change our method of accounting used in previous business combinations including those accounted for under the
pooling-of-interests method.

In
July 2001, the FASB also issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective
for fiscal years beginning after December 15, 2001. Certain provisions shall also be applied to acquisitions initiated subsequent to June 30, 2001. SFAS 142 supercedes APB Opinion
No. 17 "Intangible Assets" and requires, among other things, the discontinuance of amortization related to goodwill and indefinite lived intangible assets. These assets will then be subject to
an impairment test at least annually. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the
useful lives of existing recognized intangibles and reclassification of certain intangibles out of previously reported goodwill.

20

---

We are required to adopt SFAS 142 effective March 1, 2002, which will result in our no longer amortizing our existing goodwill. In addition, we will be required to
measure goodwill for impairment as part of the transition provisions. Any impairment resulting from these transition tests will be recorded as of March 1, 2002 and will be recognized as the
cumulative effect of a change in accounting principle. We will not be able to determine if an impairment will be required until completion of such impairment test.

In
October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets",
which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of OperationsReporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a business. This Statement also amends
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The
provisions of SFAS 144 are required to be adopted during our fiscal year beginning March 1, 2002, however early adoption is acceptable. We are currently in the process of
evaluating the potential impact the adoption of SFAS 142 will have on our consolidated financial position or results of operations.

21

---



RISK FACTORS

You should carefully consider the risks described below before making a decision to invest in Intraware. The risks and uncertainties
described below are not the only ones facing Intraware. Additional risks and uncertainties not presently known to us or that we do not currently believe are important to an investor may also harm our
business operations. If any of the events, contingencies, circumstances or conditions described in the following risks actually occur, our business, financial condition or 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 NEGATIVE CASH FLOW AND MAY NOT HAVE SUFFICIENT CASH TO EFFECTIVELY MANAGE OUR WORKING CAPITAL REQUIREMENTS AND FUND OUR OPERATIONS FOR THE PERIOD REQUIRED TO ACHIEVE
PROFITABILITY.

Our
annual report on Form 10-K, for the year ended February 28, 2001 contains a disclosure expressing substantial doubt regarding our ability to continue as
a going concern as a result of our recurring losses and negative cash flows from operations. We have limited cash and credit available, and may be unable to raise additional financing or establish
additional lines of credit. As of August 31, 2001, we had approximately $7.6 million in cash and cash equivalents of which $1.5 million was restricted in use. We may not be able
to achieve the revenue and gross margin objectives necessary to achieve positive cash flow or profitability without obtaining additional financing. Such financing may not be available on reasonable
terms, and if available such additional financing may dilute current shareholders.

OUR RECENTLY ISSUED PROMISSORY NOTES ARE SECURED BY SUBSTANTIALLY ALL OF OUR ASSETS AND ARE SENIOR TO ALL OF OUR EQUITY AND DEBT.

On
August 31, 2001, and September 20, 2001, we issued an aggregate of $7 million principal amount of our one-year senior secured promissory notes,
bearing interest of 8% annually, to accredited investors in a private placement. The notes are secured by substantially all of our assets. We may repay the notes at any time, and the notes will mature
early if we are acquired or undergo a change of control, or if our stockholders do not approve the terms of the financing by November 29, 2001. If we obtain stockholder approval, our senior
secured promissory notes will be convertible into the type of securities we issue in our next equity financing.

IF WE FAIL TO MEET NASDAQ NATIONAL MARKET LISTING REQUIREMENTS, OUR COMMON STOCK WILL BE DELISTED.

Our
Common Stock is currently listed on the Nasdaq National Market. Nasdaq has requirements that a company must meet in order to remain listed on the Nasdaq National Market. If we
continue to experience losses from our operations or are unable to raise additional equity financing, or are unable to convert our recently issued promissory notes into equity and reclassify our
recently issued warrants as equity, we might not be able to maintain the standards for continued quotation on the Nasdaq National Market, including the minimum bid price requirement of $1.00 and the
requirement that our net tangible assets be at least $4 million or that our shareholders' equity be at least $10 million. The bid price for our Common Stock has been below $1.00
consistently since September 19, 2001. Moreover, our recent issuance of promissory notes and warrants, the classification of the warrants as liabilities, and recent restructuring-related
accounting write-downs may make it difficult for us to sustain the minimum net tangible assets or shareholders equity requirement. If as a result of the application of these listing requirements, our
Common Stock were delisted from the Nasdaq National Market, our stock would become harder to buy and sell. Further, our stock could then potentially be subject to what are known as the "penny stock"
rules, which place additional requirements on broker-dealers who sell or make a market in such securities. Consequently, if we were removed from the Nasdaq National Market, the ability or willingness
of broker-dealers to sell or make a market in our

22

---

Common Stock might decline. As a result, your ability to resell your shares of our Common Stock could be adversely affected.

WE HAVE A HISTORY OF LOSSES, WE EXPECT FUTURE LOSSES AND WE MAY NOT EVER BECOME PROFITABLE.

We
have not achieved profitability, expect to incur net losses at least through our fiscal year ending February 28, 2002 and may not ever become profitable in the future. We
incurred net losses attributable to Common stockholders of $27.9 million for the six months ended August 31, 2001, $68.4 million for the year ended February 28, 2001,
$28.0 million for the year ended February 29, 2000, and $15.0 million for the year ended February 28, 1999. As of August 31, 2001, we had an accumulated deficit of
approximately $134 million. Net losses have increased for most of our quarters since inception and we cannot assure you this trend will not continue. We will need to generate significant
additional online services and technology revenues and/or reduce operating costs to achieve and maintain profitability. We have a limited operating history that makes it difficult to forecast our
future operating results. Our revenues have declined in recent quarters, and we cannot be certain that we will achieve sufficient revenues or gross profits in future quarters for profitability. If we
do achieve profitability in any period, we cannot be certain of continued or increased profitability on a quarterly or annual basis.

WE HAVE RECENTLY EXPERIENCED WEAKENING DEMAND FOR OUR PROPRIETARY SOFTWARE AND OUR SUBSCRIBENET SERVICE.

Since
the beginning of the current calendar year, we have experienced weakening demand for our proprietary software for our SubscribeNet service. It is possible that the
September 11, 2001 terrorist attacks will accelerate this weakening of demand. Several other computer software and hardware manufacturers have recently reported sharp reductions in demand for
their products and services or in their sales growth. We have had, and may continue to experience, similar sharp reductions in demand for our products and services, which have had (and would have) an
immediate and adverse effect on us.

ANY TERMINATION OF OUR RELATIONSHIP WITH IPLANET E-COMMERCE SOLUTIONS OR CORPORATE SOFTWARE WOULD HAVE A SUBSTANTIAL, ADVERSE EFFECT ON OUR
BUSINESS.

We
provide online software update and license management services to iPlanet customers through our SubscribeNet service under an agreement that expires on June 30, 2003 and
that may be terminated by iPlanet without cause after June 30, 2002. We cannot assure you that this agreement will be extended after June 30, 2003 or that it will not be terminated after
June 30, 2002. Most of our SubscribeNet revenues to date have been generated through this iPlanet contract, and our failure to extend this contract at the end of its current term could have a
material adverse effect on our SubscribeNet revenues and on our business as a whole. If iPlanet chose to offer its own electronic software delivery, tracking, maintenance or other services, which it
is permitted to do under the current agreement, it would have a substantial adverse effect on our business, results of operations and financial condition.

Under
our Sales Alliance Agreement with Corporate Software dated June 28, 2001, we are transitioning to Corporate Software our reseller relationship with iPlanet. This
agreement expires in June 2003, but may terminate earlier under certain circumstances, including any termination of the reseller contract between Corporate Software and iPlanet. A significant
portion of our SubscribeNet revenues in the three months ended August 31, 2001 was generated through this Corporate Software contract, and a significant portion of our revenues in future
periods could be generated through this contract. Any termination of this contract before June 2003 could have a material adverse effect on our business and financial performance.

23

---

THE LOSS OF ONE OR MORE OF OUR KEY CUSTOMERS OR RESELLERS COULD ADVERSELY AFFECT OUR REVENUES.

We
believe that a substantial amount of revenue from software product sales in any given future period may come from a relatively small number of customers and resellers. If one or
more major customers were to stop using our products or services, or one or more major resellers were to stop reselling our
products, our operating results could be materially adversely affected. Our contractual relationships with most of these customers and resellers are subject to renewal annually. As a result, we cannot
assure you that any of our customers or resellers will renew their contracts with us in any given year.

OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS BECAUSE OF MANY FACTORS AND ANY OF THESE COULD ADVERSELY AFFECT OUR STOCK PRICE.

We
believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. Our operating results have fallen
below the expectations of public market analysts and investors in the past. It is likely that in future quarters our operating results will again be below the expectations of public market analysts
and investors and as a result, the price of our Common Stock may fall. Our operating results have varied widely in the past, and we expect that they will continue to vary significantly from quarter to
quarter due to a number of risk factors, including:



In
addition, our June 2001 agreement with Corporate Software, under which we are transitioning to Corporate Software our business of reselling iPlanet software, has resulted in
and will continue to result in a decrease in gross revenue to us. This decrease in our gross revenues could affect the market price of our Common Stock.

Our
operating expenses, which include sales and marketing, product development and general and administrative expenses, are based on our expectations of future gross profits and are
relatively fixed in the short term. If gross profits fall below our expectations and we are not able to quickly reduce our spending in response, our operating results would be adversely affected.

24

---

SOFTWARE MANUFACTURERS MAY NOT WISH TO USE OUR SUBSCRIBENET SERVICE AS A WAY OF OUTSOURCING ELECTRONIC DELIVERY OF THEIR SOFTWARE

Our
strategy for achieving profitability assumes significant revenue growth from our SubscribeNet service. However, we cannot assure you that software manufacturers that are not
currently our SubscribeNet customers will find it strategically or economically justifiable to use the SubscribeNet service to deliver software to their end-users. Some software
manufacturers are reluctant for security reasons to deliver their software via the Internet or to authorize a third party to do so on their behalf. Some software manufacturers believe that they can
internally develop an adequate electronic software delivery system at a cost lower than the fees we charge for SubscribeNet. These and other concerns on the part of software manufacturers could make
it difficult for us to quickly achieve significant growth in
SubscribeNet revenue, which could in turn hinder our ability to achieve profitability and positive cash flow.

OUR INDUSTRY IS HIGHLY COMPETITIVE AND WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO EFFECTIVELY COMPETE.

The
market for selling software products and related online services is highly competitive. We expect competition to intensify as current competitors expand and improve their product
offerings, new competitors enter the market, and the business market for information technology products and services continues to exhibit softness. We have experienced, and expect to continue to
experience, competition on our software sales. We cannot assure you that we will be able to compete successfully against current or future competitors, or that competitive pressures faced by us will
not adversely affect our business and results of operations. Our current competitors include a number of companies offering asset management software and/or electronic software delivery and management
solutions. We expect additional competition from other established and emerging companies. Increased competition is likely to result in price reductions, reduced gross margins and loss of market
share, any of which could have a significant adverse effect on our business and results of operations. Many of our current and potential competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, better name recognition, and a larger installed base of customers than we do. Many of our competitors may also have
well-established relationships with our existing and prospective customers. Our current and potential competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their products to address customer needs and compete with our products. We also expect that the competition will increase as a result of
software industry consolidations. As a result, we may not be able to effectively compete for customers.

WE ARE DEPENDENT ON MARKET ACCEPTANCE OF ELECTRONIC SOFTWARE DELIVERY, AND IF IT DOES NOT ACHIEVE WIDESPREAD ACCEPTANCE, OUR BUSINESS WILL BE ADVERSELY
AFFECTED.

Our
future success will depend in large part on broadened acceptance by information technology professionals of electronic software delivery as a method of receiving delivery of
business software. If electronic software delivery does not achieve widespread market acceptance, our business will be adversely affected. Electronic software delivery is a relatively new method of
distributing software products and the growth and market acceptance of electronic software delivery is highly uncertain and subject to a number of risk factors. These factors include:



25

---



Even
if electronic software delivery achieves widespread acceptance, we cannot be sure that we will overcome the substantial technical challenges associated with electronically
delivering software reliably and consistently on a long-term basis. Furthermore, the proliferation of software viruses poses a risk to market acceptance of electronic software delivery.
Any well-publicized transmission of a computer virus by us or another company using electronic software delivery could deter information technology professionals from utilizing electronic
software delivery technology and our business could be adversely affected.

CONTINUED ADOPTION OF THE INTERNET AS A METHOD OF CONDUCTING BUSINESS IS NECESSARY FOR OUR FUTURE GROWTH.

The
widespread acceptance and adoption of the Internet by traditional businesses for conducting business and exchanging information is likely only in the event that the Internet
provides these businesses with greater efficiencies and improvements. The failure of the Internet to continue to develop as a commercial or business medium would adversely affect our business.

FAILURE TO EXPAND INTERNET INFRASTRUCTURE COULD LIMIT OUR FUTURE GROWTH.

The
recent growth in Internet traffic has caused frequent periods of impaired performance, and if Internet usage continues to grow rapidly, its infrastructure may not be able to
support these demands and its performance and reliability may decline. If outages or delays on the Internet occur frequently or increase in frequency, overall web usage including usage of our web site
in particular could grow more slowly or decline.

Our
ability to increase the speed and scope of our services to customers is ultimately limited by and dependent upon the speed and reliability of both the Internet and our customers'
internal networks. Consequently, the emergence and growth of the market for our services is dependent on improvements being made to the entire Internet as well as to our individual customers'
networking infrastructures to alleviate overloading and congestion.

INCREASED SECURITY RISKS OF ONLINE COMMERCE MAY DETER FUTURE USE OF OUR SERVICES.

Concerns
over the security of transactions conducted on the Internet and the privacy of users may also inhibit the growth of the Internet and other online services generally, and
online commerce in particular. Our failure to prevent security breaches could significantly harm our business and results of operations. We cannot be certain that advances in computer capabilities,
new discoveries in the field of cryptography, or other developments will not result in a compromise or breach of the algorithms we use to protect our customers' transaction data or our software
vendors' products. Anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may be required to incur significant
costs to protect against security breaches or to alleviate problems caused by breaches. Any well-publicized compromise of security could deter people from using the web to conduct
transactions that involve transmitting confidential information or downloading sensitive materials.

WE MAY NOT BE ABLE TO RETAIN SALES, MARKETING AND SUPPORT PERSONNEL THAT WE NEED TO SUCCEED.

If
we fail to retain sufficient numbers of sales, marketing and support personnel, our business and results of operations would be adversely affected. Competition for qualified sales
and marketing and support personnel is intense, and we might not be able to retain sufficient numbers of qualified sales and marketing and support personnel. The products and services we offer require
a sophisticated sales

26

---

effort targeted at several people within the information technology departments of our prospective customers. Retaining a sufficient number of qualified sales personnel to complete these sales cycles
will be critical to our success.

OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.

Our
future success depends upon the continued service of our executive officers and other key technology, sales, marketing and support personnel and most of our officers or key
employees are not 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 employees decided
to join a competitor or otherwise compete directly or indirectly with us, this could have a significant adverse effect on our business. In particular, the services of Peter Jackson, Chief Executive
Officer, Frost Prioleau, President, Paul Martinelli, Chief Technology Officer and James Brentano, Executive Vice President of Technology, would be difficult to replace.

WE FACE RISKS OF CLAIMS FROM THIRD PARTIES FOR INTELLECTUAL PROPERTY INFRINGEMENT THAT COULD ADVERSELY AFFECT OUR BUSINESS.

Our
services operate in part by making software products and other content available to our customers. This creates the potential for claims to be made against us, either directly or
through contractual indemnification provisions with vendors. Any claims could result in costly litigation and be time-consuming to defend, divert management's attention and resources,
cause delays in releasing new or upgrading existing services or require us to enter into royalty or licensing agreements. These claims could be made for defamation, negligence, patent, copyright or
trademark infringement, personal injury, invasion of privacy or other legal theories based on the nature, content or copying of these materials.

Litigation
regarding intellectual property rights is common in the Internet and software industries. We expect that Internet technologies and software products and services may be
increasingly subject to third-party infringement claims as the number of competitors in our industry segment grows and the functionality of products in different industry segments overlaps. There can
be no assurance that our services do not infringe on the intellectual property rights of third parties. In addition, we may be involved in litigation involving the software of third party vendors that
we electronically distribute. Royalty or licensing agreements, if required, may not be available on acceptable terms, if at all. A successful claim of infringement against us and our failure or
inability to license the infringed or similar technology could adversely affect our business. Although we carry general liability insurance, our insurance may not cover all potential claims or may not
be adequate to protect us from all liability that may be imposed. We take steps to verify that end-users who use our SubscribeNet service to download third-party software from our web site
are entitled to deploy and use that software. However, there can be no assurance that this verification procedure will help us defend against claims by, or protect us against liability to, the owners
of copyrights in that third-party software. Our success and ability to compete are substantially dependent upon our internally developed technology, which we protect through a combination of patent,
copyright, trade secret and trademark law. We are aware that certain other companies are using or may have plans to use the name "Intraware" as a company name or as a trademark or service mark. While
we have received no notice of any claims of trademark infringement from any of those companies, we cannot assure you that certain of these companies may not claim superior rights to "Intraware" or to
other marks we use.

Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our services or technology and we cannot be certain that
the steps we have taken will prevent misappropriation of our technology.

27

---

OUR MARKET MAY UNDERGO RAPID TECHNOLOGICAL CHANGE AND OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO MEET THE CHANGING NEEDS OF OUR INDUSTRY.

Our
market is characterized by rapidly changing technology, evolving industry standards and frequent new product announcements. To be successful, we must adapt to our rapidly changing
market by continually improving the performance, features and reliability of our services. We could incur substantial costs to modify our services or infrastructure in order to adapt to these changes.
Our business could be adversely affected if we incur significant costs without adequate results, or find ourselves unable to adapt rapidly to these changes.

A DISASTER COULD SEVERELY DAMAGE OUR OPERATIONS.

We
do not have a complete disaster recovery plan in effect and do not have fully redundant systems for our service at an alternate site outside of California. A disaster could
severely damage our business and results of operations because our service could be interrupted for an indeterminate length of time. Our operations depend upon our ability to maintain and protect our
computer systems, all of which are located at our facility in Orinda, California and at an offsite location managed by a third party in Santa Clara, California. Orinda and Santa Clara exist on or near
known earthquake fault zones. Although the outside facility, which hosts our primary web and database servers, is designed to be fault tolerant, the system is vulnerable to damage from fire, floods,
earthquakes, power loss, telecommunications failures, and similar events.

Although
we maintain insurance against fires, floods, earthquakes and general business interruptions, there can be no assurance that the amount of coverage will be adequate in any
particular case.

WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR
EXPENSES.

California
is in the midst of an energy shortage that could disrupt our operations and increase our expenses. California has on some occasions implemented, and may in the future
continue to implement, rolling blackouts throughout the state. Our online services are provided entirely from California and most of our sales, product development and administrative operations, and
internal computer networks, are based in California.

Our
online services have alternate sources of power, including battery and generator backup, that are designed to keep these services fully operational for a limited time period in
the event of a blackout. However, the backup power systems in place for our California-based sales, product development and administrative operations are designed to keep these operations functioning
on only a very limited basis in the event of a blackout. In addition, our current insurance may not provide coverage for any damages we or our customers may suffer as a result of any interruption in
our power supply. If blackouts interrupt our power supply, we may be temporarily unable to continue normal operations at one or more of our facilities. Any such interruption in our ability to continue
normal operations at our facilities could damage our reputation, harm our ability to retain existing customers and to obtain new customers, and could result in lost revenue, any of which could
substantially harm our business and results of operations. Furthermore, due in part to a shortage of supply, wholesale prices for energy have risen dramatically in California over the past year. If
wholesale prices continue to increase, our operating expenses will increase, as our principal facilities are located in California.

28

---

ADDITIONAL GOVERNMENT REGULATIONS MAY INCREASE OUR COSTS OF DOING BUSINESS.

In
delivering third-party software through our SubscribeNet service, and in delivering our own IT asset management software, we must comply with U.S. export controls on software
generally and encryption technology in particular. It appears that these controls may be strengthened in light of the September 11, 2001 terrorist attacks. Changes in these laws could require
us to implement costly changes to our automated export compliance processes. More generally, the law governing Internet transactions remains largely unsettled, even in areas where there has been some
legislative action. The adoption or modification of laws or regulations relating to the Internet could adversely affect our business by increasing our costs and administrative burdens. It may take
years to determine whether and how existing laws such as those governing intellectual property, privacy, libel and taxation apply to the Internet. Laws and regulations directly applicable to
communications or commerce over the Internet are becoming more prevalent. It appears that additional laws and regulations regarding protection of privacy on the Internet will be adopted at the state
and federal levels in the United States. The European Union has enacted its own data protection and privacy directive, which required all 15 European Union Member States to implement laws relating to
the processing and transmission of personal data. We must comply with these new regulations in both Europe and the United States, as well as any other regulations adopted by other countries where we
may do business. The growth and development of the market for online commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad. Compliance with any
newly adopted laws may prove difficult for us and may negatively affect our business.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relate primarily to our investment portfolio. We have not used derivative financial instruments in
our investment portfolio. We place our investments with high quality issuers and, by policy, limit the amount of credit exposure to any one issue or issuer. At August 31, 2001,
$7.6 million of our cash, cash equivalents and investment portfolio (of which $1.5 million is restricted in use) carried maturity dates of less than 90 days. We have the ability
to hold the portfolio to maturity, if deemed necessary. The effect of changes in interest rates of +/-10% over a six-month horizon would not have a material effect on the fair market value
of the portfolio.

29

---



PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On April 6, 2001, Milinx Business Services, Inc. and Milinx Business Group Inc. filed a Writ of Summons and Statement of Claim in the
Supreme Court of British Columbia, Canada, against Intraware Canada, Inc., our wholly-owned subsidiary, as well as against Burntsand Inc., Netergy Networks, Inc., Netscape
Canada, Inc., and Sun Microsystems, Inc. The claim arises out of Intraware's alleged involvement in the supply of hardware and software packages to Milinx. Milinx alleges the defendants
made representations regarding the current and future capabilities and features of the Netergy and Sun/Netscape software and other system components, and that those representations were not true. The
claim seeks a return of US$1,548,385 paid to Intraware, a return of Cdn$56,350 (approximately US$36,690) paid to Netergy Canada, Inc., as well as additional damages of approximately
US$41,000,000. Milinx claims that the five defendants held themselves out as "partners" and therefore are jointly and severally liable for all damages. At the time Milinx filed its claim, Intraware
was pursuing collection proceedings against Milinx for approximately US$250,000 in unpaid fees. We have denied any liability to Milinx and intend to defend the claim vigorously.

From
time to time, we are party to various other legal proceedings or claims, either asserted or unasserted, which arise in the ordinary course of business. Our management has
reviewed those other pending legal matters and believes that the resolution of such matters will not have a significant adverse effect on our financial condition or results of operations.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On August 31, 2001, and September 20, 2001, we issued promissory notes in a private placement to a group of institutional and individual
investors for aggregate gross proceeds of $7 million, and net receipts of approximately $6.4 million after fees and expenses. On those dates, we also entered into binding agreements to
issue to the investors warrants to purchase an aggregate of 7 million shares of our Common Stock at an exercise price of $0.01 per share. In addition, on those dates we entered into binding
agreements to issue to the placement agent in the transaction warrants to purchase an aggregate of 700,000 shares of our Common Stock under the same terms as the warrants issued to the investors. We
issued all of these warrants on September 24, 2001, in accordance with Nasdaq's application of NASD Marketplace Rules as described below. However, to comply with NASD
Marketplace Rule 4350(i)(1)(D), warrants exceeding an aggregate of 5,600,000 shares of our Common Stock (approximately 19.7% of our outstanding Common Stock) will not be exercisable until we
obtain shareholder approval.

The
warrants were issued in a private placement without registration under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. In issuing the securities, we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, based in
part upon the limited number of institutional type investors and their representations in the purchase agreements. We have agreed to file with the SEC a registration statement to register the resale
of the Common Stock issuable upon exercise of the warrants, and if the notes are ultimately converted or exchanged into or for equity, the shares issuable upon conversion or exchange of the notes. We
are required to file the registration statement by February 28, 2002, and to cause the registration statement to be declared effective by the SEC by May 31, 2002. However, the
registration deadline may be accelerated to any earlier stock registration deadline agreed to by us in any subsequent private placement.

In
connection with the private placement, our Board of Directors created a new seat on the Board and appointed to that seat an officer of the company which acted as placement agent in
the private placement. Another officer of that company is also a member of our Board of Directors. Those two Board members are also indirectly affiliated with one of the purchasers of notes and
warrants in the

30

---

private placement. Because of these relationships, as well as the quantity of warrants issued and the price of the warrants, Nasdaq's application of NASD Marketplace Rules would have required us to
obtain stockholder approval before issuing the warrants. However, Nasdaq granted an exception from the stockholder approval rule. In keeping with Nasdaq's determination, we gave our stockholders
10 days prior written notice of this exception before issuing the warrants.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

On August 15, 2001, we held our Annual Meeting of Stockholders. At the meeting, the stockholders elected as Class III directors Mark B. Hoffman
(with 24,260,251 affirmative votes and 51,419 votes withheld) and Peter H. Jackson (with 21,719,122 affirmative votes and 2,592,548 votes withheld). Messrs. Laurence M. Baer, John V. Balen,
Ronald E. F. Codd, Michael S. Falk and Frost R. R. Prioleau
continued as directors after the Annual Meeting. Since the meeting, we have added a member to our Board of Directors (see Note 9Promissory Notes to our Consolidated Financial
Statements in Item 1 of Part 1).

The
stockholders also ratified the appointment of PricewaterhouseCoopers LLP as our independent public accountants for the current fiscal year (with 24,271,782 affirmative votes,
29,672 negative votes, and 10,216 abstentions).

ITEM 5. OTHER INFORMATION

None.

31

---

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



Exhibit
Number

Description3(i).1(1)

Restated Certificate of Incorporation.3(i).2(1)

Certificate of Elimination of Series B Certificate of Designations, Preferences and Rights.3(i).3(1)

Series B-1 Certificate of Designations, Preferences and Rights.3(ii)

Amended and Restated Bylaws4.1(1)

Form of Promissory Note.4.2(1)

Form of Warrant.4.3(1)

Security Agreement, dated August 31, 2001 by and among Intraware, Inc., the placement agent for the offering of the promissory notes, and the investors named therein.4.4(1)

Exchange Agreement, dated August 31, 2001 by and among Intraware, Inc. and the investors named therein.4.5(1)

Registration Rights Agreement, dated August 31, 2001 by and among Intraware, Inc. and the investors named therein.10.31(2)

Sales Alliance Agreement dated June 28, 2001 between CorpSoft, Inc. and Intraware, Inc.10.33(1)

Form of Subscription Agreement, dated August 31, 2001 by and among Intraware, Inc. and the investors.10.34(1)

Placement Agency Agreement, dated August 31, 2001 by and between Intraware, Inc. and the placement agent for the offering of the promissory notes.


---

None.

32

---



SIGNATURE

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.
|----------------------- |  | ---------------
|Dated: October 15, 2001 |  | By:            

33

---

QuickLinks